Sunday, August 03, 2014

The Slide to Collapse Is Greased with Self-Interest

Self-interest is intrinsically self-liquidating on a systemic level.


One enduring if rarely stated principle of Neoliberal Democracy is that the single-minded pursuit of self-interest magically produces an equilibrium which serves everyone's interests well enough to avoid the destabilization of rebellion or systemic collapse.

Let's start by defining Neoliberal Democracy: neoliberalism sees markets as the only efficient, fair and durable method of organizing resource extraction and the social order: governance, employment, distribution of income, etc. Turning every social and economic function into a marketplace ensures that market forces provide the discipline and transparency participants need to make prudent choices and investments.

Democracy is a political marketplace in which votes replace investor and consumer decisions as the mechanisms that enforce discipline and transparency.

The melding of these two ideologies is clearly natural, as both see a transparent market as the best possible system for both governance and and the economy.

The key characteristic of a market is that all participants exclusively pursue their own self-interest. No one need sacrifice their own self-interest for the good of the whole system because by definition the system of competing interests naturally organizes itself to maximize the choices of each individual and the equilibrium of the system.

The transparency, fairness and stability offered by this ideological system is very compelling: the advantages of a system that transparently discovers the price of everything while offering roughly equal opportunity to all participants to seek self-fulfillment (i.e. the pursuit of happiness) via a dogged focus on self-interest are self-evident.

Looking out for Number One is thus the foundation not just of personal self-aggrandizement but of systemic stability and fairness.




But let's move from ideological abstraction to the pragmatic--what happens in the real world? What we find in the real world is that participants seek to transfer their own risk to others while minimizing their productive work and maximizing their gain/skim.

Risk inevitably introduces the possibility of loss--both fair and unfair. Let's say a participant in the market invests in a scheme to produce the Acme Brand widget. 

Unfortunately, the widget fails to find a market and the enterprise closes its doors. The investors lose their investment: this is fair because any enterprise in a market is at risk of losing favor from changes in fashion or the emergence of more agile competitors.

Unfair risk is loss incurred through no fault of one's own. Let's say an employee of Acme Widget Corporation gave his all to the company, and was laid off anyway--not through some failing in his efforts or talents but as a result of dynamics beyond his control: the marketplace found little value in the Acme Widget.

The rational, self-interested participant will naturally seek to offload risk of loss to other participants. Employees of the state (i.e. the government) transfer most of the risk of being laid off to the larger group of taxpayers: in a recession, the state can raise taxes on everyone in the system to guarantee its employees get paid. In effect, the risk of loss is distributed to everyone paying taxes in order to guarantee the employment of state employees.

Financiers have learned that making bets big enough to render their enterprise too big to fail effectively transfers the risk of loss to the taxpayers. We see the same mechanism in action: those who manage to transfer the risk of loss to others guarantee their self-interest can be pursued risk-free.

The rational, self-interested participant will also naturally seek to minimize his productive contribution while maximizing his income/gain. The state employee will (for example) game the system to retire early on a fake disability claim, or manage to evade work, accountability or responsibility with little risk of loss because the system makes firing a slacker employee almost impossible.

A financier will use free money for financiers issued by the Federal Reserve to buy assets everyone needs to live: private water systems, rental homes, parking meters, etc.--what are known as rentier assets because the financier isn't adding or creating any value in his ownership; he is skimming a fee from those who pass through the gate he owns.

The rational, self-interested participant will minimize his own expenses and maximize his income/gain by exploiting the commons--assets shared by all participants. The rational, self-interested participant will thus let his sheep out into the common pasture to graze for free, dump his waste into the river and the smoke from his works into the air, all free of charge.

This dynamic of everyone pursuing their own self-interest destroying the commons was articulated by Garrett Hardin in his paper The Tragedy of the Commons.

There is another dynamic at work called tyranny of the majority.

Imagine a ship with 100 passengers and crew drifting down a river that eventually cascades over a 1,000 foot waterfall. It's easy to plot the ship's course and the waterfall ahead. You might think 100% of those onboard would agree that something drastic must be done to either reverse course or abandon ship, but before we jump to any conclusion we must first identify what each of the 100 people perceive as serving their self-interest.

If life onboard is good for 60 of the 100, they may well rationalize away the waterfall dead ahead. Why risk the treacherous river currents by abandoning ship? As a result, the majority vote to tweak the ship's course slightly, thus dooming the 40 others who can hear the thundering cascade ahead but who are powerless to change course in a democracy.

This is the tyranny of the majority feared by some of the American Founding Fathers.

If 60% of the voting public is dependent on government spending, then they will vote to continue that spending regardless of its unsustainability, source or unfairness to those who will suffer most when the entire contraption collapses in a heap.

To the degree that government revenue is a form of public commons, then the siphoning of that resource to serve individual gain leads to the loss of the commons, as well as the loss of any notion of the common good.

With 60 of the 100 voting to continue the present course of State borrowing and spending to support their piece of the largesse, the ship is doomed to end up in pieces at the bottom of the waterfall, despite the utter obviousness of the catastrophe just ahead.

In other words, democracy functions when a sustainable equilibrium can be maintained with slight adjustments in course/policy. But when a dramatic change of course is required to save the system, a change that upends all the rentier skims and redistributes risk of loss to all those who reckoned they'd successfully offloaded all risk onto others, then there is no political support for the necessary radical change of course.

Those collecting a piece of State spending will vote to keep the ship firmly heading for the waterfall, because they fear the consequences of changing course or abandoning ship. Any radical change of course reintroduces the risk of loss that each self-interested participant offloaded onto the system itself.

Enterprises that haven't offloaded risk or secured guarantees from the State are forced to make radical changes when their survival demands it. Recent history is full of examples of corporations that were riding high and then failed to change course radically enough; those companies lost their way and were acquired for a sliver of their former value.

The political marketplace of democracy fails when the State has transferred risk and guaranteed the skim of enough voters.

The political marketplace of democracy also fails because self-interest is best served by influencing the State to protect one's private rentier skims and gains.The highest-leverage, highest-return investment is buying political favors and influence from politicos.

If average citizens could buy a semi-permanent escape from taxes for, say, a $20,000 "contribution" to the right politico, anyone with a tax burden of $10,000 or more annually would make this easy calculation: in a single decade, I'm going to pay $100,000 in taxes if I do nothing. If I buy the political favor for $20,000, I will save $80,000 over a decade.

That's a four-fold yield on the initial investment. Where else can you reap that kind of guaranteed return?

It turns out to be remarkably easy to evade the transparency required to make democracy and the market function fairly. The political favor is buried in hundreds of pages of legalese jargon in a legislative bill or regulatory statutes. No one will ever discover the favor unless they know where to look.

Self-interest is intrinsically self-liquidating on a systemic level, something I analyze in depth in Resistance, Revolution, Liberation, for without an understanding of the distorting mechanisms of self-interest, we cannot understand why people will continue supporting a visibly imploding Status Quo: they will do so as long as they are getting a piece of that Status Quo that is free to them.

This is how systems collapse: those who have offloaded risk (a.k.a. skin in the game) to the system itself and guaranteed their job, income, pension or rentier skim via the State will continue to support the Status Quo that has benefited them so handsomely even as the ship tumbles over the waterfall to its destruction.



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Laura Y.

Gordon Long and I discuss The New Nature of Work: Jobs, Occupations & Careers (25 minutes, YouTube) 




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