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The next area we’ll discuss in which the absence of skin in the game causes problems is centralized government. Throughout the book, Taleb criticizes centralized power structures in which a few people make decisions that affect everyone. In his view, large systems, like governments or economies, are far too complex for individuals to effectively manage from the top down.
Instead, Taleb advocates for the decentralization of power—smaller territories are more likely to govern themselves effectively. For example, Taleb credits the success of the United States of America to its federalist nature—the government of each state has more skin in the game than the federal government has in any state.
First, we’re going to examine the benefits of decentralized government: greater accountability and more democratic representation. Then, we’ll take a look at why people believe in the power of centralized government and the one fact they overlook in doing so: Intellect and morality don’t scale.
By nature, the government doesn’t have much skin in the game—it’s a small segment of the population tasked with managing the affairs of the entire nation. As a government grows, decision-makers move farther away from the consequences of their actions, in distance and time, removing skin in the game. And, as we’ve established, a lack of skin in the game prevents workers from learning from their mistakes and causes them to make less ethical decisions.
Since they have no direct exposure to the consequences of their own decisions, government officials are never given the opportunity to learn from their mistakes. Additionally, without skin in the game, public officials are able to transfer their risk unfairly onto others.
Whenever someone in government uses taxpayer money to compensate for their own mismanagement or enacts a policy that benefits their image more than their constituents, they’re creating an immoral asymmetry of risk. Since they’re operating within such a large, complex system, this kind of corruption is difficult to detect.
More specifically, Taleb criticizes corrupt civil servants who make decisions that benefit certain industries, then join those industries after leaving office. Taleb criticizes former Secretary of the Treasury Timothy Geithner for facilitating the bailout of big banks and then accepting a multi-million dollar salary at a private equity firm as a “reward for good behavior.”
Similarly, Taleb condemns instances in which government workers deliberately enact elaborate industry regulations, then get hired by those industries as experts with exclusive knowledge of the way those regulations work.
Regulations Are Easily Abused
Taleb describes his first-hand witness of this kind of corruption in Antifragile. When he worked at a Wall Street investment bank, the managing director notified the traders that they were all expected to donate a percentage of their income to a few specific politicians’ campaigns, politicians who it was well known would treat their industry well. Taleb refused on moral grounds.
Another incident occurred when Alan Blinder, former Vice Chairman of the Federal Reserve Bank, tried to sell Taleb an unethical service: Blinder’s company would split up the funds of someone wealthy like Taleb among several different banks in order to circumvent government regulation that put a cap on deposit insurance. Blinder admitted to having several former regulators on his staff that were profiting from their extensive knowledge of regulation loopholes. It was legal, though extremely unethical.
In 2020, political scientists published a study identifying what they call “Unrules”—exemptions in regulatory law that allow certain individuals and organizations to circumvent regulation. Unrules are extremely prevalent in regulatory law—by scanning a massive regulatory code document for keywords, the researchers found that for every five or six instances of regulatory obligations, there was a way to get around them. While unrules aren’t necessarily a sign of corruption—they allow regulatory bodies to more precisely regulate complex situations—they also allow people like Alan Blinder to deliberately plant loopholes and more profitably wield insider knowledge.
To solve this problem, Taleb proposes that, after they enter office, civil servants should never be allowed to earn more than a set amount from the private sector, even after they leave office. This would help curb bribery and ensure that those running for office do so for honest, selfless reasons.
(Shortform note: The United Kingdom has instated a watchdog committee for this purpose. While the Independent Advisory Committee on Business Appointments (ACOBA) hasn’t capped civil servants’ income, it sets some limits and investigates post-service jobs for corruption. The committee, however, lacks the ability to enforce its rules and has long been a target of criticism.)