An Essay Featured In The Fate of Beauty by O.G. Rose
Self-Interest, Self-Regulation, and Ironic Free Markets
When something is “too big to fail,” it will continue to exist, and if what is TBF is apocalyptic, does the end becomes inevitable or impossible? After 2008, we generally associate TBF with the banks, but TBF is the rational “self-interested” goal of all free market entities, if not all entities in general. For the market to be rational is for the market to seek TBF, which assuming TBF destroys the market, means it is rational for the market to destroy itself.
As employers can want to become “too valuable to fire,” businesses can desire similar irreplaceability: the banks after 2008 are simply the most visible manifestation of this desire (hence becoming like Heidegger’s “broken doorknob,” as often alluded to in the works of O.G. Rose). Ironically, I personally believe the free market works well thanks to competition and “self-regulation” (as will be discussed), both of which cease to apply to a given entity once it becomes TBF. Yes, there can still be competition between TBF banks, but probably not competition that readily drives socioeconomic evolution: “natural selection” requires the possibility of death. When free market entities become TBF, the free market loses its grandeur and identity: our market becomes mixed.
The free market works well because entities aren’t TBF and can meaningfully compete, and yet “rationality” and “self-interest” — principles which drive wealth creation — drive entities to try to make themselves TBF, hence driving them to threaten if not ruin the wealth creation which justifies their existence. The free market works if entities cannot achieve this state, and yet it is this state entities rationally seek achieving. Capitalism requires there to be no TBF institutions, and yet free market entities rationally try to achieve this condition, a state in which the “self-interest” of free market entities is separated from “self-regulation,” effacing the very principle that makes free markets efficient and innovative. The free market thrives thanks to that which drives it toward failure.
The Libertarian will likely argue that no entity in the free market can become TBF without State involvement and/or the corruption of businesses into corporations, per se, that something TBF is only possible in a mixed market. The State is itself TBF and the source of all such states; if the State intervenes in the market, TBF-ness will spread like dye in milk. Perhaps this is true, but regardless, the rationality of the free market drives it to turn itself into a mixed market, and the manner by which it can do this is by encouraging for the State to somehow intervene (perhaps by intentionally messing up, being caught in a “black swan,” etc.). The free market can hate the State and love the State; the free market can want to be free but also TBF. It can want its cake and to eat it too, and it will if the State somehow enables it to do so.
In a free market, self-interest — and rationality relative to that self-interest — drives wealth creation; in a mixed market, these very principles can work toward achieving TBF, which can threaten wealth creation and distribution. And as this occurs, it will seem to be evidence that the free market fails, for “rationality” and “self-interest” seem inadequate. Hence, it is likely the State will be further encouraged to intervene and regulate the market, which will only enable the market to further make itself TBF, caught in a vicious cycle, perhaps accelerated by public outcry.
I
Irreplaceability is a reasonable desire, from the biggest cooperation to the smallest of children. To be irreplaceable is to matter, and we all want not only meaning but important meaning (or “meaningful meaning,” if you will). We want to be irreplaceable, not only because that means we matter, but also because that means we are safe in a world where safety can feel rare. Our salary is guaranteed; our families and friends, provided for and protected. It is not simply the banks that want to be TBF, but all of us — it’s an innate desire — and it is important that the socioeconomic order keeps us from achieving this ultimate extreme. Unfortunately, 2008 is evidence that the system has already failed.
What is TBF is that which cannot be lost without taking down everything else with it: it is a kind of “mutually assured destruction” (or MAD). If I am an employee who is “too important to be fired,” the company cannot fire me without destroying itself; if I am a loved one who is “too loved to be let go,” there is nothing I can do to lose the love extended to me. I’m safe (which I could problematically use to my advantage): there’s no need to worry. It is in our rational self-interest to be secure and at peace, and so the goal of arguably everyone is to become as TBF as possible. But the socioeconomic order must make sure this goal is like an asymptote line: ever-closer but never reached.
The phrase “too big to fail” is used generally in this paper to refer to any “necessary relationship and/or existence.” What is necessary is that which is inseparable from a given system. If the banks are indeed TBF, they basically are the American economy: to use Aristotelian terms, they’re essential, not simply accidental. If I am “too loved to be let go,” I am essential to the very existence of the one who loves me: for me to die is for the other to perish (if not physically, spiritually). Normally, when it comes to love, none of us can become so close to another that our death will cause them to immediately pass away, and yet there is a sense in which we seek to become so close to another that they cannot live without us. Love entails becoming irreplaceable to another and hence requires great risk and vulnerability. We all, in a sense, want to be “necessary” and “essential”; businesses are like us (though perhaps more prone to determine if they “lived a good life” according to profits).
The desire to become necessary — essential, not simply accidental — seems part of life itself, for life desires to live, subconsciously or consciously, and becoming invincible is a much easier way to do that than fighting it out every day forever (and also seems to be the only way to live forever, for otherwise death seems practically inevitable). To put it another way, life naturally wants to achieve an existence that is non-contingent, meaning it will “be” regardless (God-like). What isn’t essential can want to become essential; what is contingent can want to become non-contingent. A state of “non-contingency” can be described as follows:
The end of x is the end of the system in which x is situated.¹
“The Law of Seeking Non-Contingency,” as I will call it, can be formed as:
x seeks for the end of x to be the end of the system in which x is situated.
(In a sense, it could be said that all living things want to achieve a state in which their death is the end of the world. Rationality calibrates accordingly.)²
To want is to want non-contingency. If I want x, I want to achieve x without having to do y to get x. Additionally, I want x as I want it without having to do anything else (no one wants strings). Of course, nothing finite can be so “in-finite” — to be finite is to be contingent — but if it is alive, it still strives for what it cannot have (the “in-finite”). And if the socioeconomic order allows for “non-contingency” to be reached in some form, it will be reached, even if ultimately the state proves self-destructive.
Businesses entail extensions of our longing for necessity; since we desire non-contingency, so too do our enterprises. And it is this longing in fact which orientates our self-interest and rationality; if we had no desire “to be” (as we want “to be”), we’d have no self-interest and rationality relative to that self-interest. Because we want necessity, we have self-interest, and thanks to this, the free market innovates and creates wealth in ways that the world has never seen before (as argued persuasively by Deirdre McCloskey). Unfortunately, this same drive can compel us to become TBF, and TBF kills Capitalism, concentrates power, and breeds tyranny. Horrifically, the worst tyranny can be that which cannot be destroyed without ending the world.
II
Once failure is impossible, we are no longer accountable to customers, nor do we have to worry about competition: we could have the worst products in the world, and it wouldn’t matter. And so we no longer have to be “self-regulated,” only “self-interested.” Free market self-regulation generally works because businesses are accountable to customers and competitive forces. Self-interest and self-regulation are combined where bankruptcy is possible; where bankruptcy isn’t, self-interest and self-regulation can separate, causing the benefits of free markets to dissolve. The profit-motivator can cease to profit.
The merging of self-regulation and self-interest (where consequences are possible) not only applies to economic exchanges but also personal relationships. When I am angry, if I don’t scream, I self-regulate myself, and in a business meeting, when I am angry, in order to keep receiving a paycheck (which is in my self-interest), I must self-regulate my fury. All mutually-benefiting relationships are those in which self-regulation and self-interest can combine, and this is arguably why business not only creates profit but also helps us learn to live together (in line with the thought of Deirdre McCloskey, author of The Bourgeois Virtues). We learn not to let our emotions get the best of us, that self-regulation and self-interest can merge (that selflessness and selfishness can intersect). Unfortunately, like invincible businesses, when there are no consequences for bad behavior, people have no reason to self-regulate. Perhaps they will act morally and properly all the same, but the system won’t incentivize it (which means probability will turn against it and immorality may thus become not “theoretically inevitable” but “practically inevitable”). Where there will be no consequences, the CEO has much less reason to treat his competition and employers with dignity and little incentive to care what the general population thinks about his actions (and so may, for example, take a large bonus during a financial recession).
Capitalism creates business environments in which self-regulation and self-interest combine from “the top down” — from the macro-level of the business itself down to every employee. It teaches everyone to be good to one another, but when the free market becomes a mixed market, the lessons can stop, and social interactions transform for the worse (which suggests the importance of the question “Is it practically inevitable that free markets become mixed markets?” similar to the question “Is it practically inevitable that Socialism becomes Stalinism?”). Considering this, free market Capitalism doesn’t necessarily devolve social relations like Marx believed; in fact, Capitalism can improve them. By merging self-regulation and self-interest, Capitalism can motivate people to treat one another with respect even when they don’t feel like it (which is when it counts). Would it be better if people genuinely liked others and weren’t compelled by external forces? Certainly, and life would be miserable if we only had people around we liked because of external influences. But it’s not possible for everyone to “genuinely” like everyone, and yet we still need people to learn to live with one another. And the practical consequences are the same — people treat one another civilly — and in this imperfect world occupied by finite beings who can only be heavily invested in so many loved ones, we should be satisfied, and not let the perfect destroy the good.
Morality is a kind of self-regulation, and Capitalism in a way creates “moral action.” Yes, perhaps the banker is “faking morality” when he acts nice to customers, so in a sense the morality isn’t moral at all. But from a utilitarian standpoint, “genuine morality” and “fake morality” are practically identical (at the time of the act, at least), and “fake morality” may hold a Pluralistic world together just as well as a “genuine morality” (and “fake moralities” can sometimes turn into “genuine moralities” — people can “fake themselves” into being real). Seeing that the free market teaches us that self-regulation and self-interest can unify, the free market can teach us to be “moral-like,” and considering that without morality we cannot be free and will struggle to live in a Pluralistic World (as argued in “On Kafka, Character, and Law” by O.G. Rose), the free market matters.³
An advantage of the free market is that it can turn greed into a force of wealth creation by combing self-interest with self-regulation, but where self-interest and self-regulation are divided, “the miracle of benevolent greed” ceases and greed only benefits the greedy. To make the free market work, entities cannot be allowed to achieve a TBF state, and that might require regulation. If it does and regulation rarely works, then the free market — which has a claim to being the world’s best socioeconomic system — will likely destroy itself. This lack of success may function as evidence that the free market doesn’t work, and so be used to justify State intervention. If this perhaps necessary action causes the market to work even less, this may function as evidence that more State intervention is needed, causing a vicious cycle that could ever-increase the likelihood of TBF institutions emerging.⁴
III
Libertarians generally favor the free market because they believe, rightly or wrongly, that self-regulation works better than regulation. They claim this because a given institution knows more about what it needs, does, etc.: it has a better sense of the variables that need to be regulated and addressed. Government regulators don’t know this information naturally and must collect it, which can be a long, expensive, and bureaucratic process (and perhaps mostly impossible). Furthermore, when businesses are self-regulated, they don’t have to be forced to be regulated, which requires power and risks causing backlash: instead, businesses choose to regulate themselves out of self-interest. This increases the likelihood of efficiency, innovation, successful implementation, and so on.
Government regulation is meaningless if not enforced, and that takes people to do the enforcing. Threats can upset people, and this can create a combative relationship between the State and business community, whereas markets work better if they have a friendly relationship. Furthermore, where there is State regulation, businesses are incentivized to find loop-holes, tricks, etc. around those regulations, which will grow the litigation community, and may also waste a lot of business productivity on “finding loopholes” instead of creating wealth (though might still make money for the businesses). Also, where this is State regulation, there is the possibility of “regulatory capture” and corruption, as well as the possibility of big business using these regulations to keep out small competitors, solidifying a monopoly. Considering this, the choice to regulate, even if necessary, is not an easy one.
All of this suggests why self-regulation is preferable to government regulation, but that doesn’t change the fact that TBF institutions probably need to be regulated, since for them, self-regulation and self-interest have been divided. The bigger an institution becomes, the more self-regulation and self-interest split apart, and so the more regulation is justified (though that isn’t to say all “big institutions” should necessarily be regulated or that government regulation works). On the other hand, the more self-regulation and self-interest are unified, the less government regulation is needed (though that isn’t to necessarily say small institutions shouldn’t be regulated at all, or that government regulation doesn’t work — these are different questions). Is it easy to tell the difference between “big” and “too big?” Again, the very fact such a perhaps unanswerable question has to be addressed suggests the superiority of self-regulation when possible.
Do note that the fact that TBF institutions need to be regulated can be used as evidence that the whole free market needs to be regulated, when such doesn’t necessarily follow, because other institutions are that which can still “fail” and so that in which self-regulation and self-interest are unified. The fact banks need to be regulated isn’t evidence that free markets don’t work; rather, its evidence that mixed markets don’t work and/or need to be regulated (regardless if they actually can be successful), for it is in a mixed market where business enterprises can access the State or be affected by the State, and hence become TBF (as will be explained). Where institutions are TBF (or believe they are such) is exactly where self-regulation and self-interest are divided, and so where self-regulation proves ineffective. This is where regulation is necessary, but that doesn’t mean regulation works (a key point), and if it doesn’t, we are in a dire situation. Furthermore, determining in particular which businesses are those of which self-regulation and self-interest are divided is perhaps an incredibly complex task, and that I myself am not completely sure how it would be done. Perhaps it can’t be, and if that’s the case, regulation cannot fix Capitalism, or at least not without a high probability of error. It would be preferable to avoid a situation in which regulation is needed, but I fear we are long past that point.
If TBF institutions must be regulated, and if it can’t be determined which institutions are such, then that which must be regulated will not be, and the market will crash and the poor will be made poorer and the rich will be made richer. But if it’s also true that, even if these institutions could be identified, government regulation doesn’t work (because the task is too complex, regulators are captured, etc.), then the market will still crash and the poor will be made poorer and the rich will be made richer (or everyone will lose). Hence, our best chance is to not get in the situation in the first place in which there are TBF institutions (rather they be in food, oil, banking, etc.). But what if it’s too late?
Free markets self-regulate themselves without government intervention because they aren’t TBF. When banks cease to be able to fail and especially when they become conscious of that fact, they likely won’t self-regulate and require government regulation (the same goes with any institution, unless there is a powerful moral force in society, which I think is not the case in modernity, but I could be wrong). But I believe government regulators are ill-equipped to handle this incredible task and are often corrupted in the process. Personally, I do believe that TBF institutions should be regulated (though do note I didn’t say “big” institutions should be regulated), and yet I believe regulation doesn’t tend to work in the long run. Regulation may have some successes, but its failures tend to be greater than its victories. This is a terrible problem: TBF institutions should be regulated and yet cannot be regulated.
I believe our situation is tragic: there is no way to stop economic catastrophes once institutions become TBF, which means they can’t fail without destroying the whole system, and our economy is full of TBF entities. Considering this, I fear America if fated for another economic catastrophe. Unless, that is, America itself is “too big to fail” — is that what has happened? Is it TBF “all the way up?”
IV
Institutions naturally want to become “too big to fail” — it is in their rational self-interest — and if there is a large and/or intervening State, that will likely be possible. Hence, where there is a large State, the free market will likely function poorly, precisely because the presence of the State will make it “rational” for businesses and institutions to figure out how to corrupt the State to become TBF (say through K street, the Fed, Congress, etc.).⁵ With a large State, the “free market” likely won’t function well, precisely because the State diverts rationality “toward” TBF and separating self-regulation from self-interest, undermining the free market. Without an intervening State, though it may be “abstractly” rational to become TBF, if that ideal cannot be realized, “rationality” will never entirely lead the market into ruining itself (only wish it could, per se). But once the State is large, if the market is to continue to be itself (“that which is rational”), it must work “toward” becoming TBF. In other words, once the State intervenes, rational businesses will attempt to use the State in their favor, suggesting why “acting rational” isn’t necessarily “acting best.”
Where there are no penalties or restrictions, it is always rational for institutions to form monopolies. Worse yet, institutions even have an incentive to create a “doomsday scenario” in which their end is the end of the world. It is natural to want to be “irreplaceable,” guaranteeing one’s well-being and prosperity, but perhaps without a large State, this desire can never be realized (even if the State grows precisely to stop this from happening). Considering this, there is an irony at the heart of Capitalism: it functions well because it merges self-regulation and self-interest, and yet Capitalistic institutions are rationally motivated to achieve a state in which self-regulation and self-interest separate, unbinding Prometheus. What motivates wealth-production may also motivate wealth-reduction.
Milton Friedman argued that the problem with an intervening State was that it created incentive for businesses to corrupt it, and yet the State might be “rational” to intervene to stop businesses from becoming corrupt. If it is always the case that the State eventually intervenes on the free market (perhaps to save it), then free markets never practically work out, because they “practically must” become mixed markets (suggesting the superiority of Socialism, though that’s a step we can’t be quick to take). When, for example, institutions know they can take great risk and, if they fail, be bailed out, it becomes irrational not to take those great risks. Federal Reserve involvement changes what it is rational, and considering this, perhaps it isn’t so much that bankers are greedy that they take the massive gambles that can ruin the economy; rather, it becomes irrational for them not to take those bets. Rationality is the blood of the market: it is what makes the machine work. If the Federal Reserve (through “Greenspan puts,” stimulus, low interest rates, or what have you) makes risking a crisis rational, then indeed, the market will risk a crisis. Rationality knows no limits.
Institutions don’t act via “irrational exuberance,” to use Greenspan’s famous term: the exact opposite is the case. Rather, the banks act via “rational exuberance”: we just call it “irrational” because we don’t like the result, it doesn’t benefit lower classes, and/or threatens the entire market. But for the benefactors, they’ve very rational: they make billions. Greenspan’s phrase, I believe, has contributed to a misdiagnosis: we think it is irrationality that causes businesses cycles, when instead it is the irony of rationality. The presence of greed and evil in the market should concern us much less than the question of if the market is free or mixed.⁶
Involvement of the State can turn the very life blood of the market against itself: rationality can become a threat. Every business in the free market, in a sense, wants to violate the free market: it wants to become that which is no longer vulnerable to market forces. Becoming invincible is rational: all businesses that can, compelled by rationality, and assuming profitability increases correlatively, are compelled to become larger and approach the status of TBF. But as long as TBF isn’t possible, only bigness, this problem will be manageable.⁷ Unfortunately, rightly or wrongly, I believe TBF is already with us, and if that is the case, it is too late to turn back.
To not threaten the integrity of the free market, businesses that can become TBF must act irrationally and turn against what makes the free market prosperous. State involvement can cause that which makes the free market destroy itself, which ironically can function as evidence that the State should have gotten involved in the first place and should continue to be involved. And so more intervention may occur, and so more incentive to become TBF created, and so more self-implosion of the free market which would then require regulation to be fixed in a world where regulation seems to rarely work. Can free markets entail TBF-ness without State intervention? Perhaps (though I struggle to imagine it), and if so, free markets are inherently self-destructive, but it would not follow from this that Socialism is necessarily better. Our problems may be deeper than any system can solve.
V
The State is, by definition, an institution that is TBF (for its respective nation), and so the closer the relationship of a business to it, the more that business is also TBF by extension. Since the government owns the monetary system, private entities involved in the monetary system are in a prime position to become TBF, as occurred in 2008. What the State owns and works with doesn’t necessarily become TBF, but I think it is likely, given all the advantages. Moving forward, please note that arguments against “large States” apply to “large businesses,” that “corporate totalitarianism” and “State totalitarianism” tend to blend or at least feed each other.
As has been suggested, it should be noted that a TBF entity could theoretically self-regulate even though it wasn’t forced to (it may ascribe to a higher moral code, perhaps due to religion, or hold personal reasons for not acting tyrannically); a dictatorship, after all, can be benevolent. Also, so powerful, TBF entities could perhaps do a lot of good extremely quickly, just as they could do a lot of bad. Not having to worry about opposition or bureaucracy, a dictator can quickly pull a country from squalor into prosperity and ruin it just as fast. Likewise, a large oil company, if it decided to switch to alternative energy, could efficiently and quickly change the entire socioeconomic order into something more sustainable; on the other hand, it could just as easily block shifts to alternative energy. Where power is concentrated, for good or for bad, there is great risk, but it must be acknowledged that as ‘the rise of [dictators may not be] the necessary consequence of a totalitarian system,’ as corruption and a loss of self-regulation doesn’t necessarily follow from TBF.⁸ Certainly, but is it practically necessary? If so, we must be careful not to be someone who believes ‘that it is not the system which we need fear, but the danger that it might be run by bad men.’⁹
I personally am concerned about power concentration, coupled with a belief that it is more probable that TBF situations incubate tyranny than sainthood. Leopold Kohr put it well when he wrote that ‘the thought of throwing the explosive does not come from our philosophic attitude but from the fact that we are holding it.’¹⁰ In other words, once power is concentrated, the very act of people having power makes them use it, and it is this tendency that makes it unlikely the power won’t be overused. Perhaps this belief is wrong, but even if it’s not more probable, the very fact this tyranny is possible is grave enough. But what if it is no longer possible to “back out of” this possibility? What if indeed.
Perhaps the world would be a better place if ruled by a “benevolent dictator” who was TBF (perhaps the function of God in some religions). Perhaps, but what if Hayek is correct that ‘[t]here are strong reasons for believing that what to us appear the worst features of the existing totalitarian systems are not accidental by-products but phenomena which totalitarianism is certain sooner or later to produce?’¹¹ If this is the case, then a “benevolent dictator” is more a theoretical possibility than an actual possibility, and I think the same perhaps holds about a “benevolent CEO of something TBF.” What Hayek argues about “big States” I think equally applies to “TBF businesses” (and perhaps to “big businesses” to a more limited extent). Basically, Hayek’s claim is that there is something about large systems that attract people who exhibit the worst characteristics (bad people like being obeyed while good people don’t like to control others; ‘there [are] special opportunities for the ruthless and unscrupulous’; and so on).¹² Is it possible that “the worst” don’t get on top? Of course, but is it likely? I think Hayek is right about this, and if this is the case, then a TBF entity is precisely regarding which “self-regulation” and “self-interest” most need to synthesize and yet most likely to be divided. Whether in the State or a business, probability is against TBF entities working out well (and please note that I think growing businesses motivate the State to grow and vice-versa, creating a self-feeding problem).¹³
Concentrating power can be a temptation: we want it in order to achieve the ends we want to achieve now (like moving in a straight line to travel quickly between two points). Where power isn’t broken up, change can happen quickly, and if we believe there is an injustice in the world we want to fix, not concentrating power stands in the way of justice (a dilemma discussed in “Belonging Again”). In a sense, “checks and balances” can contribute to injustice, and perhaps of all the desires, it is the desire for justice that compels us to concrete power and tear down “checks and balances” most of all (as discussed in “The War Between Process and Justice” by O.G. Rose). Yet, on the other hand, if the State isn’t “checked and balanced” and the concentration of power becomes a great source of injustice, the scope of that injustice will be immense.¹⁴ If Hayek is correct that power attracts the worst kinds of people, then justice — which could entail efforts to “save America” or increase freedom, for justice isn’t only a Progressive value — can compel us to create the conditions in which injustice are likely.¹⁵
To restate a point nearly verbatim from “Belonging Again,” the more a system grows, the more good that can be accomplished if good people control it, and so there will be good reason to keep the system growing. And yet the more it grows, if Hayek is correct, the less likely the growing potential for good will be realized: there could be an inverse relationship between how much potential good a system can do and how much it attracts good people to realize that potential. The more possible the ideal becomes, the more unlikely the ideal is realized.
VI
Since enterprises naturally and rationally want to become TBF, assuming Hayek is correct about “bigness attracting the worst kinds of people,” the only way to save a system from corruption is to make sure nothing is in the system which makes possible for a given thing to become TBF. For if enterprises can, they will rationally seek to become TBF, and if they succeed, terrible corporate and/or political tyranny will be likely (though not necessary, to stress the point).
But perhaps it could be argued that we’re not beyond a “point of no return” yet, that the American and global economy do not yet consist of numerous TBF entities. If TBF is lacking, the State certainly acted wrongly in 2008 to bail out the banks and, by so acting, the State forced a certain appearance of history that confirmed a certain narrative (in line with “Flip Moments” by O.G. Rose). After all, how can we really know if banks truly are TBF unless we let them fail and see what happens? Still, I would point out that the theoretical points I’m making hold: that entities in a free market, following the rationality of that very free market, act rationally if they seek to become indispensable to that free market (TBF, part of its essential structure, etc.), and thus become no longer as susceptible to the same free market forces as competitors: the free market seeks to escape itself, like a soul wanting to leave a body — dead. Free market entities are not supposed to be invincible, and yet that is precisely what rationality would have entities in free markets become (through changing the free market to a mixed market and so on). If institutions become so invincible, and if these institutions become corrupt or act in a manner that could threaten the entire socioeconomic order, then humanity has passed a point of no return (at least not without war and/or “a great reset”).
Hayek and Taleb in mind, it seems to be the case that large systems are hard to manage, so is it really the case that TBF is rational? Arguably a large, non-invincible system is less rational than a smaller, non-invincible system, but it seems at least that, at a certain point, it becomes more rational for a system to keep growing and become TBF versus shrink and become more manageable (also, computers may make large systems manageable that in the past were not). At the same time, it’s also rational for a system not to be “too small,” for a small system to grow (in order to even exist, to increase profits, etc.), and so rationality pushes systems in different and even paradoxical ways. If A represents the smallest possible size, and Z the largest, then a graph like this could be drawn:
If System 1 is at stage A, there are incentives to grow “toward” Z, but at some point it becomes rational for System 1 to stay at the size it’s at (say around G); then, between G and M (for example), to shrink “toward” A. But then at M, there are reasons for System 1 to move “toward’” A but other reasons to move “toward” Z. If System 1 reaches W, then it’s rational to go on and reach Z and not rational to move back “toward” A and the equilibrium spot around G. Thus, somewhere between M and W, the directionality of rationality shifts, making it foolish to move backwards.
System 1 at A is “toward” Z, for there is incentive to become invincible and away from not existing. However, the more 1 moves from A “toward” Z, the more 1 will approach a point where reasons begin to emerge for 1 to stop growing. If G is the point where reasons for moving “toward” A balance with reasons for moving “toward” Z — if a “rational equilibrium” is reached, per se — doesn’t this represent “the most rational” point for system 1, and thus the point which free markets would lead 1 to reach and reside? Perhaps then it’s not fair to suggest that “the rationality of the free markets” is a threat to free markets? Aren’t free markets “toward” a “rational equilibrium” before they are “toward” a TBF that would ruin the free markets?
Fair enough, and admittedly I could be accused of describing rationality like a monolith, when really there is no “rationality” only “rationalities” (as the conflicting advantages of “being invincible” and “being manageable” hopefully delineate). Certainly, it is indeed true that markets don’t always make it only rational to become invincible: they can also make it rational to stay a certain size at a certain point and going beyond that point irrational — though perhaps also rational to some degree, for there’s rationality in growth (rationalities can mix). But eventually, if a system goes down the “irrational road” long enough, it becomes more rational than irrational suddenly to keep going, and perhaps it could be argued that it is always rational to pass this point, for it is more rational overall to be invincible than to be manageable. Fine, but to reach the point where it’s more rational to (try to) become invincible than manageable, a system must to some degree act irrationally, so surely it’s not fair to suggest that free markets necessarily entail the seeds of their own destruction, is it?
Again, these are fair objections, and though I would be willing to argue that there is some (perhaps weak) degree to which rationality necessarily threatens free markets, I would not be willing to argue that the rationality which threatens markets is necessarily greater than the irrationality against moving “toward” TBF. Rather, what I am arguing is that free markets necessarily entail a point where a system moving “toward” Z would be irrational not to keep moving in that direction; past this point, rationality, the lifeblood of the market, becomes poisonous.¹⁶ What exactly constitutes this point depends on the entity in question (which is not easy to identify), and perhaps no entity in the history of the world has ever reached this point. Perhaps not, and thus perhaps my admonishment is not needed. Still, I hope to deconstruct the assumption that “the market necessarily knows best,” because at a certain point, the market devours itself. Perhaps practically the market always does “what’s best,” because the theoretical point I have laid out is never reached, but after 2008, I think there is reason to be skeptical.
Are there any systems, entities, etc. around that have reached point Z or passed the point where it becomes rational to reach Z? I think there is reason to think so, and if TBF is with us, a clock might be ticking. Unfortunately, the problem of TBF is not only something we have to worry about regarding hedge funds: I believe TBF applies to the US dollar itself. Why and how will be taken up in the paper “No Exit.”
VII
In The Breakdown of Nations, Leopold Kohr warned that ‘whenever something is wrong, something is too big.’¹⁷ As argued by Steven Yates, Kohr did not believe the problems of countries were matters of Conservatism or Liberalism, but rather size, for any ideology could be ‘the basis for cruel, totalitarian regimes.’¹⁸ As Yates noted, Kohr seemed to have thought that any private or public system could ‘be rendered workable under the right circumstances,’ but no system could work once too large.¹⁹ ²⁰
Kohr’s work is a remarkable read, and I find his ideas (such as the power theory of aggression) to be invaluable tools for understanding the modern world. But horrifically, if both Kohr and the argument of this paper are correct, then rationality itself will direct private and public systems to become exactly what Kohr warned they should never become: “too big.” And if “too big to fail” systems are already with us — a Global Debt Bubble already established, perhaps — then I fear that, to use Sartre’s famous phrase, there is “no exit.”²¹
To use a distinction made by Bo Burlingham, Kohr wants systems to focus on “being great” instead of “being big,” and in fact would argue that bigness and greatness share an inverse correlation. This might be true, but Kohr also understands that a system which is “too small to succeed” will struggle to accomplish anything and rest on the edge of nonexistence. Like Nassim Taleb, Kohr believed systems have an “optimal size”: if humans grow too tall, they become dysfunctional; if houses become too large, they become unmanageable; and so on.²² And yet if it is indeed the case that rationality would drive systems to become “too big” (especially after a certain point of growth), is our only hope for systems to act foolishly? It would seem regulation is needed, but regulation in practice can prove useless if not corrupted and taken over by the very entities which are supposed to be regulated (“regulatory capture”). What’s required is also what’s bad for us.
“Self-interest” and “self-regulation” are divided at the point of TBF, which is the point that most horrified Kohr. Based on his views of human nature, Kohr believed that ‘[w]hat [people] can get away with, they will get away with,’ and the larger systems become, the more there will be that which people can do and not face consequences.²³ When systems are small, though evil and aggression will always be with us, there will be a better balance of power, and the scope of what people could do without consequence will be much less. And yet sounding like Jonathan Rauch or Mancur Olson (both of who had similar views on the possibility of reversing the extraordinary growth of special interest groups), when asked if it was possible for great powers to be reduced, Kohr answered with a simple “no.” Large systems are now forever part of our world, but if this is the case, and if these systems likely transcend controllability either through free market forces or regulations that practically work, then we have entered into a dire world.²⁴ All we can hope for is managing the problem.
I believe the following captures the thrust of Kohr’s thinking well:
‘According to Marx, the primary cause explaining both historic change and, along with it, our changing actions, attitudes, and institutions, is our changing mode of production. According to the theory underlying the analysis of this book, it is the changing size of society.’²⁵
In Kohr’s mind, “big versus small” is far more important than “right versus left,” but Kohr fears we tend to think that if “our side” is in power, then “bigness is good,” for it means we have more power to accomplish what we believe is worth accomplishing: it doesn’t even dawn on us that we can’t grow in size without undermining the ends for which we grow to accomplish.
‘Again we shall find that the dreaded result of a society’s behavior is the consequence not of evil schemes or evil disposition but of the power that is generated by excessive social size. For whenever a nation becomes large enough to accumulate the critical mass of power, it will in the end accumulate it. And when it has acquired it, it will become an aggressor, its previous record and intentions to the contrary notwithstanding.’²⁶
Kohr does not deny the possibility of some individual leaders using “large systems” for positive ends; the problem is that the majority won’t, and therefore “large systems” have an “expiration date” (and when they expire, the consequences could be “massive”). ‘True,’ Kohr notes, ‘some may develop an extraordinary will power and stay good because of sheer intellectual fortitude; but the mere fact that they, too, have to fight hard battles with the forces of opportunity shows the elementary character of these forces.’²⁷
“Why the Worst Get on Top” is a section in Fredrich Hayek’s famous The Road to Serfdom, which Milton Friedman described as explaining ‘why it [was] that ‘good’ men in positions of power [would] produce evil.’²⁸ Now, it certainly doesn’t follow that a large corporation is entirely the same as a large government, and we also have to be careful to assume that large governments are always totalitarian regimes, but what if what Hayek is arguing is true because Kohr is correct about size? What if it doesn’t matter if a system is Liberal or Conservative, Marxist or Capitalist, etc., because if it’s too big, it will be corrupted? Size itself might be what makes “the worst features of the existing totalitarian systems” inevitable, and if this is true, then, to repeat Hayek’s quote, ‘those who think that it is not the system which we need fear, but the danger that it might be run by bad men, [would act foolishly if they thought] to forestall this danger by seeing that it [was] established in time by good men.’²⁹ If Kohr is correct, this is not possible.
Complementing Kohr, Hayek offers a few of his own reasons for why “the worst rise to the top” of the most powerful systems, which may help us understand why size itself is unavoidably problematic:
‘[The power beget by large systems attracts those who particularly enjoy] the pleasure of being obeyed.’³⁰
‘There is […] in the positions of power little to attract those who hold moral beliefs of the kind which in the past have guided the European people, little which could compensate for the distastefulness of many of the particulars tasks […] [Simply put, “good people” don’t like controlling others.]’³¹
‘[…] it is probably true that, in general, the higher the education and intelligence of individuals become, the more their views and tastes are differentiated and the less likely they are to agree on a particular hierarchy of values. It is corollary of this that if we wish to find a high degree of uniformity and similarity of outlook, we have to descend to the regions of lower moral and intellectual standards where the more primitive and “common” instincts and tastes prevail. This does not mean that the majority of people have low moral standards; it merely means that the largest group of people whose values are very similar are the people with low standards. It is, as it were, the lowest common denominator which unites the largest number of people.’³²
‘If a numerous group is needed, strong enough to impose their views on the values of life on all the rest, it will never be those with highly differentiated and developed tastes — it will be those who form the “mass” in the derogatory sense of the term, the least original and independent, who will be able to put the weight of their numbers behind their particular ideals.’³³
Following the thought of Kohr and Hayek, large systems produce negative and destructive results by definition.³⁵ If this is true, and if it is also true that there are large systems with us that are “too big to fail,” then that means what causes hardship and destruction for us cannot be removed without destroying ourselves. If this is an age of TBF, then it is too late for us to heed the admonishments of Hayek and Kohr, and if it is true that “the worst rise to the top” and “bigness causes dysfunction,” then we will have to learn to live with dysfunction and “the worst.” There’s “no exit.”
If the rich are getting richer at the expense of the poor, but the rich are “too big to fail,” then to keep the poor alive, the poor must get poorer. If the powerful are TBF and getting more powerful at the expense of the weak, then the weak must get weaker. If inequality is the environment in which civil unrest becomes more likely, along with general socioeconomic breakdown, and if free markets ultimately develop out of free markets, like a cocooned butterfly devolving into a maggot, then the inevitable results of free markets are socioeconomic collapse (even though McCloskey is likely correct that free markets are the world’s greatest source of wealth creation).
To list out the basic and hopefully wrong argument of this work:
1. If it is possible and rational for enterprises to become TBF, they probably will.
2. It is probable that TBF enterprises are corrupted and used for bad ends (considering Hayek and Kohr).
3. TBF enterprises cannot be removed without devastating and possibly apocalyptic consequences.
4. America cannot be saved without ending it.
All this might be the horror of our current situation, and if it is practically inevitable that free markets become mixed markets, then it is practically inevitable that our current situation be Capitalism’s ultimate reality, a “rational” disregard of Kohr and Hayek. And yet at the same time, if only in the ideal, I believe free markets are the best system we have that successfully decentralize power while spurring innovation and wealth creation.
As it seems practically impossible for free markets not to become mixed markets, it might also be “practically inevitable” that small systems become large systems.³⁶ If this is the case and Kohr correct, then it is practically inevitable that society undergoes ever-escalating “crises of bigness” (to use Kohr’s phrase), until one day we reach an age when most systems are TBF, which is when Kohr’s nightmare will be fully realized. It is very likely we have already entered this age, both on the market and in the public sector, precisely because the two are responding to one in a feedback loop, trying to keep up with one another, growing all the while. And problematically there seems to be “no exit” from Kohr’s incubus; we’re all “too big to fail” now.
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Notes
¹Do note that all “apocalyptic thinking” ultimately relies on an appeal to a “non-contingent,” as discussed in “Death Is the Event Horizon of Reason” by O.G. Rose.
²The counter to my claim is the suicide, a fair objection. However, I would point out that the suicide wants to be a “non-living thing,” and hence a law that applies to “living things” doesn’t quite apply. If a thing wants to live, the law applies, but otherwise the law loses its hold (and hence why distinctions between what living things “naturally want” and “unnaturally want” — babies do not desire suicide; the desire for death is learned). Additionally, if a thing doesn’t want to live as the thing is living, the law also loses its influence. The law mostly applies to that which wants to “be” as the thing “is”; in other words, if we are happy with life, we want our current state to become necessarily existent. We want our happiness to be final, by definition (even if we want sadness, for we must believe sadness is good — we cannot want what we believe is bad, only what has bad consequence — and we must want the good to “be”; even if we only want a particular manifestation to be temporary, we still want it to be “noncontingent,” meaning it cannot be lost for any other reason than pure will, which paradoxically means we want to be the thing’s only contingency and “noncontingent” otherwise).
Isn’t another counterexample the person who currently isn’t an engineer but who wants to become one? This living thing doesn’t want to be “necessarily so” as the living thing “is.” True, but I would argue that “The Law of Seeking Non-Contingency” doesn’t apply as strongly to a living thing that isn’t currently content with its present state. That said, if the person were to become an engineer, then the person would want “non-contingency,” assuming the individual achieves happiness (and the closer the person comes to becoming an engineer, the more the person will desire non-contingency). Likewise, when a business achieves a state which satisfies it, it desires non-contingency and desires this increasingly the more it approaches this state.
We want non-contingency on our terms: we want to be the only contingency, God-like. Granted, the suicide does offer a counter to this point, but I do think it is a rare case, and certainly I can’t imagine many people run a business that they want to go bankrupt.
³But surely Capitalism can have negative influences on personal development too, yes? Can’t Capitalism encourage materialism, greed, selfishness, and other vices? Did not Capitalism encourage slavery and exploitation of the working class? It can, but so can Socialism and Fascism. There are few nations on earth where slavery, alienation, and exploitation aren’t found: where there are humans, there are sins. Concentration camps were present in the Soviet Union like plantations ran throughout the American South. The question is “Does Capitalism worsen these vices more than do other socioeconomic systems?” To answer this, the works of Deirdre McCloskey could prove useful.
There is bad in people that will come out regardless the socioeconomic order, but a case can be made that at least free markets can force people to be self-regulated out of self-interest. The more people who practice this “self-interested self-regulation,” the more the bad can be contained, and when it isn’t, the badness can be better mitigated. Much of the world may agree, as perhaps suggested by the high number of immigrants who travel to America. The “vote of the feet” strikes me as the most reliable of votes.
Perhaps the errors of Capitalism may “stand out” to us more than the errors of other socioeconomic systems due to “vividness,” as explained in “Incentives to Problem Solve” by O.G. Roe. Also, even if it could be proven that Capitalism causes more corruption than Socialism, it wouldn’t follow that Socialism makes people saints. Even if the market isn’t the source of virtue, we can’t assume the State is any different.
⁴Through the Fed, this may also incentive the State to stimulate growth in the stock market to help the whole economy, when this may only help the 1%. And the bigger the 1% growths, the more the State may try to intervene, making the situation worse and ever-worse.
⁵At the same time, it could be “rational” for the State to get involved for its own good or bad agendas, perhaps to assure the free market doesn’t self-destruct.
⁶One could argue it is “irrational” to ruin Capitalism, and that we only act “rational” if we possess a full life view and live not just for money, but also for family, others, etc. But again, though I don’t dispute the point, “rational” is relative to who we ask and relative to what we value and believe constitutes “being true” (to use the language of “The Truth Isn’t the Rational” by O.G. Rose): we must avoid being a “monotheorist” about (our) rationality.
⁷But aren’t many businesses downsizing today? Perhaps, but they are doing so to increase profitability and because, in their given market sector, they cannot become “too big to fail.” The default is to grow, and if that is possible in a manner that will increase profit, growth will occur.
⁸Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148.
⁹Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–149.
¹⁰Kohr, Leopold. The Breakdown of Nations. Green Books Ltd, in association with New European Publications, 2001: 58.
¹¹Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 149.
¹²Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 166.
¹³Yes, a given TBF situation could entail a benevolent dictator, but I believe the majority of TBF situations will incubate corporate and/or State tyranny. Considering this and that TBF entities necessarily threaten the entire socioeconomic order, even if TBF entities exist for a thousand years before they are corrupted, when they are corrupted, the consequences will be grave. It is possible a dictatorship be run by saints for a century, but saints die.
¹⁴The work “On Justification and Consequences to Others” by O.G. Rose is relevant here.
¹⁵Considering the grave risks, I believe it is better not to concentrate power and to keep systems small, and though this means it can take longer for a good change to happen and for smaller goods to build upon one another, it also means a little bad can’t tear down the entire socioeconomic order by infiltrating the power center. Tragedy accompanies this view — injustice perhaps cannot be stopped as quickly as it could with concentrated power — but I believe tragedy accompanies all views, and I would prefer many smaller tragedies over a huge one. That said, I fear it is too late for “small systems” — TBF is with us.
¹⁶It’s also possible that it its always more rational to approach TBF than stay manageable, but that is not an argument I will try to make.
¹⁷Kohr, Leopold. The Breakdown of Nations. Green Books Ltd, in association with New European Publications, 2001: 21.
¹⁸See “Leopold Kohr: Prophet of a Coming Decentralization?” by Steven Yates, as can be found here:
https://www.abbevilleinstitute.org/review/leopold-kohr-prophet-of-a-coming-decentralization/
¹⁹See “Leopold Kohr: Prophet of a Coming Decentralization?” by Steven Yates, as can be found here:
https://www.abbevilleinstitute.org/review/leopold-kohr-prophet-of-a-coming-decentralization/
²⁰If the arguments of O.G Rose are correct and consciousness is “toward” centralizing and growing the State (“A/A thinking,” as discussed elsewhere) — “bigness” — then consciousness itself is “toward” making all systems, public or private, ineffective, perhaps even destructive.
²¹In politics, people think the problem is that there is either too much Conservatism or too much Liberalism, but Kohr’s thinking adds an important “y axis” to the equation. Instead of thinking about political solutions as purely horizontal (suggesting we need to avoid “pendulums” or other metaphors that imply there is only movement left to right), we need to think of solutions in terms of a grid, from something that only moves side to side to something that also moves up and down.
²²See “Leopold Kohr: Prophet of a Coming Decentralization?” by Steven Yates, as can be found here:
https://www.abbevilleinstitute.org/review/leopold-kohr-prophet-of-a-coming-decentralization/
²³See “Leopold Kohr: Prophet of a Coming Decentralization?” by Steven Yates, as can be found here:
https://www.abbevilleinstitute.org/review/leopold-kohr-prophet-of-a-coming-decentralization/
²⁴To stop “too big to fail” entities, regulators themselves will grow, and if they themselves become “too large,” that will create new problems. And in response to growing regulators, systems are likely to grow, in response to which regulators will grow — a feedback loop.
²⁵Kohr, Leopold. The Breakdown of Nations. Green Books Ltd, in association with New European Publications, 2001: 66.
²⁶Kohr, Leopold. The Breakdown of Nations. Green Books Ltd, in association with New European Publications, 2001: 55.
²⁷Kohr, Leopold. The Breakdown of Nations. Green Books Ltd, in association with New European Publications, 2001: 59.
²⁸Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: xii.
²⁹Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–149.
³⁰Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–166.
³¹Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–166.
³²Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–152.
³³Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–152.
³⁴Hayek, F.A. The Road to Serfdom. Chicago, IL: The University of Chicago Press, 1994: 148–157.
³⁵If the State naturally grows larger with time, and if the quality of choices in elections naturally drops as the State grows (which would follow if Hayek is correct, for the more the State grows, the more it will attract the worst people), then it is likely that every election will be worse than the last.
³⁶Perhaps because of the “towardness” of consciousness itself (which on a positive note, is against anarchism), as argued throughout O.G. Rose, a natural tendency perhaps worsened by how we have become “one dimensional people” (A/A) (to allude to Herbert Marcuse).
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