Individuals
A book summary of The Sovereign Individual
Perhaps every generation thinks they live at an exciting time, and perhaps we all do. Indeed, there's been a lot of change in the last two hundred years. Carlota Perez's Technological Revolutions and Financial Capital (summarised here and here) lays out five technological revolutions:
The Industrial Revolution began in Great Britain in 1771, with the opening of Arkwright's mill in Cromford
The Age of Steam and Railways began in the United Kingdom in 1829, with the test of the 'Rocket' steam engine for the Liverpool-Manchester railway
The Age of Steel, Electricity and Heavy Engineering began in the United States in 1875, with the opening of the Carnegie Bessemer steel plant in Pittsburgh, Pennsylvania
The Age of Oil, the Automobile, and Mass Production began in the United States in 1908, with the production of the first Ford Model-T in Detroit, Michigan
The Age of Information and Telecommunications began in the United States in 1971, with the announcement of the Intel microprocessor in Santa Clara, California
Each, according to Perez, has an era of installation (which is Venture Capital (or similar) funded, high growth, and disruptive), and an era of deployment (which is financed by production capital, expansive and sustaining). Perez coins the phrase 'Techno-Economic Paradigm' (TEP): Each of the above is a TEP, and each TEP has a cycle:
some critical factor of production suddenly becoming very cheap,
some new infrastructure being built,
a laissez-faire period of wrenching innovation followed by a bubble,
a post-bubble recession,
a re-assertion of institutional authority, and then
a period of consolidation and widespread of the gains in productivity from using the new technology.
To have been alive through any of the above 'Ages' is to have seen system-wide changes in how the world works. We are living through one now: the Age of Information.
Perez believes that the Information Age is in its deployment phase. That is, we see the globalisation of existing technologies but not the step-change in technological capability (think how TikTok has been less disruptive than the iPhone). This is an interesting take.
However, there may be more enormous changes afoot: megapolitical changes. I recently read The Sovereign Individual by James Dale Davidson and Lord William Rees-Mogg (from hereon called D&RM). This book, while generally quite hard to read, is powerful. The book's revelations, once read, cannot be unseen. As such, I thought I'd pen out some of its most hard-hitting points in the context of today and recommend you grab a copy. This summary is incomplete, but I hope it gives a flavour of their interesting hypothesis.
Published (way-back) in 1995, the book is weirdly prescient. It's interesting to read today, because the concepts that are discussed are no longer hypothetical. For one, Bitcoin is the currency of a nation.
"The universe rewards us for understanding it and punishes us for not understanding it. When we understand the universe, our plans work and we feel good. Conversely, if we try to fly by jumping off a cliff and flapping our arms the universe will kill us." —JACK COHEN AND IAN STEWART
As a guiding principle as to 'why' D&RM write The Sovereign Individual, the above quote, which is included in the book, says it all. The authors seek to understand the future (or predict it), so it doesn't kill us or impede our family planning.
Impermanence
I am often struck by how permanent today's institutions seem. The Sovereign Individual works hard to point out they are transient. The fall of the Holy Roman Empire, the subsequent decline of the Catholic Church, and even more recently, the fall of the British Empire (as recently as 1913, it controlled 23 per cent of the world population) are similar events from which D&RM say we can learn from. Each is very recent in the 10,000 years of human post-agricultural history.
'Every social order incorporates among its key taboos the notion that people living in it should not think about how it will end and what rules may prevail in the new system that takes its place. Implicitly, whatever system exists is the last or the only system that will ever exist.'
Until reading this book, I failed to truly consider that the megapolitical status quo of China and America (economically) leading the world is not the end-state for civilisation. D&RM go further: 'even transitions that are undeniably real in retrospect may not be acknowledged for decades or even centuries after they happen.' Implicit here is that changes (such as the collapse of the nation-state, as we know today) are already be irreversibly underway. This means that 'Most books about the future are really books about the present.'
Importantly, what we want to happen rarely does say D&RM: 'If you think about it carefully, it should be obvious that important transitions in history seldom are driven primarily by human wishes.'
So when do these transitions begin? D&RM suggest that: 'Incomes are usually falling when a major transition begins, often because a society has rendered itself crisis-prone by marginalising resources due to population pressures.' In previous eras, the book notes that 'The plunge in real income caused by crop failures and lower yields played a significant role in both instances in destroying the predominant institutions.' Today (2021), we see a stagnation in real income in the US. 'Middle-class wages are stagnant—Middle-wage workers' hourly wage is up 6% since 1979, low-wage workers' wages are down 5%, while those with very high wages saw a 41% increase.' The stats may induce fearful apprehension about what change is coming.
In light of this impermanence, D&RM predict a new world order centred around a Sovereign Individual and a decline in the power of the nation-state (the role of which we will come on to discuss).
Sovereignty
Concerning ideology, the book, and D&RM, is unequivocally beyond-libertarian. It describes a libertarian world, where there is only minimal state intervention in the free market and the private lives of citizens. I say 'beyond' because even the future state itself is subject to those same markets forces. Perhaps it's Randian, believing that the free market is the cure of all of societies ills.
Bad governance, D&RM says, can be remedied by opening every nook of democratic institutions up to market forces. D&RM's heavy criticism of the welfare state (which they say is bloated beyond repair) contrasts with the utopia of their merchant run city-states, which live harmoniously and compete for customers.
And by customers, D&RM mean individuals. At the core, a Sovereign Individual is a customer, not a citizen, of a state. If the individual doesn't like the service or believes it represents poor value for money, they will move their life and business to another jurisdiction. Technology enables this.
'For the first time, those who can educate and motivate themselves will be almost entirely free to invent their own work and realise the full benefits of their own productivity. … Governments will ultimately have little choice but to treat populations in territories they serve more like customers, and less in the way that organised criminals treat the victims of a shakedown racket.'
The authors note that 'From the advent of farming until recent generations, life was characterised by its immobility.' For many people today, this is no longer true. Case in point, I am writing from Nairobi. They cite Milton Friedman: "It is today possible, to a greater extent than at any time in the world's history, for a company to locate anywhere, to use resources from anywhere to produce a product that can be sold anywhere."
D&RM predict that 'The Sovereign Individuals of the Information Age, like the gods of ancient and primitive myths, will in due course enjoy a kind of "diplomatic immunity" from most of the political woes that have beset mortal human beings in most times and places.' This is quite a story—but perhaps it's always been (to a lesser extent) true. Today, the very wealthy harbour their wealth in Jersey, Gibraltar, or the Seychelles. D&RM say the future legal home of the Sovereign Individuals will be 'cyberspace' (remember, this is written in '95). The modern term is crypto or Web3. They say this is 'the ultimate offshore jurisdiction. An economy with no taxes. Bermuda in the sky with diamonds.' It already is.
Nations
It's a neat 200 year period between the French Revolution, in 1789, and the fall of the Berlin Wall. The French Revolution represents, according to the D&RM, the dawn of nation-states. Two centuries on, the fall of the Berlin Wall was the beginning of the collapse of the concept of them. D&RM go on: 'In the modern sense of the term, national consciousness has only existed since the French Revolution, since the time when in 1789 the Constituent Assembly equated the people of France with the French nation.'
But where did the nation come from? Nations followed from religions: 'We used to assume that religions should have their own territory or 'turf.' As nations replaced universal religions as the sovereign arbiters of life and death, the 'compactness' and 'boundedness' of religion gave way to our now familiar intermingling of believers in the same area.' The authors expand:
'…the democratic nation-state succeeded during the past two centuries for these hidden reasons: There were rising returns to violence that made magnitude of force more important than efficiency as a governing principle. Incomes rose sufficiently above subsistence that it became possible for the state to collect large amounts of total resources without having to negotiate with powerful magnates who were capable of resisting. Democracy proved sufficiently compatible with the operation of free markets to be conducive to the generation of increasing amounts of wealth.'
The fall of the Berlin Wall represents the collapse of Communism—and (so I've been socialised to believe) the victory of Capitalism. Nevertheless, say D&RM, Capitalism (and democracy) as we know it is fatally flawed. They write, 'In terms of the Industrial Age, the two systems were indeed great opposites. But seen from the perspective of the Information Age, the two systems had more in common than you might suspect.' They expand: 'Far from assuring that the democratic welfare state will be a triumphant system, as has been widely assumed, [the collapse of Communism] was more like seeing that a fraternal twin has died of old age. The same megapolitical revolution that killed Communism is also likely to undermine and destroy democratic welfare states as we have known them in the twentieth century.'
This is because 'Democracy facilitated domination of government by its "employees," thereby assuring that it would be difficult to curtail expenditures, including military expenditures.' The domination of government by its employees (which D&RM says includes the public sector and those who benefit from the welfare state) means that the system becomes bloated. There are no incentives for efficiency. D&RM quote Frederic C. Lane: 'Governments have become accustomed to imposing "protection services" that are … "of poor quality and outrageously overpriced."' Lane goes on (quoted): "When employees as a whole controlled, they had little interest in minimising the amounts exacted for protection and none in minimising that large part of costs represented by labor costs, by their own salaries. Maximising size was more to their taste also." This is the same with Capitalism and Communism, say the authors.
This 'bloating' was, for a time, tolerable because 'incomes were rising dramatically, particularly in the jurisdictions where most industrial development was confined.' However, as we noted earlier, this real income growth has evaporated.
All this is to say that the nation is a recent invention, and with it is nationalism. They say: 'nationalism was an invention that enabled a state to increase the scale at which it was militarily effective. Like politics itself, nationalism is mostly a modern invention.' Our disenchantment and apathy at the political sphere (see anything written on Trump and Johnson) confirm people's perspective on politicians today: derision.
Interestingly, there appears to be a rise in nationalism in recent years (again, ref. Trump and Brexit)—but perhaps it's less extreme than the nationalism felt at the peak of the industrial age. The nationalism we see today is, conceivably, a pushback against entrenched establishments—Trump is, perhaps, a symptom of the growing demand for change.
The book continues, quoting Taylor and Wacker. They
'see a powerful dynamic at work: The simple fact is that the larger sense of patriotism—a love of nation, a sense of filial duty to it—is not a particularly useful predisposition to have any longer.… Citizens who thrive in the global society will identify themselves globally. They will make political, social, and economic choices based not on national identity, but on how those choices relate to themselves directly and to people like them around the world.… Nations and corporations who thrive will organise themselves accordingly. They will maximise the freedom to know, to go, to do, and to be. Nations and corporations that don't, that continue to fight rear-guard actions based on nostalgia, will atrophy.'
The following paragraph explains the logic behind the hypothesis:
"access creates globalism, and globalism disrupts political systems by making the concept of borders obsolete. As borders disappear, the concept of taxation, which supports governments, becomes increasingly fragile.… As borders disappear, the concept of entitlement—the belief that because you were born in a particular place, you are entitled to the economic advantages associated with that place—falls apart, and as it falls apart, the perks of nationhood fall apart with it. And as all that happens, the ideals that underlie nationhood—patriotism, democracy, the state, the melting pot, unification, responsible participation, whatever they happen to be in whatever nation one is living in—get relegated to the junk heap of history."
Violence
The authors say that the ‘government's principal economic function from the perspective of those who pay the taxes is to provide protection of life and property'. In fact 'Protection of life and property is indeed a crucial need that has bedeviled every society that ever existed.' D&RM say that the state was protecting 'primarily industrial installations with high capital costs and significant vulnerability to attack.' Moreover, 'Industrial society as a whole was able to proceed because a certain kind of order was established and maintained. Enterprises were subject to regular, predictable shakedowns [taxation], rather than erratic violence.' The state has been effective in maintaining order, allowing industrialised nations to develop: For example, is safe for Tesla to invest millions (billions?) in a new factory in Austen, Texas.
More than anything else, the nation-state has a monopoly on violence. You and I can't hurt another, but the state (until recently) performed executions and still goes to war. Understanding the role of violence is central to understanding the rise of societies, our current nation-states, and Sovereign Individuals.
The authors explore the emergence of violence and complex society in great detail: 'Farming set humanity on an entirely new course. The first farmers truly planted the seeds of civilisation.'… 'no one would be content to toil through the whole growing season to produce a crop just to see someone else wander along and harvest what he produced. The idea of property emerged as an inevitable consequence of farming.' … 'Farming was an incubator of disputes. Farming created stationary capital on an extensive scale, raising the payoff from violence and dramatically increasing the challenge of protecting assets.' So, therefore: 'Wherever farming took root, violence emerged as a more important feature of social life.' But the ability to exercise violence changed as technology developed.
Technologies like the stirrup meant the capacity to exercise force was unequal, increasing returns to violence. Later, 'When gunpowder came along, it was impossible to be powerful without being rich.' D&RM comment: 'No one was writing in 1276 that "all men are created equal." At that time, in the most manifestly important sense, men were not equal. A single knight exercised far more brute force than dozens of peasants put together.' In the twentieth century, industrial economies, with industrial technology, went to war at an unprecedented scale. Charles Tilly (quoted by D&RM) notes: "[S]tates having the largest coercive means tended to win wars; efficiency (the ratio of output to input) came second to effectiveness (total output)." This contributed to the scaling-up of the nation-state, which—until recently—seemed unstoppable. Orwell's 1984 describes Oceania, Eurasia, and Eastasia as the world's superstates (written in 1949). This is a world where 'Cold War' type standoffs, or total war, reward the largest states.
However, D&RM have a contrasting proposition. In contrast to the bloody battles of the agricultural and industrial ages, the authors say: 'Wars of the next millennium will include some almost bloodless battles fought with computers.' Books (which I haven't read) like The Wires of War confirm their 1995 bloodless predictions. Lone hackers, not only nation-states, can effectively fight these wars. D&RM go on: 'Cybersoldiers could be deployed not merely by nation-states but by very small organisations, and even by individuals.'
As the authors have noted, and we have explored above, the state's role is to protect assets. To date, violence has been necessary to do this: armies and police forces are employed. Critically, a core tenet of cyberspace is cryptography, and security in this realm is based on simple math:
'What the computers show is that complex systems can be built and understood only from the bottom up. Multiplying prime numbers is simple. But disaggregating complexity by trying to decompose the product of large prime numbers is all but impossible. Kevin Kelly, editor of Wired, puts it this way: "To multiply several prime numbers into a larger product is easy; any elementary school kid can do it. But the world's supercomputers choke while trying to unravel a product into its simple primes."'
Cryptography is the basis of security in this new Information Age. This security, which is cheap to set-up (low energy) but unfeasibly expensive (energy-intensive) to break, is at the core of Bitcoins security. In the case of Bitcoin, it's tied to the real world via energy consumption under Proof of Work, but other on-chain protocols, such as Ethereum, are utilising Proof of Stake. (For more, read this by Vitalik Buterin).
This means that the returns to violence are astonishingly low. No matter how much war is waged, without access to private keys would block access from distributed assets. It is ineffective to pillage towns or seize assets when the assets themselves are cryptographically locked and distributed.
Crypto
A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they'll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone. (from the Bitcoin White Paper)
A friend of mine noted that the internet is as old as a cat. This is true (just about), and Web3 is as old as a kitten. Whereas Web2 gives its users read-write permissions (for example, Facebook and LinkedIn), Web3 gives read-write-own permissions. Users own the value they create (or invest) into the web. For instance, in the future, you will own and be able to paywall your blog posts. Similarly, you will own, in some way, the social networks that you use; and I will get paid for the attention I give to adverts.
How this will transform the FAANG oligopoly is hard to foresee. It seems likely that what is good for Apple, will also be good for America (same with the others). The government will attempt to slow the Web3 creep. Nevertheless, this read-write-own logic forms the basis of a new, decentralised cyber-economy beyond the reach of state actors.
Bitcoin is the flagship technology in this space, which is why I've included the abstract from the Bitcoin White Paper above. It's a 'purely peer-to-peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution.' NFTs and DAOs have come later, but they are equally important. D&RM predicted this technology.
China's ban on bitcoin demonstrates that the technology is beyond state control, reaffirming D&RMs thesis. The second most powerful country in the world, back in September '20, accounted for 70% of the total BTC hashrate; today, China accounts for none. The change failed to damage the resilient network. The following graph shows the fall in hashrate coinciding with China's shutdowns: mining moved elsewhere. This FT article has an excellent graphic showing the shift in hashrate. Today America and Kazakstan(!) Lead the world at 35% and 18% of global hashrate, respectively.
What is Hashrate? Mining hashrate is a key security metric. The more hashing (computing) power in the network, the greater it's security and overall attack resistance. Although Bitcoin's exact hashing power is unknown, it is possible to estimate it from the number of mined blocks and the current block difficulty.The authors draw a parallel between this fully distributed technology and international waters. They say: 'no government has ever been able to monopolise violence on the sea, [and] it is even less likely that a government could successfully monopolise an infinite realm without physical boundaries.' They believe no government will be able to monopolise the cyber-economy. With the technologies exponential growth, underlined by Bitcoin's adoption as El Salvador's national currency, the authors note: "For the first time in history, information technology allows for the creation and protection of assets that lie entirely outside the realm of any individual government's territorial monopoly on violence."
Similarly, D&RM describe cyberspace as a march region: 'Cyberspace is in one sense the equivalent of a technologically protected march region of the kind that existed in border areas during the Middle Ages.' And they cite Andorra as an example, which sat between local French and Spanish feudal laws:
'Because of the competitive position of the two authorities, each of which was weak, rulers would sometimes even solicit volunteers among their subjects to settle in march regions in order to increase the reach of their authority. Almost as a matter of course, the subjects were lured into settling in the march by freedom from taxes. Given the delicate margins upon which they competed, if either authority in a march attempted to impose taxes, he would make it more difficult for his followers to make ends meet, as well as give everyone a reason to affiliate with his competitor. Therefore, residents of a march usually had a choice in deciding whose laws they were to obey. This choice was based upon the weakness of the competing authorities; it was not an ideological gesture.'
The relative weakness of the competing authorities meant the residents of a march region got a better deal. The authors' hope (dream?) the same will be true of Sovereign Individuals who hold their assets in cyberspace. Competition between states will mean states provide a better service.
On fiat currency, D&RM note that 'Governments have grown used to enjoying a monopoly over currency that they could depreciate at will. This arbitrary inflation has been a prominent feature of the monetary policy of all twentieth-century states. Even the best national currency of the postwar period, the German mark, lost 71 percent of its value from January 1, 1949, through the end of June 1995. In the same period, the U.S. dollar lost 84 percent of its value. This inflation had the same effect as a tax on all who hold the currency.' Today, we see inflation start to climb as we enter a post-Covid world. Anyone with savings is losing money month-on-month. This aggressive Fox News clip demonstrates the (anti-state) narrative that is catching the zeitgeist. Most crypto assets are, by contrast, deflationary. People will look for deflationary assets in the coming years.
‘When cyberspace comes increasingly to host financial transactions and other forms of commerce, the resources employed there will be more or less immune to ordinary shakedowns and theft [read: taxation]. Therefore, predators will be unable to harness as large a share of resources as they do today and have done through much of the twentieth century. … cybermoney [Ethereum or Bitcoin, or other] controlled by private markets will supersede fiat money issued by governments.’
One measure of this dominance of crypto over fiat is the billionaire flippening, where more than half of the world's billionaires are from crypto. Balajis comments: '$100k-$1M/BTC is the right range for when the billionaire flippening happens, though you might argue for the upper end of that range. The main point is that if and when the billionaire flippening does happen, keeping out the world's crypto millionaires and billionaires will mean keeping out a large portion of the world's wealthiest people from investing in your country.'
This will represent a shift of power and a change in the relationship between state and citizen: 'The advent of the cybereconomy will at long last finally expose the welfare state to genuine competition. It will change the nature of sovereignties and transform economies, as the balance between protection and extortion swings more completely on the side of protection than it has ever done before.'
Welfare
"I also believe—and hope—that politics and economics will cease to be as important in the future as they have been in the past; the time will come when most of our present controversies on these matters will seem as trivial, or as meaningless, as the theological debates in which the keenest minds of the Middle Ages dissipated their energies." —ARTHUR C. CLARKE
D&RM tell us that in the world of tomorrow, 'Even wealthy individuals and families will possess their own plots where they will exercise limited sovereignty, issue their own stamps and passports, and maintain a Web site.' States in the Information Age, they say, will be 'Government a la carte will seem natural to citizens in the twenty-first century.' (unlike the take-what-you-are-given status quo). The authors predict the instability and collapse of today's nations: 'The breakdown of empires is part of a process that will dissolve the nation-state itself. Government will have to adapt to the growing autonomy of the individual. Taxing capacity will plunge by 50-70 percent. This will tend to make smaller jurisdictions more successful.'
I am left wondering how this free-market world will support those who rely on welfare. With taxing capacity 'plunging', will we be left with no safety net? With the wealthiest all Sovereign and ostensibly free from burdensome taxes, will wealth be re-distributed at all? Or will society become increasingly unequal?
While income inequality between countries has declined in recent years (since D&RM wrote the book), income inequality within countries has risen. With the wealthiest leavening en masse, will that increase income inequality further? They cite Adam Smith: 'Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.'
The authors don't establish how future mechanisms will develop to ensure 'fair' income distribution. Could it be that relic-states, in the absence of the most talented and most affluent, get continually economically drained by the elites from afar? I don't know, but it sounds a lot less like utopia. D&RM say that 'Increasingly autonomous individuals and bankrupt, desperate governments will confront one another across a new divide.' This confrontation may be bloodless, but it may not be without its suffering.
Moreover, the distinction between politics and government is often forgotten. Governments may be bad, but politics can be designed to be good. The authors believe that "On the horizon waits a much purer form of individualism than democracy as we now understand it allows." There may be a baby-bathwater situation here, where all ‘politics’ is binned for the sake of bad government.
Critically the thesis has not been proven wrong yet. The onset of the cryptoverse seems increasingly unstoppable (especially after the China Bitcoin ban). And is Brexit, and other exits, representative of a decline in the power of Orwell's megastates? Covid has propelled the world to a global work-from-home era, which may have recently been decades away. Has it also advanced the dates of D&RM’s pedictions, as already broke states turn bankrupt. It seems likely to me.
The future is hard to predict: we are often wrong. (And D&RM know this, although they do speak about their hypothesis with certainty). Among various—ridiculous-sounding—examples, D&RM note that 'In 1903, the Mercedes company said that "there would never be as many as 1 million automobiles worldwide. The reason was that it was implausible that as many as 1 million artisans worldwide would be trainable as chauffeurs."' Mercedes knew more about the auto industry than everyone else, but they were wrong. To repeat the authors: 'Most books about the future are really books about the present.' —this is a book about today.
This is not the last I'll write on the topic. If you have any questions or feedback, please email me at hector@yokeru.io (or hit reply), and I'll include your takes or my retort in a follow-up letter.
Live well,
H