5.15 Social Inflation

Social inflation occurs when a social environment insulates its members from the demands of its environment. This is not sustainable, as outer environment demands ultimately “cascade” over inner ones. Social environments that ignore the demands of their environment experience social inflation, as the value of the tokens it gives to members lose their external value. Monetary inflation illustrates this, as money (a social token) loses value relative to world standards like a loaf of bread. Grade inflation occurs when professors give all students A grades regardless of competence, and the token “A grade” loses value in the University’s environment, i.e. with employers. Internally giving high grades seems to benefit everyone, as grading is easier, students are happier and high pass rates attract more students. Yet externally it gives no value to the society at large, so it is unsustainable. While crime and corruption deny the requirements of the social environment, social inflation denies the requirements of the world environment. It builds gradually like a choir slowly going off-key together, but ends suddenly in the failure of the social unit due to an external rectification.

A social unit that does not satisfy the demands of its environment creates an external rectification.  World events like the great depression and the world wars were external rectifications, as was the 2007–2008 global financial crisis. This world gives gains at the cost of risk, but then banks and credit companies began offering loans regardless of risk. Internally this seemed to benefit everyone—lenders got more interest, borrowers got needed money and bank popularity increased. As some banks increased lending, others followed suit to keep in the market. Finally, when companies could not recover their loans, the banking social system collapsed.

The expected result of letting an external rectification run its course is the collapse of social synergy. In the 2007–2008 global financial crisis the global credit system started to collapse. The likely results was another depression possibly accompanied by conflict or war. Knowing this, the US and other governments stepped in with billiondollar bailouts to restore trust. Yet without an accompanying internal rectification, this would only delay another inevitable external rectification because no social system can deny its environment. In the social environment model, a social system must not only demand synergy from its members but also pass on the requirements of its world environment to them.

Businesses leaders who cheat society of billions are removed but what of the banks who lost even more money by incompetent risk management? Both cases are social errors, but while crime is about a lack of social ethics a financial collapse is about world incompetence. If the same people who cause a credit collapse still draw bonuses based on their business “skills”, no correction has been made. In the social environment model, the 2007/2008 financial collapse was a higher level of incompetence. A society need not punish bank leaders for negligence but should remove them for the same reason it removes criminals— for the good of society.

The 2007/2008 financial collapse shows that private businesses require government control. When Wall St’s credit froze, through its own errors of judgment, the government stepped in to pay the $700 billion heating bill for the public good. Similarly, when the naughty boys at Enron played with the matches of cheating and nearly burnt down the market house, the government had to again step in for the public good. To expect state bailouts in hard times but no state control in good times is like a child who wants to be left alone but still expects its parents to pay the bills. If public good is important then it is important all the time, not just when there is trouble. If in times of trouble the nation pays the piper, then in times of plenty it can call the tune. For corporate cheats, it can set public-good rules of financial disclosure or rule that no company can pay zero tax. For corporate incompetence, it can replace the incompetent by those with real skills. Any society that fails to act in its own interests in such ways invites its own collapse.

Crime arises when citizens are under-socialized and social inflation arises when they are over-socialized. When an organization becomes over-socialized, it becomes:

a)   Bureaucratic. People follow social rules regardless of practical consequences. When rule following is the primary directive, the group becomes externally incompetent.

b)   Image focused. When social appearances supersede practical skills, people with fake qualifications can get high positions. As image wins over substance, the group becomes incompetent.

c)   Reality denying. Outside problem “shocks” are covered up or denied rather than dealt with, and whistle-blowers who point them out suppressed or fired. No competence learning occurs.

d)   Political. Members are too busy with internal power struggles to attend to outside problems, so the group handles them poorly.

e)   Negatively driven. Socialization works by applying negative sanctions, so avoiding them becomes the key to advancement. Leaders practice non-failure not success. Yet budget cuts and monitoring are no substitute for incentives and a positive vision. Negatively driven citizens become submissive or apathetic.

All of the above are maladaptive because they try to use social means (rules, image, conformity, politics and sanctions) to achieve competence goals. This does not work, as the solution to incompetence is competence, which is not created by rules and regulations. Competence is increased by allowing rule breaking, image deviations, criticism and giving incentives for results. Social performance is not achieved by enforcing social rules alone.