| Volume XII, No. III
Can We Possibly Make This Stuff Any More Complicated?
Are you following this manic-depressive cycle in Europe? Last week alone markets headed down until news came that EU leaders agreed to “step in” and do…well, I forget what it was they said they’d do. Anyway, following whatever they said, markets shot up at the end of the week.
Nothing new here; just business as usual. Indeed, last October we noted:
Just look at the “solutions” we keep hearing about every other day. Every time Merkel, Sarkozy, Berlusconi et al get together, they come up with a new solution – the one that really will take care of things. What happened to yesterday’s solution? Never mind. We only thought we had a solution yesterday. Now we’ve got it right.
Of course, some of the names have changed since then. Hollande replaced Sarkozy and Monti replaced Berlusconi. But the manic-depressive ups and downs go on and on. So last year we tried to provide a clear, simple explanation for what’s really going on. (You can find it by clicking here.)
This year we decided to confront this madness by looking at things from another perspective. And so last time we took a first look at the role “complexity” plays in this biggest economic and financial crisis of our lifetimes. Now let’s pick where we left off:
- What Makes Our Society Too Complex
- Why Complex Societies Collapse
- Whether Reason and Common Sense Will Be Able to Steer Us Away Trouble
- The First Lesson to Learn and Immediately Apply to Your Investment Decisions
- How Complexity Makes the Threat of Currency Wars – Yes, Wars – a Clear and Present Danger
If you’re wondering whether complexity really is that big a deal, just look at the Supreme Court’s recent decision regarding Obamacare.
What Exactly Did the Supreme Court Decide About Obamacare?While Chief Justice Roberts siding with liberals seems surprising on the face of it, my first reaction is to discount the media’s response. (Always discount the media’s response if you want to keep your own reasoning capacity intact. Just a suggestion.)
So what do we know about what just happened? One thing we know is that starting in 2014 you will have to pay a penalty if you don’t buy health insurance.
Oh, I’m sorry. It’s not a penalty. It’s a tax. Excuse my mistaking a tax for a penalty. Of course, when the law was passed by Congress, it was specifically called a penalty and not a tax. Indeed, even the President publicly announced that the penalty you will have to pay (er, right, I mean the tax) if you don’t buy health insurance isn’t a tax (that is, wasn’t a tax then, but is now). Did I get that right?
So the President who proposed the law and Congress which passed the law, both of which adamantly insisted that you will not pay a tax if you don’t buy health insurance, but what you’ll pay is a penalty, were wrong. The Supreme Court has corrected the President and the Congress and informed them that it’s not a penalty after all, it’s a tax…that is, it’s a tax for “constitutional purposes.”
Are you following all this? See what I mean about complex?
Of course, I’m not a lawyer. I’ve read some of the commentaries about all this. Some think the ruling makes some kind of sense. Maybe. One thing I do know is that it bolsters the argument thatour society is simply too complex.
Not convinced? Let’s go from the hallowed halls of the Supreme Court to the mundane world of…don’t laugh now…underwear. For this we turn to a recent experience at a shopping mall.
Now maybe my shock and confusion was caused by the fact that I don’t spend a lot of time shopping as a general rule. But during a recent vacation, we stopped at a Jockey outlet where I expected to stock up on my usual stuff, all at a hefty 40% discount. (Not bad, right?) Except that what greeted me was an array of not only boxers, briefs, crewnecks and tees, but also every variation of style, fabric, color and pattern known to man. And all this for items that you basically wear under something else! Never mind all the “deals” you could get by giving them your e-mail, or getting a store card, or using promotional codes, or…Starting to get the picture?
If none of this drives you crazy, a tu salute, as the Italians say. As for me, I wonder whether this is all getting out of control.
But if you still don’t think our world has grown too complex, we turn to Joseph Tainter and a study he published in 1988, The Collapse of Complex Societies. I originally read Tainter’s work when the financial world was melting in 2008 and found it helpful then. I think it can now help us put the European debt crisis, the Supreme Court’s ruling and the Jockey Outlet sale into some sort of perspective. It may also provide some insight into what the future may hold for a complex world in crisis.
The author takes us through various successful albeit complex societies throughout history which have since collapsed to find the common thread that builds them up, then knocks them down. He attempts to understand collapse as a general phenomenon, to gain an understanding not limited to specific cases, but applicable across time, space, and type of society. After reviewing eleven reasons that previous historians have proposed for the collapse of societies he develops an explanation of collapse that focuses on economic factors. Remember that he is writing 20 years before our current economic and financial crisis. But, as you will see, his explanation sheds some light on our situation.
Why Some Complex Societies Have Collapsed
The author sees complex societies not just as bigger, more powerful organizations than their more primitive neighbors. He notes how complex societies change from small internally homogenous, minimally differentiated groups characterized by equal access to resources, shifting leadership, and unstable political formations to large, heterogeneous, internally differentiated, class structured, controlled societies in which the resources that sustain life are not equally available to all. (That’s a mouthful, but it’s accurate.)
As a result, a complex society, of necessity, evolves into a problem-solving organization. Its leaders need to focus time and energy on problem-solving because their society is made up of more parts, different kinds of parts, more social differentiation, more inequality, more kinds of centralization and control.
You can see the similarity to our own society. Indeed most modern states represent good examples of complex societies.
Why Economic Development Produces Both Progress…and Collapse
Common sense tells us that economic factors play a significant role in the growth of any society. But Tainter shows us how they can also lead to the collapse of a society. What happens in a nutshell is that economic development costs something. And, as it turns out, economic development inevitably leads to a society becoming more complex. As Tainter looks back through history, he finds that at certain points people simply no longer believe the cost of developing their economy is worth it. Tainter calls this the “principle of declining returns.” Basically, you get less bang for your buck.
At the point where people no longer want to pay the price for greater economic development, and decide that the complexity that comes with it isn’t worth that price, the society collapses. One example the author uses to show this principle at work is the Roman Empire.
How the “Principle of Declining Returns”
Brought Down the Roman Empire
The fall of the Roman Empire has always fired up the imagination of many a writer and historian, and Tainter is no exception. Here’s how he weighs in on the subject.
From the middle of the 3rd century BC, ever increasing quantities of gold and silver flowed into the Roman treasury. The result was that the Roman people paid little or nothing for continuing conquests and for garrison costs. The conquered populations underwrote the cost of further expansion. The Roman people reaped a benefit from territorial expansion. After the initial series of successes, the benefit/cost ratio was spectacularly high.
Inevitably, it couldn’t be maintained. Three factors lowered the marginal return. First, the number of profitable conquests declined. In Rome’s case, expansion ran up against the Parthians, a competitor with equivalent capabilities. In the north, the Germans presented other problems. Conquest and garrisoning became unprofitable.
Second, logistics of transport and communication dictate that, beyond a certain distance, lands will be difficult to govern.
Third, once the accumulated surpluses of conquered nations have been appropriated, a conqueror must thereafter incur costs to administer, garrison, and defend the province – and this must come from yearly income. Costs rise and benefits decline.
It is the cost/benefit ratio of the investment in complexity that begins to put pressure on the complex society. When challenges and stresses cause this ratio to deteriorate excessively, or coincide with a declining marginal return on investment in complexity, collapse becomes increasingly likely.
The fall of Rome was not due to barbarians, for the Empire was economically, organizationally and militarily stronger than its besiegers. And it was not due to internal weaknesses, for the Empire remained essentially intact for a period of several hundred years. Rome’s collapse was due to the excessive costs imposed on an agricultural population to maintain a far-flung empire in a hostile environment.
Whether the principle of declining margins provides the one and only explanation for the fall of the Roman Empire isn’t the point here. The author warns us that application of the principle to specific cases cannot be automatic or mechanical. Each society that has collapsed has done so under a set of circumstances that was at least partially unique.
However, we can observe that, in the past, the process of collapse has been rapid and substantial. In the case of Rome, a civilization that lasted over a millennium disappeared in a few years (at least in the West) and the world found itself in what has become known as the Dark Ages.
So How Does All This Help Us Understand the European Debt Crisis, the Supreme Court’s Ruling and the Jockey Outlet Sale?
First, the Good News:
Reason and Common Sense Will Be Able to Steer Us Away From Trouble
I’ve become so convinced of the critical importance of being able to think clearly and independently to get through our current economic and financial crisis that I started this year off with a discussion of how we can, indeed must, use our reason and common sense as never before in 2012. I believe these same skills can help us successfully negotiate our way through any complexity the world throws at us. Here’s how I put it then:
There are no easy answers or magic bullets that will make this crisis go away. And there’s no sure way to predict exactly how things will play out in the coming months and years. That’s why being equipped to understand events as they unfold is so important.
And please don’t fall into the trap of thinking that you need a specialized education, years of financial services industry experience, or a PhD in economics. You will find that our basic tools of reason and common sense will allow most of us to grasp most of the important issues.
(Click here if you want to read the rest of that letter.)
With this in mind, I’ve recently redesigned my blog so that much of the material posted there will focus on clear and simple ways to understand the important issues and events that will confront us in the coming months and years. The crisis will last until it ends – and we’re probably talking years rather than months. With effort, you can not only survive intact, but may even prosper. It all starts with a desire to know the truth along with a willingness to put in the effort it takes to find it. I’m hopeful the blog will help us in that effort.
Here are some recent entries that touch on today’s discussion and should serve as examples of what I’m talking about:
What’s Really Going on in the European Debt CrisisHere I’m throwing out an idea that almost no one talks about – the elephant in the room, as the expression goes. The point is to break through the endless drone of bureaucratic babble about rescues that, so far, have yielded nothing.
Did the Supreme Court Really Save Obamacare?You’ll find some mostly overlooked pieces to this puzzle that led me to, frankly, a surprising conclusion. I’m not saying I’m right, but I did try to follow my own thinking here rather than just listen to the flood of opinions we’ve all seen over recent days. (And let’s not forget the one issue related to all this that’s been lost in the shuffle which you’ll find in the Independence Day reflections below.)
So we’ve covered the European Crisis and the recent Supreme Court decision. What about applying our reason and common sense to that Jockey Outlet sale? Well, reason and common sense would tell you that either you embrace the brave new world of gazillions of choices to sort through, combined with endless sources of hard copy and digital coupons and deals, or you may just want to take my approach and limit your shopping experiences to the few and far between…although I’m open to suggestions.
So if the goods news is that each of us has the capacity to deal effectively with the challenges of our complex society, what’s the bad news? Well, for one thing, we’ll be taking a look at that last point we mentioned when we started:
- How Complexity Makes the Threat of Currency Wars – Yes, Wars – a Clear and Present Danger
Only we don’t have time for that now. Now it’s time to gear up for the 4th of July festivities. But before we do, here’s one last thought about effectively dealing with a complex world.
The First Lesson to Learn and Immediately Apply
To Your Investment Decisions
I’ve got a simple, clear and reasonable suggestion regarding investment decisions in a complex world: Keep them simple. Easier said than done? It is, but don’t let that stop you.
Taking my own advice, I spent the last two years or so grappling with how to simplify my firm’s investment discipline in the face of the biggest economic and financial crisis of our lives. In fact, the reason why it’s been an unusually long time since the last letter I shared with you is that we finally decided on a solution and went ahead and implemented it. It took some doing. The good news is that I expect we’ll be better prepared for what’s coming, using our clearer, simpler approach.
Happy Independence Day!
We’ve been discussing our complex world, along with the costs and benefits of it. Many people think that July 4, 1776 – the birthday of our country – was a simpler time. It may have been, but it certainly wasn’t safer. The men who signed the Declaration of Independence put their lives on the line. As they stated it then, “we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.”
And so the benefit our Founding Fathers passed on to us all – liberty – came at a great cost. And when issues arise that concern our liberty, it behooves us all to take notice and, at times, to take action. The Supreme Court’s recent decision concerning Obamacare leaves one such issue regarding liberty unresolved. We duly take notice.
The federal government, as a result of the Obamacare legislation, now requires all institutions that provide health insurance, including religious institutions, to offer abortion and contraception services. The Catholic Bishops of the U.S. have taken a strong stand against this requirement. Their efforts have drawn media attention, although this is not a strictly Catholic or religious issue. Whether or not you believe abortion and contraception are moral doesn’t change the fact that this is a Constitutional issue affecting our liberty.
The first sentence of the First Amendment to the U.S. Constitution states:
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof…”
Can this statement possibly be any clearer? The first part means that the federal government may not declare any particular religion as the official religion of the state. The second part means that each of us may exercise his or her religion freely – without impediment. The state may not impose restrictions or requirements on any religion, as that would interfere with the free exercise of religion.
It’s important that you engage with this issue, whether or not you’re Catholic. Here’s why:
The whole point of our ancestors coming to America was to exercise their religion freely.
Our first ancestors were Protestants who dissented from the established state religion of England, the Church of England. They were persecuted because of their faith. They came here to be able to freely practice their faith.
You must understand this fundamental point about why they came here in the first place. It wasn’t to pursue business opportunities, or because they thought they would live a life of luxury like when people buy a place on some Caribbean island to lounge around in the sun, or because – like some of the Spanish Conquistadors – they wanted to find gold and silver and get rich. They came here to freely exercise their religion.
There is nothing more fundamental to our rights as Americans than the free exercise of our religion.
In the moment the government creates a law that tells a religious institution that it must offer products and services that the religion considers sinful, it is preventing the members of that religion from freely exercising their religion. How could you view this any other way?
This is therefore a fundamental attack on all of us as Americans. It is an attack on our fundamental rights as guaranteed under the U.S. Constitution.
In fact, the Catholic Bishops recently made it clear that they don’t want an exemption from this law; they want the law overturned. They understand that this is a fundamental attack on freedom of religion and realize that letting this law stand would be the beginning of a new (and profoundly disturbing) round of erosion of our U.S Constitution and therefore our rights as U.S. citizens.
We should all applaud them. They are fighting for our liberty – the most fundamental liberty of all – as guaranteed under the Constitution. If anything should energize you to somehow get involved here and let your voice be heard, I can’t imagine another issue that could be more pressing or more important – at least from the point of view of being an American. Can you?
I realize that some of you may not agree with me here. Maybe some of your think I’m somehow “interpreting” this issue in light of my own beliefs. (Disclosure: I’m Catholic.) But I’m not interpreting. Religious liberty is the issue here and it is our most basic right as Americans.
I’d ask you to do some thinking about this. Use your reason and common sense and think about the government’s position here.
If you’re not sure about all this, perhaps a good way to gain some clarity would be by re-reading the Constitution. If you are not familiar with the Constitution, or if you have forgotten what you learned in the past, now might be a good time to learn or refresh your memory, as we celebrate Independence Day.
God bless you and God bless America,
Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952
Email: resposito@lighthousewm.com
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