Modern discourse on politics often makes a great deal out of ideologies and systems of governance. This is a habit that nearly everyone has fallen into. Democracy is supposedly the panacea for all the issues in a non-democratic country, while theocracy is a no-go. Either capitalism or socialism is the biggest threat to humanity, depending on who you ask.

It’s not as if these discussions lack substance. But they are misleading because they shift the focus towards the peculiarities of those political and economic systems, instead of common themes that could explain the successes and failures of those systems. Why are the supposed benefits of democracy so unequally distributed across the countries of the world? Why does the welfare state work in some places but not others?

Clearly we cannot rely on the particulars of those systems to explain whether or not they succeed. It is more helpful to discuss pros and cons in terms of three simple ideas that have profound implications and go beyond those particulars: dependence, scale, and skin-in-the-game.

Dependence: Equality requires reciprocity

As social animals, human beings have relied on each other for survival since the dawn of the species. Our aptitude for complex language is one of the hallmarks of our reliance on social interaction. It is hard to imagine people getting by without depending in some way on some people at least some of the time.

capitalism-socialism-meetings

Yet, dependence needs to be symmetric. Relationships between members in prehistoric societies (as well as modern primitive societies) are reciprocal in nature. A skilled hunter may donate part of his kill to an expert forager, with the expectation of his share of berries when big game animals are hard to find. Dependence goes both ways and that serves as a deterrent against exploitation.

These egalitarian societies lack hierarchies, which are much more common in modern societies. Hierarchy creates asymmetry by introducing a superior and a subordinate, who are not equally dependent on each other. This weakens the deterrent against exploitation and may lead to the superior attempting to take advantage of the subordinate. The next time you feel bored after being compelled to attend yet another meeting, feel free to wonder why we need certain things more than they need us and how that affects our well-being.

It should be noted that the superior-subordinate relationship is not limited to positions of explicit authority. The key criteria is leverage. For example, China could use American economic dependence to influence US foreign policy, unless the US has an equally powerful bargaining chip.

Scale: Size does matter

scale-alienation

Despite being social creatures, humans do not conform to “the more the merrier” except to a very limited extent. There is a concrete upper limit, known as Dunbar’s number in social psychology and estimated to be around 150, to the number of stable social relationships a person can maintain at any given time.

Human societies do not scale very well. A group of 1000, left to its own devices, does not function identically to 10 groups of 100 people. Dynamics change as the community size exceeds the cognitive limit. If there are too many people to keep track of, conflict resolution becomes much more difficult. It is no longer possible for everyone to sit around a fire and hash things out amongst themselves because, due to the fragmentation created by the large community size, the two disputing parties may not share a strong enough social bond to have the incentive to resolve conflicts peacefully between themselves. Laws and government are needed, so that a recognized authority with a monopoly on force can impose a solution that will be accepted by both parties.

The upshot of this poor scalability is that policy ideas, especially those imposed in a top-down manner, are often misguided because they ignore scaling effects. The world is not a village. Ideas that work well for a small-town neighborhood do not translate into effective policy at the national level.

Skin-in-the-game: Risks and rewards should go hand-in-hand

When trying to decide whether someone is worthy of your trust, it is a good idea to cut through all the noisy details and ask a simple question: “what happens to them if they betray me?”

What will happen to politicians you voted for if they renege on their promises? How is a professional consultant affected by bad advice given to a client? Will a corporation on the verge of failing actually reform itself after being bailed out?

A lot of the time, nothing much happens. Many explanations are put forward, some of them quite complicated and nearly all of them suspiciously convenient. But there is an underlying fact that cannot be ignored: a lack of skin-in-the-game. The consequences of failure are just not strong enough. Some may even choose to fail on purpose if it serves their bottom line better.

This is known as the principal-agent problem or the agency problem in economics. If you hand money to a stranger to invest and agree to share the profits equally, don’t expect a good outcome. The lucky stranger stands to either gain something or lose nothing, pushing him/her to take bigger risks than you would on your own. Offering someone an equal share of gains without an equal share of losses is a recipe for warped incentives and disastrous outcomes.

Framing discussions in terms of dependence, scale, and skin-in-the-game

Dependence, scale, and skin-in-the-game are interconnected ideas. Mutual, symmetric dependence can often serve as skin-in-the-game. Two parties that depend on each other are less likely to betray each other. Scaling creates asymmetry and distributes consequences of actions unevenly, insulating some while exposing others to a greater share. It creates alienation, disconnecting action from consequence, separating decision from outcome.

Rewards and risks of decisions must be tied directly to those who take those decisions. To ensure this fundamental principle of fairness, the alienating effects of scale must be reduced by managing community size. The communities must be as independent of each other as possible, since too much dependence can distort incentives and lead to conflict and fragility.

Earlier in our history, the problem was that we did not know enough. Nowadays it seems that we know too much and are unable to act on it. One of the reasons for our failures is the inability to accept the role of the three factors outlined here. It’s a much better use of our intellectual energy to explore them instead of getting bogged down in the pros and cons of specific ideologies and systems.