Relevant to what’s happening today.
This post is about three empirically based theories of national decline. It’s written as a freestanding essay. Some readers may want to know, however, that it’s also Part II of a two-part project to help me better understand the root causes of the United States’ growing social and political instability.
Part I (312) explored the Gilded Age, which is the closest parallel to the present. In addition, I wrote a shorter bridge essay (319) that provides some useful historical information on the U.S. tax code and takes a critical look at the narrative, embedded in the legal profession’s code of ethics, that lawyers have special roles and responsibilities in the preservation of constitutional democracy and the rule of law.
As noted in Part I and the bridge, I am using these essays to “build a sturdier, more informed, and more realistic intellectual frame — i.e., something that can be fully squared with the present day.” This is a difficult topic that requires a lot of work. Yet, in our present environment, and speaking only for myself, I’ve concluded that it would be unethical, immoral, and decadent to focus on other, “more practical,” projects. Further, I suspect a subset of readers shares my sense of alarm. Hence, I’m sharing my work.
The three theories come from different intellectual disciplines but all land in the same place. I will spend the most time on the Ray Dalio theory (~3,500 words), primarily because it is data-rich and centered on the United States. But the Mancur Olson and Joseph Tainter theories (~1,500 words each) add valuable perspectives, with all three theories building on one another. The result is a lot more clarity on the present.
Theory #1: Dalio’s Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail
The first theory of national decline comes from Ray Dalio’s Principles for Dealing with the Changing World Order: Why Nations Succeed and Fail (2021). It’s noteworthy that the other two theories in this review essay come from distinguished academics—Mancur Olson (an economist and political scientist) and Joseph Tainter (an anthropologist and historian)—whose books regularly appear on graduate and undergraduate-level syllabi. Dalio, in contrast, runs Bridgewater, the world’s largest hedge fund.
A. Is Dalio credible?
The reflexive academic impulse is to view Dalio (#71 on the Forbes list of the world’s richest billionaires) as a dilettante who wants to add intellectual prestige to his considerable personal wealth. See, e.g., Tunku Varadarajan, “‘Principles for Dealing With the Changing World Order’ Review: Trouble Ahead, As Usual,” Wall Street Journal, Nov 19, 2021 (reviewer with an appointment at NYU Law concluding that Dalio “craves recognition as a polymath” and “strains much too hard to persuade us that he’s not just a wildly successful businessman”).
In this case, the reason to seriously consider Dalio’s theory of national decline is not that he’s wealthy but, instead, the type of investing he does at Bridgewater and the empirical methodology he has long relied upon to make his investment allocation decisions.
1. Type of investing.
Bridgewater is a hedge fund that invests across a broad range of asset classes in ways that are designed to diversify away systematic risk (beta) while maximizing returns in excess of the overall market (alpha).
This is very different than Warren Buffett (#5 on the Forbes list), whose Berkshire Hathaway buys and holds large equity stakes in great businesses. Likewise, it’s different than Jim Simons (#48 on the Forbes list), whose Medallion Fund uses a quantitative black-box strategy to successfully day trade public securities. See Steve Burns, “$28 Billion Day Trader that Even Warren Buffett Acknowledges,” Moneyshow, July 8, 2022 (quoting Simons, “we’re 100% right 50.75 percent of the time”). Also distinguishable is Henry Kravis (#304 on the Forbes list) of KKR, who made his fortune in private equity, which is the buying and selling of public and private companies, typically with heavy reliance on debt.
Bridgewater is very different. For example, its recent gross returns have been coming from investments and trading in commodities (17%), short positions on interest rates (13%), nominal bonds (11%), short/long positions in cash (6%), and equities (5%), with smaller or negative returns in various other assets classes, including sovereign credit and cryptocurrency. See Bridgewater Press Clipping, Apr 15, 2022.
2. Empirical methodology.
The best way to understand the patterns and interdependencies of interest rates, currency values, commodities prices, and the creditworthiness of corporations and governments is to assemble and analyze a vast amount of quantitative and qualitative historical data — which is exactly what Bridgewater has done under Dalio. In addition, this analysis necessarily includes domestic and geopolitical risk assessments, which is far relevant to how Buffett, Simons, and Kravis invest.
Further, when historical patterns lack a reliable analog, such as a resurgence in populism in the developed world, Dalio and his team react by expanding the scope of their research. A good example is a 61-page memo titled “Populism: The Phenomenon,” which was published on March 22, 2017 as part of Bridgewater’s Daily Observations newsletter. A subsequent article in the Financial Times put Dalio’s research into context by directly quoting the memo: “[P]opulism is not well understood because over the past several decades it has been infrequent in emerging countries, and virtually non-existent in developed countries.” Gillian Tett, “Populism emerges as a key economic influence,” Financial Times, Mar 23, 2017. Bridgewater fixed this information gap and shared its work.
In addition, this is not my first brush with Dalio’s methodology. Several years ago, I read Dalio’s first book, Principles: Life and Work (2017), as it overlapped with my interest in decision-making. Recalling his early days in investing, Dalio tells the story of how he meticulously mapped out the various causal relationships in the commodities market, running regression models on his HP-67 calculator, and using colored pencils to plot the results on graph paper. He then used these graphs to take market positions, carefully recording each trade. See Id at 20-22. This is a type of rare discipline that compares the cost of rigorous fact-gathering to the benefit of higher quality thinking; Dalio did this painstaking work because the spread was sufficiently large. Virtually no one else in the professional world does this. But maybe we should when the stakes are high.
Further, although most readers are likely picking up The Changing World Order for Dalio’s observations of national decline (particularly Western democracies), chapter 7 is entirely focused on how to invest in light of the book’s findings. See right graphic. In other words, this entire project is part of Dalio’s day job.
So the answer to my question is “yes,” Dalio is highly credible.
B. Basic contours of Dalio’s theory
The core of Dalio’s theory is what he refers to as the Big Cycle. The graphic below is a summary of the archetypical Big Cycle with annotations on six specific stages.
The Rise (Stages 1 and 2) is a period of building. A nation on the rise is generally characterized by (a) low levels of debt, (b) relatively small gaps in wealth, values, and politics, (b) people working together effectively to produce prosperity, (d) good education and infrastructure, (e) strong and capable leadership, and (f) a peaceful world order guided by one or more dominant powers. Changing World Order at 43.
The Top (Stages 3 and 4) is a period of excess characterized by (a) high levels of debt, (b) large gaps in wealth, values, and politics, (c) declining education and infrastructure, (d) internal class conflict, and (e) growing external conflicts as rivals seek to challenge overextended empires. Id.
The Decline (Stages 5 and 6), which is “the painful period of fighting and restructuring” that ultimately results in “the establishment of new internal and external orders.” Id. Yet, according to Dalio, not every decline results in either civil war or revolution. For example, Dalio cites the U.S. and the U.K. during the 1930s as declines that were resolved through nonviolent revolutions, see id at 173-74, albeit both populations became united in a war effort against fascism. In 1945, the outcome of World War II combined with the “Roosevelt revolution,” id at 50, which peacefully retributed wealth, enabled the United States to become the most powerful nation in a new world order. Dalio is clear, however, that the United States is once again at Stage 5 Decline.
The graphic below is the “typical progression” of the Big Cycle.
As discussed in greater detail below, the last shoe to drop (and definitely one of the most important) is #16, the loss of reserve currency status, as it hobbles a nation’s ability to carry on a low tax/high consumption lifestyle that the public has come to enjoy. The incumbent leadership takes the blame, which increases political instability.
Dalio and his team have developed an 18-factor index for determining a nation’s relative health. Within the 18 factors, the three most important factors are (1) Debt/Money/Capital Markets/Economic Cycle, (2) Internal Order/Disorder, and (3) External Order/Disorder. Collectively, Dalio calls them the Big Cycles (plural), which are the primary drivers of the rise, top, and decline of the Big Cycle (singular). The three Big Cycles, applied to the United States, are discussed in subsection C.
The 18-factor index also includes eight key measures that assess a nation’s relative wealth and power. In the graphic below, Dalio uses a composite of the eight key measures to summarize the relative standing of the 11 leading empires over the last 500 years.
The key storyline here is the succession of three dominant Western empires (the Netherlands, the U.K., and the U.S.) that may soon give way to an ascendant China. With copious amounts of data, chapter 9 covers the Dutch/Guilder, chapter 10 focuses on the U.K./Pound; chapter 11 looks at the U.S./Dollar, and Chapter 12 turns to China/Renminbi.
According to Dalio, “the great empires typically lasted roughly 250 years, give or take 150 years, with the big economic, debt, and political cycles within them lasting about 50 to 100 years.” Id at 14. At some point, each empire reaches its peak—the top of the Top. Relative to that peak, the graphic below shows the timing and interdependencies of the eight key measures of wealth and power.
Dalio’s logic is straightforward: A more educated citizenry increases innovation and technology >> which leads to greater global competitiveness >> which leads to a build-up of the military to protect trade routes >> which increases economic output >> which results in a global financial center and, eventually, status as the world’s reserve currency.
Commenting on the above chart, Dalio notes that “most of the [eight] factors stayed strong together and then declined in a similar order.” The one exception is status as the world’s reserve currency, which “tends to stick around after an empire has begun its decline because the habit of usage lasts longer than the strengths that made it so commonly used.” Id at 42.
Unfortunately, reserve currency status makes it much easier for a nation to live beyond its means, as the rest of the world is essentially willing to lend you money on very favorable terms. This results in excessive borrowing and spending, particularly on international military conflicts. Although all this spending and military engagement creates the appearance of strength, in the long run, the debts become unsustainable. As the nation enters decline, it’s forced to choose between defaulting on its debts or printing a lot of money. In almost every historical example, it opts to print money, which in turn, devalues the currency and causes inflation. (Note that debasing currency—mixing gold or silver with base metals—is the old-fashion equivalent and had the same effect.)
Obviously, this appears to describe the U.S., particularly during the financial crisis and pandemic, when the Federal Reserve was buying distressed financial assets and a large amount of government treasury bills. (This is functionally how the U.S. government “prints money.” See Sean Ross, “Understanding How the Federal Reserve Creates Money,” Investopedia, May 19, 2022.) A few years ago, economists began to question the conventional wisdom that printing money inevitably leads to inflation. See, e.g., “Special Report: Inflation is losing its meaning as an economic indicator,” Economist, Oct 19, 2019. Now, of course, inflation is high and a huge political issue.
How does it end? Dalio writes, “When those holding the reserve currency and debt of the declining empire lose faith and sell them, that marks the end of its Big Cycle.” Id at 51. Per Dalio’s analysis, it likely won’t happen tomorrow. But prudent people ought to plan for it.
C. Applying Dalio’s theory to the United States
In this subsection, I’ll make two points. First, if you’re worried about the political stability of the United States (and that certainly describes me, see Part I (312)), the most important parts of Dalio’s book are chapter 5, “The Big Cycle of Internal Order and Disorder,” and chapter 10, “The Big Cycle Rise and Decline of the United States and the Dollar.” This subsection includes some key highlights.
Second, the human impulse is to search for solutions, especially when the stakes are high. But there are no solutions here. As discussed in greater detail below, Dalio’s theory is simply too big to form the basis for broad-based political action. Instead, people of goodwill who have the education and intellect to digest Dalio’s analysis also have the opportunity to face the future with fewer illusions. I hope more legal professionals join this group.
1. The Big Cycle, Internal Disorder, and the United States
The Appendix to The Changing World Order has complete 18-factor scorecards for the world’s leading countries (United States, China, Eurozone, Germany, Japan, India, the United Kingdom, France, the Netherlands, Russia, and Spain). The full U.S. scorecard can be accessed here.
Below is the top portion of the U.S. scorecard (the Big Cycles), which is where America is experiencing the greatest stress under the Dalio model.
Although the United States is ranked #1 for total empire score, all the Big Cycle indicators are negative and on the decline. Subsection B, above, already discussed U.S. fiscal and monetary policy, which bears on Economic/Financial Position. Regarding External Order, the topline is that Dalio’s metrics show an elevated risk of conflict with China and Russia. See these graphics from chapter 14.
What has motivated this essay series, however, is undeniable evidence of serious political instability in the United States combined with historically high levels of concentrated wealth. See Part I (312) and bridge essay (319). Perhaps few readers are surprised that these Internal Order factors rank the lowest in Dalio’s model.
At the beginning of chapter 5, Dalio writes, “How people are with each other is the primary driver of the outcomes they get. Within countries there are systems or ‘orders’ for governing how people are supposed to behave with each other. These systems and the actual behaviors of people operating within them produce consequences.” Changing World Order at 149. At the end of World War II, everyone had a lot to gain from shared investment and cooperation, as external events had leveled the economic and social order. The result was a massive surge in economic production. Yet, nearly 80 years later, we have become much more disconnected from one another, often based on whether our families were relative winners or losers in a dynamic and rapidly changing post-War economy.
For example, Dalio notes that his home state of Connecticut has the nation’s highest per capita income, yet also has the largest wealth and income gaps along with one of the largest unfunded pension obligations. Through his wife’s work with disengaged and disconnected high school students in disadvantaged communities, Dalio has a window on the plight of the have-nots, which includes neighborhood violence and food insecurity. Yet, ironically, Dalio acknowledges that the haves “don’t feel rich” and are primarily focused on “work/life balance” and “making sure their kids are well-educated, etc.” Id at 170-71. This is a cultural mindset that has evolved over a period of decades and is nearly impossible to reverse.
According to Dalio, the Internal Disorder is exacerbated by excessive government borrowing. Perhaps this is obvious at the federal level, but Dalio notes that indebtedness is just as chronic (and toxic) at the state and local levels. Cities like San Francisco, Chicago, and New York City, and states like Connecticut, Illinois, Massachusetts, New York, and New Jersey are jurisdictions with very high incomes but also very large wealth gaps and high per capita government debt. Obviously, only the “haves” have the resources to pay off past obligations and make much-needed investments in infrastructure and education. Yet, when a state or city imposes high taxes, it triggers a “hollowing-out process” in which the haves relocate. This is certainly consistent with U.S. migration patterns over the last two decades or so.
For the most part, the dynamics described above apply primarily to the urban/suburban divide. In addition, they are often intra-Blue state problems. In contrast, Rural America represents a very different set of social, economic, political, and cultural tensions, putting Blue and Red states at direct loggerheads with one another. Below are two Dalio charts that show historic levels of polarization and partisanship in Congress:
As noted earlier, Dalio believes that the United States, with its heavy debt financing and loose monetary policy, is now in Stage 5 Decline. This portion of the Big Cycle tends to include the following additional markers:
- Decadence, which Dalio defines as spending by the wealthy on consumption (e.g., expensive real estate and luxury goods) rather than saving and investments that is likely to increase future output. “What a society spends money on matters.” Id at 173. Perceived decadence increases resentment among the have-nots.
- Bureaucracy, which is the tangle of laws and processes that inhibits necessary adaptive change. Although this may sound like a conservative talking point to some, it closely tracks the Olson and Tainter theories of decline. In effect, society loses its capacity to make decisions and build.
- Populism and Extremism. Dalio writes, “Out of disorder and discontent come leaders who have strong personalities, are anti-elitist, and claim to fight for the common man. … Populists can be of the right or of the left, are much more extreme than moderates, and tend to appeal to the emotions of ordinary people.” Id at 174-75. Moderates are squeezed out of power, which is happening now, as many Republicans who voted to impeach Donald Trump are either retiring or losing in the primary elections. See, e.g., Lauren Gambino & Martin Pengally, “Peter Meijer, Republican who voted to impeach Trump, loses Michigan seat,” Guardian, Aug 3, 2022.
- The Loss of Truth in the Public Domain. Dalio cites a 2019 Gallup poll documenting a massive slide in the public’s trust in the media. See Changing World Order at 177 (from 72 percent in 1976 to 41 percent in 2019). Dalio’s research shows that the media eventually takes sides, working with their preferred leader to destroy the opposition. Sound like Fox and MSNBC?
- Rule-Following Fades and Raw Fighting Begins. “When the causes that people are passionately behind are more important to them than the system for making decisions, the system is in jeopardy.” This milestone was likely crossed on January 6, 2021. Subpoenas are being ignored. Partisan state and local officials are pledging to take over the process of counting and certifying votes — enough to potentially affect the outcome of national elections. See Matt Vasilogambros, “Republican Lawmakers Seek New Powers Over Elections,” Pew Trusts, Jan 26, 2022 (discussing efforts in Georgia, Wisconsin, Arizona, Florida, Pennsylvania, and Utah).
So what is the likelihood that the United States tips into violent conflict?
Dalio answers this question with numbers. For most of his 18 factors, Dalio calculates a Z-score (a standardized distribution of values expressed in standard deviations units). He then combines the economic measures to calculate the likelihood of internal conflict over the next five years. “Internal conflict” involve “majors cases of civil war, rebellion, and revolution but exclude peaceful revolutions that did not change the existing system” (e.g., the “Roosevelt revolution” in the 1930s). The data used to conduct this analysis includes “nine great powers” covering “2,200 years of history.” Changing World Order at 157-58 & n 2. The result is the below graphic.
Dalio notes that the United States “is in the 60-80% bucket today,” which reflects approximately “a 1-in-6 chance of severe internal conflict” during the next five years. Id at 157.
2. No solutions here
In his introduction, Dalio makes a subtle point that’s easy to overlook: The Big Cycle unfolds over several generations, with the typical person experiencing only one or, at most, a portion of two phases. If your grandparents enjoyed the Rise, and your parents lived through the Top, and the first 20 years of your working life have been personally and professionally prosperous, nothing in your lived experiences has prepared you to see the warning signs of early Decline or anticipate the vicissitudes and chaos what might come later. See id at 8 (“[P]people typically miss the big moments of evolution coming at them because they experience only tiny pieces of what is happening”).
If the U.S. was doing just fine, I probably wouldn’t have read Dalio’s book. Although Dalio’s investment work was the driving force to develop the Big Cycle theory, as a U.S. citizen, he’s also deeply worried about the implications for his country.
If you doubt Dalio’s sincerity and passion, I suggest you visit the website www.economicprinciples.org, which is a collection of high-quality public education resources, including a 40-minute YouTube version of The Changing World Order that is, in my view, an adult education masterpiece, albeit on a very sobering topic. Dalio has poured millions of dollars to (a) boil down complex but important information and (b) push it out in digestible bits across multiple mediums.
All of these efforts help at the margins. Yet, for several reasons that become obvious with a bit of reflection, Dalio’s theory of national decline is not a vehicle for national renewal, at least not directly. Foremost, it’s complex. Only a portion of the electorate has the education and intelligence to understand its many levels and implications, though as Tocqueville noted, lawyers are part of this group. See bridge essay. Second, a huge number of folks are too busy or preoccupied to critically engage—they remain in the “End of History” cocoon. Third, a natural response for many is psychological denial, as these topics are painful. Cf Post 314 (Jae Um imploring readers that “denial is dangerous”). Fourth, for some (even many), the rational response will be to prioritize themselves and their family rather than make sacrifices and take risks to broker peaceful outcomes. Indeed, this is the formidable problem of collective action discussed by Mancur Olson.
The first group that should stand up, however, are lawyers. See Part I (312) and bridge (319). No doubt, we’ll be joined in the same proportion or more by allied professionals who have become part of the modern legal profession.
Theory #2: Mancur Olson’s The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities
When I realized that for nearly four decades, virtually all my life decisions were premised on the unstated assumption of ongoing political stability and relative economic prosperity, I was embarrassed. Thus, as I build my sturdier, more informed, and more realistic understanding of the present, see Part I (312) and bridge (319), I’m using industrial-grade material, which includes Mancur Olson’s The Rise and Decline of Nations (1982).
A. Basic contours of Olson’s theory
In brief, Olson’s theory of decline is that the longer a country enjoys a period of stability and prosperity, the more susceptible it becomes to group interests that seek private benefits at the expense of society’s overall collective welfare. No group is likely to seek private benefits that shrink the overall pie to the point where their proportionate slice declines in value. This is a fact that tends to discipline political parties, as they are “encompassing organizations” that must reap what they sow. Rise and Decline at 42-51. Further, no small group is likely to obtain such a large benefit that it sinks the republic. But cumulatively, a large number of effective “distributional coalitions” can do just that, particularly with the passage of time, as it permits them to overcome difficult collective action problems in organizing. Id at 44-73.
In chapter 3, Olson lists nine implications of his theory, which he then tests and supports with a copious amount of econometric and historical data (chapters 4 to 6), including post-War Europe and Japan and America after the Civil War, comparing the trajectories of the North to the South. In this review essay, it is not necessary to go through all nine implications, as the endpoint here is fairly intuitive—after several decades of peace and prosperity, the proliferation of distribution coalitions:
- Slows down organizational and political decision-making, often to reduce price competition (implication #6)
- Slows down society’s capacity to adopt new technology and reallocate resources in response to changing conditions, which reduces overall economic growth (implication #7)
- Increases the complexity of regulation, the role of government, and our ability to create shared understandings that actually result in social progress (implication #9).
In my view, this describes the world we’re living in. It is important to note that Olson’s theory of decline is built upon his more famous work, The Logic of Collective Action: Public Goods and the Theory of Groups (1965), which challenged the conventional wisdom that groups of individuals will work together to advance their common interest. This is because collective action is plagued by the temptation to free ride. In Rise and Decline, Olson writes:
[In any collective action, such as a strike, boycott, or the building of a bridge,] those who contribute nothing to the effort will get just as much as those who made a contribution. It pays to “let George do it,” but George has little or no incentive to do anything in the group interest either, so [in the absence of “selective incentives”] … there will be little, if any, group action. The paradox, then, is that … large groups, at least if they are composed of rational individuals, will not act in their group interest.
Rise and Decline at 18. Yet, the benefits on the table are often extremely large. Thus, with the passage of time, capable leaders find ways to overcome the challenge. The most obvious method, of course, is the creation of a government that mandates equal sharing of costs. The “selective incentives” at work here are penalties for failure to pay taxes. Id at 21.
Yet, it’s also possible to create positive selective incentives through non-governmental organizations. Olson cites American farm organizations as a prototypical example, as “due payments are automatically deducted from ‘patronage dividends’ of farm cooperatives or are included in the insurance premiums paid to mutual insurance companies associated with farm organizations.” Id at 23. A more contemporary example is the AARP, which bundles together a large number of valuable discounts (from organizations anxious to do business with seniors) that far outweigh the annual membership fee. These funds, in turn, are used to finance lobbying efforts for seniors.
Finally, Olson notes that collective action is most easily overcome when a group is relatively small and/or relatively homogenous and the potential private benefits are large. Thus, a trade group will seek regulation that has the effect of protecting their market from competition. In addition, “social selective benefits” are more likely to work with homogeneous groups, as membership can confer status. Likewise, homogeneity makes it easier to forge a consensus. See id at 25. This would be consistent with organizations like the NRA, which has successfully leveraged identity politics to grow and influence public policy.
B. Applying Olson’s theory to the United States
The above analysis leads to two relatively straightforward conclusions that appear to describe the United States circa 2022:
- In the race to obtain private benefits, smaller and more homogenous coalitions have a big advantage over larger and more diverse coalitions. (This partially explains why Republicans are often said to be better at political messaging. If fact, they’re playing an easier hand.)
- A very long period of political stability and economic prosperity has enabled the number of distributional coalitions to grow in number and strength, which has made all levels of government more ineffectual, which in turn reduces overall popular support.
Regarding my second conclusion, it is worth directing readers to OpenSecrets, which is a 501(c)(3) nonprofit organization dedicated to tracking the flow and influence of money in U.S. politics. The volume of data, and how it can be sliced and diced with web-based analytics, is truly extraordinary.
The founding of OpenSecrets traces back to 1983, when two retired U.S. Senators, Frank Church (Democrat from Idaho) and Hugh Scott (Republican from Pennsylvania) came together to form the Center for Responsive Politics (CRP). In 1996, the CRP launched the Open Secrets website. In 2021, the CRP changed its name to OpenSecrets as part of its merger with the National Institute on Politics — a combination that was funded by the Hewlett Foundation.
No doubt, OpenSecrets is a heroic example of good people finding a way to overcome a gigantic collective action problem. The hope underlying OpenSecrets is that mass disclosure can reveal, shame, and curb the influence of special interests. OpenSecrets compiles virtually everything you want to know, past and present, about wealthy donors, PACs, lobbying organizations, candidate spending, and revolving door employment with government agencies.
A final point worth making is that lawyers and law firms, just as in the original Gilded Age, see Part I, profit handsomely through their connections to wealthy special interest clients, first by helping to create the loopholes, and second by exploiting law changes to their clients’ advantage. Below is a list of the nation’s top lobbying firms. 80% are corporate law firms in the AmLaw 200.
Source: OpenSecrets, Revolving Door, Top Lobbying Firms
The OpenSecret data suggest that lobbying works better with a revolving door in and out of government. Obviously, the financial payoff comes from the high salaries on the outside. Further, disclosure is not enough to stop it.
Olson observes, “The regulatory complexity that derives from lobbies is magnified by a dynamic process [described by Charles Schultze in The Public Use of Private Interest (1977)]. When regulations are established through lobbying or other measures, there is an incentive for ingenious lawyers and others to find ways of getting around the regulations or ways of profiting from them in unexpected ways.” Rise and Decline at 70.
Theory #3: Joseph Tainter’s The Collapse of Complex Societies
Similar to Olson’s Rise and Decline, Joseph Tainter’s The Collapse of Complex Societies (1988) is more industrial-grade material to build my sturdier, more informed, and more realistic view of the present. (H/T to LE contributor Evan Parker PhD for recommending it.)
Tainter began his career in the branch of anthropology that focuses on archeological evidence as opposed to the study of contemporary people. He became interested in the topic of collapse because it is such a recurring theme in human history — and often, the collapses were truly massive in scope, like the Egyptian, Roman, Mayan empires. Yet remarkably, this was no unifying theory that could explain how once mighty, sophisticated, and wealthy cultures could vanish from the landscape.
Tainter’s 1988 book, which covers thousands of years of human civilization and draws upon a staggering number of disciplines (archeology, economics, geography, geology, statistics, history, and law) essentially created the academic subdiscipline of societal collapse. Observed a 2020 feature story in the New York Times Magazine, “before Tainter, collapse was simply not a thing.” Ben Ehrenreich, “How Do You Know When Society Is About to Fall Apart?,” NY Times Magazine, Nov 4, 2020.
In the early days of his research, Tainter was immersed in the rise and fall of ancient civilizations. Yet, Tainter acknowledges that as he was writing up his seminal work, “it was very clear that what I was realizing about historical trends wasn’t just about the past.” Id.
A. Basic contours of Tainter’s theory
Tainter’s core theory is that every nation, state, or social order necessarily becomes more complex as it attempts to solve problems related to its security and prosperity. Eventually, however, these investments in greater complexity reach a point of diminishing returns, which creates social and political tensions, as the costs are high and the benefits are not always evenly spread. At some point, the return on each unit of complexity becomes negative, which creates crisis conditions that existing leadership is unable to solve.
According to Tainter, “A society has collapsed when it displays a rapid, significant loss of an established level of sociopolitical complexity.” Complex Societies at 4. In ancient societies, this means that people retreat to simpler and more primitive forms of living, often moving away from once thriving urban areas — hence the eerie and baffling ruins of once great civilizations. In modern times, however, all societies are complex. Hence, collapse takes the form of groups of people, or territories, being absorbed by stronger adjacent rivals. See id at 213 (noting that “the world today is full” and that “every nation is linked to, and influenced by, the major powers”).
I realize that the above description is extraordinarily abstract. Yet, Tainter’s theory is extracted from more than a dozen of complex case studies, going far beyond the usual causal narratives (e.g., resource depletion, insurmountable catastrophe, intruders, class conflict, social dysfunction, economic factors, etc.). See id at ch 3. He then tests his theory of collapse against a vast amount of historical data (ch 4-5), building a persuasive case that every complex society, including the world we live in today, is always in a race against time (ch 6). I’ll do my best to bring it alive.
Arguably, the figure to the right is the most important graphic in Tainter’s book [click on to enlarge]. It depicts the relationship between additional levels of complexity and benefits that flow back to society.
At the early stages of society (to the left of B1, C1), these are large and clear benefits to social cooperation and coordination. For example, division of labor increases overall productivity, enabling everyone to enjoy a higher standard of living. To achieve this outcome, the collective needs to build out sociopolitical systems for guiding, for example, agriculture production and shared resources, such as roads and aqueducts. This, in turn, requires some element of hierarchy and effective mechanisms for exchanging information.
It’s interesting and important to note that movement along the Figure 19 continuum is almost always necessitated by the unsustainable nature of the status quo. For example, growing population density required the shift from a hunter-gatherer to an agriculture-based society. In turn, the shortage of arable land required improvements in farming technology, such as irrigation and crop rotation. Eventually, prosperity required protection from foreign intruders. The cost of running the society (and resistance to higher taxes) made it expedient to plunder or enslave neighboring populations. Similarly, deforestation during the Middle Ages resulted in the development of the coal-based economy in England. See id at 98. After the extraction of readily available surface coal, new mining techniques and/or alternative fuel sources needed to be developed. See id at 111.
As Tainter writes, “complex societies are problem-solving organizations.” Id at 37. Yet, each iteration of complexity requires larger investments in socio-political systems to process information, oversee complex projects, educate the citizenry to do increasingly technical and specialized work, and legitimate current leaders.
At this point, a complex society is likely between B1, C1 and B2, C2 on the Figure 19 continuum, which is the zone where each unit of additional complexity is yielding a smaller unit of social benefit. This raises the stakes for political leaders and reduces the margin of error in decision-making. In addition, there is a heightened risk of conflict over who should bear additional new costs.
One of the axioms of Tainter’s theory is that “increased complexity carries with it increased costs per capita.” Id at 95. According to Tainter (and this data), this worsening cost dynamic is driven by declining marginal returns in four important domains, which Tainter lists as “ agriculture and resource production,  information processing,  sociopolitical control and specialization, and  overall economic productivity.” Id.
For example, regarding agriculture and resource production, as yields go up (per acre, per cow), which is necessary to support growing populations and longer life spans, so does the required labor per unit of output. The graphic shows this pattern in the American dairy industry.
Although higher yields increase total output (and wealth goes up), the process of always getting more from less necessarily requires planning and ingenuity. Over time, this gets harder.
A similar dynamic applies to the second domain, information processing, which encompasses things like “education, research & development, and the development/maintenance of information channels.” Unfortunately, each appears to be affected by declining marginal returns. For example, the graphic to the right shows fewer patent applications per 100 scientists and engineers and per $1 million in R&D. This is no doubt due to the growing base of prior art.
Regarding the third domain, sociopolitical control and specialization, Tainter writes:
Control and specialization are the very essence of a complex society. The reasons why investment in complexity yields a declining marginal return are: (a) increasing size of bureaucracies; (b) increasing specialization of bureaucracies; (c) the cumulative nature of organizational solutions; (d) increasing taxation; (e) increasing costs of legitimizing activities; and (f) increasing costs of internal control and external defense.
Tainter notes how these spheres are intertwined but inevitably result in expenditures (perceived as necessary to solve problems) that yield progressively smaller benefits. Echoing Dalio, Tainter notes that as taxes go up, tax avoidance increases, and the currency gets debased (e.g., mixing gold or silver with copper, lead, nickel, or tin), which creates inflation. Id at 116-137. In addition, Tainter cites Mancur Olson’s Rise and Decline for the proposition that “complexity itself breeds further costs.” Id at 116.
Finally, declining marginal returns are also present with overall economic productivity (i.e., more advanced economies tend to grow at slower rates), see id at 108-109, an observation that also finds support with Dalio, Olson, and many other economists.
If and when a society goes to the right of B2, C2 on the Figure 19 continuum, investing in more complexity makes things worse.
B. Applying Tainter’s theory to the United States
Of the three theories of national decline discussed in this review essay, Tainter’s resonates the loudest, at least for me. We rely on complexity (technology, education, regulation, free markets, transportation infrastructure) to solve so many large and important problems, yet it’s hard to see and internalize complexity’s hidden costs, including the growing burdens it places on political leaders. Thus, our political discourse is seldom if ever capable of a truthful and accurate root cause analysis.
The table below illustrates the problem of bureaucratic bloat in the British Navy during the time period associated with the decline of the U.K. empire.
As the British Navy declines or stays roughly level in the number of ships, personnel, and dockyard workers,the number of supporting administrators and clerks skyrockets. I have little doubt that a similar table could be generated for U.S. higher education. Although the complexity of campus life, and the expectations of student and parents, has clearly gone up, the phenomenon of declining marginal margins is clearly present, creating understandable acrimony and tension.
Yet, a key insight from Tainter is that bloat is not limited to the government or the nonprofit sector. Tainter notes that patterns of hierarchical specialization in the private sector are very similar to those in government. For example, the right graphic shows how the ratio of administrators to production workers increased steadily and significantly in several Western countries during the first half of the 20th century.
Tainter acknowledges that public and private bureaucrats are subject to different incentives, yet theorizes that both are subject to the same constraints that plague all large, complex organizations: “ever larger portions of their personnel and other resources” must to allocated to administration “because increased complexity requires greater quantities of information processing and greater integration of disparate parts.” Id at 107. Honestly, when Jason Barnwell writes about his modernization challenges inside Microsoft’s legal department, he’s implicitly making the identical point — his unit is a new bureaucracy charged with solving nearly unfathomable complexity. See, e.g., Post 277 (discussing the pressing need to industrialize the practice of law).
Finally, Tainter’s theory of national decline would seem to explain an increasingly common critique: that America has lost either the will or the capacity to build. For example, the liberal political commentator, Erza Klein recently wrote a blistering critique of delays in implementing an important, environmentally sensible congestion pricing program in New York City. See Erza Klein, “There Has to Be a Better Way to Run the Government,” NY Times, June 12, 2022.
Technically, the task is not that hard — just mounting some sensors on poles. The project was originally approved by the New York legislature in 2019. However, it’s not scheduled to be done until 2024, primarily because New York has to cooperate with the federal government, which funds some of the affected NY roads. The number of agencies that have to sign off is staggering; further, the risk of litigation causes administrators to slavishly follow process, including a full-blown environmental impact study — for sensors!
Only two weeks earlier, in an essay examining America’s inability to build, Klein wrote “the problem isn’t government. It’s our government … Government isn’t intrinsically inefficient. It has been made inefficient.” Erza Klein, “What America Needs Is a Liberalism That Builds,” NY Times, May 29, 2022. Perhaps. But it could, following Tainter’s theory, that an investment in more sociopolitical complexity (here, congestion pricing) is a problem-solving response that is likely to have very low marginal returns. In short, we may be very close to B2, C2 on the Figure 19 continuum.
Klein rightly wonders whether the future is just transfer payments, like the child tax credit expansion, which are easy to do and politically popular. See “There Has to Be a Better Way,” supra. If so, under all three theories, it’s fairly strong evidence of a nation on the decline.
I’ve written enough. Frankly, I am interested in the thoughts and reactions of readers, which I am collecting here. Beyond that, good comes out of bad. That’s something I can work with.