The Roman Empire, the Pandyan Dynasty, Britain… What do these and 275 other regimes have in common? The answer: 

Collapse. 

Joseph Tainter outlines what causes system collapse in “The Collapse of Complex Societies”. 

He cites societies reaching a point of diminishing marginal returns as the main reason for this occurrence– not competition or catastrophic events like wars (since some systems thrive in these environments). 

So if not these, then what is the cause for collapse?

Well, it’s diminishing returns. 

Let me explain…

When a society reaches a point of diminishing returns it’s accumulated surplus is often reallocated to operating needs. At this point, stressors on the system (wars, catastrophes) are also taken out from the operating budget instead of its budget surplus, as the surplus is now the operating budget. After this point of declining marginal returns the system is fragile to collapse. 

In an instant, otherwise tolerable triggers can collapse now vulnerable regimes which otherwise stood for millennia. Given enough time, collapse at this point is inevitable without adaptation. Not even a 2000’s pop greatest hits playlist could save these empires:

Well, maybe I’ll take that back.

To add to this, a state of declining marginal returns makes complexity a less attractive strategy. Since there’s no higher benefits to added complexity at x level compared to y level, different parts within a society get an advantage through disintegrating from the broader system. 

If adaptation doesn’t occur prior to this point then bifurcation does.

Bifurcation then creates two separate attractor points which only one system wins out (same occurrence as PE spinoffs).

Collapse however, can only occur within a vacuum, as absorption of smaller systems into larger ones is what occurs in reality. It’s the interconnectedness of a system allowing for this to occur (same occurrence as PE rollups)

In private equity, companies reach a point of complexity. They experience declining marginal returns to the system (and fast if its poorly designed). At this point the system either collapses or needs to shift to a point of decreasing complexity, and adapt. 

Collapse isn’t bad. It’s a healthy and logical, economizing process. It’s important to keep that in mind the next time you get all teary eyed over the Dutch East India Company. 

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