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Business, Society - Written by on Wednesday, September 9, 2009 14:57 - 4 Comments

Jeff DeChambeau
Hegeling for the Economic Center of Society: The Internet vs. The Financial System

The idea that most captured my thinking while at school was Hegel’s process of History. Think of History as a marketplace of ideas that happens over time. At the highest level there are competing approaches to how society should be structured. The goal of History is to uncover a sustainable form of society that reconciles perfectly with some ideal conception of human freedom. World War II and the Cold War saw Enlightenment-era answers to this challenge vying for resources and adherents in the real world. Western Liberalism happened to win, but since History takes place over such long period that inconsistent approaches eventually fail it’s possible that there are inconsistencies at the heart of the way we live that make it unsustainable in the long term.

While the global battlefield showcased the fight between ideas like Communism, Fascism, and Western Liberalism, other ideas are pit against one another on smaller scales all the time. Take for instance the showdown between alternating current and direct current (AC and DC). Both are ideas about how to transfer electricity. DC ultimately lost because it wouldn’t work on a large scale; it wasn’t viable in the long term. Had Edison’s pro-DC publicity campaign been successful and DC became the dominant electricity model, it’s likely that we would have quickly hit the upper limit of usefulness and been abandoned in favor of AC anyway (or another, better technology).

This happens everywhere: Phrenology lost to Psychology; more trivially the curtsey lost to the handshake. Betamax was superior to VHS but lost the format war of the 70s. Either format would have been beaten handily by DVD but only VHS lived to see its own demise. Inconsistent (or suboptimal) approaches lose out over and over again.

For now Western Liberalism married with Capitalism seems to be the mode of choice for maximizing individual freedom in the broader context of society. This means having a democratic society with—in varying degrees—free markets. This has been supplemented by finance, a global network that connects all countries and peoples of the world and communicates information about supply and demand via indicators (market prices) that drive human behaviors.

The hierarchy of things should be that governments set the rules for economic behavior, and within those confines companies and individuals act in their own self interest. Unfortunately in practice money is seductive and politicians are (often) bribed. Further still, government is inherently local while finance is global. In essence, by its nature finance struggles to be the highest principle at play—the one at the heart society. After all, there’s more money to be made when everything—government included—is subsumed into the profit-seeking construct. This isn’t to say that finance is bad, just single-minded.

The recent financial meltdown seems to hint that Capitalism may have at its core some inconsistencies that undermine its long term viability. These objections aren’t new; take for example shopping at Wal-Mart: short term benefit (in the form of low prices) is contrasted with the long term cost of driving down wages and moving business overseas. Similar arguments can be made socially and environmentally.

In the past few years we have seen the rise of another global network that connects all peoples in all countries and efficiently communicates information about supply and demand: the Internet. While the relationship between finance and technology has usually been mutually beneficial, with the advent of the Internet it seems possible for technology to offer an alternative to finance as the central pillar for global society—one for which finance is a tool rather than a master.

Already large companies are trying to bend the internet into a new corporate-controlled distribution channel for their products and services, but could this go the other way? Could the internet replace finance as the central pillar that networks the world together? Are the two necessarily in competition? What would the world look like if this shift ever took place? Do we want it to?

I’m curious to know.


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Sep 9, 2009 15:36

One could argue that the Internet has provided a forum for free markets to achieve their full potential – more perfect distribution of both goods and information to everyone participating.

Capitalism has been a target since at least the turn of the last century – doesn’t make it any less secure than it was 100 years ago. It’s on a solid foundation – as alluded to in your posting: human freedom. Competing models of facism and communism are direct contrasts to this model – control the people because they cannot/will not achieve their potential if left to their own devices. These models are repugnant to human freedom, not merely “competing approaches to how society should be structured.” They’re not on equal footing but just happened to lose – they’re inferior.

Addressing one of your closing questions – companies that perceive that the Internet poses a threat to capitalism and free-market economics are missing the mark. The Internet needn’t (doesn’t) undo capitalism but rather lifts capitalism to the next level. My hope is that the corporate-controlled Internet alluded to is nothing more than their blowing against the wind.

Sep 9, 2009 20:46

There is no question that the internet has the potential to level the playing field. I think it’s optimistic to hope that it will be anything other than a structured, corporate beast over time, with only a small segment of people who operate their own ‘freenet’.

Interesting thoughts, Mr. DeChambeau [if that is your real name].

Sep 10, 2009 9:10

I personally think that finance will remain the central “pillar” that networks the world together. What the internet can challenge is it’s “signaling” power. One could argue that, historically, prices (of goods, services, and capital) were the only way to effectively communicate information, but as the Internet evolves and more knowledge can be both created and shared, different signals can be provided – and perhaps some that account for the externalities financial markets struggle to deal with. However, the “prices” not only provide information – they provide an incentive to act. Self-interested people are “encouraged”, through the pricing mechanism, to offer what others want / are willing to pay for, and stop doing what they don’t want / aren’t willing to pay for. Even if the internet provided “perfect information” that accounted for all externalities (etc.), it’s hard to envision a model where the internet – in isolation – could drive behavior in a similar fashion.

In terms of competition, it’s important to note that much of “capitalism”, as it currently plays out, is trying to avoid competition – fairly or unfairly. One could argue that a major effect of the Internet has been moving more industries towards something that looks more like the “perfect competition” model taught in Eco 101 – where it is impossible to earn “excess profits”. It’s capitalism at work, but many capitalists will work hard to resist it – preferring the higher profit making opportunities in monopoly and oligopoly industry structures. But real capitalists will just look at is another round of creative destruction and look for new “signals” on how they can make money.

One final point – there does seem to be an underlying theme in such discussions that what “big corporations” do is inherently bad – which falls back on the traditional mindset that it’s a small group of elites running the big companies for their own benefit, against the interest of the “normal people” who make up the majority of the population. But this is a false divide. I imagine you might consider BCE to be one of those “big companies trying to bend the internet”, and the tone implies this is bad for the “little guy”. But remember the privatization battle for BCE last year? One group was led by The Ontario Teachers Pension Plan; the other was led by the Canadian Pension Plan (CPP), which is the social security system the vast majority of Canadians are depending on. While it eventually fell through, there are MANY “ordinary” people that count on the profits from that “big corporation” to fund their retirements. And if you want to tie the Internet and finance together more directly, note that the CPP is now one of the major investors in Skype. In turn, basically every working Canadian, past and present, has a stake in seeing it make serious money.

So while it may be true “big corporations” are trying to bend the Internet a certain way, many “ordinary people” will the main beneficiaries if they succeed. Makes for an interesting sub-plot: whether they know it or not, many people who rail against the “evils of capitalism” have made themselves wholly dependent on it continuing to churn out profits for them to live off of (particularly in retirement)… so they should be very careful about what they wish for.

Naumi Haque
Sep 11, 2009 11:36

A thought regarding Denis’ point about the Internet providing additional information about externalities that the financial market struggles to deal with (i.e. more than simply price driving behavior): I’ve read some research recently that looked at eBay and Amazon. Price in these Internet marketplaces only accounted for 50% or the buying decision – and additional 20% of the decision was attributed to ratings, and another 20% was attributed to unstructured comments and reviews (10% was other). Seems like there’s definitely an added layer of behavioral impact created by the Internet, but what is really interesting is the ability now to quantify unstructured data and attribute a value to it (i.e. we can now start to quantify how much a comment is worth in dollar terms using data mining).

If this type of information/data mining technology takes off, one can imagine a growing virtual currency that only exists on the Internet. In many respects, this currency already exists – it is comprised of reputation, ranking, and traffic (via links). Would the financial system account for this additional layer of value in the market when the metrics are available to assign a monetary value to it? It’ll be interesting to see.

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