Saturday, April 10, 2010

How the Mighty Fall: The Case of America

James Collins is a visionary business leader. He is well known in his field of studying company behavior and widely respected among some of the elite CEO (Steve Ballmer, for instance). One of his most recent books, “How the Mighty Fall ... and Why Some Companies Never Give In,” seeks to explain the trajectory of a company’s success to its ultimately irrelevance and ignominy. He lists the (5) precursors that lead organizations to ruin. These observations could be connected, I reckon, to studies that conclude that family wealth (measured in monetary terms) on average lasts no more than three generations. The same paradigm can be attributed to nations. This is his list:

1. Hubris born of success. Or, as Bill Bonner from the Daily Reckoning often remarks, “nothing fails like success.” This is characteristic of complacency that emanates from good fortunes (i.e. success). You believe that because you are successful, you must be good at what you do. In fact, success could have been solely the outcome of being at the right place at the right time; not because you were actually good at what you do. A false impression gets created.

2. Undisciplined pursuit of more. Or, in plain English, this is the idea that says, “hey, look, I’m good, I’m going to up the stakes to show you how exceptionally good I am.” Of course, in this stage, undue risk is taken.

3. Denial of risk and peril. That is, ignoring the obvious warnings. As Mr. Collins writes, when these “Internal warning signs begin to mount, [the] external results remain strong enough to 'explain away' disturbing data or to suggest that the difficulties are 'temporary' or 'cyclic' or 'not that bad,' and 'nothing is fundamentally wrong.'... leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data ... blame external factors for setbacks rather than accept responsibility" ... slogans and ideologies beat out "vigorous, fact-based dialogue that characterizes high-performance teams ... those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences"

4. Grasping for salvation. This is the stage of desperation. Actions are taken, which under normal circumstances would not be considered. In this stage, the true character of the organization is evident. Loss is inevitable, yet a grasp of hope is retained.

5. Capitulation to irrelevance or death. After all silver bullets have been fired, it become obvious that jumping ship is the best thing to do. As Mr. Collins writes, “accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. In some cases the company's leader just sells out; in other cases the institution atrophies into utter insignificance; and in the most extreme cases the enterprise simply dies outright."

Where is our society, i.e. the U.S.A., in this continuum? In my view, we are at stage 4, grasping for salvation.

America was founded with the concept of the right to life, liberty, and the pursuit of happiness. These aspects are unique in historical perspective; that is, no other nation since time immemorial had been created under a creed of individualism. Sure, the Magna Carta can be argued to be the first western civilization creation trumping the concept of individual rights, yet it was limited in comparison to the foundations of America.

It was the belief that one can come to America, mind his/her own business, and live the life he/she has imagine (as H. Thoreau wrote), that garnered the nation unprecedented prosperity, not only in monetary terms but also in non-monetary terms. Indeed, it was not a perfect nation, but in relative terms it was.

But there was underground force that sought to stir its control over politics and invariably the economy. This was manifested by the creation and subsequent dissolutions of several Central Banks. This can be encapsulated in what President Andrew Jackson said of the operators of the Second Bank of the United States,
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.”

But the financiers and their political appointees who aimed to extend the control over all economic activity ultimately won out. This was first manifested in the creation of the Federal Reserve Board in 1913, the institution of the federal income tax in the same year, and America’s official imperial ambitions by entering in WWI. The goal was expanded in the 1930s by the creation of the New Deal. The military-industrial complex, which was left over after the involvement in WWII, was amplified in the subsequent decades through the coercion of foreign nation building (i.e. gunboat diplomacy, or spreading democracy by force). These affairs invariably involved (and continues to involve) a significant cost. For some time now, the expansion of centralized political power has determined the allocation of economic resources, which almost always redistributes them inefficiently. This inefficiency manifests itself in the form of recessions. Of course, the economic theory taught in higher learning institutions funded by the same centralized political powers never exposes the fallacy of their expositions.

The crisis America is currently experiencing is the result of policies and other political maneuvers that have been in place for well over a century. The masses have learned to live with them. In 2008, America officially (out of desperation) embraced the socialization of all economic risk. This was unprecedented in American history. This is a point of no return. The only enigma now is how long we, as a society, will stay in stage 4. Stage 5 is inevitable.

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