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06 November 2017

How Software is Eating the World and Reprogramming Democracy

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Democracy, the government of the majority typically through elected representatives, is undergoing a major crisis. Human societies have experimented with democracy since at least the fifth century BC in the polis of Athens. Whether democracy is scalable is an open question that could help understand the current mistrust in democratic institutions and the rise of populism. The majority rule is a powerful narrative that is fed every few years with elections. In Against elections, the cultural historian Van Reybrouck claims that elections were never meant to make democracy possible, rather the opposite, it was a tool designed for those in power to prevent “the rule of the mob”. Elections created a new elite and power remained in the hands of a minority, but this time endowed with democratic legitimacy.

Van Reybrouck claims that elections were never meant to make democracy possible, rather the opposite, it was a tool designed for those in power to prevent “the rule of the mob” /Image: Arnaud Jaegers

While it is unquestionably true that the universal suffrage has been entirely accomplished (black male suffrage was amended in the US as late as 1920 and only one nation in the world (Finland) allowed women to vote in 1906) if one pays attention to the immense role of political donors, the wealthy minority still rules. There are historical precedents that show the power of the minority (not necessarily wealthy) to impose its own thinking against a more heterogeneous majority. For example, as pointed out by Taleb, early christians ended up imposing themselves over more numerous but less recalcitrant religious groups. A more recent event that supports this view point is tax evasion laws. The European council, at the time lead by Mario Monti, established that tax avoidance is a competition issue which means that it is subject to the unanimity rule in the council. In practical terms, this entails that one member of the council, let us say Ireland, can simply use the veto to block any changes that could undermine the interest of, for example, Apple’s Irish subsidiaries.

Capitalism and democracy: the rupture of the binomial

The 2008 financial crisis have changed the perception of, the once taken for granted, complementary nature of democracy and capitalism. The belief that capitalism and democracy go hand by hand is not credible anymore. The concept of nation is a fiction in need of a continuous stock of intergenerational believers. The nation state successfully assimilated heterogeneous groups of people under a common language and shared cultural values. But this seems today a rather fragile foundation to resist the centrifugal forces that financial capitalism impinges upon the social fabric.

Financial capitalism raises wealth inequality and curbs the power of elected representatives in democracies. The hallmarks of financial capitalism are decentralisation, speed and informational efficiency. Parliamentary democracy, on the contrary, carries over the inertia of command and control bureaucracies and loyalty to worn out historical myths (eg. the nation). The current wave of nationalism and populism, if anything proves that human beings starve for control and understanding via narratives that speak to them.

Market capitalism has the upper hand over politics

This is by design because today’s democratic governance can’t possibly keep pace with the speed and complexity of financial transactions. The ideology that politics can and must tame financial capitalism is naive and to a greater extent delusional. Along these lines social theorist refer to “time and space social compression”“empire of speed” or “desynchromization”. The idea of desynchronization is particularly worth mentioning. The faster the system is the less predictable it becomes, because it will less rarely repeat itself (desynchronized). If financial capitalism had to impersonated it would be a playboy with a strenuous life style; his past is a bad predictor of his future. Democratic governance, on the other hand, would be a priest in rural Spain who tends to follow the same pattern, history repeats itself (synchronized).

The fundamental problem of modern financial systems is that they are non self-regulating systems and left to their own devices will inevitably create debt in excessive quantities. Adair Turner convincingly argues that financial stability in modern economies lies in the intersection between the infinite capacity of banks to create new credit, money, and purchasing power, and the scarce supply of irreproducible urban land. The commonly held idea that banks are places where people gather together and bring money so that banks can lend that money to someone else, for example, business owners, is plain wrong. Banks do not intermediate already existing money, but create money and purchasing power which did not previously exist. Bundesbank economists have taken the time to give an accessible explanation of how banks can create book money just by making an accounting entry.

An industrial mechanism in the digital age

Nation states will not collapse over night, but they are an industrial era device in a digital world. To do not fall into obsolescence they will need to change their operative system. Since the venture capitalist Marc Andreessen coined the phrase “software is eating the world” the logic of financial capitalism has accelerated this trend. Five software companies: Facebook, Apple, Amazon, Netflix and Google parent Alphabet (FANG) equal more than 10 per cent percent of the S&P 500 cap. Todays dominant industries in entertainment, retail, telecom, marketing companies and others are software companies. Software is also taking a bigger share in industries that traditionally exist in the physical space like automakers and energy. Education and health care have shown more resistance to software-based entrepreneurial change but a very profound transformation is underway. This is already visible with the growing popularity of MOOCs and personalized health monitoring systems.

Software-based business not only have up trending market share but more importantly, software can reprogram the world. The internet of things will allow to have full connectivity of smart devices in an economy with massive deflationary costs in computing. Computing might even become free. This has profound consequences for business, industry and most importantly, for how citizens want to organize society and governance.

The most promising technological innovation in years is the blockchain technology, an encrypted and distributed ledger system. Blockchain is an universal and freely accessible repository of documents including property and insurance contracts, publicly auditable, and resistant to special group interests manipulation and corruption. New kinds of governance models and services could be tested and implemented using the blockchain. The time is ripe for fundamental software-based transformation in governance. Democracy and free society will ignore this at its own peril.


Jaime Gómez Ramírez

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