When do nations fail?

Trying to collect a few salient readings from the past week or so on what causes fatal collapse of a complex developed society.

Via:  http://globalguerrillas.typepad.com/globalguerrillas/

When elites depart

One of the benefits of having a son that is a scholar of ancient warfare, from Alexander the Great to the Byzantine Empire to the Mongols, is that we can have wide ranging discussions on very deep topics.  Of perennial interest to us:  why do complex societies/civilizations collapse? 

One of interesting working theories we have is that while complex societies can be in decay for a long period of time, they only collapse when its favored elites abandon it/betray it.  

Here's an example from Roman history written by Joseph Tainter:

The Collapse of The [Western] Roman Empire

One outcome of diminishing returns to complexity is illustrated by the collapse of the Western Roman Empire. As a solar-energy based society which taxed heavily, the empire had little fiscal reserve. When confronted with military crises, Roman Emperors often had to respond by debasing the silver currency (Figure 4.2) and trying to raise new funds. In the third century A.D. constant crises forced the emperors to double the size of the army and increase both the size and complexity of the government. To pay for this, masses of worthless coins were produced, supplies were commandeered from peasants, and the level of taxation was made even more oppressive (up to two-thirds of the net yield after payment of rent). Inflation devastated the economy. Lands and population were surveyed across the empire and assessed for taxes. Communities were held corporately liable for any unpaid amounts. While peasants went hungry or sold their children into slavery, massive fortifications were built, the size of the bureaucracy doubled, provincial administration was made more complex, large subsidies in gold were paid to Germanic tribes, and new imperial cities and courts were established. With rising taxes, marginal lands were abandoned and population declined. Peasants could no longer support large families. To avoid oppressive civic obligations, the wealthy fled from cities to establish self-sufficient rural estates. Ultimately, to escape taxation, peasants voluntarily entered into feudal relationships with these land holders. A few wealthy families came to own much of the land in the western empire, and were able to defy the imperial government. The empire came to sustain itself by consuming its capital resources; producing lands and peasant population (Jones 1964, 1974; Wickham 1984; Tainter 1988, 1994b). The Roman Empire provides history's best-documented example of how increasing complexity to resolve problems leads to higher costs, diminishing returns, alienation of a support population, economic weakness, and collapse. In the end it could no longer afford to solve the problems of its own existence.

A more recent example of this is how the bureaucratic elites of the former Soviet Union, turned on the system and quickly gutted it through privatization, when their privileges were reduced.   An accelerant of the process was the availability of an external financial system to deposit the newly looted wealth.

The big question for those of us in the US/EU is whether we are seeing this process at work in our system.  Are the government/business elites turning against the system? 

Update: Wall Street Journal Wealth Report, Are Taxes Causing the Rich to Renounce Their Citizenship?:

Why is this happening? The IRS doesn’t tell us why people expatriate, or who they are or where they go. Lawyers say most are wealthy Americans who have expatriated to all manner of countries.

One argument is that they are leaving because of President Obama and the nation’s leaders.

“There is growing concern, particularly among the wealthy, about the future financial direction of the country,” said Paul L. Caron, Charles Hartsock Professor of Law at the University of Cincinnati College of Law. “This President constantly demonizes the wealthy, who undoubtedly are concerned about the tax policy that would emerge in 2012 if a re-elected Barack Obama, unconstrained by re-election concerns, finally confronts the budgetary train wreck that he has done so much to exacerbate.”

Other attorneys who specialize in helping the Americans expatriate say the reason is that the IRS is cracking down on overseas bank accounts and offshore income.

Via:  http://www.nytimes.com/2012/03/18/magazine/why-countries-go-bust.html?pagewanted=all

By his own admission, Daron Acemoglu is a slightly pudgy and fairly nerdy guy with an unpronounceable last name. But when I mentioned that I was interviewing him to two econ buffs, they each gasped and said, “I love Daron Acemoglu,” as if I were talking about Keith Richards. The Turkish M.I.T. professor — who, right now, is about as hot as economists get — acquired his renown for serious advances in answering the single most important question in his profession, the same one that compelled Adam Smith to write “The Wealth of Nations”: why are some countries rich while others are poor?

For centuries, economists and intellectuals have been compelled to explain why some nations fail. Here are their theories and the holes in the arguments.

Over the centuries, proposed answers have varied greatly. Smith declared that the difference between wealth and poverty resulted from the relative freedom of the markets; Thomas Malthus said poverty comes from overpopulation; and John Maynard Keynes claimed it was a byproduct of a lack of technocrats. (Of course, everyone knows that politicians love listening to wonky bureaucrats!) Jeffrey Sachs, one of the world’s most famous economists, asserts that poor soil, lack of navigable rivers and tropical diseases are, in part, to blame. Others point to culture, geography, climate, colonization and military might. The list goes on.

But through a series of legendary — and somewhat controversial — academic papers published over the past decade, Acemoglu has persuasively challenged many of the previous theories. (If poverty were primarily the result of geography, say, or an unfortunate history, how can we account for the successes of Botswana, Costa Rica or Thailand?) Now, in their new book, “Why Nations Fail,” Acemoglu and his collaborator, James Robinson, argue that the wealth of a country is most closely correlated with the degree to which the average person shares in the overall growth of its economy. It’s an idea that was first raised by Smith but was then largely ignored for centuries as economics became focused on theoretical models of ideal economies rather than the not-at-all-ideal problems of real nations. […]

Worth reading the whole article.  I read the reviews of the book at Amazon which indicated that his method is largely inductive (by example) which will never convince mainstream economists; and any mathematization he provides will be attacked on its assumptions.  Mainstream economists are paid by the institutions of the status quo, and face severe consequences for speaking out (much like bankers critical of their industry or of current economic policy).

I find Acemoglu and Robinson’s conclusions to be virtually self-evident to anyone whose heart has not hardened with the sclerosis of Econ.  See also their blog http://whynationsfail.com/.

Via:  http://www.angrybearblog.com/2012/03/when-do-humans-want-to-share-wealth.html

When do humans want to share the wealth?

Jonathan Haidt reports an interesting experimental result:
Two three-year-olds walk up to a marble-delivery machine that has two bins. Each stands in front of one bin. Three scenarios:

1. One bin has three marbles in it, the other has one: the winner is unlikely to share to equalize the takings.

2. There are two ropes to pull; one delivers one marble, the other three: the winner is unlikely to share to equalize the takings.

3. Two ropes, but both must be pulled together to deliver the one/three marbles: the winner is likely (75%!) to share to equalize the takings. (Either spontaneously, or on request from the loser.)

If people feel that they must work together to get the goods, they also feel that they should (or even want to) share the goods.
Haidt’s take (my emphasis):

If there’s a problem with the ultra-rich, it’s not that they have too much wealth, it’s that they bought laws that made it easy for them to gain and keep so much more wealth in recent decades.
Sarah Palin gave a speech last September lambasting “crony capitalism,” which she defined as “the collusion of big government and big business and big finance to the detriment of all the rest – to the little guys.” I think that she was on to something and that she was right to include big government along with big business and big finance. The problem isn’t that some kids have many more marbles than others. The problem is that some kids are in cahoots with the experimenters. They get to rig the marble machine before the rest of us have a chance to play with it.

Now add this:
The losers know the game is rigged, so their innate intution tells them that the winners should share.

Let me reiterate that I believe there is an optimal level of inequality that is optimal, possibly output-maximizing, and most definitely social-welfare-maximizing.  And I believe that level is far less than exists in the US or many other developed countries.  The notable reference here is the survey result of Ariely and Norton, “Building a Better America—One Wealth Quintile at a Time”:

Disagreements about the optimal level of wealth inequality underlie policy debates ranging from taxation to welfare. We attempt to insert the desires of “regular” Americans into these debates by asking a nationally representative online panel to estimate the current distribution of wealth in the United States and to “build a better America” by constructing distributions with their ideal level of inequality. First, respondents dramatically underestimated the current level of wealth inequality. Second, respondents constructed ideal wealth distributions that were far more equitable than even their erroneously low estimates of the actual distribution. Most important from a policy perspective, we observed a surprising level of consensus: all demographic groups—even those not usually associated with wealth redistribution such as Republicans and the wealthy—desired a more equal distribution of wealth than the status quo. [Emphasis mine]

Finally, it’s been a hypothesis of mine (partly resulting from observation of the few 1% friends I have) that the 1% like to get the hell out of the country for vacations, with the preferred destinations (I googled “vactions destinations wealthy” and got a series of articles on where the Forbes 400 go to play) being in Europe.  Absent the UK, one feature of the European nations is that they have much flatter income and wealth distributions than the US, and hence are arguably lacking the schizoid social tensions of America, where a generation of 76 millions Baby Boomers largely without adequate retirement assets and facing the possible gutting of Social Security by whomever is elected shuffle zombie-like through their days wondering if they’ll be living in their cars if they lose their jobs, because their children will be debt slaves….  You know, the unspoken fears of the average American.

Collapse is a distinct possibility.  There is already evidence of hysteresis, the damaging follow-on damage to the potential output of the economy from the last credit crisis (see Economist article on this).  Dmitri Orlov has drawn attention to many similarities of current America to pre-collapse Soviet Union:  declining life expectancy in major segments of the population; extreme inequality; looting of national resources by elites.

The test of whether America can still function as a nation lies ahead, for the first time since the Civil War.