BY JOHN MAULDIN
This year at SIC 2018, Niall Ferguson gave us some insights into the economy from his latest book, The Square and the Tower.
Niall’s book is about hierarchy and networks. Squares are where people meet and mingle. They are the source of creativity, invention, and innovation. Towers, on the other hand, are where power resides—“hierarchical structured power,” as Niall calls it.
The great tension in human history is between those two, the squares and the towers—and technology has increased that tension.
The Network Effect That Triggered the 2008 Financial Crisis
Rising tensions have all kinds of implications, but the most obvious were the 2016 political changes: populist uprisings in many countries, Brexit in the UK, and Trump’s election in the US.
Would those have happened without the new networks Facebook and Twitter? Probably, but not as quickly. The process is continuing, too.
Niall pointed out something critical about networks: They are profoundly unequal. Networks may connect us all, but not in the same ways. Here’s Niall from the SIC transcript:
Networks are inegalitarian in two ways. The structure of the network is inegalitarian because of preferential attachment. When new people join a network, they want to be connected to the most connected nodes. Secondly, once networks become economic propositions run for profit, it’s winner takes all. And that is why five of the eight richest men in the world today are rich because of network economics.
He then showed a slide of those five men: Bill Gates, Jeff Bezos, Mark Zuckerberg, Larry Ellison, and Michael Bloomberg. In different ways, they all saw and exploited the value of connecting people via technology.
This network revolution had a dark side though, and we saw that dark side manifest in 2008. Here’s Niall again.
The financial crisis, I think, needs to be understood as a colossal network outage. Very few central bankers understood the extent to which the international financial system had become a giant network. I think regulators and legislators underestimated the fragility of the system in 2008. They failed to see that a single node, a single investment bank that nobody regarded as pivotal to the system was in fact very important. And when Lehman failed, the system, the entire global credit system… you remember? I remember… threatened to collapse completely. Andrew Haldane, chief economist at the Bank of England now, is one of the few central bankers who think about this, and indeed this slide was taken from a deck that he did in 2011.
The way I see it is that since 2008 the rest of us have basically caught on with where the financial world was 10 years ago. Initially it was only the financial world that was networked to the max because it was still quite expensive to be networked 10 years ago. But with the advance of giant platforms like Facebook offering zero-cost networking, all of us are now as connected as only investment bankers were a decade ago.
This is happening in literally hundreds of industries.
These ubiquitous connections were supposed to empower everyone. Instead, they empowered those who owned and controlled the networks. A handful of “platform” companies essentially gained the ability to micromanage the village square. They control what information each person could see and hear.
The Backlash Tide Is Rising
In fairly short order, the FAANG companies leveraged that ability to dominate the global economy. Amazon is in a sense eating retail sales by making price discovery much easier. You can compare prices simply by running your phone over a barcode while you shop in a store.
Similarly, Google and Facebook are eating advertising. Apple, Netflix, and their kin are eating leisure time. Our already weak form of capitalism has turned as monopolistic as it was in the Gilded Age more than a century ago. It wasn’t supposed to happen that way, but it did.
So now those companies face a worsening backlash.
Evidence increasingly suggests that Facebook’s data trove affected election results more than previously understood. Whether that was spontaneous or planned isn’t yet clear. But many Facebook users and, more importantly, advertisers aren’t happy about it.
To be clear, I am not talking about Russian use of Facebook or Twitter. Whatever they spent pales in comparison with what the candidates themselves spent, plus their surrogates and other groups.
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