The Sovereign Individual
By James Dale Davidson and William Rees-Mogg ← Notes, upon returning a year later
Chapter-by-Chapter Breakdown
Chapter 2: Megapolitical Transformations in Historic Perspective
I’ll separate this chapter into two parts (1) why history's great transformations are almost always misperceived as they happen, and (2) how we can make more accurate predictions.
Why history’s great transformations are almost always misperceived as they happen
Cultural Blind Spots & Maintaining Stability
People almost always have an aversion to change, and for good reason. We do not want to overturn our social conventions, accepted institutions, and defy the laws and values that give us our bearings. Doing so would be extremely painful. Our risk aversion contributes directly to our cultural blind spots, as we often hide what would force drastic change.
These blind spots are also present for practical reasons too. People are more reluctant to follow the laws of a system nearing its end. Denying change maintains stability.
Discussing how the social order could end is nearly universally taboo. This means conventional information sources do not advertise dramatic changes, and you cannot depend on them for an objective and timely warning about the changing world order. No one depending upon the official news would have learned that Rome had fallen until long after the information ceased to matter.
Finally, when predominant institutions reinforce a convenient conclusion, even one based largely on pretense, it requires both strong character and strong opinions to contradict it.
Major shifts happen subtly, not all at once
Major social developments are frequently ambiguous. They happen in stages, over time. To those who lived through it, the fall of Rome appeared as negligible shifts in public life. The facade of the old system was preserved, albeit deformed by barbarism. I’m sure many Romans said something similar to, “So, our new emperor is a barbarian lieutenant. What’s the big deal?”
Comforting Illusions
The primary causes of societal change are not subject to conscious control. Instead, they are the factors that alter the conditions under which violence pays, and the conditions under which violence pays are determined by the dominant military technology. Pre-colonial Africans could not will themselves past European machine guns any more than our current government can tax cryptographically sealed wallets.
Still, a shared illusion is that citizens can consciously act together to shape the spontaneous and economic natural processes around them. This is equivalent to saying that feudalism might have survived if only all men had rededicated themselves to chivalry. No one in the court of the late 15th century would have objected. It would have been heresy to do so. But it also would have been entirely misleading—an example of the snake trying to fit back into its old skin.
How this applies today
As we go through a significant transformation, the tendency will be to downplay the inevitability of these changes or to argue about their desirability. Both are misguided attempts to turn back the hands of time.
Microprocessing will so profoundly alter the logic of violence that it will inevitably change the way people organize their livelihoods and defend themselves. Those changes will radiate throughout the whole of society. The best we can do is pay attention and act accordingly.
How we can make more accurate predictions
If you drop a $100 bill on the street, you can say with a high degree of confidence that someone will soon pick it up. People at all times and places tend to respond to incentives. Not always as mechanically as economists hope, but they do respond. Forecasting is possible because people tend to respond to costs and rewards. Any forecast that accurately anticipates the impact of incentives on behavior is likely to be broadly correct.
The more significant the anticipated change in costs and rewards, the less trivial the implied forecast. Violence is the ultimate boundary force on behavior, as it has the highest cost. Shifts in megapolitical conditions change the returns to violence and determine the degree to which people are willing to tolerate its costs. So, if you can understand the implications of megapolitical shifts on the logic of violence, you can usefully predict a lot. That is precisely the logic this book attempts to understand.
Megapolitics — the influence of structural factors (topography, climate, microbes, and technology) on human incentives & the resulting rise and fall of governments, economies, cultures, and violence
Logic of Violence — the rationale for violence according to a given set of megapolitical factors
Returns on Violence — the resources gained from violence according to a given set of megapolitical factors
The logic of violence and the returns on violence are nearly identical concepts, but not quite. Returns on violence are a subset of the logic of violence, which also includes losses.
Scale of Government — placed on the same scale people use to refer to "big government vs small government." A big government means higher taxes, greater distribution of wealth, a larger police presence, and a stronger military. A small government has less of each.
In this sense, a collapsing scale of government means that megapolitical conditions no longer support big government, and society is beginning to transition towards a smaller government.
Some summary points to keep in mind as you seek to understand the information revolution:
A shift in the mega political foundations of power typically unfolds far in advance of the real revolutions in the use of power.
Incomes are usually falling when a major transition begins.
Seeing outside of a system is usually taboo. People are frequently blind to the logical violence in the existing society. Therefore, they are almost always blinded to change in that logic.
Major transitions always involve cultural revolution and usually entail clashes between the old and new rules.
Megapolitical transitions are never popular because they attenuate painstakingly acquired intellectual capital and confound established moral imperatives. They're not undertaken by popular demand but in response to changes in the external conditions that alter the logic of violence.
In the local setting, transitions to new ways of organizing livelihoods or new types of government are initially confined to those areas where the mega political catalysts are at work.
With the possible exception of the early stages of farming, past transitions have always involved periods of social chaos and heightened violence due to disorientation and the breakdown of the old system.
Corruption, moral decline, and inefficiency appear to be signal features of the final stages of a system.
The growing importance of technology and shaping the logic of violence has led to an acceleration of history, leaving each successive transition with a less adaptive time than ever before.
As events unfold many times faster than during any previous transformation, an early understanding of how the world will change could turn out to be far more helpful to you than it would have been to your ancestors at an equivalent juncture in the past. Quite fortunately for readers of the Sovereign Individual, the action horizon for megapolitical forecasts has shrunk to its most helpful range: a single lifetime.
Megapolitical Variables
Megapolitical variables can be grouped into four categories: typography, climate, microbes, and technology.
Topography
The first states (i.e., Mesopotamia, Egypt) emerged as floodplains surrounded by deserts. Those who controlled the water in a desert were in a position of great strength. This situation often made for a despotic and rich government. The authors refer to these systems of government as hydraulic societies.
Topography — the arrangement of the natural and artificial physical features of an area
Hydraulic Government — a social or government structure that maintains power and control through exclusive control over access to water
An essential aspect of topography is that no government laws have ever exclusively applied on open seas. This matter is vital to understanding how violence and protection evolve as the economy migrates into cyberspace. If no government could ever maintain control over the sea, they will also struggle to control a domain with no physical existence at all. ← Governments do, however, have access to monitoring mechanisms that allow them access to internet activities of those within their physical territory, so the open sea to cyberspace comparison isn’t nearly as straightforward as the authors expected.
Climate
A modest understanding of climate change and past societies could prove helpful if our climates continue to fluctuate. For example, a drop of one-degree centigrade (1) reduces the growing season by three to four weeks and (2) shaves 500 feet off the maximum elevation at which crops can be grown.
If you know that, you know something about the boundary conditions that will confine people's actions in the future. You can use this knowledge to forecast changes in everything from grain prices to land values. You could even conclude the likely impact of falling temperatures on real incomes and political stability if you include that governments have been overthrown when extended crop failures raised food prices and shrunk disposable incomes.
A significant climate shift was the catalyst for the transition from foraging to farming. About 13,000 years ago, the end of the last ice age led to a radical alteration in vegetation. With less to gather, hunter-gatherers supported themselves on dwindling herds of large mammals. As a result, tribes hunted many species to extinction. With less to gather and less to hunt, the transition to agriculture was not a choice but a strategy adopted under duress to make up for shortfalls in the diet.
Although current fears of a warming climate may be well-founded, humanity has traditionally faced stronger burdens from colder climates. It is no coincidence that the 17th century, the coldest in the modern period, was also a period of revolution worldwide. Shortened growing seasons produced crop failures and undermined real income, and prosperity began to wind down into a long global depression that started around 1620. The economic crisis of the 17th century led to the world being overwhelmed by rebellions.
During the Industrial Revolution, the growing importance of technology and manufactured output reduced the impact of the weather on the economic cycle.
Microbes
Microbes convey power to harm or immunity from harm.
Microbes — a microorganism, especially a bacterium causing disease or fermentation
Microbes are vital in understanding the European conquest of the new world. Europeans carried diseases previously unseen by the immune systems of Native Americans. Thus, colonizers could more easily harm natives suffering from a plague from which Europeans had already achieved immunity.
There are also microbiological restraints on the exercise of power. For example, potent strains of malaria made tropical Africa impervious to invasion by white men for many centuries before the discovery of quinine.
Technology
In more recent centuries, technology has played the most prominent role in determining the costs and rewards of projecting power. This book presumes that it will continue to do so.
The crucial dimensions of technology include:
Offense and defense
Prevailing weapons technologies imply a balance between offense and defense. This balance has a direct effect on a political organization's ability to scale. ← The distinction between offensive and defensive technology is likely to most important concept in the Sovereign Individual. It is featured prominently in Peter Thiels’s 2020 forward.
He wrote, “In truth, the great conflict over our megapolitical future is only just beginning. On the dimension of technology, the conflict has two poles: Al and crypto. Artificial Intelligence holds out the prospect of finally solving what economists call the "calculation problem": Al could theoretically make it possible to centrally control an entire economy. It is no coincidence that Al is the favorite technology of the Communist Party of China. Strong cryptography, at the other pole, holds out the prospect of a decentralized and individualized world. If Al is communist, crypto is libertarian.”
This distinction is so important because AI is the premiere offensive technology and crypto is the premiere defensive technology. The future development of these technologies will determine a government’s ability to scale, which, in turn, will determine the level of freedom for humanity.
When offensive capabilities rise, governments can more easily project power at a distance. As a result, power tends to consolidate, and governments function on a larger scale. For example, machine guns tipped the scales toward offensive warfare in the late nineteenth and early twentieth centuries and allowed the British Empire to expand throughout the world.
Conversely, when defensive capabilities rise, it is more costly to project power outside of core areas. As a result, jurisdictions tend to devolve, and big governments tend to break down into smaller ones. For example, castles and moats tipped the scales toward defensive warfare and made it difficult for any prevailing government to conquer another.
Dispersal of Technology
When the balance between offense and defense remains constant, the dispersal of technology (weapons, tools of production) becomes a critical megapolitical factor. If they can effectively be hoarded or monopolized, they tend to centralize power. If not, power is more evenly dispersed.
Returning to the earlier example, the European powers enjoyed a monopoly on machine guns in the late 19th century, which allowed them dramatically expand their colonial empires. Later in the 20th century, machine guns became more widely available, and they were deployed to help free British colonies.
Advantages and disadvantages in the scale of violence
The scale of organization required to use predominant weapons is another crucial factor in determining the existence of a few large governments or many small ones. For example, nuclear weapons require more people and more organizations to use than machine guns.
Relatively cheap weapons that can be employed by nonprofessionals enhance the importance of the infantry. This tends to equalize power. Nuclear weapons, which nonprofessionals cannot easily employ, have had the opposite effect.
Returns to Violence
When there are increasing returns to violence, it is more rewarding to operate governments at a larger scale. Therefore, governments tend to get bigger. When there isn’t much to gain, such as in hunter-gather societies, there is little reason to consolidate violence and, therefore, little reason to govern. ← This is also directly relevant to cryptocurrencies, but the outcome is much less clear. Theoretically, cryptocurrencies allow for cold storage and peer-to-peer exchange. These attributes should make them impossible to confiscate. Here is an example. The issue, in that case, is that the government did not stop him for the sake of confiscating his money. But(!), they could not do so when they tried. So, he is in jail but still rich. ← This also hints at another issue with the Sovereign Individual. Namely, governments operate for reasons other than accumulating capital.
Economies of scale and production
Another important factor of technology is the ability of significant private companies (non-violent organizations) to scale. If companies are large and located in one place, it is significantly easier for governments to protect and earn substantial profits from taxation. Under such conditions, the entire world economy usually functions more effectively with one supreme world power, as the British Empire did in the 19th century.
Conversely, if companies are smaller, more numerous, and spread out, it is more difficult for the government to protect and extract payment. So, a few large companies lead to large governments, and many small companies lead to smaller governments.
The speed of megapolitical change
It's essential to recognize that mega political variables mutate at dramatically different speeds.
Typography, for example, has been fixed throughout (almost) the entire record recorded history. Climate fluctuates more actively than topography but less frequently than technology. The rate of change in the influence of microbes on the exercise of power is more of a puzzle. Microbes mutate very quickly but are benign for long periods of time.
From the end of the fifth century to the last quarter of the 20th, the impact of microbes on industrial society was ever more benign, improving public health and the advent of vaccinations and antidotes generally reduce the importance of infectious microbes during the modern period. This increases the relative importance of technology in setting the boundaries where power is exercised.
However, the recent emergence of AIDS and alarms over the potential spread of exotic viruses hints that microbes' role may not be altogether as megapolitically benign in the future as it has been over the past 500 years. With this in mind, the eruption of a viral pandemic is the most likely variable to disrupt the megapolitical predominance of technology. ← Relevant
Chapter Four: The Last Days of Politics
This chapter examines the effect of technology on warfare and, in turn, the effect of warfare on governance. The authors examine the technological catalysts that led to the collapse of the church and feudalism in hopes that they will provide foresight into the future effects of modern technological changes.
Politics — (according to Davidson and Rees-Mogg) the preoccupation with controlling and rationalizing the power of the state ← Obviously, this definition differs significantly from Aristotle and other ancients. Of the moderns, I’ve only read closely Machiavelli and Weber, and the definition above seems to fit well with Weber, especially. It’s a particularly nihilistic approach.
The Gunpowder Revolution
Feudal oaths emerged when defensive technology (castles, moats) was essential and sovereignties were fragmented (the top monarch had to draw support from those below them, who drew from those below them, and so on).
Fragmented authority meant wars were not fought by governments or nations but by groups tied together by complex feudal agreements. These agreements were enforced by social convention, where the knights fought to maintain their honor. ← Conventions like this take a long time to change.
Feudal Contract — the lord had the duty to provide the land for his vassal, to protect him, and to do him justice in his court. In return, the lord had the right to demand the services attached to the land (military, judicial, administrative) and a right to various “incomes” known as feudal incidents.
Gunpowder weapons separated the exercise of power from physical strength so that money was the ultimate form of power (rather than physical prowess). The weapons also meant no individual or small group could exercise military power independently—they made warfare more costly, so fewer could engage in it. By establishing money as the dominant form of power and limiting the number of potential aggressors, gunpowder weapons changed the style of warfare so that feudal agreements were no longer productive. In turn, this changed society's structure.
Society ultimately found a new balance under nation-states, which enforced agreements through citizenship. As no individual could defend themselves against military power, the state would take large amounts of capital in return for protecting its citizens.
As citizenship emerged because no individual (or small group of individuals) could exercise military power independently, it will disappear when this is no longer true. In the 21st century, we are beginning to see this shift. The most prominent examples include Al Qaeda and disinformation warfare.
The Printing Press
All the while, the printing press accelerated the timeline detailed above. As the gunpowder revolution declared war on feudalism physically (by increasing the cost of war), the printing press did so ideologically (by lowering the cost of knowledge). This rapidly undermined the church’s monopoly on god and truth, in a very similar way that social media affects legacy media today.
Defund the Church
The industrial revolution meant more goods could be produced, and therefore, more goods could be bought and sold. This created investment opportunities that made donating to the church ever more costly. People were more reluctant to give away money that could earn so much more elsewhere.
The church was also a drain on economic progress through irrationality, unproductive use of capital, and time commitment. The church took money through simple taxation, guilt (referring to those who saved money as ‘misers’ or encouraging the buying of expensive but unproductive relics), and arbitrary regulations, among other things. They also were a significant burden on time, as holy days and continued to increase.
When the traditional church declined to downsize, the Protestants took advantage by offering more realistic rules–the church lost its monopoly.
To keep up with its massive bureaucratic load, the church did everything it could to increase revenue. This effort included arbitrary bans on meat (to force buying from church-owned fisheries) and declaring it sinful to use lower grade aluminum (a competitor to the church-issued textiles).
As you can imagine, these regulations made it difficult for merchants. And, the power to regulate arbitrarily is also the power to sell exceptions from these rules. So, the church would turn around and sell exceptions from the arbitrary rules they just made.
These excessive regulations came during significant hypocrisy from church leaders, who frequently produced bastard children while preaching the abstinent word of God. With all this in mind, it makes sense that people hated them. Part of the reason people considered the church corrupt is that it was true.
Disdain as an indicator of change
Davidson and Rees-Mogg argue that mass disdain for their institutional leaders is an indicator of imminent change. There was immense disdain for church leaders before its collapse, and contempt for political leaders was emerging during the time of their writing, before an articulate rejection of politics as a whole. Years later, Trump, Brexit, and cryptocurrencies are the most poignant forms of this rejection.
Politics emerged to control the state.
Because the state could wage war, and gunpowder weapons made war infinitely more profitable, the gunpowder revolution meant controlling the state more important than ever before. Politics emerged after the gunpowder revolution to do just that—control the state. The state could, in turn, control violence, and therefore maintain the sharply increasing spoils of power.
People struggled to comprehend change then, as they do now.
Everything in medieval society was divided by status. The distinctions in society were nobility, clergy, and commoners. But, within commoners, they literally did not distinguish between a wealthy banker and a beggar. This mental inertia made it nearly impossible for even the best thinkers to comprehend the importance of commerce and merchants in the coming centuries.
Davidson and Rees-Mogg make a comparison to modernity:
“Their whole system of ideas was permeated by the fiction that chivalry rules the world. This has a close second in the contemporary assumption that it is ruled by votes and popularity contests.” The fact that saying so is striking and bordering on heresy suggests how divorced conventional thinking is from a realistic grasp of power dynamics in the late industrial society.”
Churchmen, who were the ideological guardians of medieval life, reinforced this blindness. We have similar ideological guardians in our legacy media and political institutions.
Chapter Five: The Life and Death of the Nation-State
As we saw in chapter four, gunpowder weapons sparked the transition from the feudal to industrial age by increasing the costs of violence. On the flip side, the simultaneous rise of commerce meant there were also increasing returns on violence. There were more goods and services and, therefore, more wealth to take by force.
Returns on violence — the amount gained from violent actions
War suddenly had higher stakes. It became more costly to enter and more profitable for the winner. Because so much could be gained from violence, groups began organizing themselves around the ability to enact it on a mass scale. The preoccupation with controlling and rationalizing the power of the state was now more important than ever. So, politics was born.
Politics — (according to Davidson and Rees-Mogg) the preoccupation with controlling and rationalizing the power of the state
Politics is concerned with vying for control of power as an individual. This chapter, however, examines strategies of governance—tactics employed by those already in power. It’s concerned with how groups organized themselves to maximize their ability to enact mass violence and reap the corresponding rewards. It examines welfare-state democracies, state socialism, and nationalism as the optimal strategies for accumulating resources to most effectively engage in mass violence.
Continuing the diagrams from the previous chapter:
The Industrial Age culminated in the mass organization of violent institutions, with the communist and democratic welfare states as the most effective organizational strategies. With that in mind, the next question is: What common characteristics of state socialism (USSR) and welfare-state democracies (United States) led them to be the final contenders for world domination?
State socialism and welfare-state democracies had the ability to enact the largest coercive means possible. More specifically, it mattered less how efficient (the ratio of output to input) a military was, and more how effective it was in total (total output). Essentially, only big governments with ever-greater command of resources could compete on the battlefield.
The communist countries could simply take all the resources from their people, but the welfare states were able to incentivize individuals to produce more by taking a percentage of their production and allowing them to keep the rest. This proved to be the better strategy. Remember, the United States essentially spent USSR out of commission. They simply had more resources.
The next question is: Why were these two forms of government able to extract the most resources? To answer this question, the authors describe the difference between a government controlled by employees vs a government controlled by customers.
The authors describe the incentive structure of a government controlled by employees as follows:
Governments controlled by employees tend to favor any policy that increases employment and oppose anything that reduces it.
A government controlled by its employees would seldom have incentives to either reduce the costs of government or the price charged to their customers.
If the government encounters strong price resistance (opposition to higher taxes), governments controlled by employees would be more likely to let their revenues fall below their expenses than to cut their expenses. In other words, their incentives imply that they may be inclined toward chronic deficits.
They compare employee-controlled governments to consumer-controlled governments, where the government offers its product (protection) in exchange for a fee (taxes). This essentially limits the government to a security force—a monopoly on violence and nothing else. Of course, this means everything else is done privately: roads, schools, regulation. In all likelihood, there would be no welfare.
For example, they describe a group of medieval merchant republics in Venice:
“There, a group of wholesale merchants who required protection effectively controlled the government for centuries. They were genuinely customers for the protection service government provided, not proprietors. They paid for the service. They did not seek to profit from their control of the government’s monopoly of violence. If some did, they were prevented from doing so by the other customers for long periods of time.”
Governments controlled by customers have the following incentives:
Reduce their operating costs as far as possible
To hold down the prices they charge.
Where customers rule, governments are lean and generally unobtrusive, with low operating costs, minimal employment, and low taxes.
For a government truly to be controlled by its customers, the customers must have options. It must be a competitive industry, and therefore moving from place to place must be feasible. The governments would still have a monopoly on violence in their given territory, but not a monopoly on customers willing to move territories. In 2021, the acceleration of remote work has made this all the more possible.
It is often assumed that democracies are controlled by customers (voters & taxpayers), but, in reality, democracies (& communist states) are controlled by employees. Democracies actually have few characteristics of governments controlled by customers.
Democratic governments typically spend only a fraction of their total expenditures on protection and do not accommodate those who actually pay the majority of the costs. Most democracies run chronic deficits, a policy characteristic of control by employees.
An employee-controlled democracy helps explain the difficulty of changing government policy. It also explains why those who pay do not set the terms of spending, and why prices bear little relation to costs. Not to mention, government quality of service is generally low compared to that of a private enterprise, and customer grievances are hard to remedy.
Returning to the original question: Governments controlled by employees can extract more resources than governments controlled by customers because they only need the permission of the employees (government workers) not the customers (tax-payers).
Under constant threat of mass violence, this actually means that governments controlled by customers cannot survive. They will constantly be overpowered by employee-controlled governments.
Nationalism was added as an accelerationist ideology, by lowering the costs of mobilizing military personnel by encouraging group identification with the interests of the state. Nationalism acted as a steroid in the sport of mass resource extraction for violence.
In sum, rising returns on violence led groups to organize themselves around the ability to engage in war on a mass scale. State socialism and welfare-state democracies had the ability to enact the largest coercive means possible because they are forms of government run by employees rather than customers. In turn, the two systems rose became the dominant forms of governance. Finally, just as increasing returns on violence meant the end of feudalism and the beginning of the industrial age, decreasing returns on violence means the end of the industrial age and the beginning of something different.
Chapter 6: The Megapolitics of the Information Age
Information technology (IT) shifts the balance between extortion and protection toward protection for the first time in generations.
Information technology — the study or use of systems (especially computers and telecommunications) for storing, retrieving, and sending information
As goods services move to cyberspace, individual actors have a greater ability to protect themselves and, if necessary, to retaliate. This development undermines the government’s monopoly on violence, which, in turn, has dramatic effects on the foundations of our society.
A Recent History of Violence
Historian Frederic Lane organized the history of post-dark-age economies into four stages. He separates each stage by its logic and organization of violence, varying in degrees of competition and monopoly.
It’s worth noting that when the only role of the government is protection, government surplus can be calculated quite simply:
Government Surplus = Taxes - Cost of Protection
Stage One: Anarchy and Plunder
During this time, the use of violence was highly competitive, which created significant obstacles to any scaling of power. This challenge meant defensive military strategy was more vital than offensive, as it was easier to defend goods than to take from others. In addition, this period coincided with adverse climate changes and, consequently, the falling productivity of agriculture. An inopportune climate and constant violence stifled economic activity.
Stage Two: Small Regional Monopolies
This second stage began when local warlords were able to establish small regional or provincial monopolies. As a result, agricultural production rose, and the recently inaugurated monopolists of violence collected most of the surplus.
At first, an inability to scale power (one government could rarely conquer another) still held down significant economic growth and kept the military costs of enforcing local monopolies high. But while the costs of protection remained expensive, these newly established governments could charge high prices (taxes) for their services. People could pay higher fees because economic activity expands when anarchy is controlled. There was simply more to go around (and to tax).
Later on, local warlords did what local merchants do when they need to increase market share: discounted their services to attract customers. Once they firmly established control, rulers began to enjoy more of the advantages of monopoly. Their military costs for policing fell, and they could also increase the price they charged without making their service less attractive to customers. In this transition stage, those who employ violence—the medieval lords and monarchs—took most of the surplus.
Stage Three: Privatization
This stage began when the merchants and landowners retained more of the surplus than the government. Since successful merchants are more likely to reinvest their profits than consume them, the higher earnings of merchants in that stage in history led to self-reinforcing growth.
Stage Four: Industrial Societies
The fourth stage began with the emergence of technological innovations, which quickly became more critical to earning profits than lowering protection costs. Moreover, as the scale of government rose, the government could finance operations besides the military, including business enterprises on a larger scale.
Technological advantages reduced the competition between jurisdictions and allowed governments to charge higher prices. When there were more significant technical gaps, entrepreneurs in the jurisdictions with the best technology tended to maintain more money, even though they paid higher taxes.
During the industrial period, the government’s protection was necessary and effective. Industrial companies had high capital costs and significant vulnerability to attack. Large-scale industrial firms would have been impossible in an environment with more competitive violence. The industrial society was able to succeed because governments maintained a level of order.
To articulate why the logic of violence from the industrial period no longer applies, the authors examine the megapolitical conditions that made coercion against businesses effective. They do so by addressing the two types of organizations that employed this coercion successfully: governments and unions.
Governments and Unions
Conditions for effective labor unions
Union strikes are most effective when large amounts of capital can be claimed for ransom by employees to extort their employers for higher than market wages. The capital can be physical, productive capital (machinery used in assembly lines) or, in some cases, human capital (employees refusing to work). In this chapter, the authors focus on physical capital.
Most industrial processes were tied to natural resources and therefore set in one location. Assembly lines required large amounts of workers and relatively few capitalists and managers. So, the capital stayed in one place surrounded by many more workers willing to steal than those able to defend. Thus, extortion was easier than protection.
As we move towards the information age, unions have become less effective in two ways: (1) The capital is movable and often located in cyberspace. It is, therefore, less easy to claim. (2) In most industries, there are fewer workers per company and more companies in total. It's easier for many workers to extort a few companies than fewer workers to extort many companies.
The Union as the Government’s Counterpart
The authors argue that the union is the government's counterpart, as both use coercion to extract resources at higher than market value (wages and taxes, respectively).
In the same way that industrial megapolitical conditions favored unions, they also favored governments. The single location was also favorable to governments. Large-scale industrial employment made a broadly based income tax practical. Tax collectors could coordinate with the accounting departments of each industrial firm, taking wages at the source. Industrial technology made taxation more routinized, more predictable, and less dangerous for collectors.
The same shift in megapolitics conditions that hurt unions will also hurt governments. As technology begins to favor protection over extortion, it will make government coercion (tax collection) less effective (or, at least, more difficult).
This prediction is one they nailed on the head, primarily due to two different megapolitical shifts: (1) Encryption technologies (cryptocurrencies), when appropriately used, have proven themselves to be beyond the government's ability to extract. (2) Remote work makes it significantly easier to move when unhappy with certain political conditions.
The change means that governments, like unions, will soon lose their ability to coerce their customers into paying higher than market fees.
A fifth stage in the history of violence
The fifth stage begins in cyberspace. In the same way that governments have never established stable monopolies of coercion over the open sea, the authors predicted governments would struggle to establish a monopoly over territory with no physical existence at all.
This prediction has been accurate with some exceptions, especially in countries willing to curtail human rights directly (i.e., China).
The primary role of government is to protect against violence, both external (war) and internal (policing). Protection against violence assures life and property rights, which allows an economy to function. In the past, when no single violent entity could establish a monopoly, the results were anarchy and plunder. Military costs were high and economic returns were low. People suffered immensely.
However, our future is not nearly as bleak. Microprocessing has profoundly altered the logic of violence. Information technology creates new assets entirely outside the realm of any government’s territorial monopoly on violence. Think of it this way: In the past, people had to pay for protection or risk attack at all times. This risk is absent in cyberspace. Even without computer security, you are not at constant risk of death or losing everything you own. Today, a government’s inability to monopolize cyberspace implies lower military costs and higher economic returns.
Inevitably, government protection of a large part of the world will be redundant. As the government will be less necessary, its relative price is likely to fall. But there are other reasons too. Individuals will also have a choice of jurisdictions. This possibility creates intense completion to price the government’s services (the taxes it charges) on a nonmonopolistic basis. The virtual corporation (or individual “digital nomads”) will pursue their income-earning activities in a jurisdiction that provides the best service at the lowest cost.
The redundancy of government protection and the ability to choose jurisdictions will drain the welfare state dry. With less ability to coerce, governments will earn less money. As they make less money, they will begin to break down. In this sense, violence and taxation are two sides of the same monopoly—if one disappears, the other automatically follows.
Governments will be forced to give customers what they want and only what they want. Or, the customers will find a jurisdiction that will. As a result, the competition governments must engage in is no longer just military, but also the quality and price of an economic service—genuine protection.
Government à la Carte
The authors predict that by breaking away from the tyranny of location, we will see that—as religions are not tied to a single location—governments need not be either. Their services will be offered to those who wish to use them, similar to products offered by a private company.
Historically, the government has acted as a “basket of goods,” where we cannot buy infrastructure without policing, or public education without regulation. It’s an all-in-one deal and always has been. However, this does not need to be the case in cyberspace. We can customize our citizenship à la carte. Just as nation-states today have incentives to host free ports and free-trade zones, they will also have incentives to lease their sovereignty.
Of course, traditional protection services are still needed. We must secure our assets in the world of bits and the world of atoms. This is a problem, as the free-market provision of police and justice service has not proven viable in the industrial period. When they were tried, they were overpowered and subjected to rule monopolized by outside groups.
Modern Violence and Virtual Warfare
This isn’t to say that governments will resign from using violence, just that they will gain less from it—violence is losing its leverage. It’s possible governments intensify their use of violence in local settings to compensate for their declining global significance, just as the church pursued unethical actions during its demise. All that is clear is that governments will be unable to saturate cyberspace with violence in the way they did in the modern world.
Governments could engage in information warfare, but they will find much of their current (1998) institutions ineffective. The dangers of information war will mostly be dangers to large-scale industrial systems that operate with central command and control (leading to protection by decentralization). In this sense, attempts by nation-states to wage “information wars” to dominate or thwart access to cyberspace would probably only accelerate their demise.
Again, this has largely been true with the exception of China.
An act of cyberwarfare could close down a telephone station, disrupt air traffic control, or sabotage a pumping system that regulates the flow of water to a city. It could even turn off the segments of the electric grid. This is all beyond the government’s capacity to stifle, much less monopolize.
The age of the Sovereign Individual is not merely a slogan. In virtual warfare, magnitude does not carry the importance that we currently understand. All that matters is whether the program functions, not how many people worked on it. This may genuinely allow individuals to loom as large or larger than states. Cybertechnology puts individuals at a lesser disadvantage in confronting large groups than they face in the realm of explosives and missiles.
Chapter 7: Transcending Locality
The chapter begins by examining a 1990s metaphor for the internet: The Information Superhighway. The metaphor betrays a subtle but common misunderstanding of the cybereconomy, and this misconception sheds light on the magnitude of the change created by the internet.
Highways are a physical transit of people and goods, connecting two locations in the physical world. The internet does not transport information from one point to another. Instead, it transcends locality. It allows the instantaneous sharing of data everywhere and nowhere at once. The concept of transportation is irrelevant in cyberspace.
In the authors’ words, the superhighway metaphor “betrays the extent to which we were hostage to the tyranny of place. Even when technology enables us to transcend locality, the instrument of our deliverance is given a nickname describing it as a route from place to place.”
Until fairly recently, those who left their immediate area became overwhelmingly famous. For example, Marco Polo is still renowned for leaving Europe to visit the court of the Great Kahn, and Christopher Columbus is extraordinary enough to be remembered in every literate household for the better part of five centuries. Polo and Columbus were notable because they were the exceptions of their time.
More recently, individuals have moved around more freely, but societies (and therefore economies) remained in one place. This restriction kept the focus of human action narrow and local. Information technology divorces income-earning potential from location, breaking economies free from the tyranny of place.
Stages of the Cybereconomy
The effects of this newfound freedom will not be immediate. Instead, the authors predicted the cybereconomy would evolve through three stages:
The internet serves as an information medium to facilitate what are otherwise ordinary industrial-era transactions.
Internet commerce will employ information technology in ways that would have been impossible in the industrial age. (i.e., long-distance accounting or medical diagnoses).
True cyber commerce.
True cyber commerce means: (1) Not only will transactions occur over the net, but they will migrate outside the jurisdiction of nation-states. (2) Participants will render payment in cyber currency, (3) profits will be booked in cyberbanks, and (4) many transactions will not be subject to taxation.
Cryptocurrencies
True cybercommerce begins with the creation of an internet-based, denationalized form of currency. This, of course, has come true. We know them as cryptocurrencies. The authors refer to this technology as “cybercash,” but otherwise, the accuracy of their predictions is remarkable.
When money backed by the state is the only approved currency, the chances of amassing capital in opposition to or independent of the state machinery becomes difficult. Cryptocurrency means this is no longer true. Instead, it resets the odds, reducing the nation-states’ ability to determine who accumulates large sums of capital.
True cybercommerce has immense megapolitical consequences, beginning with the end of inflation and the toppling of the financial system. Both rapidly accelerate the fall of the nation-state.
Inflation as a Tax
The purchasing power of one dollar is tied to its proportion to the total dollars in circulation.
For example, if there are 100 dollars in circulation, that dollar can buy 1/100th of the goods in the economy. If there are 1000 dollars in circulation, that dollar can buy 1/1000ths of the goods in the economy. So, as governments print more money, they reduce the value of the money in the market. Simple enough.
The question remains: Where does that value go? To the people who printed the money, of course. With this in mind, government-produced inflation can be interpreted in two ways. (1) It is a transaction fee for the service of conveniently maintaining wealth, or (2) it acts as an additional tax on savers, by removing the value from the saver’s money and adding it to the government’s money.
In the 20th century, higher military expenditures required more aggressive efforts to confiscate wealth. Through inflation, governments could impose an additional, more subtle wealth tax on all who held their currencies.
The Death of Inflation
As money becomes competitive, any currency that doesn’t maintain its value will quickly lose its customers. This competition means that cryptocurrency hold(dl)ers can be effectively liberated from inflation. It's hard to overstate the importance of that.
Currency depreciation is not unavoidable. To the contrary. The technical challenge is trivial: don’t print more money. As the best nationalized currencies lost nearly three-quarters of their value, the purchasing power of gold rose.
Currencies linked to gold have maintained their purchasing power, especially during relative peacetime. For example, although only weakly linked to gold, the value of the British pound rose during the 19th century. 21st-century technology means monetary policymakers can do this even more effectively. Cryptocurrencies make feasible not a weak link, like the gold standard, but a strong link, reinforced for the first time by computational resources.
If a competitive currency market extinguished the disguised profits of issuing money, currency issuers would need a new, more explicit payment method to compensate for their service. Therefore, the new monetary system will probably involve a more direct transaction cost, perhaps a fee on the order of 1 percent per annum. This cost, of course, is what cryptocurrency users now know as gas fees.
Competitive Governance → The Ability to Opt-Out
Competitive monetary systems mean people will have the ability to opt out of their territorial government. They can do so by working in the information economy, through remote work and internet currency without jurisdiction. When technology makes this lifestyle feasible, anyone who pays income taxes at rates currently imposed will be doing so out of choice. The authors expect the incentives to make this choice will be overwhelming.
Assuming you could realize a 10 percent return on your capital, each $5,000 of annual payments paid over forty years slashes your net worth by $2.2 million. At a 20 percent return, the compound lost balloons to about $44 million. They argue people should be acting to save this money, but most aren’t. Currently (July 2021), social norms and inertia have held back non-billionaires from using tax havens. That, of course, could change in a hurry.
If riches aren’t enough to compel exit, bankruptcy will be.
In the few times governments have been constrained by competition, governments were weak, and technologies were similar between jurisdictions. Profitability will once again be determined not so much by technological advantage as merchants' success in minimizing the costs paid for protection. The medieval merchant paying twenty tolls to bring his goods to market could not compete with a merchant paying four tolls to deliver the same. Similar conditions will return.
The ability to easily opt-out means that any government that insists upon lumbering its citizens with heavy taxes will assure that profits and wealth gravity someplace else. Therefore, the failure to curtail taxes will be self-correcting. Governments that tax too much will simply make residence anywhere within their domain a bankrupting liability.
This prediction is happening now with the mass migration of Silicon Valley to Austin and Miami.
The Ability to Opt-Out → The Loss of Tax Revenue
As customers choose to operate entirely in cyberspace, governments will begin to lose revenue. At this stage, cyber commerce will begin to have some significant mega-political consequences outlined in previous chapters. In 2021, these effects are finally arriving.
Cryptocurrencies will place a large and growing portion of the world’s wealth outside of the reach of governments. This will reduce costs allocated to transit duties, tribute, and simple extortion.
Territorial governments can still threaten personal harm or, perhaps, even hold the wealthy to outright ransom. They can still enforce the collection of consumption taxes. Yet protection, the most essential service governments provide, will be put on a more nearly competitive basis. This competitive market means less of the cost paid for security can be seized and reallocated by political authorities.
The Loss of Tax Revenue → The Nation-State’s Loss of Power
In the past, megapolitical conditions have been associated with changes in the character of money.
The introduction of coinage helped launch the five-hundred-year cycle of expansion in the ancient economy that culminated with the birth of Christ and the lowest interest rates before the modern period.
The advent of the Dark Ages coincided with the virtual closure of the mints. While Roman coinage continued to circulate, quantities of money dwindled along with trade in a self-reinforcing downward spiral.
The feudal revolution coincided with a reintroduction of money, coinage, and other devices for settling commercial transactions. In particular, a surge in European silver production facilitated an increase in coin circulation that helped lubricate commerce.
At the beginning of the industrial period, the early-modern state asserted its power over money and came to rely heavily upon the signature technology of industrialism, the printing press. The printing press has been widely used by governments in the modern period to mass-produce paper money.
Paper money, which would have been impractical before the printing press, contributed significantly to the state's power. When paper money backed by the state becomes the only approved currency, the chances of amassing capital in opposition to or independent of the state machinery becomes extremely difficult. This power is lost when paper money backed by the state is no longer the only approved currency.
The Nation-State’s Loss of Power → Significant Social Side Effects
The destruction of our current financial system will have profoundly unpleasant social side effects. Western governments will face sharp drops in revenue from taxation and the virtual elimination of leverage in the monetary system. At the same time, they will retain the unfunded liabilities, and inflated social spending inherited from the industrial era.
The economic consequence of this transition crisis will probably include:
A one-time spike in real interest rates. Debtors will be squeezed as long-term liabilities contracted under the old system are liquidated, and concessionary credits dry up.
The price of gold will probably rise significantly relative to other commodities, no matter which of the alternative government policies predominates. Why? The real price of gold almost always rises in deflation. A deflation, after all, reflects a shortage of liquidity. Gold is the ultimate form of liquidity.
Lower interest rates in the long term. The after-tax returns to savers will sharply increase as resources escape the grasp of governments. Dramatic improvements in the efficiency of resource use, and the liberation of capital to find the highest returns globally, should rapidly compensate for the output lost early in the transition crisis.
Governments facing serious competition to their currency monopolies will probably seek to:
Underprice the for-fee cyber currencies by tightening credits and offering savers higher real yields on cash balances in national currencies.
Remonetize gold as another expedient to meet competition from private currencies. They will reason that they could gain higher seigniorage profits from a loosely controlled nineteenth-century gold standard than would be the case if they allowed their national currency to be displaced entirely by commercial cybermoney.
Of course, not all governments will respond in the same manner.
Significant Social Side Effects ≠ Economic Collapse
Many (including myself) fear the breakdown of income redistribution in the leading nation-states would doom the world to economic collapse. The authors disagree. They argue that governments waste resources on a large scale, and wasting resources makes you poor.
As Lane said, “I would like to suggest the most weighty factor in a period of growth, if any single factor has been most important, has been a reduction in the proportion of resources devoted to war and police.”
In the final decades of the 20th century, it was not uncommon for any government to receive substantially negative returns on its investments. For the first time in history, megapolitical conditions will allow the ablest investors and entrepreneurs control over capital rather than specialists in violence. It is not unreasonable to expect that the rates of return on the dispersed, market-driven investment could double or triple the meager returns from the politically driven budget allocations of the nation-state era.
Tens of billions, then ultimately hundreds of billions of dollars will be controlled by hundreds of thousands, then millions of Sovereign Individuals. A dramatic improvement in resource use efficiency will arise when governments historically engrossed by governments are controlled instead by persons of “genuine talent.” These new stewards of the world’s wealth are likely to prove far abler than politicians in utilizing resources and deploying investment.
