The Selectorate Theory of Cryptocurrency

“Democracies are not lucky. They do not attract civic-minded leaders by chance. Rather, they attract survival-oriented leaders who understand that, given their dependence on many essentials, they can only come to and stay in power if they figure out the right basket of public goods to provide.”

In this episode of Made You Think, Nat and Neil are joined by Adil Majid to discuss their key takeaways from The Dictator's Handbook by Bruce Bueno de Mesquita. The Dictator's Handbook delivers five rules for staying in power and succeeding within the political system.

In this episode of Made You Think, we cover a wide range of topics including:

• How dictators get in power and stay in power
• The Selectorate theory
• Taxation and why leaders are so fond of taxes
• FIFA, Olympics, and giving bribes for more power
• Decentralized finance as an alternative to the current financial system

And much more. Please enjoy, and make sure to follow Nat, Neil, and Adil on Twitter and share your thoughts on the episode.

Links from the Episode

Mentioned in the Show

• Episode 7: A Crash Course in Bitcoin, Ethereum, and Cryptocurrency (0:43)
• Episode 33: An Animal of No Significance: Sapiens by Yuval Noah Harari – Part I (1:25)
• Episode 34: Money, Power, and God: Sapiens by Yuval Noah Harari – Part II (1:40)
• Selectorate theory (4:57)
• Assets of the Federal Reserve (22:00)
• Ba'ath Party; Saddam Hussein (29:05)
• Caliphate (54:11)
• Arab Spring (1:11:10)
• Democracy Index 2017 (1:12:28)
• ConstitutionDAO (1:16:01)
• Corruption in FIFA (1:15:43)
• Bribing in Olympics (1:15:43)
• Marijuana episode (1:24:27)
• A Tale of Two Talebs (1:33:19)
• Ledger (1:59:31)

Books Mentioned

• The 48 Laws of Power (2:09) (Nat’s Book Notes)
• The Sovereign Individual (4:36) (Book Episode) (Nat's Book Notes)
• Seeing Like a State (4:37) (Nat's Book Notes)
• Antifragile (1:31:38) (Book Episode) (Nat's Book Notes)
• The Bitcoin Standard (1:34:26)

People Mentioned

• Robert Mugabe (10:32)
• Elizabeth Warren (12:49)
• Bernie Sanders (12:50)
• Elon Musk (13:10)
• Ron DeSantis (15:13)
• Donald Trump (15:42)
• Machiavelli (23:45)
• Fidel Castro (41:41)
• Che Guevara (41:47)
• Rasputin (42:48)
• Abdel Fattah el-Sisi (1:11:40)
• Julias Caesar (1:21:25)
• Nassim Taleb (1:32:23)
• Gary Vaynerchuk (1:33:53)

Show Notes

1:10 Today we are joined by Adil Majid. You may remember him from some of our previous episodes (#7, #33, #34). Today’s book is the Dictator’s Handbook, a book that shares the rules of the game in politics exactly how it is. What we think is good or bad in politics may be the exact opposite.

3:27 Relying on a larger coalition of individuals results in a more equitable and just system. How this idea ties in with decentralized finance.

4:57 Adil talks about the Selectorate theory and the 3 different groups: the nominal selectorate, the real selectorate, and the winning coalition. The primary goal of a leader is to stay in power and to do this, they must keep the support from members of the winning coalition.

9:59 The way our voting system in the U.S. narrows who's vote counts. Politicians can play the game of staying in power by understanding which votes they need.

"When addressing politics, we must accustom ourselves to think and speak about the actions and interests of specific, named leaders rather than thinking and talking about fuzzy ideas like the national interest, the common good, and the general welfare. Once we think about what helps leaders come to and stay in power, we will also begin to see how to fix politics. Politics, like all of life, is about individuals, each motivated to do what is good for them, not what is good for others.”

To stay in power, politicians are not making decisions about general welfare and the common good. Bueno de Mesquita notes that it's all about what's good for them, not for us.

12:33 This brings up the question, why do politicians seem to believe things so extremely? An outside-in approach: A candidate needs to appeal to the extreme then come back to the middle and more neutral voters to win a general election.

18:25 Questionable social media sprees from politicians, and how it could be a tool for covering something up. Inflation and stimulus checks.

24:42 There are five basic rules leaders can use to succeed in any system. 

Rule 1: Keep your winning coalition as small as possible.

Having a small coalition is to your advantage in taking and keeping power. There are fewer people to keep happy, and keeping them happy is a key to staying in power.

30:50 There are so many institutions in government but not all of them are necessary in keeping and maintaining power. Corruption as an essential political tool. 

"The causal ties run both ways: power leads to corruption and corruption leads to power."

33:59 Informational asymmetry between members of the winning coalition and the nominal electorate. Transparency within companies; there's certain information that is only shared with the leaders that is not available to all within the company. 

37:38 Rule 2: Keep your nominal selectorate as large as possible.

Nat, Neil, and Adil discuss rigged elections. These are a periodic reminder that everyone is replaceable. The way to thrive in a dictatorship is not to be the dictator himself, but to be a highly irreplaceable member of the winning coalition. It’s tough to be irreplaceable, as you also don’t want to become a threat.

43:30 Once you accumulate power, it’s all about keeping power. It’s chaotic to transition from one leader to the next.

Fratricide is the act of killing one's brother. How this has been seen in history before as well as in animal behavior.

45:32 Rule 3: Control the flow of revenue.

If your leader doesn't know how to make money and increase wealth for your country, it's essential that they know who to pay to stay in power. Example: Mugabe from Zimbabwe stayed in power despite starvation and epidemics throughout the country. It was less about what happens to the people, as long as the army was paid.

“When debt exceeds the ability to pay, the problem for a leader is not so much that good public works must be cut back, but rather that the incumbent doesn’t have the resources necessary to purchase political loyalty from key backers."

49:25 Taxation: Maximize taxation while maintaining productivity if you’re an autocratic country with no natural resources. Taxes on crypto in other countries vs. the U.S.

54:02 “It seems that many non-Muslims, realizing that they could reduce the tax collectors’ reach by becoming Muslim, put their religious beliefs aside and converted."

Some religious empires collected taxes instead of direct rule. There was also tax farming where central authority bids on the taxes from different regions, and kept some of the collected tax for their own use.

58:17 Official exchange rates vs. street rates. The street rates would essentially be a better deal because the government was taking a cut out of the official exchange rates. This idea connects again with cryptocurrency where if a transaction isn’t traceable by the government, it can be a good deal for everyone involved. 

1:04:20 "Rule 4: Pay your key supporters just enough to keep them loyal."

Dichotomy in the lives of people in the same country, Saudi Arabia as an example. Some people live very wealthy, whereas some areas of the country don’t even have paved roads. Within the same country are extremely different ways of living.

1:08:54 A dictatorship is so much easier to control than a democracy when it comes to foreign aid. They’re no longer under American control when they become a democracy.

1:12:58 Relationship between military and government in other countries.

1:14:56 "Rule 5: Don’t take money out of your supporter’s pockets to make the people’s lives better."

Bribes in FIFA and the Olympics. Buying votes to win hosting rights for your country.

1:20:19 Dictators who try to support the people at the expense of their coalition often found themselves on the losing end.

“Julius Caesar’s mistake was to help the people at the expense of his backers and this too cost him his life."

1:23:25 The progression of making marijuana legal in the states. States have power in some large topics such as marijuana legalization and abortion where one state may create laws in complete opposite of another state.

1:29:10 Political divide these days can often appear less about the individual policies and more about whether it should be a Federal or State issue. 

1:32:01 Nassim Taleb tangent, and the story of how Nat got blocked on Twitter.

1:37:00 Getting sick as a dictator. Those who depend on you are no longer secure, so they’re looking for someone else. It's important to have a succession plan lined up that your key supporters believe in. They don't want their future to come into question.

1:41:40 The monarchy in England and other European countries, and the way that they’re born into power.

1:45:28 The more democratic a group is, the weaker it is. If it’s weak, slow, and requires a lot of consensus, there is less power. Same goes for companies.

1:50:13 Crypto and selectorate theory. Some tokens are very autocratic while some are very community-owned and community-driven. Low exit costs in crypto, if you don’t like what you see, you can take your money and go elsewhere.

1:59:40 Thanks for listening! Adil will be back in a future episode where we cover Seeing Like a State.

If you enjoyed this episode, let us know by leaving a review on iTunes and tell a friend. As always, let us know if you have any book recommendations! You can say hi to us on Twitter @TheRealNeilS and @nateliason and share your thoughts on this episode.

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