‘A New Social Contract’ Part 3
At any given time in history, the leading edge of technology is surrounded by a noisy crowd of startups and salespeople, whose salary essentially relies on giving you the impression that they know something that you don’t.
Like a flock of seagulls in the wake of a fishing trawler, they circle and spin, throwing up a cloud of vague, fashionable buzzwords: ‘the cloud’ ‘the sharing economy’ ’smart cities’, ’big data’, ‘artificial intelligence’ ‘Industry 4.0’. Of course, no one wants to look stupid, so the temptation is to echo these buzzwords rather than question them, or to debunk them with a dystopian counter-narrative, or just to back off entirely.
All this makes it very hard for democratic societies to develop a clear public debate about what the social, economic and political implications of digital technology actually might be, and how we should respond to them.
When we do respond, we tend to frame the problems reactively, around issues such as privacy, fakes, social media echo-chambers, the psychological effects of information overload and the ‘ethics’ of the big ‘tech companies’.
This is not to say that these issues aren’t important. On the contrary, they’re hugely important. But they are only one part of a bigger picture.
In fact, by missing that bigger picture, we are also missing quite how important even these issues actually are. The danger of these reactive framings is that they can fool us into accepting false premises, such as the assumption that digital technology is a uniquely private sector phenomenon (it’s not), that so-called ‘tech companies’ are a new, separate class of business (they’re not. Facebook sells advertising. Uber is a taxi agency) or that ‘digital technology’ is somehow a separate area of policy and regulation to everything else (again, it’s not).
It is too easy to tell ourselves that the problems we are experiencing are an inherent function of technology itself – as opposed to the business model behind it. Or the opposite; that these problems are just the result of a few particular companies behaving in an ‘unethical’ way.
Most importantly of all, what these reactive conversations don’t do is give us a mental model that allows us to connect technological change to wider events. They don’t allow citizens and democratic institutions to understand what is really going on, and to get ahead-of digital transformation and shape it, rather than being shaped by it.
So what is going on?
As I explored in Part 2, if we step back and look at the long picture, we can see two underlying patterns.
The first is automation. That, is, the activity of taking human knowledge and skill and encoding it into powered machines, so they can perform laborious, repetitive and difficult tasks for us in a continuously faster, cheaper, and more consistent way than we could before.
The second is a byproduct of the first, globalisation; that is, it becoming ever cheaper and easier to move information, money, goods and people around the world.
Neither of these patterns are new. In fact, as humans, it is precisely this innate ability to create tools and encode knowledge (and to pass it all on for the next generation to build-upon) that differentiates us as a species. It is arguably the basic building block of all human progress. Economists call it ‘lowering the marginal cost of production’. Buckminster Fuller called it “ephemeralization”; our ability to “do more with less, until eventually we can do almost everything with almost nothing.”
Digital technology is new only in that it represents an exponential leap in the pace, scale and complexity of what can be automated.
As Arvind Narayanan of Princeton University wittily points out, if you strip away all the noise, there are basically two things that computers and the internet are really, really good at.
The first is collecting and storing data. Lots of it.
This is exciting because it exponentially increases our ability to understand ourselves, each other and the world around us. It is also dangerous, because that data has incredible power, and if that power is centralised into the hands of only a few unaccountable corporations and/or parts of government, it can be used to exert a level of control over individuals, society and the economy that is historically unprecedented.
The second thing computers are good at is following rules (or ‘algorithms’). If this then that. Where a few decades ago, automation was largely restricted to mechanical tasks and simple calculations, the exponential increase in processing power (described by Moore’s Law) means that today we can automate hugely complex information processes and knowledge work. The result has been termed the ‘fourth industrial revolution’; and that — for once — is not hyperbole. We, as a society, are making a huge, uneven transition, from centralised systems that run on paper, mechanical technology, labour and fossil fuels, to a world that runs on distributed computing, distributed fabrication and the internet.
This should be cause for huge optimism, because it means that a functioning, democratic market economy is, in effect, a progress machine. Given reasonable levels of competition, collaboration, education and investment, the cost of living should steadily fall, and quality of life should steadily rise, for everyone. It means power and information will be increasingly distributed and democratised, whether that be publishing power, monitoring power, production power or literally, electrical power. It means huge challenges like climate breakdown and population growth are far from insurmountable. Ours is the first generation in history that finds itself within realistic reach of what Jeremy Rifkin calls a ‘zero marginal cost’ economy; where the cost of producing and distributing almost everything falls so far that it becomes cheap and abundant, be it information, renewable energy, food, construction, medicine, mobility and so on. Imagine a world of rapid, customised innovation, where no problem needs to be solved twice, where natural resources can be stewarded rather than depleted, and where our labour is focused on leadership, innovation, care and human connection. A positive-sum society, where there is enough for everyone, and no one needs to be left behind.
Except, something is going wrong.
The cost of living is not falling. In fact in many developed economies, the cost of living is rising, while investment is declining and wages are stagnating. Progress has stalled.
The explanation for this lies in a crucial – but often poorly understood – difference between markets and capitalism.
Rifkin is right. The natural endgame of free, fair, competitive markets is a world where almost everything can be made available to everyone for almost nothing. But the natural end goal of capital is the opposite. For an investor, the ultimate prize is to own a monopoly: a position of power, protected from competition, from which it is possible to drive production costs down to zero, but keep prices the same, extracting the difference as profit. This is what economists refer to as ‘economic rent’ or ‘unearned increment’. Money for nothing.
In the 20th century, capital could achieve something close to this simply by owning the direct means of production. The sheer firepower of large productive factories, service providers and consultancy firms was enough. But as digital automation wipes out the cost of production, these become ever less secure investment positions. Algorithms written by teenagers can replace whole industries within years. Products that used to require years of R&D, large factories and distribution chains can increasingly be digitally manufactured for a fraction of the cost.
So, where does capital go next? Or to put it another way, in this increasingly automated, globalised economy, what is left to own?
The future of ownership, and the ownership of the future
1 — Land. In the context of a digital industrial revolution, it may seem odd to talk about land. Perhaps that is why it is so often forgotten. But land ownership remains the original and most significant form of economic rent extraction; the primary channel by which money is transferred from those without capital to those with it.
Ask yourself, what is your single largest monthly outgoing? If you’re under fifty years old, the chances are it’s rent or mortgage payments.
As Adam Smith explains in The Wealth of Nations, land is originally created by governments, and then licensed to citizens and businesses. The model of land ownership we use today is still essentially based on the feudal system introduced to the UK by William the Conqueror, whereby land owners (who we still refer to as landlords) are granted a monopoly over their own mini-fiefdoms, within which they have the right to charge as much rent as people can afford for its use. In effect, rent was invented as a kind of privatised tax.
For the wealthy, who have cash to spare, purchasing land means purchasing the right to extract taxes from others. For ordinary homeowners, purchasing the land under your own home means buying-yourself-out of this form of taxation (hence the term freehold. Free as in speech, not as in beer). And of course, if the value of the location goes up (because, say, your local council builds a new school nearby, or because people can borrow more), then the owner gets to capture that increase in value too, even though they didn’t create it.
Land was described by Winston Churchill in 1909 as the “mother of all monopolies”, allowing landowners to make money by merely ‘sitting still’. As the third and fourth industrial revolutions have kicked-in, this has only become more true. We have seen investment diverted away from productive enterprise and into real estate speculation and landlordism, fuelling a housing crisis in most major cities. The effect on society and the economy is exactly what you would expect punitive taxation levels to have; sucking the life out of almost every aspect of society, and absorbing any economic growth or productivity gains, wherever they may come from. Even the billionaire Peter Thiel, in 2018 complained that “as a venture capitalist… the vast majority of the capital I give to companies is just going to landlords”.
By 2018, the global value of these privatised taxation rights was around $280tn. That makes it the largest form of wealth on the planet — and by a huge margin too. To put it in perspective, the total value of all the gold in the world is only around $7.5tn, and the net value of all shares in all companies is around $83tn. The entire market value of all personal data in the world is estimated at only $3tn; pretty much negligible in comparison to land.
Most elected officials do not understand this, which is why the UK government, for example, finds itself in the bizarre position of choosing to rent back its own land, to the tune of £23bn a year in housing benefits. That’s more than it spends on policing, roads and military equipment put together, and enough to end austerity on its own.
2 — Finite materials. While the cost of renewable materials may fall (with falling processing costs), the cost of non-renewable materials, such as oil or gold will retain their value. There are, after all, only finite quantities of copper and rare earth minerals on the planet, and it is perfectly possible to own a significant percentage of any given one. It is not inconceivable that in the coming decades device manufacturers, for example, will refuse to sell us a device, they will only allow us to rent them, allowing them to retain ownership of the materials inside them.
3 — Infrastructure. Every time there is an industrial revolution, it never takes investors long to realise that you don’t need to own the means of actual production, so long as you control the means of distribution.
Infrastructure, whether it is hard infrastructure (such as railways or water) or soft infrastructure (such as digital platforms or the world wide web), tends to have a natural monopoly. Usually, this is because it either has no like-for-like competition (you can’t switch to a different one), or because it has critical mass (you have to use it because everyone else is using it).
In the digital era, we are reliant on a new, growing array of digital infrastructures or ‘platforms’. Accordingly, a new investor playbook has emerged – arguably exemplified by companies such as Uber, Amazon, Softbank and WeWork– whereby investors get in early to buy digital platforms, and use the ‘disruptive’ low costs made possible by digitisation to replace or capture whole industries within a few years (witness how AirBnB has eaten the hotel industry, Facebook has eaten the advertising industry, and so on). During the early years of these companies’ growth, they are not even expected to return a profit. In fact, they can even run at a loss, as investors pour their own money into undercutting or acquiring all competition. Only once all competition has been eliminated are prices raised, by which time, many of the original investors have already sold their equity anyway, like a kind of pyramid scheme. Matt Stoller of Open Markets calls this phenomenon ‘Counterfeit Capitalism’.
A more straightforward infrastructure acquisition strategy can also be used by foreign governments for purposes of profit or political leverage. The additional advantage here being that national infrastructure such as power networks or railways are so essential that governments will continue to subsidise owners in order to keep the lights on, even as they extract huge profits. The UK is a notable example, with much of its infrastructure now owned by foreign governments.
4 — Intellectual Property. Though originally invented to encourage openness and competition, over time IP has also been used by wealthy interests for the opposite effect: to capture monopolies that allow the owner to extort prices wildly beyond the cost of production, protected from competition. Notable examples have been in agriculture, and in the domain of pharmaceuticals, where that monopoly gives them power over peoples very lives. In the US, the production cost of a vial of insulin is estimated to be around $5, yet they are routinely sold for prices over $300.
5 — Data Much has already been written about the power of digital devices and the web to harvest citizens’ personal data; at the expense of our privacy. So far, the use of this data has primarily been for the purpose of targeted marketing and advertising. But there’s a limitation: in conditions of economic stagnation and rent extraction, individuals’ spending power is ultimately limited. So increasingly, this personal data will be used to create another class of saleable asset:
6 — Behaviour Once you can combine personal data with any predictable means of influencing a person’s behaviour (for example making them happier, more ‘loyal’ or more inclined to vote one way or another), you have effectively created a new kind of asset, which can be sold to any powerful actor, for example governments or insurance companies. Even in 2014, Facebook admitted to running tests on whether it could influence users happiness. China’s social credit system is a dystopian demonstration of the kind of behaviour control that is already possible.
As devices become increasingly personalised, and indistinguishable from our biology, we should expect this to be a growing business practice.
7 — Public services Public services, by definition, usually have a monopoly. If governments can be persuaded (or forced) to privatise or outsource these services, shareholders can digitise and extract rent from them instead of making them better or cheaper. Outdated government procurement models make this disturbingly easy.
Another version of this pattern involves public services being not outsourced, but slowly outperformed. As public services get worse and worse, more and more people will begin to turn to private sector alternatives that are making the most of digital innovation. In effect, investors will be able to replace many functions of government for a fraction of the cost; sometimes even providing the services for free in exchange for saleable personal data.
An example of this is growing number of private online GP services being advertised in the UK. Many patients will be tempted to use these, because getting a free appointment with an NHS doctor can take weeks, and is so much less convenient.
8— Money/debt We often forget that currency is a technology, manufactured by governments. In principle, central banks have monopoly on money creation, but in practice that right is licensed-out to private banks, who are permitted to create new money in the form of loans, and then collect interest on those loans. Today, 97% of new money is created by private banks. The digitisation and deregulation of these banks is what caused the subprime mortgage bubble and subsequent financial crisis.
In recent years, experiments into non-state digital currencies (most notably Bitcoin) have been leapt-upon by speculators. A more recent example of a private company seeking to put itself into a monopoly position by owning the money supply is Facebook’s Libra. Even if that project fails, it will not be the last attempt by a private company to capture the right to issue and own a currency.
9 — Government All the forms of monopoly in this list are, ultimately, created — or at least permitted — by governments. So, not surprisingly, in recent decades we have also seen a significant increase in the amount of money large companies and wealthy individuals are spending on the capture of government, through lobbying, think tanks, revolving door arrangements and political donations. Professor Larry Lessig has researched and campaigned at length on this subtle form of corruption, and its hugely damaging effects; eroding trust in democracy, and preventing meaningful action on issues such as climate change.
Understanding the future of ownership in this way gives us a diagram of power in the 21st century; a kind of battleground map for the politics of the fourth industrial revolution. I’m relieved to say that I’m not alone in perceiving this. Earlier this year a whole new Think Tank was founded that is exclusively focused on the future of ownership.
Put simply, societies that can innovate around these nine issues, inventing new forms of ownership, new charters, new social contracts, new rights and new forms of regulation — and so prevent economic rent extraction and ensure reasonable levels free and fair competition — will find themselves able to unlock exponential levels of progress, prosperity, wellbeing and innovation, as well as being able to restore public trust in institutions.
Societies that can’t or don’t do this will find themselves trapped into a zero-sum game; a downward spiral of rent extraction, inequality, deflation and decline, flatlining productivity, falling public tax revenues, retreating public services, geopolitical weakness, increasing institutional corruption and rising public anger.
So why aren’t we already doing more? Why are we paying so much to subsidise our broken systems, instead of fixing them?
The problem is not one of political support. Most of these issues – from reforming banking to getting money out of politics – enjoy huge popular support from across the political spectrum. Even those with vested interests in these broken systems never really try to offer a moral or rational argument in their defence— because really, there isn’t one; Left or Right. Instead they rely on everyday soft power to obfuscate or co-opt. If challenged, the go-to defence is usually ‘it’s too big, there’s nothing we can do about it’.
So it is more a problem of ideological inertia from the existing political parties, and to some extent, timidity. In many cases their lenses, and their tools are obsolete. In this era, the traditional policy ideas and approaches of ‘Left’ and ‘Right’ no longer make much sense. For example, even significant increases or decreases in tax rates or public spending will have less impact on people’s lives than tweaking a few lines of legal code, changing (or adding to) the rules of the game. De-rigging the economy, if you like. These changes often cost government nothing to implement, they just need political self-confidence and a clear head.
And it’s here that a very simple realisation begins to take shape.
What if our whole way of thinking and talking about the relationship between the state and capitalism has been wrong the entire time?
The State as a Platform
Throughout the second half of the 20th century we tended to talk about the ‘The State’ and ‘The Market’ as side-by-side alternatives; opponents; or in the case of neoliberalism, ‘partners’. If we accept this framing, it seems logical to assume that expanding the role of the state must mean diminishing the role of markets, and vice versa.
But what if we had the diagram wrong by ninety degrees?
In practice, the state is the platform on which markets run; the operating system (literally, think of the App store). It does more than tax, regulate and redistribute profits. It provides the entire economic and social infrastructure that underpins it. It sets the rules in the first place. In fact, at the most fundamental level, markets comprise a series of legal entities (or ‘patterns’) that provide the basis of what can and cannot be owned in the first place, and on what terms: the joint-stock company, currency, patents, copyrights, licences, land title. Without these forms of social agreement, the market wouldn’t exist.
The state is — and always has been — the maker and shaper of markets.
This means that in the zero marginal cost economy of the 21st century, the most powerful role of the state will be not as a re-distributor, but as a rule-setter. Not a player, but the designer of the playing field, determining, by social consent, what can and cannot be owned, and on what terms.
It will also – as the economist Mariana Mazzucato (whose work and thinking I have referred-to again and again throughout this series of posts) have a pivotal role as a funder and investor. But I’ll talk a bit more about that in Part 4.
However, in this rediscovered diagram, the state has a scale problem. In the last few decades, both companies and individuals have become increasingly global in their reach, but democratic institutions have not. Whether we like it or not, both businesses and individuals will increasingly treat nations like medieval Italian city-states, choosing and moving between them; picking where they want to live, work, store data, and pay taxes. Increasingly, citizenship will come to be seen as a choice, more than a birthright.
Two possible versions of this future lie ahead of us.
One could be described as the The Market as a Platform for Democracy. A kind of globalised digital feudalism, dominated by a handful of huge private companies, whose annual turnover is bigger than the GDP of most countries. They invert the diagram, and buy-up or replace the platform. They become, in effect, global superpowers, controlling most goods and services (including military and intelligence services), playing national and city governments off against each other in a race to the bottom. We saw an example of this recently, when Amazon cleverly forced US cities to ‘bid’ to host their headquarters. What followed was a demeaning spectacle: American cities jostling to undercut each other by offering tax-breaks, deregulation, local monopolies or otherwise bending the rules and rigging the game in Amazon’s favour, at the expense of citizens and small businesses. Meanwhile, rents rise, public services are cut, and institutions fail. In an almost self-parodying illustration of this kind of tacit institutional corruption, the Governor of New York, Andrew Cuomo, even joked that he would “change (his) name to Amazon Cuomo if that’s what it takes.”
In practice, the UK — along with the Netherlands, Luxembourg and Switzerland — has been a world leader in this race to the bottom for some time. Global tax avoidance and evasion is now estimated to cost governments $500bn dollars a year. It is estimated to cost the UK £90bn per year (that’s six red campaign buses, if you’re Boris Johnson).
This is where the faux-patriotism of many right-wing populists rubs off. They are happy to blame the global movement of people for putting strain onto public services, whilst doing nothing to close the loopholes that allow huge companies to move their profits into offshore tax havens to avoid paying fair tax, even though that represents a far, far larger burden on national budgets.
That is the version of the future that we are currently headed into.
The alternative could be described as Democracy as a Platform for the Market, where it is societies and our governments that set clear, transparent rules of the market, and it is businesses that compete with each other on top of those platforms. Those rules include the rules of access to a nation’s citizens, to its land, to its infrastructure and to its economy; what can and cannot be owned, and on what terms. The choice of whether or not to play on a given platform is up to individual companies and people: but the rules are transparent, and if you don’t want to play, the field is left open to others who will.
By upholding a clear, robust, rules-based tax system, by preventing monopolies and rent extraction, by reducing the influence of money in politics, and by enforcing clear, transparent limits and regulations to protect humans and the environment, democratic states would find themselves in a position of extraordinary economic and geopolitical strength. Capital would be forced to choose between abandoning the stage altogether, ceding the field to others, or making investments into innovation and productive enterprise; competing to provide ever better, ever cheaper products and services in free and fair markets, all supported by world-class infrastructure, education systems and public services. Productivity would rise, the cost of living would fall, wellbeing would increase, prosperity would grow. A race to the top.
In this mindset, instead of trying to protect themselves using trade tariffs, the leading economies would do better to use the desirability of access to their markets to lever their position as global leaders, by demanding that all products and services entering their domain meet the same, high environmental, worker and consumer rights, and then backing up those demands by building new global digital infrastructure for making such demands workable for SMEs. The byproduct of this would be that trading blocs such as the US and the EU could effectively force global progress by unilaterally setting new de facto global standards, and inviting others to opt-in. (The EU’s Data Privacy laws have arguably been a superbly successful example of this, although sadly not backed-up by investment into open digital infrastructure, resulting in the mess of ineffectual pop ups we experience today when browsing).
What’s powerful about this platform-based perspective of the state is that it shifts our conversation about democracy and digital technology away from a reactive one about ‘tech ethics’ or ‘regulating the tech companies’, to one that is about the wider shifts that are taking place beneath us, and the fundamentals that are holding our economy and our society back, and causing these toxic crises at the level of everyday politics.
Adopting this approach doesn’t require radicalism in the traditional Left / Right sense. In fact, it is politically fairly agnostic. It requires radicalism only in the original meaning of the word (meaning ‘intervening at the roots’). The essential idea is that not only is digital technology presenting us with exponentially more complex challenges, it is also giving us exponentially more effective tools to uphold our own stated values in a digitised, globalised age. It therefore tests us to prove whether we really believe in them or not.
Indeed, there is at least one nation on earth that is already using many elements of this platform-based approach to digital statecraft; and, of course, it isn’t a democracy at all. From land to personal data and behaviour, China is using the same technologies and levers to accrue massive state power; presenting an intimidating, depressing model of a form of digital society that could be termed Authoritarianism as a Platform.
And yet, when you begin to look in detail at some of the specific potential implementations of this idea of Democracy as a Platform, it’s not hard to see how easily, even in a digital age — in fact, especially in a digital age — truly open, free, fair, liberal, democratic societies could dramatically outperform authoritarian or feudal ones.
Britain — like most western democracies today — finds itself at a crossroads. We need to take a clear-eyed look at the world we’re heading into, and decide for ourselves which of those societies we want to be.
And then, once we’ve made that decision, we need to act on it.