First, the context. From Augustus (Caligula’s great grandfather, the first emperor) onward, the emperor was the most powerful person in Rome, partly due to his control of the Praetorian Guard, and partly due to the economic resources the imperial household had come to control. At the same time, the emperor depended (at least early on) on the senatorial aristocracy to rule the empire. In more technical terms, the 600 or so member senate constituted the emperor’s selectorate, the group from which the emperor needed to draw the people who could command the legions, coordinate the taxation of the provinces, and in general govern the empire and keep him in power. The emperor could differentially favour members of the senatorial aristocracy (by promoting them to various high-status positions), but segments of the aristocracy could also conspire against him and potentially overthrow him, selecting a different emperor, especially since principles of hereditary succession were never clearly institutionalized (though emperors early on had wide latitude in selecting their own successors). Nevertheless, though senators as a group might dislike a particular emperor, they did not necessarily agree on any given alternative (much less on any alternative acceptable to the Praetorian Guard, which also had some say in the matter), and at any rate individual senators could always benefit from convincing the emperor that some other senators were conspiring to unseat him (via maiestas [treason] trials, in which the convicted were executed and their property confiscated – something which incidentally provided an incentive for accused senators to commit suicide before their trial, so that their families could keep their property). Senators thus faced some coordination costs in acting against even a hated emperor. These obstacles were not insurmountable (conspiracies did take place, and sometimes succeeded), but they were not insignificant either.
So far, so good: nothing too different here from any number of autocracies in the ancient world (and many modern ones as well).Yet there is one thing that makes this strategic situation interesting: despite the huge disparity in military and resources between the emperor and the members of the aristocracy, emperors and senators did not at first have widely different social statuses, and the senate remained the central locus for the distribution of honours in Roman society. Senators jockeyed over relative status (marked by such things as the seating order in the circus or the theatre, the order of voting in the senate, the lavishness of their hospitality in their private parties, the achievement of political office, the number of their clients, etc.) while recognizing the primacy of the emperor, but they remained notional social equals. Augustus was known as the princeps, literally the “first citizen” (hence the early Roman Empire is normally called the “principate”); the standard republican offices were filled more or less normally and retained their meaning as markers of status (though elections were basically rigged, when they were held at all, to produce the results decided in advance by the emperor); the senate voted triumphs and special festivals in honour of particular people and events, and technically confirmed the emperor’s own position; even the title imperator originally meant nothing more than military commander (though it came to be applied exclusively to the princeps or certain members of his family). Most importantly for our purposes, the first two emperors (and many later ones as well) did not (and could not, for reasons that should become clear shortly) compel the sorts of marks of obeisance typical of Hellenistic monarchies, where the “status distance” between the rulers and the members of the traditional elite had been much larger than in Rome: proskynesis (prostration), kissing the feet or the robe, worship as a god, elaborate forms of address, clear hereditary succession, etc. (Incidentally, in these monarchies, as in the later Roman empire, the immediate “key supporters” of the ruler tended to be assimilated to or incorporated into the ruler’s “household,” which limited the extent to which they could gain status at his expense: though the ruler might treat you like family, you could always be seen as his “slave”).
In fact, Augustus in particular went out of his way not to signal any sort of intention to become a “king,” that is, a ruler like the Hellenistic monarchs of an earlier time (including, most famously, Alexander the Great), despite the fact that the Roman polity had obviously become a “monarchy” in all but name, something that was common knowledge among all members of the elite. He lived in a relatively small house on the Palatine hill; stood for office in the normal way, and sometimes resigned it; and let the senate conduct the business of the republic in appearance, cleverly signalling his intentions so that senators could reach the “right” result (i.e., the result Augustus wanted). Why?
Part of the answer to this question has to do with the way in which signalling any intention to become a king was thought to risk nearly certain conspiracy. This was, after all, what happened to Julius Caesar (Augustus’ adoptive father). By behaving in ways that signalled an intention to become a king in the Hellenistic sense (whether or not he actually wanted to do so), he threatened to destroy the foundations of senatorial status in the Republic, i.e., to drastically humiliate them vis à vis the emperor. The Republic was built on norms that rejected kingship and competitively allocated relatively “equal” high social status among the senatorial class, so that any credible signals of an intention to re-establish kingship seem to have greatly lowered the coordination costs of dissatisfied senators for conspiring against the emperor.
So how do we get from Augustus to Caligula, who attempted (among other things) to widen enormously the social distance between himself and the senatorial elite, especially in the last year of his reign, when a full-blown emperor cult – a cult of personality – was instituted? More generally, how do we get to the later empire of 100-150 years later, which was not too different from the hereditary Hellenistic monarchies that had been seemingly abhorrent to the senatorial aristocracy of a few generations earlier, and which included proskynesis, emperor cults, etc?
Here is where the idea of flattery inflation comes in. The process is grounded in the “disequilibrium” between material resources (military and economic, in particular) and social status noted above. The emperor controlled more material resources than any given senator, but his social status was not fully commensurate with his resources. Senators as a group liked this situation. But individual senators could benefit (both materially and in status terms) from credibly signalling special loyalty to the emperor. Such signalling could take two forms, which I’ll call “negative” and “positive.” The negative form consisted of informing on each other. The disadvantage of such negative signalling (for the emperor), however, was that denunciations also increased the risk of actual conspiracies and devastated the elite on which he relied. The positive form consisted in what we normally call “flattery.” The problem here was that any particular form of flattery quickly became devalued, and the emperor lost the ability to distinguish genuine supporters from non-supporters. Moreover, flattery inflation tended to diminish the collective social status of the senatorial aristocracy: the more the emperor was praised, the more the senators were abased. For example, in Roman elite society the morning salutatio was an important indicator of status: friends and clients visited their friends and patrons in the mornings, and the more visitors a senator had, the higher his status. But nobody could afford not to visit the emperor every morning, or to signal that they weren’t really “friends” with the emperor. So the morning salutatio at the emperor’s residence turned into a crush of hundreds of senators, all of them jostling to get a little bit of the emperor’s attention, and all of them pretending to be the emperor’s “friends,” regardless of their private feelings. Similarly with senate votes granting honors to the emperor. In principle, the senate retained some discretion in the matter, but individual senators could always sponsor extraordinarily sycophantic resolutions in the hopes of gaining something from the emperor (offices, marriages, etc.), and other senators could not afford not to vote for such resolutions.
In sum, flattery inflation was, from the point of view of the senators, a kind of tragedy of the commons: as each senator tried to further his relative social status within the aristocracy, they tended to devalue their collective status. And it was not necessarily a good thing from the point of view of the emperors either, who could not easily distinguish sycophantic liars and schemers from genuine supporters, and who often disliked the flattery. So the emperors tried to dampen it or manage it to their advantage. Winterling distinguishes three different responses.
First, as noted earlier, Augustus managed flattery inflation through ostentatious humility. Everybody could then pretend that things remained the same even though they all knew that Augustus was ultimately in charge. But this required indirectly signalling his intentions so that senators had enough guidance to know what to vote for and who to denounce without ordering them to do anything (which would have resulted in a catastrophic loss of status for the senators, potentially risking a conspiracy). Such indirection could lead to confusion when practiced by a less able political operator, like Tiberius. Tiberius apparently detested flattery, but he was at the same time unable to clearly communicate his intentions to the senate, unlike Augustus. His inability to master the complex signaling language that Augustus had used prevented him from containing flattery inflation very well, leading him to use increasingly blunt instruments to tame it (like moving to Capri permanently and banning the senate from declaring certain honours: this is sort of the equivalent of price controls in "economic" inflation, and was just about as effective). This provided endless opportunity for denunciations, since senators were constantly making “mistakes” about what Tiberius really wanted. The more denunciations, moreover, the less actual conspirators had to lose, leading to a poisoned and dangerous atmosphere, especially as factions of Tiberius’ family schemed over the succession. Most potential heirs didn't live long; Caligula was the last man standing.
At first, Caligula tried the Augustan policy, and was reasonably good at it. But for a number of reasons that Winterling describes, he seems to have changed tack in the third year of his reign to deliberately encourage flattery hyperinflation. He did this, in part, by taking the senators literally: when they said that he was like a god, he basically demanded proof of this, thus forcing them to worship him as a god. Or when he was invited to dinner, he forced senators to ruin themselves to please him. And he demonstrated contempt for their status by the way he behaved in the circus and elsewhere. (The famous story of how he named his horse a consul can be understood as one such insult). Yet the senators could not retaliate by revealing their true feelings; their coordination costs had increased insofar as their individual incentives were always to flatter Caligula.
Strategically speaking, the point of this seems to have been to lessen his dependence on the senatorial aristocracy and to move the regime towards a Hellenistic model. (Winterling discusses some suggestive evidence that Caligula might have been planning to move to Alexandria, an obviously symbolic move to the historic capital of Hellenistic dynasts). Runaway flattery inflation not only makes it exceedingly difficult for conspirators to succeed (even the most innocuous comment can be used against you when flattery inflation is in full swing) but also succeeds in completely humiliating the flatterers (in this case the senatorial aristocracy) and lowering their collective social status vis a vis the ruler. If flattery hyperinflation is not stopped, the end result is that the ruler no longer has to use "ambiguous" language to manage his relationship to the selectorate. He can just order them to do things, without worrying about slighting their status. One might also speculate that it also helps to institutionalize the principle of hereditary succession, which was not clearly established in the early empire, and which would contribute to a shift in the selectorate from the aristocracy to the imperial household. (It does not seem to be coincidental that cults of personality in the modern world appear to be associated with forms of hereditary succession even in regimes that are not in principle hereditary, like North Korea or Syria). But of course flattery hypeinflation doesn't always work for the ruler: the humiliation of the aristocracy eventually led to the downfall of Caligula, and (according to Winterling) contributed to his characterization by later writers as the "mad emperor."
Anyway, I think one can extract a more general model of flattery inflation from all this. When material resources are more much more unequally distributed than status, and status is competitively allocated, flattery inflation can result. But rulers (or those who control material resources) will usually try to dampen or manage this kind of inflation, since flattery has obvious disadvantages from their perspective. Yet there seem to be circumstances under which they will try to encourage flattery hyperinflation, e.g., when the costs of coordination for challengers are relatively low and the maintenance of "low inflation" requires extensive communication management. One could also imagine other ways in which this process may play out. For example, if status is more unequally allocated than material resources, high status rulers may encourage flattery (hyper)-inflation (e.g., cults of personality) in order to accumulate these resources. (This seems to have happened in the Soviet system under Stalin and in North Korea). And if material resources become more equally distributed, or more diverse in their effects, as in many modern economies, one might see flattery deflation.
[Update 15/12/2011 - added the bit about Tiberius moving to Capri, clarified a transition]
[Update 17/12/2011 - fixed some minor typos.]