War-gaming the Chinese Nuclear Option with US Treasuries

[ In the quite useful parlance of Scott Alexander, the epistemic status of this post is fairly uncertain, so take with a grain of salt.] 

As the economic tension between the US and China slowly ratchets up, I've found myself thinking recently about the financial nuclear option that China has, and how it might play out. 

What I mean by the nuclear option is China strategically using its large reserves of US Treasury Bonds and Bills to cause maximum economic and financial chaos in the US. This is something one occasionally hears about, but the discussion seems to be split between serious economists who blithely assume it will never happen, and doomsayers that think it will be the end of the world. As you'll see, I'm somewhere in the middle. 

Then again, I'm not a macroeconomist, so take my views as just an educated guess. Perhaps the easiest way to do it is just to assume that I'm playing the Chinese, and that I wanted to cause maximum carnage. What would I do, and how would it play out? I am almost certain that I'm not giving the Chinese any new ideas here, and since I'm John Q. Nobody in any case, I don't feel particularly guilty at writing this publicly. For instance, here's a recent statement from a Chinese diplomat [Update: Cui Tiankai is actually the Chinese Ambassador to the US, so this is pretty close to the official position of the Chinese Government]:

Cui said he did not believe Beijing was seriously considering using its massive US Treasury debt holdings as a trade war weapon, citing concerns that such a move would destabilize financial markets.

Translated back from Diplomat language, this means: We'd like to remind you that we could use our massive US Treasury Debt holdings as a trade war weapon. 

So without further ado, here's how I'd play the Chinese side. 

The first thing to realize here is the poker mindset. You don't want to be thinking of your chips as money. The money is spent when you walk in. Once you sit down, the chips are ammunition, used to defeat other players at the table. What you get at the end is the prize, but if you're thinking on every raise about the rent money, you're toast.

So it is here. If I were China, I would assume that the current holdings of US Treasury debt are like an ICBM. We're no longer trying to maximise the value of the holdings, or even preserve the value of the holdings as a strategic asset of China. We're treating the assets as already worth zero. Because, as we shall see, the policies designed to keep the value of the assets high are almost the exact opposite of the ones aimed at causing carnage.

US Treasury obligations play a very important role in the financial system. In many applications, we need to know a "risk-free" interest rate, and typically the rate on short term (i.e. 30 day ) US Treasury Bills is used as a proxy for this. They're denominated in dollars, which are fiat, so the Treasury can just print as many as it wants. Even "print" is a euphemism - press a button, and the dollars electronically appear. So there's very little reason why the US ever couldn't pay its short term obligations. It might choose not to, either because it went crazy (e.g. during the Clinton government shutdown, or the debt ceiling debate), or because the amount of dollars required to print would cause massive inflation whose cost would be worse than defaulting on the debt, but again, it nearly always could pay. And in practice, it always has paid. Which is why short term US T-Bills are treated as a proxy for the risk-free rate in lots of financial models, such as those used by banks.

But this interest rate is determined by supply and demand in the market for Treasury assets. China has accumulated a ton of them, and could dump them on the market at any time. In bond terms, the yield or interest rate* is inversely related to the price (assuming a zero coupon bond, as is the case for short term obligations like T-Bills, though the logic is similar for coupon bonds). Dump lots of T-Bills on the market, the price drops, and the interest rate rises. When the interest rate rises, every bank who has a short term financing gap that they were planning on covering on the overnight lending market is suddenly in a huge hole. Chaos ensues. 

So I'm China. As a preparatory step, beforehand I'd take all my own financial institutions and ensure that they're not holding any US treasuries privately as collateral on anything. Slowly switch to safe stuff for my own accounts - gold, Euro bonds, whatever. The point is that we're going to screw everyone holding treasuries, and everyone else too. But we definitely want to minimise our own banks' exposure. We want to try to get the financial side of the Chinese economy as close to self-sufficient as possible. 

The basic step is dumping Treasury assets. If we do it right, the first asset dump will be a surprise attack that will spook the market as much as possible. To ensure maximum carnage, I'd begin my sales at maybe 3pm EST. The aim is to do it shortly before market close in the US, when lots of financial institutions have to mark their accounts to market at the end of the day. 

So, first step, I would start with a massive dump of Treasuries on the market. Not the whole amount  - one must always keep troops in reserve. But enough to cause a big spike in short term interest rates, and enough to panic everyone in the market.

So, this happens at say 3pm. The other reason to do it close to the end of day is as follows. We cannot raise interest rates forever. Indeed, we may not even be able to raise them for very long. The reason is that whoever is playing the US Fed has an obvious countermove. As soon as they realise what's going on, they'll step into the Treasury market themselves and start buying treasuries to raise the price and lower the interest rate. Remember, they're doing this with printed dollars, which are in an almost infinite supply, up to the point of causing inflation. And if you're the Fed, the tradeoff between inflation versus short term market chaos is like worrying about becoming addicted to morphine when you've just been shot in the leg. The choice is obvious - they'll buy, in whatever quantity needed to prevent interest rates from going through the roof.

If they can do this, what's the play? Well, first of all, there's the surprise attack. We're gambling that they don't necessarily have a plan set up to immediately deal with this and implement the massive purchases necessary. Maybe they do, in which case the first round effects aren't as dramatic as we'd hoped. But we can help ourselves by giving them a limited amount of time before market close - just enough time for everyone to react and price in the carnage, but ideally not enough time for them to respond properly.

The aim is that every bank who's long in Treasury assets and has borrowed against them (which is a lot of them) was accounting for this collateral at a low interest rate, and a high price. Suddenly, with minutes left on the equity clock, they realise they're on track to be insolvent by the end of the day, as the collateral on their obligations is rapidly dropping. Loans get called in. Prices of their equities fall, making everyone else panic, making the market as a whole crash. 

So, that's the aim. How would I ensure this gets played up?

Having done the initial dump at 3pm, I would make an announcement at 3:15 or 3:30 or so. The Chinese government is planning to liquidate all its remaining US Treasury obligations and US Dollar denominated assets, immediately. Moreover, we will be switching to Euro Bonds and Euros.

What's the point of this?

In normal trading times, this would be crazy. You're just inviting people to front run your trades, selling before you sell so you get a worse price and then buying back off you later at a profit.

But in chaotic times, this is ideal. We're trying to maximise price impact, not trying to maximise value. By announcing our intentions, we tell the whole market - lots more treasury sales are on the way. What will they do? Start dumping their own Treasury assets, pronto, and switching to Euro ones. In this way, we're not just using our own Treasury reserves. Now the second round of selling is coming from every other financial institution with a fast-moving trader and a desire to stay solvent. Of course, this still doesn't count for squat if the Fed puts in an infinitely large buy order, but there's a long term point. We want as many financial institutions as possible to stop holding US Treasury assets, so the Treasury is basically having to hold the whole lot themselves. This is functionally equivalent to just printing money to cover the entire deficit. They'll do it if they have to, but they don't really want to.

And in the mean time, now the Fed is not only trading against us, but trading against lots of other people in the Treasury market as well. Which makes it harder for them to just take steps that would somehow freeze us out of the market. 

Anyway, let's assume we're playing against a highly competent Fed. Unbeknownst to us, they have contingency plans in place to send enormous buy orders if the price drops sufficiently, and so we don't get anywhere much in terms of disrupting the Treasury market. What then? Has the plan failed?

No. The Treasuries are only step one. The real action is in the foreign exchange market. The Fed is going to have to provide me as China with lots of US Dollars to purchase all the Treasury assets off me. As they do, what's my response? Immediately start selling those US Dollars and buying Euros. In large quantities, as fast as possible.

In other words, we're trying to tank the US dollar. And this is something the Fed has a much weaker position on. Why? Because while they can print up an infinite amount of US Dollars to purchase treasuries, they can't print up any Euros at all to buy US Dollars. Sure, they have some reserves, and you can bet your ass they'll use them. But now there's a finite target. We may even have some idea of how much we're having to trade against, yet in any event, it's a finite and achievable task. And the more they support the T-Bill, the more they give us ammunition to attack the currency.

Which gets to the other point - why buy Euros? Why not buy Renminbi?

Because China wants a weak dollar, but it doesn't really want a strong Renminbi. When the dollar weakens, the US gets imported inflation on its many foreign goods. It also makes it easier for US exporters, so it's not all bad (we have to assume that trade between the US and China will be totally frozen, so it's just other countries we're thinking about). So a big drop in the US Dollar will cause significant inflation in the US.

China relies on exporting industries, so it generally wants a weak Renminbi. Instead, the aim is to make the Euro strong instead.

You might wonder, would the Europeans actually want this? What if they started printing Euros to resist it? 

Well, they might. But I'm not so sure. What we're really trying to accomplish as China is a shift in the question of who gets to be the global reserve currency. It's not going to be China. But it may easily be Europe. A large part of the Euro project was trying to set up a global counterweight to US financial hegemony. There are probably a fair number of Euro policy-makers that would be quite pleased to see the US dollar get displaced. The main advantage of being the global reserve currency, when we're talking fiat, is getting to run enormous ongoing deficits without creating inflation. If the US can't sell its Treasury debt to global investors any more, it runs a real risk that printing more money will result in inflation. As the reserve currency, so far this hasn't happened. 

Indeed, this was surprising to many people during the financial crisis - the Fed was printing like crazy and buying up all sorts of things. Why didn't it result in lots of inflation? Well, part of the reason is that the dollars weren't circulating back into the US economy in the same way. Foreigners buy up the debt. If they bought Euro debt instead, European countries would face much lower borrowing costs, the famous exorbitant privilege that the US currently has. Not only that, but being the reserve currency means that other countries want to invoice in your currency, and hold assets in your currency to hedge against this risk, and have banking services with your country. So being the global reserve asset fosters the development of your financial sector. If the US Dollar goes out of fashion, expect New York to become significantly less important relative to Frankfurt and London as the place of global financial markets. 

It's not just me that thinks this, by the way. This is approximately the argument in the recent Gopinath and Stein paper. They' don't say as much on the question of how one might shift between equilibria, but they more or less agree on the effects of being the dominant currency for trade, invoicing and financial development.

In other words, we're potentially peeling off the Europeans from the Americans. We're saying, hey, don't just instinctively support Uncle Sam here. We think it's probably in your interests to play along with us.

Why might this also be important? Because the other thing that the Fed will probably do in this scenario is call up every other Central Bank in the world and demand that they start buying US dollars with their own currency reserves. Assume that lots of serious threats are made here. If we're China, we can't overwhelm everyone. But if we can convince the Europeans to think twice before buying dollars, then maybe Japan thinks twice too, and India, and Australia, and before you know it, suddenly everyone is holding Euros instead. Russia certainly would be pleased to see the change, so you can count them out. Bye bye US financial hegemony.

Ideally, if I were China, I'd implement this plan when the US was in a recession, or near it. Because this means it's a lot more costly for the US to take the other option to support the currency - let the bond sales go on and interest rates rise. Because this will almost certainly tank the US economy if they do. 

That's the basic play. I think. As I said, I have a lot of uncertainty as to how large the effects would really be, even under the Holmes plan. Maybe global investors believe China won't be able to displace the US, and so don't sell many Treasuries or US Dollars. Maybe they do, and USG threatens their governments that they'll get Color Revolutioned if they don't demand their banks fall into line. This is pretty close to an act of war, so you'd be crazy to do this as China without expecting serious repercussions. And if the aim is to displace the US Dollar as the global reserve currency, you've pretty much only got one shot at it. Once you've fired all your missiles, they're gone. If people stick with the US, in the long run China might end up weakened, and you've destroyed the value of a substantial foreign currency reserve in the process. 

Anyway, this is a guess. Maybe I'm totally wrong, either in what they'd do, or what the consequences would be.

But let's assume for the moment that I'm approximately correct. One obvious question is, would they actually do this?

It's like a nuke. Generally speaking, no. Firstly, the main aim will be short term chaos. The effect on interest rates will likely be temporary, and the Fed will find some excuse to declare that all the financial institutions aren't actually insolvent at 5pm, no matter what market prices say. The currency play is harder for them to deal with, but also speculative as to how big the effect will be, and if its actually worth it. Maybe the US decides its okay with a weak dollar after all? Many other places are okay with this policy. Stranger things have happened.

Actually, it's not even like a nuke, as much as being like two guys in a bar fight, and one of them is threatening to burn the whole bar down, but he's standing closer to the door, so he won't get burned as much. Chinese financial institutions will suffer too. Chinese exports will suffer, big time. And it's a large gamble to see who else goes along, somewhat like a leadership challenge in a parliamentary system. The votes are taken by all the other countries. If you win, you can win big, but if you lose, you're off to the back benches or worse.

But thinking about it in this way misses a larger point. Are nukes pointless simply because in equilibrium its unlikely they'll get used? Wrong. As long as the threat to use them is somewhat credible, they can make excellent negotiating chips.

And this isn't just hypothetical. This actually happened. 

In 1956, during the Suez Canal crisis, Britain, along with France, decided to implement a military initiative to take back the Suez Canal, which Egypt's President Nasser had recently seized off them.

They felt that, as sovereign countries looking out for their own interests, they could just go ahead and do it.

Wrong answer. 

You know who was annoyed at not being consulted? Dwight Eisenhower. So what did he do?  He called up Sir Anthony Eden, and among other things, he threatened to dump the enormous US holdings of British War Debt, while simultaneously cutting Britain off from borrowing. The pound would tank in value, and Britain would be in chaos. The chaos didn't have to be permanent, necessarily, though it might be. But it would certainly last long enough to permanently end the political career of Sir Anthony Eden.

And so Eden backed the @#$% down.

If there was one day where it became completely clear to all concerned that the US was now the world's financial and military hegemon, this was it.

Maybe the Chinese will never do it.

But you'd be a bolder man than I to think that they'd never threaten it. 

All I can say is that I hope some of the smart people at the Fed are thinking about this more than I am.

They have our soul, who have our bonds.

Carlyle Considered

After a shameful delay, at last I have joined the Froude Society! Previous installments covered Froude's "The Bow of Ulysses: The English in the West Indies" and Maine's "Popular Government". Today's subject is Thomas Carlyle, the grand old man of reaction, and his "Latter-day Pamphlets".

Reading Carlyle is often quite surprising, because while he is indubitably reactionary, it's not always in ways that one might expect. For instance, Carlyle places a lot of emphasis on the great men theory of both history and government.

Indisputably enough the meaning of all reform-movement, electing and electioneering, of popular agitation, parliamentary eloquence, and all political effort whatsoever, is that you may get the ten Ablest Men in England put to preside over your ten principal departments of affairs.

This emphasis means that there is relatively less discussion of detailed policy positions on particular issues of the day. Good government, to Carlyle, is a long way from a set of conservative talking points. It arises by appointing the most competent men to power, and giving them the authority to actually rule.

Carlyle wants, in other words, an aristocracy. But this is an aristocracy of talent and character, not one of inherited class. Men of low birth but noble character are singled out for praise, Robert Burns being a prominent example.

Choose well your Governor;—not from this or that poor section of the Aristocracy, military, naval, or redtapist; wherever there are born kings of men, you had better seek them out, and breed them to this work. All sections of the British Population will be open to you.

To the modern mind, one is more apt to evaluate governments by whether they their preferences accord with our own (and hence whether we want the same things implemented as the leaders do ) and whether they have the competence to actually carry the plans out. In this reckoning, a competent leader carrying out plans we hate is considerably worse than an incompetent leader trying and failing to carry out plans we hate.

But to Carlyle, competence involves the ability to understand the decrees of Nature or Nature's God, and thus know what will cause justice to be done. As a result, the distinction between competent government and just government is not of primary significance:

To prosper in this world, to gain felicity, victory and improvement, either for a man or a nation, there is but one thing requisite, That the man or nation can discern what the true regulations of the Universe are in regard to him and his pursuit, and can faithfully and steadfastly follow these. These will lead him to victory; whoever it may be that sets him in the way of these, —were it Russian Autocrat, Chartist Parliament, Grand Lama, Force of Public Opinion, Archbishop of Canterbury, M'Croudy the Seraphic Doctor with his Last-evangel of Political Economy,—sets him in the sure way to please the Author of this Universe, and is his friend of friends. And again, whoever does the contrary is, for a like reason, his enemy of enemies. This may be taken as fixed.

Perhaps the reason that we no longer talk this way is that most of us no longer believe in God (or anything else), and hence don't think of the aim of politics as being to implement his justice on earth. As a result, there's just preferences.

The above quote also illustrates that the focus on competent leaders making competent decisions takes precedence over designing mechanical schemes to implement decisions. As I noted in the discussion of Maine, early Moldbug (in the form of ideas like neocameralism) is a scientist of government, seeking the truth of optimal arrangements. Maine is an engineer of government, grappling with the messy practicalities of what produces generally stable outcomes. But in this taxonomy, Carlyle is an artist of government. Governing is a skill to be learned by able men, appropriately apprenticed to their trade. The only interest in systems and mechanisms is in the extent to which they correctly select the right men, and elevate them to power.

For this reason, Carlyle is generally scathing about the modern implementation of democracy, but not because it is impossible to implement well. The main problem is the fact that the world is full of fools, most of whom know nothing about either government policy or selecting able men. The Laws of the Universe are not easily given up to every Tom, Dick and Harry, so averaging out their opinion with those of the wise is a recipe for disaster:

Your ship cannot double Cape Horn by its excellent plans of voting. The ship may vote this and that, above decks and below, in the most harmonious exquisitely constitutional manner: the ship, to get round Cape Horn, will find a set of conditions already voted for, and fixed with adamantine rigour by the ancient Elemental Powers, who are entirely careless how you vote. If you can, by voting or without voting, ascertain these conditions, and valiantly conform to them, you will get round the Cape: if you cannot,—the ruffian Winds will blow you ever back again; the inexorable Icebergs, dumb privy-councillors from Chaos, will nudge you with most chaotic 'admonition'; you will be flung half-frozen on the Patagonian cliffs, or admonished into shivers by your iceberg councillors, and sent sheer down to Davy Jones, and will never get round Cape Horn at all!

...
Ships accordingly do not use the ballot-box at all; and they reject the Phantasm species of Captains: one wishes much some other Entities,—since all entities lie under the same rigorous set of laws,—could be brought to show as much wisdom, and sense at least of self-preservation, the first command of Nature.

For democracy skeptics like me, there is much to enjoy. But Carlyle is not easily reduced to slogans, and gives a quite nuanced view on when voting will work better or worse. Latter Day Pamphlets is not wedded to a particular governing system.

For instance, the biggest surprise of the book was that Carlyle is relatively positive about Oliver Cromwell. To me, I had always thought of Cromwell as a disaster, the beginning of where things went badly wrong in English history, and the destruction of genuine monarchy in England. But this isn't how Carlyle portrays it. Cromwell's strong Christian belief is implicitly praised, as is competence in leadership. Remember, the key is greatness of leadership, not forms of government! In this respect, I part company with Carlyle in the importance of institutions and norms. Even if Cromwell were more competent than Charles I, the successor to Charles I would have been a much better bet than the successor to Cromwell. Institutions are not an idea that has much prominence in Latter-day Pamphlets, and the subject of Cromwell and Charles I is not covered in enough detail for me to fully understand the appeal or the implied argument, But the overarching point is still correct - having a crown does not make one a real king, and fake kings are a source of particular disgust to Carlyle. While he does not elaborate much on Charles I, he accurately predicts that constitutional monarchs will not be stable arrangement, nor should we wish them to be:

Imposture, be it known then,—known it must and shall be,—is hateful, unendurable to God and man. Let it understand this everywhere; and swiftly make ready for departure, wherever it yet lingers; and let it learn never to return, if possible!

...
The Kings were Sham-Kings, playacting as at Drury Lane;—and what were the people withal that took them for real? It is probably the hugest disclosure of falsity in human things that was ever at one time made.

...[The Common Englishman] has been used to decent forms long since fallen empty of meaning, to plausible modes, solemnities grown ceremonial,—what you in your iconoclast humour call shams,—all his life long; never heard that there was any harm in them, that there was any getting-on without them. Did not cotton spin itself, beef grow, and groceries and spiceries come in from the East and the West, quite comfortably by the side of shams? Kings reigned, what they were pleased to call reigning; lawyers pleaded, bishops preached, and honourable members perorated; and to crown the whole, as if it were all real and no sham there, did not scrip continue saleable, and the banker pay in bullion, or paper with a metallic basis ?"

Carlyle predicts, in other words, what I have mentioned before - that political arrangements which are no longer actively defended, which persist out of institutional habit and inertia, will not survive. The unprincipled exceptions, if not actively insisted on, will be made into principled disasters. My guess as to the big elephant in the room on this front is citizenship. With Politics as with life -  nature has made up her mind that what cannot defend itself shall not be defended, as Mr Emerson put it.

By contrast, Oliver Cromwell and the members of the Long Parliament were deadly serious. And Carlyle gives an outstanding Chesterton's Fence justification of what role Parliament actually used to fill (much better than my own poor efforts)

Reading in Eadmerus and the dim old Books, one finds gradually that the Parliament was at first a most simple Assemblage, quite cognate to the situation; that Red William, or whoever had taken on him the terrible task of being King in England, was wont to invite, oftenest about Christmas time, his subordinate Kinglets, Barons as he called them, to give him the pleasure of their company for a week or two: there, in earnest conference all morning, in freer talk over Christmas cheer all evening, in some big royal Hall of Westminster, Winchester, or wherever it might be, with log-fires, huge rounds of roast and boiled, not lacking malmsey and other generous liquor, they took counsel concerning the arduous matters of the kingdom.

...So likewise in the time of the Edwards, when Parliament gradually split itself into Two Houses; and Borough Members and Knights of the Shire were summoned up to answer, Whether they could stand such and such an impost? and took upon them to answer, "Yes, your Majesty; but we have such and such grievances greatly in need of redress first,"—nothing could be more natural and human than such a Parliament still was.

...For, in fine, the tragic experience is dimly but irrepressibly forcing itself on all the world, that our British Parliament does not shine as Sovereign Ruler of the British Nation; that it was excellent only as Adviser of the Sovereign Ruler; and has not, somehow or other, the art of getting work done

In the Carlyle telling, the Parliament worked for two reasons. Firstly, it was composed of men who were themselves Nobles and Rulers, and thus competent to advise on such matters. And secondly, it filled the role of discussing policy choices when there were few avenues available for this. As Carlyle notes, this task is much more competently carried out in modern times (both his and ours) in the press. But the presence of the press makes Parliament not only superfluous, but contemptible, as it turns Parliamentary speeches into performances marketed to the rubes, not serious policy debates. Parliaments, at best, make good advisers but bad sovereigns. Modern parliaments are bad at both. 

There are some parts of Latter Day Pamphlets, especially those that describe the actual workings of government, that read as eerily prophetic. One is forced to do a double-take when one reads the descriptions of how government in England actually worked at the time. For instance:

[I]t is felt that 'reform' in that Downing-Street department of affairs is precisely the reform which were worth all others; that those administrative establishments in Downing Street are really the Government of this huge ungoverned Empire

Much has been done in the way of reforming Parliament in late years; but that of itself seems to avail nothing, or almost less. The men that sit in Downing Street, governing us, are not abler men since the Reform Bill than were those before it.

The civil service, in the form of the Home Office, Foreign Office and Colonial Office was already thoroughly in charge of governing...in 1850. Not only that, but the civil service was also fast turning into a sclerotic mess of incompetent bureaucrats badly doing work that didn't really need to be done in the first place. Pause and let that sink in when you hear conservatives talking about how we need to scale back the size of bureaucracy. 

As a consequence, it doesn't matter much who is the Prime Minister, since the civil service makes all the important decisions anyway, and the election and political process is so chaotic and time-consuming that there isn't scope for much else for a leader to do. This is a point that Moldbug emphasises a lot, but the average democracy adherent simply cannot believe. The memorable description of being Prime Minister is that of trying to stay atop a wild bucking horse, with the effort towards not being thrown off crowding out any hope of controlling the direction:

[T]he Right Honourable Zero is to be the man. That we firmly settle; Zero, all shivering with rapture and with terror, mounts into the high saddle; cramps himself on, with knees, heels, hands and feet; and the horse gallops—whither it lists. That the Right Honourable Zero should attempt controlling the horse—Alas, alas, he, sticking on with beak and claws, is too happy if the horse will only gallop anywhither, and not throw him. ... This is what we call a Government in England, for nearly two centuries now.

...Really it is unimportant which of them ride it. Going upon past experience long continued now, I should say with brevity, "Either of them—Neither of them." If our Government is to be a No-Government, what is the matter who administers it? Fling an orange-skin into St. James's Street; let the man it hits be your man.

This has been the government ... for nearly two centuries before 1850.  If you think Carlyle might be right, rolling things back to the 1950's isn't going to cut it.

Yet despite these similarities in description of some parts of the world, one sees that Moldbug's description of Carlyle as a reactionary is entirely correct:

A reactionary is not a Republican, a Democrat, or even a libertarian. It is not even a communist, a fascist, or a monarchist. It is something much older, stranger, and more powerful. But if you can describe it as anything, you can describe it as the pure opposite of progressivism. True reaction is long since extinct in the wild, but it lives in Carlyle.

Indeed, reading through Latter Day Pamphlets, one continues to be struck by statements that defy description on the standard modern political spectrum. Authority is not only necessary, but wise and just:

I say, it is the everlasting privilege of the foolish to be governed by the wise

Carve it in stone. This is so far outside the Overton Window that we barely have words to describe it.

But if you were hoping for a defense of mainstream capitalist economics, you will not find it here. Carlyle is shocked and appalled by the level of poverty evident in Ireland. But unlike the left, he is appalled not only because of the suffering, but mostly because the indigence and misery is a sign of a catastrophic failure of governance. The problem with poverty is not ultimately the money, but the wasted lives.

The Idle Workhouse, now about to burst of overfilling, what is it but the scandalous poison-tank of drainage from the universal Stygian quagmire of our affairs? Workhouse Paupers; immortal sons of Adam rotted into that scandalous condition, subter-slavish, demanding that you would make slaves of them as an unattainable blessing! My friends, I perceive the quagmire must be drained, or we cannot live.
...
If our Chancellor of the Exchequer had a Fortunatus' purse, and miraculous sacks of Indian meal that would stand scooping from forever,—I say, even on these terms Pauperism could not be endured; and it would vitally concern all British Citizens to abate Pauperism, and never rest till they had ended it again. Pauperism is the general leakage through every joint of the ship that is rotten. 

Carlyle is decidedly cool on the ability of markets, not only to solve these problems, but also to generate wise decisions in general. His scathing essay on the possibility of making a statue of railway baron George Hudson, who is presented as a seller of worthless scrip and dubious economic schemes, makes clear why. A democracy of dollars is not much more likely to recognise genuine human worth than a democracy of votes, for much the same reasons. This is not a matter Carlyle takes lightly:

If the world were not properly anarchic, this question 'Who shall have a Statue?' would be one of the greatest and most solemn for it. Who is to have a Statue? means, Whom shall we consecrate and set apart as one of our sacred men?

And he walked the walk too, founding the National Portrait Gallery to make sure that great men were properly commemorated too. 

One is also reminded in odd ways that the world itself was very different in 1850, and not just in the ways that get frequently remarked on. For instance, in an essay discussing the enormous prominence given to people who had the gift of good speech, Carlyle states the following:

Our English careers to born genius are twofold. There is the silent or unlearned career of the Industrialisms, which are very many among us ; and there is the articulate or learned career of the three professions, Medicine, Law (under which we may include Politics), and the Church. Your born genius, therefore, will first have to ask himself, Whether he can hold his tongue or cannot ?

Two questions arise, both linked. Firstly, what criteria do we now use to evaluate truth, apart from rhetoric, which gets little discussion in the essay? And secondly, what is the large class of learned careers not discussed in the above list?

The answer to both is: science. One can see that the intellectual impact of the scientific method had not yet permeated much of society, and that science itself was practiced by a small number of mostly independently wealthy people like Lord Kelvin. The rest of innovation was merely lumped in with industrialism, and not at all considered to be an important or primary method of understanding the universe. If you were actually transported back to the world of 1850, it would almost certainly strike you as utterly alien in far more ways than you imagine. As Moldbug said of Larry Auster, it is equally true of Carlyle - he is gone, and so is the country he was born in. To complain of either would be as superfluous.

But the underlying truth of his words still remains. To those of us skeptical about modernity, Carlyle speaks across the ages, addressing our misgivings and pointing a way forward through the morass:

My friends, across these fogs of murky twaddle and philanthropism, in spite of sad decadent 'world-trees,' with their rookeries of foul creatures,—the silent stars, and all the eternal luminaries of the world, shine even now to him that has an eye. In this day as in all days, around and in every man, are voices from the gods, imperative to all, if obeyed by even none, which say audibly, "Arise, thou son of Adam, son of Time; make this thing more divine, and that thing,—and thyself, of all things; and work, and sleep not; for the Night cometh, wherein no man can work!" He that has an ear may still hear.

Just so.

The Leader as King, the Leader as CEO

Of all the ideas in Unqualified Reservations, perhaps the one I found most compelling is the comparison of the state with a corporation.

In the Moldbug view, the state, in any meaningful sense, already is a corporation - a group of individuals working for a shared purpose under an agreed-upon structure. It's just that the modern democratic state is a very oddly run corporation. This was satirised very well in the Moldbug theory of rotary management, where he described how bewildering democratic governance would look if applied to a regular company.

But behind the parody was a serious, and brilliant, point. Most educated people in the west think that the way we run corporations is approximately optimal, given their tasks. That is, being run with dispersed shareholders separate from the customer base, elections of board members who appoint an all-powerful CEO who is subject to board dismissal, and a share price to monitor performance. And most educated people in the west similarly think that the way we run governments is approximately optimal, given their tasks - that is, with democratic elections, a permanent civil service, judicial review etc.

But it is not at all clear that the tasks of the two organisations are that different. And since they are governed in such totally different ways, if you think that they are both optimal, it is incumbent upon you to explain what specifically about the differences between the organisational tasks requires such totally different structures.

The Moldbug answer is quite simple - there is no difference. Companies fill essentially similar functions to countries, and we can thus judge the expected success of difference governing structures by the relative success of different company structures. Sovereign corporations would likely outcompete sovereign democracies, in much the same way that regular corporations outcompete co-operatives (which is approximately what democracies are, but with more dysfunction). They just haven't been tried.

But there is another aspect to this metaphor that gets less emphasis.

Suppose we have a family-owned firm. All the shares are owned in their entirety by the male head of the family, the father. The father is both the sole shareholder and the CEO. He passes both the CEO position and his equity stake, simultaneously, to his eldest son upon his death. In this corporation, the two roles are inextricably linked by company by-laws - if at any point the father ceases his role as CEO and transfers it to someone else, then the shares and any cash flow rights are transferred to his successor, except those periodic payments given as a gratuity by the new CEO who may keep him on as an informal adviser. This has some beneficial effects, since the principal-agent problem is basically solved - the CEO now has the strongest possible incentives to maximise the value of his shares.

The father does not have to make every single decision - as CEO, he can hire advisers and delegate certain decisions, but ultimate authority must remain with him in order for him to retain his ability to reap the profits of the company. As both CEO and sole shareholder, there is no board to either evaluate his performance as CEO, or provide external opinions - the only opinions he will hear are those of subordinates directly employed by him, and who may be fired by him at any moment. Indeed, as CEO he is wary of delegating too much, lest people misinterpret these actions under the company by-laws as meaning that his delegate is actually the new CEO and shareholder. As a result, it is hard for him to reap the profits of the company without actively managing it. At first this works okay, but he has to keep doing this even when he is old and feeble - retirement means losing his equity stake.

Because the CEO must hold all the shares, he is prevented from raising outside equity. If he wants to raise capital for a project, only debt financing is available. As a result, if the CEO has a firm that is short in pledgeable assets, he may find it difficult to raise external funds for capital projects. This occasionally makes it difficult for him to ward off competitor firms.

While the father naturally has affection for his son and successor, he loves his other children too, and ideally would like to arrange to transfer his shares to a formal trust to provide for all of them. Unfortunately, company by-laws prevent the shares from being transferred to a trust. Most of the time, he can rely on his oldest son to treat the rest of the family fairly well, but it's always a gamble. In addition, he occasionally suspects that the total profits would be greater if he transferred power to his smarter, younger son, rather than his oldest wastrel son. But the by-laws are fairly strict on that point.

Every so often in the corporate history, the father becomes completely evil, incompetent, or mad. Since this threatens not only the value of his shares, but the livelihoods of his senior employees and the welfare of the customers, they occasionally take drastic action. But since the by-laws don't allow for the removal of a bad CEO, and since there's no way for the CEO to transfer control without impoverishing himself, this usually means that the current CEO has to be killed. Since this is a risky move, which the current CEO has the highest conceivable incentives to prevent, it's only attempted in the most dire circumstances.

There are other unscheduled transfers of power. Sometimes, the eldest son gets impatient, and kills off the father. Sometimes, a junior son will kill off the eldest in a deniable manner, in order to be further in line for the CEO job. You'd think that the by-laws would explicitly preclude someone from benefiting in this manner, and the shares and CEO job would be taken away, but oddly this isn't the case.

Because the parallels are more straightforward, and because I lack the cleverness and imagination of Moldbug, it's probably quite apparent that I'm describing a simplified version of absolute monarchy. I have defended absolute monarchy before, and think that it probably worked a lot better than people today tend to think. But like before with democracy, we can use the history of corporate governance to judge the merits of monarchy versus neocameralism, or sovereign corporations.

Reader, suppose that we unleashed our monarchical corporation into the world, to compete with the firms in the S&P 500. Do you suppose it would succeed? True, it has its advantages. If it started in office with a great CEO, it might do quite well for a while, since it wouldn't suffer from the standard principal agent problems of managers empire-building, or enriching themselves at the expense of shareholders. But how long do you think such an arrangement would last, especially past the first CEO? Most CEOs, even good ones, are only at the top of their game for a short number of years, and when they screw up, they have to get replaced by someone else, who is picked from among the top managers across the whole planet. The advantages here are fairly plain.

It seems quite apparent that our monarchical firm would struggle to compete. Most of the world's successful coprorations have structures that are nothing like the one we describe above. They look more like our regular, familiar public firms.

"But," you may protest, "there are successful family firms too!"

This is true. In the world today, there are large, successful family-run firms. But they tend look more like regular public companies than our monarchical corporation. Many of them are publicly traded as well, like Wal-Mart, with the family retaining only a controlling stake. Out of the rest, the shares can be distributed across family members or held a trust. The CEO job can be kept within the family, or transferred to an outsider (even if the outsider is "adopted" into the family, like in Japan). The firm can raise equity financing.

And for the families that own such firms, they don't seem to be in a huge hurry to change their corporate by-laws to those of a monarchical corporation. By revealed preference, they seem to prefer more modern arrangements.

Out of the various aspects of an absolute king, it seems beneficial that the executive has absolute authority over personnel, budget, operations, and other kinds of organisational decisions. Divided power in this regard mostly just causes problems and inefficiencies. But the linking of absolute organisational authority (which both the King and CEO share) with sole inalienable equity ownership (which only the King has) is not nearly so obviously beneficial. And the process of removing a bad CEO seems far preferable to the process of removing a bad king.

Moreover, if the CEO is not to be the sole shareholder, then it seems misguided to make the CEO the sole judge of his own performance. Having a board, who lacks any major organisational authority except the power to appoint and remove the CEO, along with other major structural changes, seems fairly benign as far as divided power goes, and is very beneficial in the event that you need to change the CEO. It's possible that the board might become meddlesome, but most of the charges against boards made by economists are that they rubber stamp the CEO's decisions too much, not that they're overly combative.

And finally, dispersed shareholders also go a decent way to combating the problem of an owner with perverse or evil preferences. When the sole shareholder in a country is the king, it's possible that the king just has preferences for evil, nasty stuff. Sure, he'd like more profit, but perhaps he's more interested in droit du seigneur, even though it's value-destroying and the citizens hate it.

But if we take the preferences of a multitude of shareholders, and ask what set of preferences can they agree upon, it's typically to just get paid more. In other words, maximise dividends, and let each shareholder buy whatever he wants. There's not usually cross-subsidisation of shareholders in their purchases from the company. It's possible that shareholder citizens in a sovereign corporation might also vote for droit du seigneur, but it seems easier and cheaper to just get hookers or groupies with the extra dividends.

Sovereign corporations have their problems, no doubt. But if your plan for how you'd like a government to be run varies wildly from how you'd like a regular corporation to be run, then you at least want to know the specific reasons why, lest the ghost of William of Occam haunts your country's fortunes.

On Power and Coordination

Occasionally, as Paul Samuelson once noted, one is tempted to write something that one can’t decide whether it’s something important, or something completely obvious. So it is here – if in doubt, go with humility and bet on the latter.

Power, in general, is the ability to impose one’s own preferences on somebody else, overriding whatever the person’s own preferences are.

So how does that come about?

It seems that there are two main ways.

The most straightforward way is to have some attribute that the other person lacks – in other words, there can be inherent differences between people. You can be stronger, or smarter, or better looking, or trained in a specific skill. This is the simplest form of power – the bully. I am stronger than you, therefore I can impose my will upon you. This kind of power is readily apparent, and understandable instinctively even to small children.

But this only gets you so far. Think about Hillary Clinton. She came close to having the ability to annihilate most of the human race with nuclear weapons. On what personal attributes did this arise? She has a certain wily cynicism, and a will to power. But she is so frail that she could barely stand up. She is so unlikable that even those voting for her now admit that nobody really liked her. She’s above average intelligence, but you could take a randomly chosen math professor from a top 200 college in the US and they’d be considerably smarter. So something is missing.

Indeed, there is a second, and broader way.

Most power comes from coordination.

Coordination at heart, is the power of other people’s beliefs. The belief among the members of a group that they will all act together, or all act at the command of a leader. The belief of the dominated group that they will be punished severely for any resistance.

The simplest form is cooperation – an explicit agreement to help each other out. This can create power even if everyone is otherwise equal. A criminal gang combined creates much more power for each of its members than they would have if they were acting alone. Four people together can gang up on another person while taking much less damage than one quarter of what they’d sustain in a one on one fight. So they have a force multiplier –the gang of four can win more than four uneven fights.

With basic co-ordination, the equivalent of ‘having inherent strength’ is having the power of numbers –inherent attributes and coordination are complements, as people generally want to coordinate with the strongest person. But co-ordination can outstrip inherent differences in numbers quite easily. Four bullies in a schoolyard can terrorize the entire rest of the student body, even though the latter are much more numerous, and their combined strength is greater. This is just another way of saying that if everyone else could coordinate, they would actually hold the power. How do they do that? How do they agree to a plan, and get everyone to stick to it? It seems like such a trivial thing to surmount, but it is in fact the entire thing.

Or if that’s trite, how did the ~35% Sunni population of Iraq rule over the ~65% Shiite population for so long? It could be that the Sunnis are better fighters, but the subsequent developments don’t seem to immediately support this – the Iraqi government may or may not survive American withdrawal, but the Shiites successfully expelled the Sunni from Baghdad, and I doubt that ISIS car bombs are sufficient to reverse this.

Beliefs often create self-fulfilling prophesies. When everyone knows that Saddam is in charge, and that dissent is ruthlessly punished, it becomes very difficult for the Shiite to all know when and how to rise up at once (even the first American arrival in 1991 wasn’t enough to generate this). The army will always be co-ordinated in their response, but the mob lacks the discipline and certainty to know that actions will be followed through. So everyone wonders if they start lobbing Molotov cocktails at the police, will the rest of the people join them, or abandon them to the tender mercies of Saddam and his industrial shredders? This uncertainty greatly benefits the incumbent government – that is to say, the better co-ordinated group.

As a result of this, smart leaders worry a lot about preventing opposition groups from organizing. Gary King’s research about Chinese internet censorship reveals that the ChiComs understand this principle very well. Most people seem to think that it’s risky to criticize the government, but this isn’t what actually gets you censored. You can say that a governor is worthless, or corrupt, or a crook. You can say that he’s having an affair, and give the name of his mistress. This kind of information is actually quite useful to the Communist party. Like any organization, they have to measure the performance of their subordinates, and promote the competent. Finding out which local officials are pissing off lots of citizens is something you’d like to know.

What you can’t say, however, is “…and so let’s go protest”. That is what gets you censored. And it turns out this holds true even for positive statements that involve collective action. “Let’s have a rally in support of the new environmental policy” also gets you censored. When lots of people turn up in the streets at once, moods can change very quickly. Remember, co-ordination (where we all think and do the same thing) doesn’t need to be co-operation, where we all explicitly agree to help each other. It’s enough if a single event makes a mob all get angry at once, there doesn’t need to be a central controlling figure or an organized plan.

This paper finally explained to me why the Chinese government was so paranoid about Falun Gong. Aren’t they just a meditation group? Probably, but it turns out it doesn’t matter. If you can get 10,000 people to all turn up at once in Tienanmen Square, you are a potential existential threat to the government, even if all you’re doing is meditating.

This is also the story of the Gulen movement in Turkey. As a mutual advancement society and cult of personality, they had strong loyalty to Gulen and each other. But so did Erdogan’s supporters, and they had the advantage of both the incumbency of government, and a superiority of numbers. So how did the Gulenists come close to pulling off a coup? They held one considerable co-ordination advantage over Erdogan – they knew who all the key Erdogan supporters were, but Erdogan didn’t know who the Gulenists were. This meant that even though Erdogan knew he was being undermined, and had the numbers to crush them, he didn’t know who to strike. So he was strong, but blind.

The story I heard (though all such stories out of Turkey are speculation) was that the key development that took place earlier in the year was that Erodgan had finally cracked the communication system by which the Gulenists were able to communicate with each other. And suddenly the game changed very quickly. Once he knew who they were, the Gulenists were in a tight spot. The story goes that they had to rush forward plans for the coup, because they knew that Erdogan was planning a big purge of them. In some sense, this was obvious – why in God’s name would you start a coup on a Friday night, rather than at 4am? Subsequent events bear this out too – within days of the coup’s failure, there were long lists of people fired or imprisoned. This means that they had at least some of the lists in advance.

But even so, it was a near thing. Because beliefs are fragile, if one can decisively change everyone else’s opinions, the Gulenists could have turned into the Baathists of Iraq, ruling over a much larger population. The key moment, as I wrote about before, was Erdogan’s facetime press conference. By getting the message out to lots of people to take to the streets, suddenly the Gulenists had a much harder time, because the government supporters now had both numbers and co-ordination – the self-fulfilling prophesy of the coup succeeding starts to turn around, people desert, and you end up dead or in prison. Until the last few months, the Gulenists looked like a very savvy model of how to build power to subvert and overthrow a government with a smaller force. Usually, guerrilla movements appeal to the numbers of the people, and their discontent. Almost pulling off a coup without popular support, and without being the army itself, is quite an impressive feat, even if they ultimately failed.

Viewed from this angle, we can suddenly see why formal systems of government are so difficult to achieve, whether this is in the form of an all-powerful king or an all-powerful constitution. Saying that the king will have absolute authority is presuming the conclusion you’re trying to reach. The king doesn’t fight off armies single-handedly, he rules because his subjects believe that it’s in their interests to follow his orders. Does this hold true for every possible order? If the order hasn’t been given yet, it might be hard to say. But if orders stop being obeyed, either he stops being an all powerful king and becomes merely one center of power in the system of government, or stops being king altogether, most likely killed by the general who disobeyed him.

We thus have a basis for Maine’s striking observation about the British crown – that some of its powers were probably lost through lack of use. If the nature of power is people’s beliefs, these are hard to measure. And while past history is a good guide to what people think now, how do you know the world hasn’t changed in the interim? Even the ruling flag must continue to be run up the flagpole from time to time in order to know that people will continue to salute.

Because cooperation requires us to agree upon a plan, it usually requires hierarchy. Somebody is at the top, and gives orders. This way, everyone knows what they need to do. And so gangs nearly always have a leader.

As I noted before, the first king is the king because he is a great leader of men, and able to upset the old order. And these traits get passed on to subsequent generations, giving them a fundamental advantage over other men. But still, subsequent monarchs are primarily the king simply because they are the son of the old king, and everyone believes that this is the basis for government, so orders get obeyed. In this regard, succession planning and institutional rules are very important in maintaining power. Monarchies make this process very simple, as rules of succession are familial and well-laid out. If they create bad incentives, it’s for potential offspring of the king to kill each other, but at least the general populace is relatively well insulated from such issues. One-party states, like the Chinese Communists, sometimes are able to manage the process pretty well. But this usually involves handing over power before the leader dies. Otherwise there’s uncertainty about who will take over, which can lead to infighting and difficulties when the leader dies, or mass purges in the leadup.

Moreover, the orderly handing over of power becomes incredibly important in getting leaders to step aside when the time is right. If there is a strong tradition of treating past rulers fairly, then current rulers will be more willing to step down when they get old and frail. If there is a history that rulers get killed and replaced, the incentive is a to pull a Mugabe, and hang on until they carry you out in a box. In this regard, the most important development of the American revolution was George Washington’s decision to step down after two terms, as it encouraged the other leaders to follow suit, rather than setting up a dictatorship because they knew that if they didn’t, the next guy would do it.

And finally, we have part of an answer to the puzzling fact that major political developments are often entirely unpredicted even a short period beforehand – World War I sweeping away the monarchies, for instance, or the fall of the Berlin Wall. Hemingway's observation about bankruptcy 0 that it happens gradually, then suddenly - is especially true of governments. It turns out that both ‘The government is stable’ and ‘the government has collapsed’ are self-fulfilling beliefs. As a result, discontent builds slowly, but can stay at a high level for quite a long time, because of the incumbency advantage of the self-fulfilling belief in stable government. These kinds of shifts will likely have a substantial degree of randomness to them –an East German official mistakenly announces that the border with West Berlin will be opened immediately, and this sets off an avalanche that brings down the whole system.

In other words, you could be years or months away from a seismic shift in government, and you probably wouldn’t know it.

Change beliefs and you change the power structure, because beliefs are the power structure.

On Maine and Moldbug

Continuing my foray into the illustrious brotherhood of the Froude Society, I’ve been reading Popular Government by Sir Henry Sumner Maine.

To read these books is to see the genesis of Unqualified Reservations – not that these books exactly mirror Moldbug, but one can see where some of the ideas come from. Of course, part of what makes Moldbug so fascinating for most people to read is that the ideas are so radically different to what one normally comes across. One of the meta points of Unqualified Reservations, encapsulated in the dictum to ‘Read Old Books’, is that if one reads the same thing as everyone else, one is likely to think the same thing as everyone else. Sufficiently old ideas when sincerely expressed are apt to strike you as more shocking and new than anything else you will encounter.

And the strongest all-pervading sense wherein Maine (writing in 1885) departs from modernity is his willingness to view democracy with the cold eyes of a political engineer. In the starkest terms possible, Maine writes as if the entire democratic process has no moral component whatsoever, either positive or negative. Voting is not a sacred duty, a fundamental right, an ennobling and dignifying symbol of equality, or any of the other hoary notions that today have been attached to the term. So what is it then?

Political liberty, said Hobbes, is political power. When a man burns to be free, he is not longing for the "desolate freedom of the wild ass" ; what he wants is a share of political government.

Can you imagine a more bracing tonic than that? When you say “I want to be free” or wear your “I voted” sticker, you are really saying “I covet political power”. Not so ennobling when phrased that way, is it? There is nothing wrong with power, of course. Someone has to have it. But the pursuit of it is hardly considered a morally virtuous cause.

Democracy, then, is merely one of a number of possible ways of governing the state, whose outcomes should be judged solely on those terms:

There is no word about which a denser mist of vague language, and a larger heap of loose metaphors, has collected. Yet, although Democracy does signify something indeterminate, there is nothing vague about it. It is simply and solely a form of government. It is the government of the State by the Many, as opposed, according to the old Greek analysis, to its government by the Few, and to its government by One. … Democracy is best described as inverted Monarchy.

We have grown up viewing democracy with a diet of rhetoric that resembles the way that a love poem describes a human body. And here, for the first time, is an anatomy textbook. To a modern western audience, this is a somewhat jarring perspective.

Maine is also unsparing in pointing out where the democratic principle, when analysed, fails to make sense. Firstly, if the people are actually wise in their judgments, why do their judgments have to be laundered through the process of first electing representatives, to whom are delegated general decision-making authority? This argument becomes even more forceful as the possibility of online elections makes frequent plebiscites cheaper and more practical. As Maine notes

The arguments of the French Liberal party against the Plebiscite, during the twenty years of stern despotism which it entailed upon France, have always appeared to me to be arguments in reality against the very principle of democracy.

Indeed.

Similar important questions get raised by the existence of second legislative chambers, such as Senates, which have different electoral rules to the lower Houses.

Nothing brings out so clearly as does this class of contrivances a fundamental doubt afflicting the whole Democratic theory. It is taken for granted that a popular electorate will be animated by a different spirit according as it is grouped; but why should there be any connection between the grouping of the People and the Voice of the People? The truth is, that as soon as we begin to reflect seriously on modes of practically applying the democratic principle, we find that some vital preliminary questions have never been settled. Granting that the People is entitled of right to govern, how is it to give its decisions and orders? …
Vox Populi may be Vox Dei, but very little attention shows that there never has been any agreement as to what Vox means or as to what Populus means. 

Maine also has some brilliant analyses of the flaws of direct democracy, though a powerful comparison to the jury system. It is a long passage, but one worth quoting in full:

We have in England a relic of the ancient Popular Justice in the functions of the Jury. The Jury-technically known as the "country"-is the old adjudicating Democracy, limited, modified, and improved, in accordance with the principles suggested by the experience of centuries, so as to bring it into harmony with modern ideas of judicial efficiency. The change which has had to be made in it is in the highest degree instructive. The Jurors are twelve, instead of a multitude. Their main business is to say "Aye" or "No" on questions which are doubtless important, but which turn on facts arising in the transactions of everyday life. In order that they may reach a conclusion, they are assisted by a system of contrivances and rules of the highest artificiality and elaboration. An expert presides over their investigations-the Judge, the representative of the rival and royal justice-and an entire literature is concerned with the conditions under which evidence on the facts in dispute may be laid before them. There is a rigid exclusion of all testimony which has a tendency to bias them unfairly. They are addressed, as of old, by the litigants or their advocates, but their inquiry concludes with a security unknown to antiquity, the summing-up of the expert President, who is bound by all the rules of his profession to the sternest impartiality. If he errs, or if they flagrantly err, the proceedings may be quashed by a superior Court of experts. Such is Popular Justice, after ages of cultivation. 

Now it happens that the oldest Greek poet has left us a picture, certainly copied from reality, of what Popular Justice was in its infancy. The primitive Court is sitting; the question is"guilty" or "not guilty." The old men of the community give their opinions in turn; the adjudicating Democracy, the commons standing round about, applaud the opinion which strikes them most, and the applause determines the decision. The Popular Justice of the ancient republics was essentially of the same character The adjudicating Democracy simply followed the opinion which most impressed them in the speech of the advocate or litigant.

Nor is it in the least doubtful that, but for the sternly repressive authority of the presiding Judge, the modern English Jury would, in the majority of cases, blindly surrender its verdict to the persuasiveness of one or other of the counsel who have been retained to address it.

A modern governing democracy is the old adjudicating democracy very slightly changed.

This is one of the great damning critiques of the modern democratic process. It is obvious to all contemporary readers what a travesty of justice it would be to substitute the modern jury system for the old one. It is also quite apparent that Maine’s final point is right – modern voting for the president looks a lot like ancient Greek justice. Is the fate of an entire people less important than the fate of a single defendant?

It is the interest in these kinds of possible modifications that makes the engineering side of Maine most apparent. While Maine is highly skeptical of democracy by the standards of modernity, by the standards of Moldbug he is actually an optimist. He thinks that democracy can be improved, and its weaknesses at least tempered by good design. For instance, he is optimistic about representative government relative to direct democracy – as he notes, “the effect was to diminish the difficulties of popular government, in exact proportion to the diminution in the number of persons who had to decide public questions.” Similarly, Maine is also enthusiastic about US State constitutions which specify formal procedures for their amendment. This is viewed as being a superior process to the ambiguity of the British process.

With the benefit of 130 years of hindsight, of course, it is easier to observe the failure modes that Maine didn’t foresee. What if, instead of formally amending the constitution, legislatures simply passed laws that exceeded the initial bounds, and then further appointed compliant judges who were on board with the ruling ideology and believed in things like ‘living constitutions’?

Or, more radically, what if the ruling party simply decided to replace the electorate through mass immigration? This has been the story of the latter half of the 20th Century. Maine understood the incentives to modify the franchise, but modifying the population itself was a leap of imagination that even he didn’t consider.

And this is where the comparison with Moldbug becomes instructive. Moldbug is a pessimist about the entire democratic process. Cthulu swims left, as the now famous expression goes. Democracy is, in other words, a fundamentally left wing phenomenon that will sooner or later produce left wing outcomes. As a result, the failure modes themselves are inevitable (according to Moldbug), not merely possible. The franchise will never be stable, as the incentives to expand it will always be present. Maine, for instance, speaks with some praise about Belgian suffrage restrictions that limit the vote to those with an education. That this would be desirable seems highly likely. But would it be stable, even if it were passed? This is the crucial question which Maine doesn’t address, and which Moldbug does quite forcefully in the negative. And when suffrage gets expanded, the decisions will shift to the lowest common denominator, or be usurped by the constant meddling with public opinion. On this last point, Maine agrees – with the mass franchise, leadership will be by “the wire-pullers”, a wonderful description of modern democratic leaders and political operatives. But Maine doesn’t get to the point of outright condemnation. To an engineer, the building that is the American constitution has survived a lot longer than what would have been predicted, and so must have something going for it. In the later stages of the US Empire, this may strike us as optimistic, but we can’t fault Maine for not foreseeing the entire future.

But the comparison with Moldbug is not universally to Moldbug’s advantage. Because, despite the large overlap between their worldviews, the two writers have one important philosophical difference. If Maine is an engineer of government, then Moldbug is more like a scientist of government. A scientist aims to develop a theory that will help him understand the world, from which practical results can then be deduced. An engineer views scientific knowledge as a means to constructing something durable, but it is only a means to an end. Kludges and rules of thumb are acceptable to engineers, but are anathema to scientists, to whom they represent only incomplete understanding.

The engineering side of Maine, which overlaps with the historian side of Froude, depicts political power as something not entirely subject to formula. One can shape it and set rules, but, like an engineer’s buildings, governing structures will eventually collapse, despite the best of intentions. In particular, the question of who holds true power in Maine's descriptions is often difficult to ascertain at any point in time, and there can be considerable ambiguity on that point. For instance, consider Maine’s description of the history of the powers of the English King:

The powers over legislation which the law recognizes in the Crown are its power to veto Bills which have passed both the House of Commons and the House of Lords, and its power to dissolve Parliament. The first of these powers has probably been lost through disuse. There is not, at the same time, the smallest reason for supposing that it was abandoned through any inconsistency with popular government. It was not employed, because there was no occasion for employing it.

As to the right to dissolve Parliament by an independent exercise of the royal will, it cannot be quite confidently asserted to have become obsolete. The question has been much discussed in the Colonies which attempt to follow the British Constitutional procedure, and it seems to be generally allowed that a representative of the Crown cannot be blamed for insisting on a dissolution of the Legislature, though his Ministers are opposed to it. It is probable, however, that in this country the object would be practically attained in a different way.

This is a very different world from the world of absolute power, or even absolute certainty about the distribution of power. Even if a King starts with a given set of powers, according to Maine, he may lose them simply through lack of use. And the most shocking word here is ‘probably’. Maine is implying that because the right to dismiss Parliament hasn’t been tested in a while, we actually don’t know if it still would be followed. His descriptions of how the Cabinet ended up arising out of nothing to effectively set the legislative agenda, while the House of Commons mostly ended up questioning the executive branch, is similarly fascinating and nuanced. You can set up a system in a way, and it can actually work in that way for a while, but then at some point things might change in practice, even as the same nominal roles are all there.

This kind of real world ambiguity and nuance is sometimes missing in Moldbug’s writing. The CEO of a neocameral state is described as being all powerful, subject to the possibility of board dismissal. Presumably he can order half the population shot if he wants, unless the board fires him before it gets carried out. He won’t have incentives to do this, of course, and Moldbug makes a convincing argument that this is the only real bulwark against abuses of authority. But if our CEO deems it to be value-maximising, the power is there. Of course, at the moment our neocameral CEO is only a hypothetical figure, and so it's easy to grant him hypothetical absolute power. But how do we know that things will actually work out that way? The critique of neocameralism that usually gets leveled is 'Do we want this to happen, or will it lead to undesirable outcomes?'. But there's a second possible question - 'Even if we do want this, can we actually create it?'. I don't mean rhetorically that it's obvious that we can't, merely that it isn't a given.

In other words, when the rubber hits the road, if the CEO gives the order to fire on the crowd at the football game because he thinks it will increase shareholder value, do the security forces actually shoot? And what happens next if they don't? Until you're a CEO commanding a drone army, there’s only human beings all the way down, and either they follow, or they don’t. Sometimes, you just won’t know until you give the order. And this is a problem that, no matter how much we might like it, I suspect we can’t simply engineer away with cryptographically locked weapons. Moldbug is brilliant, don’t get me wrong, and his imagination of how different forms of government might work is second to none. But there is sometimes an absolutism in his descriptions of how governing arrangements might work that doesn’t seem to fit Maine’s descriptions of the nuances of actual power.

Of course, with the extra century's knowledge to guide us, Maine sometimes falls victim to the same trap, he’s just enamored of different restrictions. In particular, his praise for the way that the US Federal Constitution sets out specific enumerated powers and structures (relative to the ambiguity of the British system) seems to have been optimistic even at the time. If he'd written the book after FDR, I suspect there's a few sections that might read quite differently.

And if there is a general delineation of where Maine seems to be more optimistic about how formal arrangements can limit and define government structures, it is regarding America. His analysis of Britain notes much of the deterioration of democratic governance, and he hadn't yet witnessed the full decline of the previous American governing structures (other than the Civil War, which he addresses relatively briefly, and seems oddly to think of as merely a temporary disruption to the same basic structure). Noting the big difference between the two countries, Maine attributes the relative success and consistency of American governing arrangements to the fact that its powers and structures were formalised, while Britain's were mostly established through tradition and tacit understanding. With the benefit of hindsight, this makes Maine overestimate how much the formal structures actually prevented the same trends, as opposed to perhaps just delaying them somewhat, or maybe even not achieving that. It turns out the piece of paper didn’t restrict government power after all, as Moldbug has been at pains to point out.

But doubt not that Maine is brilliant, and his depictions of the folly and stupidity of the democratic process are incisive and illuminating. Skip the travesty of election coverage these next two weeks and read some Maine instead.

On the Decline of Wisdom

The Dissenting Sociologist began a post recently with a quite striking sentence:

“The principle that “the wise shall govern the strong” is a law of Nature so basic that human society is inoperable and indeed altogether inconceivable without it. Democracy as such is an illogical Utopian fiction that doesn’t exist anywhere and cannot. In human society anywhere we find it, men in the physical flower of their youth allow themselves to be bossed around by senior men they could easily overwhelm, and legitimate authority assumes the form of a pyramid such that positions of authority, by definition, are fewer to the extent that the scope of authority attached to them is greater."

And my immediate thought was to wonder: this is a fascinating idea. Is it actually true?

The second sentence is definitely true. Society would definitely be better ordered if the first sentence were also true. But the universe isn’t usually ordered the way we would like it.

So what would be the similar, purely positive version of the same idea that might be closer to being true? I’d say that the elite will always rule over the masses. Like most, if not all, seemingly universal truths in the social sciences, it has a somewhat tautological aspect – the elites are defined as the ruling class, because ruling itself confers status. Sometimes the rulers are priests, or warriors, or kings, or judges, or bureaucrats. But everywhere there are the leaders, and the led.

Power is always jealously sought, even if not actively contested at every point in time. And so any elite must be savvy enough to at least maintain their own supremacy against other contenders for power. If you are incompetent enough, you probably won’t stay in power that long. Strictly speaking, you don’t need to be competent at any task other than maintaining your own power. You can run your country into ruin and beggary, as many long-lived dictators have done, as long as you maintain your own power. So you can definitely have an evil, psychopathic elite. But a sufficiently incompetent elite is a fragile equilibrium, at risk of collapsing. This also is the strongest evidence against frequent claims that some or other presidential candidate is a moron – Trump, Bush, Kerry, whoever. There are simply too many other people viciously vying for the presidential job for any true moron to get that close to succeeding.

Of course, the number of true psychopaths is rather small. So most leaders will have at least some regard for their people. And so if there is a general quality of intelligence and good judgment needed to maintain power, that will hopefully flow over into competent administration of the rest of the country (perhaps one of the biggest mercies the world provides, actually). The main hitch here, of course, is that psychopaths (though numerically few) are disproportionately attracted to power, and ruthless in the methods they are willing to use to obtain it. Hence the horror of the many dictators of the 20th century, from Mao to Mugabe.

A lot of elites will have a need to occasionally augment their ranks with competent administrators who can help them secure their rule. And this is where the starting quote is quite interesting, particularly with regard to exactly what qualities are being sought. What is needed is competence. But this can come from a number of different base qualities.

Reactionaries are generally drawn to old ideas, and wisdom is one such concept. Wisdom connotes judgment, nuance, experience, and a sense of doing what is right. It is related to its less lofty and less mystical relative, good judgment (of which wisdom is in some sense the pinnacle). It is not surprising that these are also associated with age – if someone is wise beyond their years, it is because wisdom is generally thought to be more likely to reside in the elders of a society.

Wisdom, dear reader, is a quality whose heyday has largely passed. The thoroughly brilliant Google NGram viewer charts the decline for us.

It should not therefore come as a surprise to find that modern society, which places relatively less emphasis on wisdom, should also come to have less respect for the elderly relative to the young.

So if the elites aren’t selecting on wisdom, but have to select on competence (broadly defined), what else are they selecting on?

Here’s one answer:

First ‘clever’, then ‘smart’.

‘Wise’ has been more or less declining as an idea since 1820 or so. Its decline was also marked by the rise of ‘clever’ – more intellectual, but in a way that seemed to prioritise shrewdness and savvy behavior, as opposed to good judgment.

But the big rise of late has been ‘smart’. This goes mostly to intelligence, raw cognitive firepower. This is a trait that (at least at an individual level) is generally considered to be inherited at birth, and which displays itself more in youth than old age.

The modern ideal of innovative success is the young tech CEO. Mark Zuckerberg is assuredly smart, and often described as such. I have yet to hear anyone praise him as wise.

The other striking aspect of this perception is that if good decisions are thought to come mostly from being smart, then they are something that one is either just born with, or can acquire merely by turning one’s gigantic brain to the subject at hand. And since every man flatters himself that he is smart, he is thereby largely relieved of the obligation of humble study at the feet of those that have come before him. Hence the modern progressive wet dream of the show ‘The West Wing’ – brilliant young minds elevated straight from their Harvard Political Science undergrad education to being White House advisors, solving the world’s problems as understudies to a Nobel Prize Winner in Economics (or at least Hollywood writers’ limited conception of one).

Intellect alone is presumed to be able to solve the world’s problems, from Syria to Washington.

Good judgment, by comparison is considered far too prosaic a quality to be encouraged, and wisdom seems almost archaic.

I am far from convinced that this shift in emphasis has been for the good.

On Kings and the Accident of Birth

We live in an era with an extraordinarily limited imagination with respect to alternative worldviews.

In the eternal present tense of the liberal mind, the past is not only alien, but almost incomprehensible. Whig history gets imbibed deeply without even understanding what it is. The net effect is that nobody is encouraged to think honestly about why people in the past thought the things they did. Most strikingly, there is no empathy towards one’s ancestors as having genuinely-held beliefs which may have had sensible underpinnings. The only acceptable explanations are those that flatter our own conceit. So the mass of people in the past must either have been evil (by comparison with which we are virtuous), or they must have been naïve dupes who were conned by a small evil elite (by comparison with which we are savvy and worldly).

Unsurprisingly, these absurd narratives quickly run into large obstacles of incomprehension.

Take, for instance, the institution of monarchy.

Everyone who is anyone agrees that democracy is not only the most effective form of government, but the most just.

So why did absolute monarchy persist in so many countries, for so many thousands of years, if it was both unjust (and thus likely to inspire resistance) and ineffective (and thus able to be outcompeted by better forms of government)?

It’s a puzzle, no?

Let us grant something obvious, but not widely appreciated. A system of government that was able to rule France for 800 years, or rule England for similar period, must have had at least something quite significant to recommend about it. How else could it accomplish the task of administering huge countries for so long, with far weaker technologies of coordination, if it was marked only by injustice, incompetence and tyranny? Wouldn’t the people have risen up long before they did?

Here is another possibility that simply cannot be imagined by most people today.

Many absolute monarchs were genuinely popular.

Not because the people were duped. Not because they were afraid of expressing contrary opinions. Because the subjects genuinely liked their hereditary kings. Because these Kings did a good job of ruling. Not all, but many of them.

Such a possibility is highly confronting to modern sensibilities, but surely it must be considered as at least a hypothesis. The historical record is there - something kept them working for a very long time. If we can’t conceive of why kings might have been effective, perhaps this means that they weren’t effective, or perhaps we just have a failure of imagination.

I think part of the mistake comes from misunderstanding how kings came about.

When people think about an absolute monarch in a western country, they think about establishing a monarchy today. And since they don’t know how monarchs came to exist, they substitute the following hypothetical – we take a person in society, and given them absolute power.

Let us put aside for the moment the question of whether kings actually have absolute power.

Even before that, the natural question arises in the progressive mind: who gets to be king? And since this is purely a hypothetical, the answers cover an equally large range of hypothetical figures, namely everyone in society. Giving one randomly chosen person control of everything strikes them, somewhat understandably, as risky and ill-advised.

But kings were not randomly chosen people, and it simply doesn’t make sense to evaluate monarchy as if they were.

More importantly, the ways in which kings weren’t random redound strongly to their advantage.

Who is the king today in a monarchy? The son of the previous king. Phrased only like this, it presents a chicken and egg argument that doesn’t tell us much.

Rather, to get anywhere we need to understand the origins – who was the first king in any given lineage? This is the basis from which the rest stems.

The answer, nearly always, is a great military leader, a commander of men able to unite his people into an army, and successfully coordinate them in battle to subdue their previous rulers. Robert the Bruce became king of Scotland after a ten year period where Scotland had no king. At the Battle of Bannockburn, Robert the Bruce began the battle by fighting Henry de Bohun in single combat, killing him by splitting his head open with an axe. Robert then led the Scottish troops into battle. That doesn't sound like a randomly chosen level of valor, strength, and ability to lead men. 

If I were a Scot, besieged and ruled by the hated English, I would be pretty damn pleased to have such a man in charge of my country. The fact that he wasn't elected in a vote would not trouble me one jot.

When William the Conqueror fought the Battle of Hastings, he had to rally his fleeing troops, and led the successful counterattack against the English forces. Talk about courage and calmness under pressure.

In medieval battles it was very difficult to command an army without personal courage and skill. You don’t get to be miles behind the front line, picking up a telephone and giving orders. You will be in the fray, fighting alongside your soldiers, giving wise orders, and convincing people to obey them through your personal authority. If you're insufficiently good at that job, you're dead, like King Harold. 

A man that can command, inspire and make wise choices in war has at least a decent shot of doing the same thing in peace. At the barest minimum, he has a much better chance of doing so than a randomly chosen citizen at the time.

In the language of economics, Kings are endogenous. It makes no sense to ask what would happen if we elevated a random person to be king. The only person who would ever get to be the first king is someone with enough personal qualities to establish themselves as such.

The person who would have had the greatest opportunity to establish himself as King of America, should he have wanted to do so, was probably George Washington. He had to tell his subordinates to address him as ‘Mr President’, not ‘Your Highness’. His stepping down, rather than ruling on until he died or was voted out, was considered very surprising. King George III said that if Washington in fact returned to his farm and thus renounced power, it would make him the greatest man in the world. One suspects he did not expect to be called on this claim.

Admit it, the prospect of King George Washington is not an immediately frightening one,. And how did he get to have this level of popular support and gratitude? By bravery and military genius. He was an outstanding leader of men long before he won an election. 

In perhaps the most credible alternative universe where America had a monarch, it would not be Barack Obama, Hillary Clinton or Donald Trump.

It would be a descendant of George Washington.

So let’s establish that we’re reasonably happy with King Washington I. How might we feel about his descendants?

If behavioral genetics has taught us anything, it’s that nearly every personality and cognitive trait we care to measure has a significant degree of heritability. George Washington’s offspring will not be the same as George Washington, but they will share many of his traits simply due to genetics.

Not only that, but the environmental factors are also encouraging. The future kings are raised in an environment where they also get passed on to them all the cultural ideas and learning of the previous king, which again tends to reinforce the behaviours that worked the previous time. Moreover, prince regents have been apprenticed from a very young age to the task of ruling, learning the trade from those that came before. All of these factors tend to reinforce the behaviours of kings over time, and encourage whatever caused the first king to be successful to continue to be present in his successors.

But still, genetic advantages wane with mean reversion. This is the major weakness of monarchy. It also applies to family firms, where the brilliant entrepreneur is succeeded by his somewhat less successful son, and his hopeless wastrel grandson.

Acting against this, however, is an opposing force. Kings also tended to marry queens who were themselves descended from other successful bloodlines. This means that both sides of the family tree tend to be selected from people who displayed a capacity for leadership.

So we can’t even just evaluate a hypothetical King Washington X by looking at the current descendants of George Washington. The marriage patterns would likely be different, the education and training they received would be different, and thus so would the descendants themselves.

Does this mean that monarchy always worked brilliantly? No. Sometimes monarchs die before their children are ready to rule, or die without children, or have idiot worthless children. It's not perfect.

Does it mean that it almost certainly worked better than most people today imagine? Absolutely. We at least have an answer to our question at the start - why might  it have lasted so long?

Does it mean we should switch back to it? Your mileage may vary.

But don’t get this far and still ask the wrong question!

“We” will not switch back to monarchy.

Should America end up as a monarchy, it will be because a monarch worthy of the title of king has commanded the country and been elevated to the position.

And at that point, it will probably work pretty well.