Has Political Hierarchy In The Form Of The State Met Its Match? by John Mauldin of Mauldin Economics

Jun 11, 2014

I have a big-picture piece for you today from a big-time thinker, my good friend Niall Ferguson. This is a little bit different for Outside the Box, but then isn’t that what this letter is supposed to be? Something to make us think and to come at a problem with a little bit different viewpoint?

At our recent Strategic Investment Conference, Niall focused on the dangers of US isolationism, the degeneration of American culture, and the immense problem of government debt whose trajectory is in the hands of a dysfunctional political system. In today’s Outside the Box, Niall examines a related issue: the dynamic interplay of networks and hierarchies that has led to the creation and destruction of economic systems in generations past… and will ultimately drive political outcomes in today’s unbalanced and rapidly changing global economic system.

Although his ideas may seem abstract at first, I agree with Niall that understanding the interplay between these forces is critical to protecting (or, even harder, growing) your savings in the end phase of a tired, overleveraged global economy.

Clashes between hierarchies and networks are not new in history; on the contrary, there is a sense in which they are history. Indeed, the course of history can be thought of as the net result of human interactions along four axes [time, nature, networks, and hierarchies].

Thinking about the current global order, Niall shows that the United States and China are growing increasingly similar as hierarchically organized super-states – despite springing from very different social, political, ideological, and economic roots.

(B)oth states are republics, with roughly comparable vertical structures of administration and not wholly dissimilar concentrations of power in the hands of the central government. Economically, the two systems are certainly converging, with China looking ever more to market signals and incentives, while the United States keeps increasing the statutory and regulatory power of government over producers and consumers. And, to an extent that disturbs civil libertarians on both Left and Right, the U.S. government exerts control and practices surveillance over its citizens in ways that are functionally closer to contemporary China than to the America of the Founding Fathers.

But despite the overwhelming power of the great hierarchies, modern nation-states could not have been conceived, launched, and sustained without drawing on the positive energies unleashed by our social and economic networks. These networks of innovators and entrepreneurs, dreamers and renegades – forces that hierarchies have often struggled to contain and control because they engender frighteningly transformative possibilities – have been the source of so much global cross-fertilization.

And now, in our own historical moment:

To all the world’s states, democratic and undemocratic alike, the new informational, commercial, and social networks of the internet age pose a profound challenge, the scale of which is only gradually becoming apparent.

Networks undermine and free up hierarchies; hierarchies co-opt and exploit networks. Which will prevail? Niall suspects we may see a rapprochement between the hierarchical and often tyrannical empire-states that dominate our world and the radical forces of our technologies and social networks. If it happens, it will not be the first time in our history that government has stifled human progress (Niall cites prior examples).

The alternative is that we’ll see one of these two forces dominate in coming years. I am betting on network-driven transformation, which I believe will become far too powerful for slow-to-adapt authoritarian governments to control.

One network technology right at the bleeding edge is electronic currencies – Bitcoin and the promise of a free, efficient, and incorruptible payment system. As Niall puts it, “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.” In any case, it is indisputable that the fundamental tech behind Bitcoin – the “blockchain” that is used to create peer-to-peer ledgers of transactions that don’t require hierarchical oversight – presents a serious alternative to fiat currencies. And the transformational possibilities don’t stop there: for a look at the breathtaking potential scope of this technology, take a gander at this piece in yesterday’s London Telegraph (hat tip to Grant Williams). My colleague Worth Wray and I are keeping a close eye on this trend, and we’ll have a lot more to say about it after some careful research and thoughtful conversation.

The strengths and vulnerabilities of both hierarchies and networks are one key area of my own thinking about the coming Age of Transformation; and in the coming weeks and months we will be revisiting the issues raised here by Niall Ferguson and those George Gilder and I hashed over so thoroughly and entertainingly during our deep-into-the-night sessions last week here in Trequanda.

It is clear to me and to many of the forward-looking people I compare notes with that we are plunging into a transformation that transcends anything humanity has yet experienced. On the one hand we have the very unsettling economic End Game about which I – and many others – have written so much; and on the other we have the incredible promise of the technologies and social networks that, day by day and year by year, are waking us up to our true potential. Who can stop us? Can our own past, our own serious mistakes, and our dangerous, not-yet-fully-wise tendencies stop us? I don’t think so. I think we grow up. I think we succeed.

Well, that is my optimistic take, as I sit here in Tuscany looking out over the hills. But “growing up” and “succeeding” are very messy processes. While I can be optimistic about the long-term outcome (say, in 20 or 30 years), the ride could be pretty bumpy. There will be a lot of Sturm und Drang, give and take, winners and losers in the process. Maybe I’m a little strange, but I think it will be a great deal of fun to try to figure it all out as we go along. Lots of moving parts to pay attention to.

Dylan Grice will show up later tonight and spend the next few days here, relaxing and sharing insights. Saturday morning we have to leave Tuscany for a few days in Rome, where I will have a series of meetings and attend as much as I can of a very interesting conference organized by Banca IMI (the Investment Bank of Intesa Sanpaolo Group) and intriguingly named, “Back to the Future: Are Markets and Policy Makers Ready for Normality?” They have asked Christian Menegatti of Roubini Global Research and me to speak jointly to the main topic. As I look over the attendee list of government officials, bankers, and major market players, the prospect is quite daunting, but we will try to provide a few worthy thoughts.

Ivo the gardener comes tomorrow evening to make lasagna for the rather small group left holding the fort. And I will sit down and begin to write what I think will be a multi-part series for Thoughts from the Frontline on the Age of Transformation. I have been thinking a lot these past few weeks about the interplay of the large forces of change in government, business, society, and technology that are sweeping over our world far faster and on more fronts than any of us have ever experienced. Exciting times. Have a great week!

Your slowing down a little this week analyst,

Mauldin signature

John Mauldin, Editor
Outside the Box

Networks and Hierarchies

By Niall Ferguson

Published June 9, 2014 in The American Interest

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

Fritz Lang’s silent movie classic Metropolis (1927) depicts the downfall of a hierarchical megacity. Metropolis is a city of skyscrapers. At the top, in their penthouse C-suites, lives a wealthy elite led by the autocrat Joh Fredersen. Down below, in subterranean factories, the proletariat toils. After he witnesses an industrial accident, Fredersen’s playboy son is awakened to the squalor and danger of working-class life. The upshot is a violent revolution and a self-inflicted if inadvertent disaster: When the workers smash the power generators, their own living quarters are flooded because the water pumps fail. Today, Metropolis is perhaps best remembered for the iconic female robot that becomes the doppelgänger of the heroine, Maria. Yet it is better understood as a metaphor for history’s fundamental dialectic between hierarchies and networks.

Political hierarchy

Lang said the film was inspired by his first visit to New York. To his eyes, the skyscrapers of Manhattan were the perfect architectural expression of a hierarchical and unequal society. Contemporaries, notably the right-wing media magnate Alfred Hugenberg, detected a communist subtext, though Lang’s wife, who co-wrote the screenplay, was a radical German nationalist who later joined the Nazi Party. Viewed today, the film transcends the political ideologies of the mid-20th century. With its multiple religious allusions, culminating in an act of redemption, Metropolis is modernity mythologized. The central question it poses is as relevant today as it was then: How can an urbanized, technologically advanced society avoid disaster when its social consequences are profoundly anti-egalitarian?

There is, perhaps, an even more profound question in the subtext of Lang’s film: Who wins, the hierarchy or the network? The greatest threat to the hierarchical social order of Metropolis is posed not by flooding but by a clandestine conspiracy among the workers. Nothing infuriates Fredersen more than the realization that this conspiracy was hatched in the catacombs beneath the city without his knowledge.

In today’s terms, the hierarchy is not a single city but the state itself, the vertically structured super-polity that evolved out of the republics and monarchies of early modern Europe. Though not the most populous nation in the world, the United States is certainly the world’s most powerful state, despite the limits imposed by checks (to lobbyists) and balances (as in bank). Its nearest rival, the People’s Republic of China, is usually seen as a profoundly different kind of state, for while the United States has two major parties and a gaggle of tiny ones, the People’s Republic has one and only one. American government is founded on the separation of powers, not least the independence of its judiciary; the PRC subordinates law, such as it has evolved in China over the centuries, to the dictates of the Communist Party.

Yet both states are republics, with roughly comparable vertical structures of administration and not wholly dissimilar concentrations of power in the hands of the central government. Economically, the two systems are certainly converging, with China looking ever more to market signals and incentives, while the United States keeps increasing the statutory and regulatory power of government over producers and consumers. And, to an extent that disturbs civil libertarians on both Left and Right, the U.S. government exerts control and practices surveillance over its citizens in ways that are functionally closer to contemporary China than to the America of the Founding Fathers.

To all the world’s states, democratic and undemocratic alike, the new informational, commercial, and social networks of the internet age pose a profound challenge, the scale of which is only gradually becoming apparent. First email achieved a dramatic improvement in the ability of ordinary citizens to communicate with one another. Then the internet came to have an even greater impact on the ability of citizens to access information. The emergence of search engines marked a quantum leap in this process. The advent of laptops, smartphones, and other portable devices then emancipated electronic communication from the desktop. With the explosive growth of social networks came another great leap, this time in the ability of citizens to share information and ideas.

It was not immediately obvious how big a challenge all this posed to the established state. There was a great deal of cheerful talk about the ways in which the information technology revolution would promote “smart” or “joined-up” government, enhancing the state’s ability to interact with citizens. However, the efforts of Anonymous, Wikileaks and Edward Snowden to disrupt the system of official secrecy, directed mainly against the U.S. government, have changed everything. In particular, Snowden’s revelations have exposed the extent to which Washington was seeking to establish a parasitical relationship with the key firms that operate the various electronic networks, acquiring not only metadata but sometimes also the actual content of vast numbers of phone calls and messages. Techniques of big-data mining, developed initially for commercial purposes, have been adapted to the needs of the National Security Agency.

The most recent, and perhaps most important, network challenge to hierarchy comes with the advent of virtual currencies and payment systems like Bitcoin. Since ancient times, states have reaped considerable benefits from monopolizing or at least regulating the money created within their borders. It remains to be seen how big a challenge Bitcoin poses to the system of national fiat currencies that has evolved since the 1970s and, in particular, how big a challenge it poses to the

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