The Thucydides Trope: Part I
What The History of the Peloponnesian War can teach us about risk: Berkshire Bets; Cyber Take the Hill; S is for Crypto; Chips and Chains; The New Guard
So little pains do the vulgar take in the investigation of truth, accepting readily the first story that comes to hand.
- Thucydides
Risk Developments this letter:
Berkshire Bets
Cyber Take the Hill
S is for Crypto
Chips and Chains
The New Guard
Apologia for Thucydides
Why read a 2,400 year old book about a long settled war between defunct city-states a mere afternoon’s drive from one another? What could we possibly learn from one of the first texts of international relations that has not been improved upon by thousands of years, millions of words and billions of dollars? If we do read Thucydides (most likely out of vanity), how should we interpret and apply the knowledge from an era so alien to our modern sensibilities?
There are three good reasons to read the classics and at least two great lessons from “The History of the Peloponnesian War” that compel us to read the primary source. To understand and contextualize the lessons, the reasons must be made clear. First, all great events are overdetermined. Second, our modern lens is fogged with self-consciousness. Third, the classics capture the importance of narrative and fortune in a way that modern writing cannot.
The many causes of important inflection points in history does not lend itself well to our post-Christian, enlightenment, scientific method of analysis. If you can tolerate the elaboration of my argument for why one should read Thucydides in the first place, we will come to see that there are still new lessons to be applied to 21st century finance, technology and geopolitics from this ancient text. One lesson is about the relationship between centralized and decentralized systems, and the other about how the greatest threats are self-inflicted, internal and implacable.
Thucydides is a deep well, and before we drink knowledge from his cool spring, we must haul up a heavy bucket. To abuse this metaphor further, the rope is the answer to the question of “Why read Thucydides?” posed above, and the vessel is the basic structure, characters and scenes from “The History of the Peloponnesian war.” Let us first put our muscles to the crankshaft and reel in that rope, starting with overdeterminism, self-consciousness and the problem of modern analysis.
What does it mean to claim historical events are overdetermined? It means there are many causes, and usually no single cause powerful enough to explain the course of history. History happens once. If a cause and effect happens multiple times, creating a reliable pattern, we call it science. It is by no mistake that Thucydides is called the “father of scientific history,” but it is a mistake to call him that. This compliment is used to juxtapose Thucydides with Herodotus (“The Father of History”), who recorded history from primary sources without interpretation or adulteration, reporting myth and superstition alongside fact. Thucydides, while skeptical, is hardly scientific, which I mean as a compliment. It is true that he does not invoke the gods as causal forces, but his work is full of opinion and rhetoric, and above all, he emphasizes the role that luck and the supernatural play in world events.
Thucydides does this with only a thin veneer of self-consciousness. Like the people he writes about, he takes self interest as a given and disdains anyone who either fails to act in their own self interests or pretends that others do not act in their own self interests. This has led people to claim Thucydides as the creator of the realist school of international affairs, but his description of events is differs from his sympathies, which lie not with the power hungry politicians and demos of Athens, but moderate elites who believe in the primacy of reputation, such as Perecles and Demosthenes. It is not until Machiavelli (the first modern political theorist) that the school of realism emerges. Revelations about human nature between the Ancient world and the Renaissance made it difficult for him to write sincerely, as we have discussed previously. The Ancients do not have the benefit, nor the hindrance, of such knowledge. This is not to claim that Thucydides wrote without bias (he was a member of the Athenian elite, and a general in exile, who despised democracy and the politicians), but it is to say that his biases are more plain and his rhetoric more transparent.
Combining these two challenges, overdetermination and the modern difficulty with sincerity, we arrive at the third critical reason to read Thucydides; namely that the Ancients accepted and even elevated the role of mythology in society. The Ancients’ causal analysis was nondeterministic and therefore reliant on the supernatural. Their analysis had to work on three levels simultaneously: individual, group and fortune. These parallel the three schools of international relations theory: realism, liberalism and constructivism, that we have spoken about before. The modern project of demythification, has led to a mistrust of narratives, but whatever we call it, constructivism, fortuna or myth, beliefs must be taken into account. Just as the “great man theory” is insufficient alone, so are each of these models. It is by integrating them through dialogue that Thucydides surpasses modern thinkers.
The integration of these models yields timeless insights about governance and insider threats, but to fully understand the lessons, some background is necessary. “The History of the Peloponnesian War” consists of eight books, spanning 27 years of nearly continuous war between the Delian League and the Peloponnesian Confederacy. The Delian League, led by Athens and sometimes joined by Argos, was mainly a collection of Athenian allies, colonies and subjects that paid taxes, provided warships and offered soldiers to the Athenians.The Peloponnesian Confederacy was a collection of city-states, most prominently Sparta and Corinth, which later allied themselves with Syracuse.
Thucydides employed a novel style of writing that cast himself as the omniscient observer of key events, especially speeches. Key speeches include:
Congress of the Peloponnesian League
Funeral Oration of Pericles
The Melian Dialogue
Speeches of Nicias and Alcibiades
These speeches are what give us a sense of the main characters in this drama. One amazing thing about Thucydides is how he emphasizes the importance of certain individual personalities without falling for the great man theory. It is the interaction between these leaders, various peoples and their environment that creates a narrative. The traits attached to these characters and their reputations are critical knowledge:
Pericles (popular and restrained Athenian politician/general)
Cleon and Nicias (Athenian politicians/generals, hawk and dove respectively)
Brasides (Sparta’s greatest general)
Gylippus (Spartan general in Sicily)
Alcibiades (Athenian politician/general and traitor)
Knowing the major speeches and characters, let us turn to the structure, or plot, of the History. The first four books deal with the Athenian general, Pericles’ novel defensive strategy and the plague that ravages Athens while the Spartans destroy the Athenian lands. Athens, made wealthy by the territories under its control after their victory over the Persians, is well defended with long walls that run around the city and down to the protected harbor. The Periclesian strategy was for the surrounding population to withdraw into the city and rely on their wealth and imports. Pericles’ famous funeral oration begins, “judging courage freedom and freedom happiness,” which preempts the attack he must constantly ward off, that he is a coward.
Eventually the hardships faced by the Athenians, such as plague and annual decimation of their fields outside the city walls proved too much for the choleric Athenians. Cleon, Pericles’ primary opposition, rose to power on a populist wave after Pericles’ death and begins to put Athens on the offensive. By fateful happenstance, one of their naval raiding expeditions is driven ashore by a storm at Pylos, a rocky harbor with a defensible hilltop deep inside Peloponnesian territory. Demosthenes decides to fortify this place and ultimately draws the Spartans into a fight resulting in the surrender and capture of hundreds of Spartan hoplites, an unheard of event and a great blow to the reputation of Sparta.
Following this victory, book five deals with the uneasy peace struck by Nicias between Sparta and Athens. Proxy wars continue and the fighting never really ends, but direct confrontation between the polies is avoided until the battle of Amphipolis (far from either city), which ends in a stalemate and death of both the Spartan leader Brasides and Athenian leader Cleon. Various other imperial exploits take place, and Thucydides reconstructs The Melian Dialogue, a tour de force of logic and international relations theory.
Following the battle of Amphipolis, Alcibiades, who had taken Cleon’s place as leader of the hawkish Athenians, advocates for an expedition to Sicily, far across the Ionian Sea. His reasoning is that to break the stranglehold of the Peloponnesian League, Athenians should expand their empire to the west and preempt the growth (and eventual alliance with Sparta) of the only other democratic naval power in the region, Syracuse. Nicias, seeing that the crowd is already on Alcibiades’ side, tries to dissuade the assembly from such a costly and dangerous use of resources in the middle of an existential war. In trying to convince the assembly not to fight, he emphasizes how hard it will be and how big an army it will require. This plan backfires and the Athenians decide to commit considerable resources (100 ships) to the adventure, which Nicias is then forced to lead.
At this point, the stage is set, so I will close this week’s essay and save the climax and lessons about decentralization and insider threats for next week.
Risk Developments
Berkshire Bets
Warren Buffett and Charlie Munger’s firm doubled down on value stocks as they edged away from positions in Apple and towards Verizon and Chevron, two big old world businesses. Both are the children of divorce, Verizon a result of the Bell breakup and Chevron’s lineage goes back to Standard Oil.
While Verizon is a technology company, it’s a capital intensive one, with large layouts that are made possible by steady income streams, not unlike a bank. Chevron and other oil companies have similar characteristics with long term capital expenses covered by short term cash flows. These are properties not unlike the banking sector, that Buffett has become disillusioned with. Perhaps this is his way of making bank like bets without dealing with bank managers.
One more way of taking a bank like bet without the banks is insurance. Birkshire has a long romance with insurance carriers, but the low rate environment and creeping losses has troubled the space for decades. Now Birkshire is taking a stake in major insurance broker Marsh, which will likely benefit from the coming merger of the other top three insurance brokers, Aon and Marsh.
Cyber Take the Hill
Lots of cybersecurity news this week as SolarWinds executive Sudhakar Ramakrishna testified on the Hill. More interesting than the political theatre are the revelations from the NSA and Microsoft. NSA spokesperson, Anne Neuberger, claimed that the Russian hackers implicated in the attack were operating inside the U.S. As we will discuss more next week, Thucydides made clear that warfare is as much about what happens inside the city walls as what happens outside.
Microsoft completed their analysis of the SolarWinds breach and found that source code from three products was exfiltrated. This points to signs that the attackers were looking to set up further campaigns and using SolarWinds primarily to expand their access, not immediately harm their targets. This point was largely lost on the Hill, where much of the time was spent emphasizing how cataclysmic an attack this was, and then there’s this, “A thousand very skilled, capable engineers worked on this.”
In other cyberhysteria, The Economist reports that a majority of businesses are concerned about a nation-state cyber attack. It’s not as if these fears are completely unjustified. Recently a VMWare bug was found effecting 6,700 servers and an exploit published before defenders had time to react. The question is not so much whether this is bad for economies and countries that depend heavily on software, but what are the costs? So far, SolarWinds has not resulted in much quantifiable economic damage (except to SolarWinds stock).
Anti Plaid
We’ve spoken about fintech infrastructure company Plaid and the banks that they pissed off here before. Now JPMorgan is joining Citi Ventures backed Akoya’s bank information network. There’s not much to say except, that banks aren’t going to go down without a fight.
S is for Crypto
Speaking of fighting with banks, crypto is having quite a week, even if Bitcoin is back down under $50,000 (wow, can’t believe I just wrote that Bitcoin is DOWN to $49,500). Last year I wrote about the coming Coinbase IPO, and I guess it’s finally here! Anyway, here’s the S-1. Enjoy digging in! I’m not sure you need to get to into the business model here though. If you’re long Bitcoin, just buy Bitcoin. If you’re long crypto in general, Coinbase is a nice option on a basket, but a basket of options is always better than an option on a basket. I have a somewhat hard time imagining being long regulated crypto exchanges, but I guess that’s why I’m not Fred Wilson.
In related crypto regulation news, Bitfinex is settling with the New York Attorney General for $18.5M and agreeing to reporting its reserves for their stable coin, Tether for two years. This seems to put to rest a long troubling case for stable coins, but if you want more discussion about the problems with stable coins, I recommend the Hidden Forces podcast with Rohan Grey.
Chips and Chains
There’s been some great reporting lately on the semiconductor shortage and if you want to read more about the automotive industry and other semiconductor news, I highly recommend Mule’s substack. The Biden administration seems to be paying attention at least as it’s paying attention to the chip manufacturing and design industry pleas we spoke about before. If chips and supply chains are issues of national security, is everything a national security issue?
The New Guard
Lastly, in some economic news that definitely is a national security issue, the defense industry is seeing some action as smaller players make strides to unseat the biggest defense contractors. In Aerospace, challenger Textron shipped more than a quarter of all general aviation aircraft in 2020. To be sure, it’s not competing with Lockheed head on, when the F-35 budget is 40 times Textron’s market cap, but with the failure of high-end, centrally planned technologies built to maintain an anachronistic order of global power, the future might be heading Textron’s way.
Similarly, Leidos, the company cobbled together out of Lockheed’s IT services spinout and the remains of SAIC has been on an interesting acquisition spree, despite claims of mismanagement. They have acquired three companies in the couple of years, Dynetics, L3Harris and now Gibbs and Cox. The first is deeply involved in developing space technology and vehicles, L3Harris primarily in sensors and Gibbs and Cox, cutting edge naval architecture. It’s an interesting portfolio, especially for a company with roots in IT, but it does look very much like the future of warfare will suite these capabilities. Whether the management team can stay clear of conflicts and execute remains to be seen.
Gratitude
Big thanks to Sachin Maini, Rohan Grey, Demetri Kofinas, and many more for your perspectives and ideas that helped shape this week’s letter!