Excerpt from The Five Stages of Collapse
Modern societies rely on the government to defend property rights, enforce contracts and regulate commerce. As the economy expands, so do the functions of government, along with its bureaucratic structures, laws, rules and procedures and—what expands fastest of all—its cost. All of these official arrangements show an accretion of complexity over time. Each time a new problem needs to be solved, something is added to the structure, but nothing is ever taken away, because previous arrangements are often grandfathered in, and because simplifying a complex arrangement is always more difficult and expensive than complicating it further. But socioeconomic complexity is never without cost, and once the economy crests and begins to contract, this cost become prohibitive. In the context of a shrinking economy buffeted by waves of escalating crises, an outsized officialdom comes to exhibit ever greater negative economies of scale, while the arduous task of reforming it so as to scale it down and simplify it cannot receive priority due to a lack of resources. In the best case, after a more or less chaotic transitional period, new, simplified and scaled-down official structures do eventually arise.
The government, at least in its non-functional, purely symbolic form, may not be abandoned outright. A few of its key functions may come to be served by unofficial groups. An almost completely lawless environment may prevail in certain particularly distressed areas for a time, after the government loses all ability to act due to lack of resources, and before local forms of unofficial self-governance spontaneously arise. It must be remembered that governments exist mainly through taxation. In a declining economy, the tax base shrinks while the government’s expenditures on social spending and crisis mitigation only go up, but the population cannot afford to pay a higher tax rate. In this situation, most governments nevertheless try to raise taxes, with the effect of driving economic activity underground. As the population is forced to resort to illegal forms of commerce, to informal arrangements, barter, gift and subsistence economies in order to survive in conditions of increasing poverty and joblessness, this vicious cycle feeds on itself and the government withers away, turns to criminal activities to survive, or both.
As the process of governmental disintegration runs its course, alternative, unofficial forms of governance take its place rather quickly. It is neither accurate nor helpful to imagine a spontaneous descent into some sort of Hobbesian state of nature, which, given what we now know, is best regarded as a ridiculous fable, a work of whimsy and a projection of ignorance, for where there is no law, there is custom and taboo that have the force of law and are upheld through judicious use of violence. Where there are no official authorities, unofficial ones spontaneously arise. Trade and commerce go on, but without government involvement or protection.
What’s more, in a transitional, crisis-wracked environment such unofficial forms of governance often turn out to be far more cost-effective. The government, with its predictable, impersonal, rule-governed, procedure-oriented set of evolved behaviors, is only able to function effectively in a stable, predictable environment. A collapsing economy is not such an environment. Here, all judgements and actions have to be based on the local, immediate situation, all solutions have to be improvised and ones that involve going through official channels and gaining official approval become noncompetitive. Illegal ways of doing business easily outcompete legal ones.
The focus on illegality is in some sense inevitable, but it is also not entirely helpful, because it tends to paint all activities as black or white. It is far more helpful to view them as grayscale, or as distributed over a two-dimensional map. In one corner, we have public institutions functioning legally—or perhaps not functioning at all: the police, the courts, code enforcement, inspectional services and so on. In the opposite corner we have private institutions functioning illegally: organized criminal groups. But there are two more corners. We also have public institutions functioning illegally—police and security forces acting privately, either for hire or on their own behalf. There can also be private organizations legally providing services that the government can no longer provide: private security and protection companies. There are numerous gray areas, such as officials randomly enforcing laws to settle scores with certain individuals or groups, or to provide a credible basis for later demanding bribes in exchange for agreeing to look the other way.
A large increase in illegal activity is often the direct fault of the government. A government that makes many essential activities illegal but lacks the ability to enforce the ban succeeds in only one thing: creating a large field of action for illegal enterprises. This, in turn, creates demand for their private protection. It is this key function of offering private protection for illegal enterprises that provides the initial basis for an entire new mode of governance. In this context, organized crime should be regarded not just as a form of social organization but as a form of alternative governance, which succeeds or fails based on personal and group reputation for honest dealing, and on its ability to use violence when it is justified and suppress it when it is not.
In many ways a weak government, which can impose a ban but not enforce it, is far worse than a largely defunct government, whose officials perform a few ceremonial duties and rarely set foot outside the heavily guarded official compound in the capital city. A weak government with some residual capacity for law enforcement produces a far more violent environment than a defunct one, by disrupting the work of organizations that offer private protection to illegal enterprises. Once the government has given up on law enforcement and become purely ceremonial, private protection organizations can begin to provide services to both legal and illegal enterprises, and indeed to the government itself. Ties between such organizations can then be worked out and territories and spheres of influence divided up, minimizing the level of violence. In this sense, a weak government’s efforts at law enforcement further weaken the economy by making it difficult for organizations that provide private protection to do their work, while their services are in demand precisely because of the government’s inefficiency in providing protection. Of course, this only further undermines the government… [This transition] should not be regarded as one that begins with the rule of law and ends with something else, but as a transition from badly organized crime to well-organized crime. Examples of this sort of succession can be found throughout history and in many parts of the world. Be it the Sicilian Mafia, Al Capone’s Chicago in the 1920s or Russia in the 1990s, there are numerous parallels in how such a transition occurs. If allowed to run its course, it eventually supplants the government and forms a system of self-governance and private protection whose legality is no longer in dispute.
Nor is this a recent phenomenon: during the Middle Ages, and even into modern times, protection rents were the largest source of fortunes made in commerce, playing a larger role in generating profits than production technology or industrial organization. Protection rents offer a means of stimulating an economic recovery (subject to natural resource constraints). This is because an organization that offers protection forms a natural monopoly within its territory, allowing it to raise the price of protection above its costs and generate a monopoly profit, which it is then able to invest in productive resources. In the absence of a government, it is the only actor that can create temporary austerity but produce greater prosperity down the road by reallocating resources from consumption to capital goods. If more competitive institutional frameworks are allowed to evolve, formerly criminal groups can become legitimate shareholders in the businesses from which they had previously extorted payments.
Such a scheme does not spontaneously arise everywhere. The demand for protection services is a matter of scale; it does not exist in societies where people deal only with those they know personally, face to face, and where disputes are mediated by family and clan. It is a byproduct of economic specialization, impersonal relations and the need for long-distance trade. In societies where interpersonal trust is high, no one needs enforcers, and where there is sufficient solidarity, people can unite and defeat the common threat of gangsterism. Like weeds that opportunistically colonize areas of disturbed soil, criminal groups sprout up in disturbed societies. Small-scale enterprises in large-scale societies are the most susceptible; kiosk owners and street vendors are traditional targets for racketeers. Next are corrupt public officials, who spontaneously give rise to private protection, because they create a market niche for those who broker bribes and guarantee the transactions of bribery, protecting both sides: the briber from non-performance and the bribed from non-payment. …It is therefore necessary, as we start to explore this topic, to set aside our negative reactions to terms such as thief, racket, mafia, gangster and so forth and concentrate on the circumstances that create a need for their services, and on how the racketeers and the gangsters can evolve in a positive direction because, strangely enough, they often do.