“The Sovereign Individual”: A summary and forecast in a post COVID-19 world

Note: This summary is not meant to serve as a substitute for reading “The Sovereign Individual”, but rather to excite the prospective reader’s curiosity as an introduction to the book’s central themes. In the 20+ years since it was published, it is remarkable how relevant and prescient the authors were in describing and understanding the critical point in history at which we currently stand, especially in light of the events and aftermath surrounding COVID-19. To provide an adequate summary of this book would be to write another book in itself. What follows is my own distillation and commentary of key themes in an attempt to better understand the topics, and convey them to the reader in a way that sparks a broader conversation of what I deem to be one of the most important works created in my lifetime. I have opted to use more direct quotes than originally planned due to both authors’ incredible ability to articulate their main points and my concern to not lose any critical information by summarizing.

Main Idea

“For most of history, if not for most of human existence, the balance between protection and extortion has fluctuated within a narrow margin, with extortion always holding the upper hand. Now that is about to change. Information technology is laying the groundwork for a fundamental shift in the factors that determine the costs and rewards of resorting to violence.”

After finishing the book and organizing my notes, I’ve contemplated what exactly the central thesis of The Sovereign Individual is, and I would say the above quote summarizes it quite nicely. Violence, from pre-agrarian societies to the present, has been a dominant force in determining the ruling contemporary megapolitical structure. Throughout history monopolies of violence, from tribal bands, religious institutions, and sovereign governments, have evolved and changed tactics based on the fluctuating returns to implementing violence.

“The reason that people resort to violence is that it often pays. In some ways the simplest thing a man can do if he wants money is to take it. That is no less true for an army of men seizing an oil field than it is for a single thug taking a wallet. Power, as William Playfair wrote, ‘has always sought the readiest road to wealth, by attacking those who were in possession of it.’
The challenge to prosperity is precisely that predatory violence does pay well in some circumstances. War does change things. It changes the rules. It changes the distribution of assets and income. It even determines who lives and who dies. It is precisely the fact that violence does pay that makes it hard to control.”

Perhaps for the first time in human history, the oscillating nature of extortion and protection through violence stands to transform the monopoly of violence that sovereign governments have by transferring the power of this monopoly to the individual via information technology.

Like every great civilization, the current power structure subscribes to the fallacy of special pleading. “This time is different” — said many a historic ruler in defiance of the unbroken historical cycle of empires.

“Every social system, however strongly or weakly it clings to power, pretends that its rules will never be superseded. They are the last word. Or perhaps the only word. Primitives assume that theirs is the only possible way of organizing life. More economically complicated systems that incorporate a sense of history usually place themselves at its apex. Whether they are Chinese mandarins in the court of the emperor, the Marxist nomenklatura in Stalin’s Kremlin, or members of the House of Representatives in Washington, the powers-that-be either imagine no history at all or place themselves at the pinnacle of history, in a superior position compared to everyone who came before, and the vanguard of anything to come.”

To be fair, there is a practical reason for why this mode of thought perpetuates beyond the fallacious and hubristic reasoning above. If the end is apparent or accepted, this creates a reluctance for people to adhere to the system’s laws. It is essential for any social organization to reject or discourage this simply out of necessity, biases and vision aside. These biases are one of the strongest patterns in human civilization and yet, they still happen in the same predictable meta-patterns of society.

Because of the unbroken cycle and resulting behavior, Davidson and Rees-Mogg argue that one must take the future and understanding of these patterns of societal collapse into their own hands to not only prosper but to survive the transitional periods from the incumbent megapolitical form to the as yet identified future regime.

Government as a model of customers, employees, and proprietors

The authors discuss the function of government through the lens of three economic actors and the logical conclusions based on their rational interest.

For proprietors, government ownership is by a single person or group — focused on maximizing revenues of the state in conjunction with minimizing the cost of services, all while maintaining sufficient military power to affirm their monopoly on violence. Because proprietors are interested in revenue maximization, cutting taxes is a function of competition with other states, thus the greater its monopoly, the less incentive to lower taxes. Nevertheless the cost minimization of services provides value to the people via efficient use of resources.

In the employee ownership model of government, the main incentive is to increase employment in the government with no incentive to maintain or lower costs due to its contradictory effect of lowering their salaries or entitlements. When faced with the decision to maintain their increasing budget in light of resistance to higher taxes, employee governments opt for chronic deficits.

Customers run governments seek to minimize the cost burden when financing the protection of a monopoly of violence. Unlike governments run by proprietors or employees, they do not seek to profit from this monopoly, nor do they wish to incur costs beyond their ability to pay. Their primary goal is to get the best services at the lowest prices. Customers are not incentivized to deviate beyond equilibrium price levels as the added cost is directly incurred by each customer.

“If you went into a store to buy furniture, and the salespeople took your money but then proceeded to ignore your requests and consult others about how to spend your money, you would quite rightly be upset. You would not think it normal or justifiable if the employees of the store argued that you really did not deserve the furniture, and that it should be shipped instead to someone whom they found more worth. The fact that something very much like this happens in dealings with government shows how little control its ‘customers’ actually have.”

When we think about the employee controlled government described above, it is important to understand that employee run governments don’t just include the employees that work in government today. The umbrella term also includes any recipient of a transfer payment or subsidy. When looked at through this lens, it is clear how the customer focused system was co-opted by the employee model in many Western governments.

Why did this occur? Because customer efficiency in the modern era was not the dominant game. Success was defined by the ability to create a military that could deploy overpowering violence against any other state. This required money. Lots of it. The winner was the government that could raise the largest amount of resources in the quickest amount of time. Military spending is largely an area with low financial return, thus the natural winner favors the employee government. It is an interesting implication and concern to look at the game theory when states are in competition with increasing demands of violence. While customer owned governments have been demonstrated to be more efficient, when it comes to military competition, governments controlled by customers will have a harder time raising the necessary funds carte blanche in comparison to the deep deficit spending that can occur under the employee regime. It is also easier to pilfer large amounts of money from big citizen populations than from a small powerful group of oligarchs in which the financial influence of one or more not supporting the increased military spending could have substantial effects on the outcome.

Socialist and Democratic Welfare States: Victors of the employee model era

By allowing personal property rights and not immediately commandeering all resources for the state, democratic welfare states were able to accumulate a greater share of resources through time relative to their socialist counterparts. While growth and productivity were high this predatory policy from the democratic welfare state was accepted, as it’s nature was not readily felt the way that it always was under the socialist state. This was a big reason for the faster collapses of most socialist regimes of the last century relative to democratic welfare states. However, as growth begins to falter, the tide rolls back and citizens begin to question both the amount they contribute and the return they get from such policies. Where did the money go? In this sense, the need to differentiate and make value judgments on the democratic welfare state being “better” than the socialist state is less relevant than the understanding that they are two pieces of the same cloth. While the western world cheered the demise of the Berlin Wall and the fall of the Soviets, the notion that the democratic welfare state could face a similar demise seemed inconceivable, and perhaps to a large degree still does.

Accelerating Consequences

Most of us can agree that the above situation is problematic, yet we also would be surprised if government announced that the majority tax payers then decided which programs were funded and which employees were fired. But no one seems to hold the same level of shock that the employees are the ones both allocating and raising taxes (or more commonly now raising deficits) based on specific agenda supporting criteria. Government is a monopoly on violence in which customers pay for protection. Under an employee model, once a monopoly is established it becomes hard to leave and creates incentives to raise the cost of protection for programs that only benefit employees.

Through this lens we can start to predict and anticipate megapolitical shifts based on technological and demographic changes, as well as the extent to which modern government pilfers its citizens, especially in the absence of growth or deceleration of growth, and the subsequent increase in entitlements that inversely follows this pattern.

“An impoverished local priesthood seemed to offer a poor service for the money it demanded; much of what was levied effectively ‘disappeared’ into enclosed monasteries or the arcane areas of higher education or administration. In spite of gifts prodigally given to some sectors of the Church, the institution as a whole managed to appear simultaneously impoverished, grasping, and extravagant.” — Euan Cameron

Why This Time Isn’t Different: Using historical analogy as a guide to understanding where we are in the current cycle

Useful heuristics in understanding revolution:

• “A shift in the megapolitical foundations of power normally unfolds far in advance of the actual revolutions in the use of power.”
• “Incomes are usually falling when a major transition begins, often because a society has rendered itself crisis-prone by marginalizing resources due to population pressures.”
• Seeing “outside” of a system is usually taboo. People are frequently blind to the logic of violence in the existing society; therefore, they are almost always blind to changes in that logic, latent or overt. Megapolitical transitions are seldom recognized before they happen. It is interesting to look at how history is taught with clearly delineated dates, such as the fall of Rome in 476 AD, when the real history of the decline in Roman influence arguably happened much earlier. It is only with the benefit of hindsight, though still a difficult task, that we can examine the events and timeline in a deterministic way. As a citizen during that time in which the near future is playing out probabilistically and the omniscience of looking into the past is not available, it is incredibly difficult to observe such profound societal changes. A cautionary tale for modern society.
• Major transitions always involve a cultural revolution, and usually entail clashes between adherents of the old and new values.
• “Megapolitical transitions are never popular, because they antiquate painstakingly acquired intellectual capital and confound established moral imperatives. They are not undertaken by popular demand, but in response to changes in the external conditions that alter the logic of violence in the local setting.”
• “The last ingredient in the powder keg of revolution is senility. As the Church, and now the state, grows old, debt proliferates, hyper politicization and bureaucratic behemoths begin to swarm every corner of social and economic life, and more and more people begin to view the megapolitical structure as obsolete and its practices irrelevant.”

Lowering The Cost Of Heresy: Technology as the catalyst for revolution

While we are undergoing a revolution in information technology, the authors point to an earlier technological revolution that took place approximately 500 years ago: the printing press and its role in The Protestant Reformation. Mass production of books ended the Church’s monopoly on Scripture by democratizing information and literacy, creating a new era of thinkers — some of which questioned the tenets of the Church.

“The Church found that censorship did not suppress the spread of subversive technology; it merely assured that it was put to its most subversive use.”

Technology serves to disrupt the monopoly that the current megapolitical structure controls. In the case of the church, this was both information and violence. For the modern state, it is the same, though the continuum of information monopoly varies from country to country.

The biggest area in IT that could catalyze change according to the authors is the advent of encryption and its use in protecting the financial freedom and privacy of the individual. The state understands that its political authority derives from its economic control. The further the state loses control of this economic power, the more impotent the political authority becomes. Fighting tooth and nail to retain this power will be an absolute necessity. Without the control of the banking system, government’s monopoly on violence will weaken.

“For the faithful to meet their religious obligations became increasingly costly and burdensome, much as the costs of remaining within the law have proliferated.”

We can already see the early stages of this fight in the US with their implementation of an exit tax on those wishing to renounce their citizenship. Not too long ago, one was free to relinquish their citizenship and have a clean break from the state, but not anymore. New exit taxes reveal how the state truly views it’s wealthy citizens — as assets that, similar to cows, must never be allowed to leave the farmer’s pasture lest they be milked by someone else.

As the ability for individuals to protect their assets outside the control of the state becomes easier, some states will embrace the new paradigm instead of fighting it and adopt a new framework of government based on the customer model described above. They will compete against fellow states to efficiently provide services for citizens in exchange for taxes or some other fee-based offering. Service competition will lead to currency competition, central to which will be the concept of sound money. As more countries drive their own currency into the ground, more citizens will begin to opt out as other options become attractive and easier to use. For the US in particular, if a new form of currency usurps its reserve status which has benefited the US substantially over the last few decades, the ability with which it can continue to run at larger and larger deficits will be hindered by the citizens disapproval, expressed by their decreasing confidence in the dollar. Bitcoin is the first large scale example of this phenomenon in action, though it is still in a very early stage. If the authors are right, one would expect a currency like bitcoin to have it’s own competition as it continues to grow.

The end of the firm

“A good job is a job that pays more than you are worth.” — Orly Ashenfelter

“Good jobs” will disappear with the growth of information and decrease in transaction costs. It will become harder and harder to obfuscate the value of an employee’s hour or skill as data and reputation allow for more concrete measures of worth. Proportion of contribution will more and more reflect directly in compensation.

The gains from centralized economic powers will no longer be as efficient for the firm of the future. The rise of outsourcing, automation, and contractors will disincentivize the incumbent firms structure largely due to high transaction costs relative to the future fragmentation of work.

The increasing abundance of information will create a higher premium on distinguishing truth and accuracy.

“Information glut leads to a premium on brevity, but this in turn leads to abbreviation. The more abbreviated the information, the poorer the foundation for understanding. Coupled with the incentives of news/information organizations and the decreasing attention span of the populace, depth and exploration become deprioritized.”

“Rapidly changing technology is undermining the megapolitical basis of social and economic organization. As a consequence, broad paradigmatic understanding, or unspoken theories about the way the world works, are being antiquated more quickly than in the past. This increases the importance of the broad overview and diminishes the value of individual ‘facts’ of the kind that are readily available to almost anyone with an information retrieval system.”

“Public discourse will decline, especially when involving impolite, unprofitable, or politically incorrect views, due to the tribalization and marginalization of life.”

Social Dynamite: How societies behave leading up to the revolution

“Hatred is the right word to use in this context, for hatred it was, latent, but general and persistent. The people never wearied of hearing the vices of the clergy arraigned.” — Johan Huizinga

Replace clergy with politicians and the result is the world we live in today. Extravagance and hypocrisy were despised by the people under the Church leading up to the Reformation, and that same level of discontent is palpable across all political parties. People are tired and opening up to the idea of an option existing beyond the framework of the bureaucratic state.

“Intense, potentially violent nationalist reactions from those who lose status, income, or power, especially when it disrupts their entitled notion of what an “ordinary life” is supposed to be.”

We see this today across the US and in Europe with movements opposing globalization, hostility to immigrants (especially if visibly different), popular hatred towards the elites and the rich, and complaints about jobs and capital flight.

“The nationalist and Luddite reaction will be strongest, however, not among the very poor but among persons of middling skills, underachievers with credentials, who came of age during the industrial era and face downward mobility.”

This speaks directly to the glut of educated millennials drowning in debt who work menial jobs due to the lack of jobs available in their field, as well as all of the industrial workers who lost their jobs to outsourcing or automation. Their hatred towards capitalism and renewed interest in socialist policies is their response to being let down from their entitled dreams and promised futures.

“The politically correct and the fundamentalist Christian groups are bitterly critical of each other, yet in the modern world they look rather alike.”

“Though the politically correct movement rose up in response to the existing moral framework, through time, it has evolved to face the same problems of its predecessors: infighting, overconfidence and fanaticism, rigidity, and lack of tolerance.”

These quotes speak to the proliferation of political correctness and cancel culture we live in today. The moral purity that one must live up to in their public speech has become an impossible and ever changing standard. Mistakes become inevitable as time progresses. Allies of politically correct movements begin to self-segregate in their attempts to purge the ranks of those who are not true believers or those who may be tainted by ever changing criteria that punish them for certain aspects of their personal politics. Meanwhile, preference falsification flourishes and creates an underground of ideas that exists on the periphery.

“Rise of the demagogues: though modern politics is new, the demagogue is not. The same people we see running for office today were the ones competing as itinerant preachers in the megapolitical era from before. Regardless of era, their currency has always been the same: be the Messiah for the poor.”

Trump and Sanders are two sides of the same coin in this regard. Citizens are desperately seeking a Messiah to deliver them from the conditions of life that they feel trapped in. The greater the promises of paradise, the stronger the support. Good and evil become common themes as the polarization of society divides the faithful, and scapegoating becomes the glue that binds them from the common enemy.

Final Quote:

“For human beings it is the struggle rather than the achievement that matters; we are made for action, and the achievement can prove to be a great disappointment. The ambition, whatever it may be, sets the struggle in motion, but the struggle is more enjoyable than its own result, even when the objective is fully achieved. And, of course, for most people, the objectives can be achieved only partially. Most of us do not have as much money as we would like, and do not live in our dream house. We have to settle for something less.”