When Failure Becomes a Business Model

In Gone with the Wind, Rhett Butler famously says: "There's just as much money to be made out of the wreckage of a civilization as from the upbuilding of one." He also expresses this idea as: "Slow money on the up-building, fast money in the crack-up

There is a lot of money to be made in the collapse of governments.

Not complete collapse. Complete collapse is usually terrible for business. Investors do not particularly want militias at the airport, contracts that cannot be enforced, customers who cannot pay, or governments that can no longer guarantee property.

The profitable form of collapse is gentler.

The electricity becomes unreliable, but the banking system still works.

The police become inadequate, but property remains enforceable.

The public school deteriorates, but parents still receive salaries.

The currency becomes suspect, but citizens possess assets that can be moved elsewhere.

The civil service loses engineers, statisticians and institutional memory, but the government retains enough authority to sign contracts with people who can supply them.

This is the interesting zone.

The state is weak enough to surrender functions but strong enough to pay the invoice.

Call it the broken-but-bankable state.

The state does not disappear

For most of my life, we imagined state failure visually.

Somalia. Afghanistan. Haiti. Men with guns standing at checkpoints. Empty ministries. A flag over a government that barely existed.

That may turn out to have been the less important model.

Modern states can fail one function at a time.

When the electricity grid fails, someone sells generators, batteries and solar panels.

When public security fails, someone sells guards, cameras and gated compounds.

When public transport fails, someone sells mobility.

When schools fail, someone sells education.

When currencies fail, somebody supplies another store of value and another payment rail.

When courts become slow or unreliable, commerce migrates towards private arbitration.

When governments cannot build infrastructure, private capital finances it.

And increasingly, when governments cannot perform cognition—analyse data, detect fraud, allocate resources, run procurement, administer benefits, secure networks—someone will sell them models, clouds and decision systems.

Nothing necessarily vanishes.

A public function becomes a private product.

Lebanon supplies the almost comic physical version. Years of unreliable public electricity created a parallel generator economy. The state supplied only limited power while private generators became indispensable. Eventually the government found itself regulating the tariffs charged by the private system that arose because the public one failed.

Failure became infrastructure.

Infrastructure became an industry.

Eventually the industry became sufficiently important that the state had to administer its own replacement.

This does not mean the replacement is evil. Private substitutes frequently save lives, restore services and create resilience while the public system is absent.

The question is not whether substitution occurs.

It is whether the state can still govern the substitute and learn from it.

From common provision to club goods

Seen this way, state failure is not principally the disappearance of services.

It is a change in their ownership structure.

A functioning government tries to make certain foundational things common: security, basic infrastructure, law, identity, education, information and public health.

A weakening government converts access to them into club goods.

You may still have electricity. You buy the battery.

You may still be safe. You live behind the gate.

Your children may still receive an excellent education. You pay for it.

You may have superb health care. You possess the correct insurance.

Your money is safe. It is somewhere else.

Your neighbourhood functions wonderfully.

The country does not.

This produces a peculiar society in which the affluent experience remarkably little state failure because they have purchased substitutes for nearly every function the state once supplied.

Indeed, they may conclude that government works perfectly well.

Albert Hirschman distinguished between exit and voice. The people best placed to demand repair are also those most able to exit the failing system. Once they buy private schools, private security, private medicine and foreign stores of value, their voice disappears from the commons.

But exit does not end politics.

Voice often returns in another form: not to repair the public system, but to defend the private substitute against taxation, regulation or competition from a rebuilt public one.

The people with the greatest political influence have acquired the least personal interest in restoring the commons—and sometimes a direct financial interest in preventing its restoration.

That is how a coping mechanism becomes a political equilibrium.

The crackup curve

There is therefore probably a curve.

At one end sits the capable state. It supplies common goods competently and retains enough knowledge to govern the private firms operating around it.

At the other end sits genuine collapse. Nobody wants to build a thirty-year toll road when tomorrow’s government may confiscate it.

Between them lies something much more attractive:

a state with enough sovereignty to guarantee contracts and too little capacity to provide what its population needs.

This is the broken-but-bankable state.

It possesses the authority required to collect revenue, enforce property and make payments. But it has lost—or chosen to relinquish—the organisational capacity to build, operate and understand the systems for which it is paying.

This business model does not require the disappearance of government.

It requires a particular amount of government.

Enough to enforce.

Not necessarily enough to provide.

The old state keeps the flag, the border, the tax authority and the international recognition.

Someone else supplies increasing amounts of the operating system.

The map stays approximately the same.

The stack underneath changes ownership.

Repair acquires two enemies

Once a substitute becomes established, repair encounters a domestic constituency.

The generator owner does not necessarily want the grid restored.

The security company does not necessarily want the street made safe.

The private school does not necessarily want the public school to become excellent.

The consultant does not necessarily want the ministry to recover the capacity to perform the work without consultants.

None of this requires conspiracy.

People defend their livelihoods. Firms protect markets they were invited to create. Temporary arrangements acquire employees, investors, creditors, customers and political relationships.

A solution becomes an industry.

An industry becomes a constituency.

The constituency learns how to defend the condition that created it.

But repair may also encounter an external constituency.

Governments trying to change concessions, rebuild public utilities, localise data or recover strategic infrastructure may confront lenders, contractual obligations, investment treaties, arbitration claims, ratings agencies and suppliers able to withdraw essential systems.

These arrangements often exist for good reasons: to prevent arbitrary expropriation and give investors confidence to commit capital.

They can nevertheless raise the cost of reversing a bad settlement.

A government may discover that it has every sovereign right to repair the public system, provided it can survive the lawsuit, the downgrade, the capital flight, the currency pressure and the sudden disappearance of technical support.

The broken-but-bankable state can therefore be held in place twice.

Domestically, by interests that profit from substitution.

Internationally, by arrangements that make rewriting the bargain expensive.

When failure becomes investable, repair acquires both a local lobby and an international balance sheet.

From outsourced activity to outsourced judgment

Previous waves of privatisation outsourced activities.

The next one can outsource perception and judgment.

That is a much larger thing.

A government can outsource payroll without forgetting how to govern.

What happens when it outsources the systems that identify tax fraud, determine welfare eligibility, prioritise inspections, model epidemics, allocate police attention, assess border risks, plan infrastructure and eventually draft substantial parts of policy itself?

The frightening possibility is not an incompetent government.

It is a government that appears extraordinarily competent.

The forms arrive instantly.

The chatbot answers every question.

Fraud detection improves.

Permits accelerate.

Dashboards glow beautifully.

Citizens encounter a state that seems more responsive than ever.

But somewhere underneath, the bureaucracy has stopped learning.

Its models belong to someone else.

Its cloud belongs to someone else.

Its institutional memory sits in someone else’s database.

Its officers gradually lose the tacit knowledge required to challenge the system supplying their recommendations.

When a vendor’s model determines who receives a benefit or becomes the subject of an investigation, the accountability problem is obvious.

The vendor is not a public body.

But the state may no longer possess enough understanding of the system to explain, contest or correct its decision.

Everyone can be responsible on paper.

Nobody may be capable in practice.

The state retains the dashboard but loses the learning loop.

That is a different kind of state failure.

And because it looks like modernisation, governments may actively subsidise it.

The minimum common state

States are not passive. A state eventually discovers that there are capabilities it cannot safely rent.

Energy can be purchased. Sovereignty over energy is something else.

Compute can be rented. The capacity to act when a supplier refuses cannot.

Consultants can provide answers. They cannot provide institutional memory unless the state is prepared to let that memory leave with them.

The answer is not that government must own everything.

The minimum common state is not a fixed inventory of publicly operated hospitals, power stations, clouds or banks.

It is the set of capacities without which a society can no longer see itself, decide collectively, enforce its decisions or learn from the consequences.

To see requires registration, reliable statistics, fiscal information, public-health surveillance and the ability to understand what is happening beyond the dashboard.

To decide requires legitimate institutions and enough internal expertise to make choices rather than merely accept recommendations supplied from outside.

To enforce requires taxation, law, security and the practical ability to make public decisions consequential.

To learn requires institutional memory, technical competence, operational feedback and a culture in which bad news can alter an existing decision.

A state need not build every system itself.

But it must be able to specify what it wants, audit what it receives, reject what does not work, replace the supplier and—where the function is essential—rebuild enough capability to operate without that supplier.

The operational test is not terribly abstract.

Can ministry staff understand, challenge and amend the technical specifications governing critical systems?

Can officials reject a vendor recommendation and explain why?

Where do the models, data and institutional memory live?

Who can inspect them?

Is there a tested exit plan for critical systems?

If the supplier left tomorrow, what would still work?

A state that cannot replace its supplier is no longer entirely a customer.

A state that cannot understand its supplier is no longer entirely sovereign.

Comfortable collapse has an upper bound

Club goods can insulate people from public failure for a remarkably long time.

But not forever.

The affluent can buy education, security, electricity and medicine.

They cannot entirely purchase a separate epidemiology, atmosphere, currency, labour force or political order.

A gated compound remains connected to an ungated metabolism.

During COVID-19, the affluent discovered that their safety depended on the public-health conditions of the people who delivered their food, cared for their parents and drove their ambulances.

The virus did not ask for a gate pass.

Pandemics cross gates.

Pollution crosses gates.

Financial crises cross gates.

Eventually, political anger crosses gates.

The broken-but-bankable state is therefore not necessarily a permanent equilibrium. It may be a long plateau on the way to public repair, authoritarian consolidation or deeper collapse.

But long plateaus can sustain large industries.

Fortunes can be accumulated before the upper bound is reached.

And the people making those fortunes may rationally prefer another decade of degradation to the uncertainty of repair.

Follow the margins

When I wrote Crackup around the 2020 American election, I was trying to understand what happened when the international and domestic orders we had grown accustomed to began coming apart.

I would ask a different question now.

Whenever something cracks, who owns what replaces it?

When the grid stops working, who sells the electrons?

When public safety deteriorates, who sells protection?

When money becomes unreliable, where does the wealth go?

When schools decline, who owns the new gates around childhood?

When borders harden, who owns the logistics corridors around them?

When climate adaptation becomes unavoidable, who gets protected first?

When public information deteriorates, who owns the authoritative dataset?

When governments lose expertise, whose machines supply the judgment?

When a state can no longer govern without a vendor, which of the two is actually sovereign?

There will be fortunes made answering these questions.

That alone is not sinister.

Private substitutes can preserve life and order. Foreign expertise can accelerate national development. Commercial infrastructure can be better than the public system it replaces.

The deeper problem begins later.

A temporary substitute acquires customers.

Customers become dependent.

Dependence produces political power.

Political power protects the substitute.

Knowledge migrates from the state to the supplier.

And eventually repairing the original public system threatens somebody’s revenue, somebody’s contract, somebody’s asset value and somebody’s claim to expertise.

At that point failure has ceased to be merely a problem.

It has acquired owners.

When government failure becomes a business model, repair acquires an enemy.