Paul Krugman has written two blogs about Ibn Khaldun this weekend (and also said some kind words about my research). Readers of this blog know that I hold Ibn Khaldun in great esteem (see this blog, for example).

Ibn Khaldun’s greatest contribution is the development of a theory of collective solidarity/social cooperation, for which he uses the Arabic term `asabiyyah (which I usually simplify to asabiya). In this he is very different from such great European thinkers as Machiavelli, Hobbs, Hume, and Adam Smith, whose great contributions eventually led to the Rational Choice Theory (and the dead end of homo economicus in its most primitive form). Yes, I know that those political philosophers were much more subtle than they are often given credit for; yet the fact is that by the second half of the twentieth century a very flawed model of human nature reigned supreme in economics. Economists and many other social scientists seemingly took to heart David Hume’s famous pronouncement:

Political writers established it as a maxim, that, in contriving any system of government … every man ought to be supposed to be a knave and to have no other end, in all his actions, than his private interest. Sign up for our newsletters

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This is very wrong. It is, in fact, impossible to build a working society if all its members are selfish rational agents (or “knaves” in Hume’s wonderful characterization). Selfish agents will not cohere in a functional society – this I believe can be elevated to the First Law of Sociology.

Ibn Khaldun knew this and he devoted his book to developing a theory of the origins of social cooperation/asabiya, and mechanisms responsible for its loss. I won’t repeat myself here, because I devoted a big chunk of my popular book War and Peace and War to discussing Ibn Khaldun’s theory. In other writings I have modeled the dynamics of asabiya waxing and waning, loosely based on the ideas of Ibn Khaldun.

My models were focused on understanding the rise and fall of states and empires. What is interesting is that a very similar kind of model can be developed for the rise and fall of business firms. (In particular, Rob Axtell, with whom I have periodically interacted in Santa Fe and elsewhere, developed such models that are very similar in spirit to my models on political cycles). In fact, I believe Paul Krugman is completely right in bringing up Ibn Khaldun when thinking about the decline of Microsoft. However, I would develop this idea a bit further.

Both states and corporations are, at some fundamental level, cooperative enterprises. Yes, political elites and corporate managers are motivated by personal gain, power, status, and prestige. And that even can be the majority of their motivations. But in addition there has to be something else, at least some of these elites (whether political or economic) some of the time must behave in a cooperative prosocial manner, that is, putting the common interest of their state or corporation above their private interests. When they stop doing that, states crumble and corporations go bankrupt.

So here is a simple model that I have in mind for explaining the rise and fall of mighty corporations, which is heavily influenced by the ideas of Ibn Khaldun, Rob Axtell, and Pete Richerson (on institutions) and mine own on the empires. (Also, Rob’s model, which he has published, is well worth checking out).

In the beginning we start with small groups of entrepreneurs randomly thrown together by chance. The vast majority of these incipient firms fail. Most of these groups will contain uncooperative selfish knaves. All such groups will fail with 100% probability; only groups consisting entirely of cooperators have a chance. However, the majority of such potentially cooperative groups will still fail because they will be unable to hit upon the right combination of social norms and institutions to enable them to cooperate effectively. As an example, people coming from different ethnic backgrounds often find it difficult to concert a cooperative action, simply because different cultures evolved different ways of cooperating, and these may not work well when thrown together.

In the next step, the majority of even those groups that consist of cooperators and have acquired effective cooperative institutions will fail – because they don’t have the right product, or perhaps because they are simply unlucky. But at least they have a chance, whereas groups with knaves and lacking the right institutions have no chance at all.

This is a typical cultural evolution scenario. At this stage we have a lot of variation, with all kinds of incipient firms churned out, and a selection mechanism that weeds the ones that don’t cut the mustard. This is completely analogous to the Ibn Khaldun situation of the stateless ‘desert’ where groups that can’t cooperate together in defense (and predation on other groups!) are rapidly eliminated.

Only those Bedouin groups that wield a lot of asabiya survive and thrive in the competitive desert. Analogously, only those start-ups that have a lot of – well, asabiya – survive and thrive in the competitive markets.

So that’s how high asabiya firms are generated. What happens next? Next they need to expand without losing asabiya. That means that they need to be very picky about accepting new members (keep those knaves out) and have another set of institutions that would allow them to assimilate newbies to the firm’s social norms of cooperation. If they surmount this challenge, they will expand and become a huge corporation.

But eventually the rot sets in. More and more knaves weasel their way in. The institutions that sustained cooperation begin to be undermined by the selfish behavior of freeriders. Moralistic cooperators, in response, withdraw their cooperation, because they don’t want to be taken advantage of. Prosocial founders and early joiners leave the company and join more cooperative ones, or start new businesses.

Eventually knaves reign and the company is really moribund. However, it’s big and has a lot of inertia and so it survives – for a while. Then, however, a particularly greedy set of executives, or a market downturn, exposes its inherent weakness and the corporation goes under. You can substitute ‘executives’ with the ‘elites’ and ‘corporation’ with ‘empire’ and you have the gist of my theory of why empires collapse (however, the time scale on which firms rise and fall is much faster than that for empires).

And that’s how I see the fall and decline of imperial corporations, when looked though the lens of Ibn Khaldun’s theory. I won’t name names, but I am sure we all can think of a number of examples of such moribund corporations.