Monday, January 26, 2015

The Network

Niall Ferguson

Has political hierarchy in the form of the state met its match in today’s networked world? [..]

Consider some examples of history along these four axes. The population of the entire Eurasian landmass was devastated by the Black Death of the 14th century, a natural disaster transmitted along trade networks. But the impact was very different in Europe compared with Asia. The main difference between the West and the East of Eurasia after 1500 was that networks in the West were much freer from hierarchical dominance than in the East. No monolithic empire rose in the West; multiple and often weak principalities prevailed. Printing existed in China long before the 15th century, but its advent in Germany was explosive because of the network effects generated by the rapid spread of Gutenberg’s easily replicated technology. The Reformation, which was printed as much as it was preached, unleashed a wave of religious revolt against the hierarchy of the Roman Catholic Church [..]

European history in the 17th, 18th, and 19th centuries was characterized by a succession of network-driven waves of innovation: the Scientific Revolution, the Enlightenment, and the Industrial Revolution [..].

Yet the 19th century saw the triumph of hierarchies over the new networks. This was partly because hierarchical corporations—which began, let us remember, as state-sponsored monopolies like the East India Company—were as important in the spread of industrial capitalism as horizontally structured markets. Firms could reduce the transaction costs of the market as well as exploit economies of scale and scope. The railways, steamships, and telegraph cables that made possible the first age of globalization had owners.

The key, however, was the victory of hierarchy in the realm of politics. Why revolutionary ideologies like Jacobinism and Marxism-Leninism so quickly produced highly centralized hierarchical political structures is one of the central puzzles of the modern era, though it was an outcome more or less accurately predicted by much classical political theory. Whatever the democratic aspirations of the revolutionaries, their ideologies ended up as sources of legitimation for autocrats who were markedly more power-hungry than the monarchs of the ancien régime [..].

The mid 20th century was the zenith of hierarchy. Although World War I ended with the collapse of no fewer than four of the great dynastic empires—the Romanov, Habsburg, Hohenzollern, and Ottoman—they were replaced with astonishing swiftness by new and stronger states based on the normative paradigm of the nation-state, the ethno-linguistically defined anti-imperium.

Not only did the period after 1918 witness the rise of the most centrally controlled states of all time (Stalin’s Soviet Union, Hitler’s Third Reich and Mao’s People’s Republic); it was also an era in which hierarchies flourished in the economic, social and cultural spheres. Central planners ruled, whether they worked for governments, armies or large corporations. In Aldous Huxley’s Brave New World (1932), the Fordist World State controls everything from eugenics to narcotics and euthanasia; the fate of the non-conformist Bernard Marx is banishment [..]

Kraus was right: The information technology of mid-century overwhelmingly favored the hierarchies [..].

There were moments of truth, particularly in the 1970s, when classified information reached the public through the free press in the West or through samizdat literature in the Soviet bloc. Yet the striking feature of the later Cold War was how well the national security state managed to withstand exposures like the report of the Church Committee or the publication of the Gulag Archipelago. George H.W. Bush, appointed head of the Central Intelligence Agency in 1976—in the midst of the Church Committee’s work—went on to serve as Vice President and President. Within a decade of the collapse of the Soviet Union, the Russian Federation had a former KGB operative as its President. The Pentagon proved to be mightier than the Pentagon Papers.

Today, by contrast, the hierarchies seem to be in much more trouble. The most obvious challenge to established hierarchies is the flow of information unleashed by the advent of the personal computer, email, and the internet, which have allowed ordinary citizens to organize themselves into much larger and more dispersed networks than has ever been possible before. The PC has empowered the individual the way the book did after the 15th-century breakthrough in printing.The PC has empowered the individual the way the book did after the 15th-century breakthrough in printing. Indeed, the trajectories for the production and price of PCs in the United States between 1977 and 2004 are remarkably similar to the trajectories for the production and price of printed books in England from 1490 to 1630. The differences are that our networking revolution is much faster and that it is global [..].

The challenge these new networks pose to established hierarchies is threefold. First, they vastly increase the volume of information to which citizens can have access, as well as the speed with which they can have access to it. Second, they empower individual citizens to publicize things that might otherwise remain secret or known only to a few. Edward Snowden and Daniel Ellsberg did the same thing by making public classified documents, but Snowden has already revealed much more than Ellsberg and to vastly more people, while Julian Assange, the founder of WikiLeaks, has far out-scooped Carl Bernstein and Bob Woodward (even if he has not yet helped to bring down an American President). Third, and perhaps most importantly, the networks expose by their very performance the inefficiency of hierarchical government.

Politicians and voters remain the captives of a postwar campaign vocabulary in which the former pledge to the latter that they will provide not just additional public goods but also “create jobs” without significantly increasing the cost to most voters in terms of taxation [..].

The modern state, at least in its democratic variant, has evolved a familiar solution to the problem of increasing the provision of public goods without making proportionate increases to taxation, and that is to finance current government consumption through borrowing, while at the same time encouraging citizens to increase their own leverage by various fiscal incentives, such as the deductibility of mortgage interest payments. The vast increase of private debt that preceded the financial crisis of 2008 was succeeded by a comparably vast increase in public debt. At the same time, central banks took increasingly unorthodox steps to shore up tottering banks and plunging asset markets by purchases of securities in exchange for excess reserves. With short-term interest rates at zero, “quantitative easing” was designed to keep long-term interest rates low too. The financial world watches with bated breath to see how QE can be “tapered” and when short-term rates will be raised. Most economists nevertheless take for granted the U.S. government’s ability to print its own currency without limit. Many assume that this offers some relatively easy way out of trouble if rising interest rates threaten to make debt service intolerably burdensome. But this assumption may be wrong.

Since ancient times, states have exploited their ability to issue currency, whether coins stamped with the king’s likeness or electronic dollars on a screen. But if the new networks are in the process of creating an alternative form of money, such as Bitcoin purports to be, then perhaps the time-honored state privilege to debase the currency is at risk. Bitcoin offers many advantages over a fiat currency like the U.S. dollar. As a means of payment—especially for online transactions—it is faster, cheaper, and more secure than a credit card. As a store of value it has many of the key attributes of gold, notably finite supply. As a unit of account it is having teething troubles, but that is because it has become an attractive speculative object. It is too early to predict that Bitcoin will succeed as a parallel currency, but it is also too early to predict that it will fail [..].

At times, it can seem as if we are condemned to try to understand our own time with conceptual frameworks more than half a century old. Since the financial crisis that began in 2007, many economists have been reduced to recycling the ideas of John Maynard Keynes, who died in 1946. At the same time, analysts of international relations seem to be stuck with terminology that dates from roughly the same period: “realism” or “idealism”, containment or appeasement. (George Kennan’s “Long Telegram” was dispatched just two months before Keynes’s death.)

Yet our own time is profoundly different from the mid-20th century. The near-autarkic, commanding and controlling states that emerged from the Depression, World War II, and the early Cold War exist only as pale shadows of their former selves. Today, the combination of technological innovation and international economic integration has created entirely new forms of organization—vast, privately owned networks—that were scarcely dreamt of by Keynes and Kennan. [..]