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Many ideas about how the Internet will effect the world are right only in certain situations, yet they are held to be true about all situations and stated in a manner that leads to overly broad interpretations.

Let’s examine some commonly held ideas about the Internet more closely:

The Idea of Disintermediation:  “The Internet allows people to contact each other directly without a middleman, and in so doing eliminates the economic value of the middle man.”

When people interact they do so in an environment that has been paid for by someone and potentially benefits someone.  If you meet someone at a club, it is paid for by the club owners, and potentially benefits the club owners.  If the environment is a sidewalk or other public location, it is paid for by taxes, and may benefit retail stores or billboard companies nearby that location.  If people interact over a phone it is paid for by one or more of the participants and benefits the telecommunications companies that provide the service.

Changes in technology can cause the manner and types of human interaction to change significantly.  People now interact on Google, Amazon, Yahoo, Youtube, Ebay, Skype, Flickr, blogs, and countless other places on the Internet.  These environments and tools clearly can generate tremendous benefits for those setting up the meeting place.

More powerful digital tools and distribution are becoming available to greater numbers of people, allowing Youtube celebrities, Ebay store owners, and others to prosper. Yet the largest single monetary reward goes to the founders of the companies that create the most useful environments. New companies may unseat old ones in creating the environments and tools that people want to use, but until all the services that all people want done for them can be done best without cost or advertising, the creator of the environment will continue to receive a generous helping of the monetary rewards.

The Idea of the Death of Distance:  “Technology allows digital work to be done from anywhere with an Internet connection and is driving down the cost of transporting goods, so technology is eliminating the importance of location.”

This idea is correct only in a certain context.  Yes, American tax returns are being created by Indian workers, Russian programmers create some Chinese websites, and the coffee beans you just imbibed travelled a great distance to find you.  Capital, workers, information, and goods are being transported and organized in global supply chains more efficiently than ever.  You can hire a tutor from abroad to teach you a language through video chat (see edufire.com) or help you gain new skills. These changes are very important economically and socially.

Yet it is also true that even as the market economy gives significant rewards to creative people who can devise new ways of serving other people, such people are flocking to certain physical locations.  The maps that Google makes of the search queries it receives across the globe are not distributed equally according to population density, they are focused in certain cities rich in human capital. This is because creative people want to cross pollinate in ways that are difficult to do across just the Internet. They want to get a feel for what tools and ideas others are adopting, and that’s hard to follow purely on the Internet. It’s also sometimes hard to spot a business opportunity if you’re not immersed in the local environment, at least for part of the time.

We live very important parts of our lives in the location we are at, establishing friendships that teach us, pick us up when we stumble, and are rewarding in their own right. Digital tools can supplement those needs, but are unlikely to completely supplant them because many types of experience are linked irrevocably to sharing a location. In some ways, particularly in finding people who will share major life milestones and experiences, location is more important than ever.

The Idea that Open always beats Closed:  “Information wants to be free of constraints, walled systems are always defeated by open systems, and open source products will always beat closed source products.”

This idea rose to prominence largely due to the distaste that many had for the media company’s takedown of Napster, for the contempt they had for the design of AOL’s service, and for the hatred they held for the product design and market dominance of Microsoft. It’s easy when there are dominant companies with inconvenient rules or poorly designed products to imagine the benefits of taking products out of their control or creating a product that is free and open.

Even frustration over a single feature in a proprietary product can lead those who want to tinker to demand a more open system. The low and diminishing cost of distributing the best, cheapest solution to everyone suggests all products and services in a digital age should be easy to tinker with and free of cost to the user.

Yet many of the most respected technology companies that provide services today are not completely open, are not open sourced, and are not free. They are adept at leveraging free or commodity services and products in building proprietary products that have closely controlled elements which are hard for their competitors to duplicate.

Apple is perhaps the poster child for the economic value and dominance that can be created using closed designs and systems. Although it uses open source components for significant parts of its software stack, it does not reveal the source code for its operating system or any of its major applications, it requires the coupling of its hardware and software, it is famously secretive about the design of future products, and in the ipod, iphone and iTunes system it has created a very dominant closed system. Apple has allowed media companies some measure of control over their content, telecommunications companies some measure of reward, and provide software developers some ability to innovate, but Apple retains both ultimate control and the primary share of the monetary reward.

Google uses linux, cheap commodity computing hardware, and makes many contributions to open source projects. Yet it also closely protects its brand and it does not release the source code for any of its major products (gmail, Google news, Google Apps, etc.). It is highly secretive about future products, the methods it uses to rank search results, the methods it uses to serve relevant advertising, and the ways in which it has organized itself.

Ebay closely controls the reputation system which gives buyers and sellers historical information about each others trustworthiness. Facebook opened its system to application developers, but keeps close control of the stream of activities your friends are up to. Even Craigslist charges for some listings to reduce spam. None of these companies reveal the source code for their websites. Even the companies that do reveal the source code for their products charge for certain levels of support and installation services, which is in effect charging for certain kinds of proprietary information.

When do companies do well with closed products? Sometimes closed systems have a design purity that creates the right customer environment or solution, sometimes closed systems discourage behavior that would detract from the community that is formed, and sometimes they simply serve people better than open systems. Sometimes they don’t. Firefox is a great web browser, but Apple thought it could create something simpler and faster and more ubiquitous in Safari. To think that one is destined to be better than the other in the marketplace simply because of their open or closed nature is to grossly oversimplify the factors that lead to product distribution and adoption.

In trying to understand a new phenomena, it’s important to form ideas about it, but also understand when those ideas don’t apply. A trail of wrong predictions and sloppy writing can drill into our heads ideas that are sometimes very false. I have learned that if I can’t name a context in which an idea is false, it is a dangerous idea to rely on. As Emile Chartier stated, “Nothing is more dangerous than an idea when it is the only one you have.” (see my favorite quotes)

The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando de Soto.

A criticism of capitalism is that even though it drives technological change and reduces the price of goods, those without capital are deprived of its rewards. The argument that the poor and disenfranchised are not well served by capitalism is usually followed by an explanation of the need for a stronger social safety net. Another potential solution would be to make sure everyone has capital, but how this can be done fairly is an issue of great political controversy.

The Mystery of Capital explores how capitalism evolved historically, how capital has been obtained in the past, and then lays out policy prescriptions for reducing the barriers that prevent the poor from developing wealth today.

A Review of the Past

Part of the book is a fascinating examination of the historical evolution of the modern market economy. In aristocratic societies only those of noble blood and the powerful guilds were allowed to undertake certain trades. Those with political power could bar competition with their monopolies. Drawn by economic opportunity, slums of workers formed around cities. Workers in the slums tried to organize their own economic activity. Out of the slums came goods of far lower price, and often equal or better quality. Aristocrats and guilds detested the slum dwellers, and would decry and criminalize such competition. The politically powerful would obtain rights of monopoly from the throne, burn down parts of the slums, and put large groups of people to death. These struggles over the right to compete could result in uprisings. For example, Mr. De Soto describes a killing of thousands of seamstresses (motivated by a desire to preserve aristocratic and guild monopolies in the cloth trade) as one of the causes of the French Revolution.

The historical review is particularly fascinating because of some counterintuitive insights. Mr. De Soto points out that in the early United States illegal squatters would adversely possess land owned by someone else. Unlike in Europe, where such action was dealt with harshly, in America if enough squatters occupied a region they could elect representatives who would change the laws to legalize their squatting. Although such an action could be seen as a violation of the absent landowner’s property right, in practice recognizing the work done by squatters on land allowed people who would diligently improve land to create capital and encouraged landlord’s to put their property to better economic use.

A Prescription for the Future

The Mystery of Capital proposes a number of powerful policy ideas. It argues capitalism is at its best when everyone is allowed to compete and it points out that to compete all segments of society need to be able to adequately describe and protect their assets. This allows those assets (1) to be traded to whomever might have the best use for those assets, (2) to be used to borrow against for other productive enterprises, and (3) to be purchased using debt financing as opposed to lump sum payments.

The book demonstrates how most of the non developed world, including those places where capitalism has been perceived to have failed and the modern Western nations before they became developed, fails to adequately describe and protect assets. Mr. De Soto explains that it takes hundreds of steps and significant resources to legally start a business or own a home in different parts of the modern world. The records of who owns what are often murky and difficult to resolve. He explains how government policies are poorly adapted to the lives of those who live on the outskirts of cities. In desiring not to encourage the growth of slums, governments prevent those who dwell in them from recognizing their assets and improving their lives. Mr. De Soto explains that the poor often are in control of assets that they can not monetize or use to obtain funding because their assets are outside of the legally recognized system.

In the absence of legal mechanisms to recognize and enforce rights, slum dwellers often turn to organizations in their own communities such as unions and worker collectives, in effect creating their own extra-legal system. Yet this extra-legal system is only recognized in their own communities, making economic trading difficult, and making it difficult for the poor to fully realize the benefits of their work. Mr. De Soto points out that although their amount of assets are small, given the number of people involved, if the land and homes of the poor were legally recognized these stealth assets would add tremendously to national capital and help encourage development of that capital. People are better served by being brought into the market system, yet laws often exclude them or their resources from it.

One criticism that has been made of de Soto’s argument is that the amount in unrecognized assets, divided among the number of people involved, results in an average of $2000 to $3000 of assets per capita, which is not sufficient to solve the problem of world poverty. The fallacy with this counter argument is that (a) that much in assets greatly exceeds the current wealth per person of the people at question, (b) while modern Western businesses are generally hard to capitalize on this small amount of money (counterpoint: Dell Computer was started on this much) a great many businesses in developing nations could be started by borrowing on this much in assets, and (c) making these assets liquid would encourage companies to serve these unserved peoples because they would form a gigantic market and it would allow for these assets to be traded to whomever would most productively use them. Mr. De Soto argues persuasively that legally recognizing the assets will cause them to grow in market value.

The Mystery of Capital is well worth reading and its ideas deserve to be widely disseminated. If you find them interesting, you can find out more about Hernando de Soto and his ideas at his wikipedia page, at google news, at the website of his organization The Institute for Liberty and Democracy, and at his blog.

Marc Andreesen, the cofounder of Netscape, met Senator Barack Obama in early 2007.  Mr. Andreesen recalls, “In particular, the Senator was personally interested in the rise of social networking, Facebook, Youtube, and user-generated content, and casually but persistently grilled us on what we thought the next generation of social media would be and how social networking might affect politics — with no staff present, no prepared materials, no notes. He already knew a fair amount about the topic but was very curious to actually learn more.” (see Mr. Andreesen’s blog post)

As a social organizer and a lover of new technologies, Mr. Obama could be expected to make good use of such tools in getting elected, and he has done so.  What may not be as obvious is that Mr. Obama appears to have a keen interest in using such technologies in the act of governing.  And whether Mr. Obama becomes president, or Mrs. Clinton or Mr. McCain do, these new tools have the potential to transform how a government of the People, by the People and for the People communicates and operates. Let us consider the effects of Internet tools on the act of governing by first considering the effect of such tools on the election process.

Mr. Obama’s presidential campaign has made an unprecedented use of Internet tools. At my.barackobama.com Mr. Obama’s supporters can create a profile (complete with name, phone number, email and zip code), blog about their campaign experiences, track the latest campaign news and videos, plan, attend and discuss events, find other supporters, and help raise funds for his campaign.  More than 90% of the Obama campaign’s cash has come through donations of $100 or less, much of it through the Internet (see WSJ article).  The website can also be used to request further funds from prior contributors, which has likely helped Mr. Obama maintain a significant fundraising advantage.  Most importantly, the Obama campaign has put supporters to work not as passive volunteers but as empowered organizers.  On my.barackobama.com supporters are given the tools to find, convince and organize other supporters among their neighbors.

As the Rolling Stone reports:

[A meeting of Barack supporters at a recreation center] in San Marcos wasn’t advertised in any traditional sense. Instead, the campaign posted the event on my.barackobama.com — its social-networking site affectionately known as “MyBo” — and e-mailed local residents who had donated to the campaign or surrendered their addresses as the price of admission to an Obama rally. And the volunteers who showed up won’t be micromanaged by Ukman or anyone else from the campaign. They’ll be able to call their own shots, from organizing local rallies to recruiting and training a crew of fellow Obama supporters to man their precincts on election day. To identify and mobilize Obama backers, they’ll log on to the password-protected texasprecinctcaptains.com, download the phone numbers of targeted voters, make calls from their homes and upload the results to Austin headquarters. They’ll also organize early-voting open houses — which will be publicized on MyBo — to boost turnout among core supporters. “Instead of hoping that your neighbors vote,” [Obama staffer] Ukman tells them in an unintentional twist on the campaign’s central theme, “you’re going to take them to the polls.”

http://www.rollingstone.com/news/coverstory/19106326

The Boston Globe explains:

From a MyBO page, a member can click onto a list of 20 phone numbers with a series of prompts and scripts that the caller runs through, entering the responses of voters online. The information goes into the campaign database for its primary day get-out-the-vote operation.

http://www.boston.com/news/nation/articles/2008/02/24/technology_aids_obamas_outreach_drive/?page=1

Mr. Obama knows that supporters who feel closely connected to other supporters, who are kept closely informed about the cause, who are empowered to take actions in support of the cause, are likely to be not just casual supporters but members of a movement.  Internet social network websites allow people to share even small actions that move the cause forward, and shared small actions tend to evolve into larger commitments of time, attention and energy.

Of the candidates, Mr. Obama appears to be particularly aware of this potential change. Mr. Obama has often expressed on the campaign trail that to change Washington, to break the gridlock he sees engulfing both parties, he needs a movement that happens from the bottom up.  Although his strongest supporters may feel the election of Mr. Obama will effect this change, Mr. Obama does not seem to be of the same opinion.  To change how Washington operates he needs the movement to continue while he is in office.

Consider the tools a potential President has at their disposal.  While John F. Kennedy may have been the first television president, Ronald Reagan may have perfected speaking to the camera, and George W. Bush has utilized the power of a sympathetic television channel and talk radio hosts, each of these prior technologies have been largely one way mediums of communication channeled through media companies that distort the relationship a politician seeks to have with their constituency.  To organize effectively to carry a message across television and radio, modern presidencies run around the clock operations to drive a particular message through the external media companies that carry the information to the citizens.  The administration of George W. Bush has created common talking points that will appeal to a broad base of his supporters, which are used by a network of media figures and commentators that seek to stay on message.  In the 2000 and 2004 elections, Karl Rove harnessed direct mail technologies to send targeted political messages to particular constituencies, but he was using a broadcast medium to target small groups of supporters with the message that would most appeal to them.  Direct mail is very expensive to maintain on a prolonged basis, and therefore has been used mostly during election campaigns themselves.

Internet tools do not have these limitations.  The Internet provides a platform for organizing and energizing social movements in a new way.  Therefore Internet tools could have a tremendous effect on not just how governments get chosen, but how governments operate.  Internet social networks allow people to stay engaged on a continuous basis.  They also allow large numbers of people to receive the same message at the same time, cost effectively, without any filter or immediate commentary from critics.  They allow targeted delivery of messages.  If you trust the brand of a social network such as my.barackobama.com, if you value its tools and its services to you, you end up trusting many of the messages you receive through it.

The President elected in 2008 can, if they choose, communicate with anyone who provided their personal information during the campaign at nearly no cost, without having their message filtered.  A sitting President could reach out to a broad base of strong supporters, keep those supporters in close contact with each other, keep those supporters funneling their support to sympathetic Congressmen, keep those supporters hounding political adversaries, and keep those supporters listening to their message.  Most importantly, the nature of the message can be very granular.  Millions of supporters in a particular zip code could be asked to contact their legislator on a particular bill that the President seeks to oppose or support.  In theory, supporters with particular demographics, with particular religious persuasions, in particular regions of the country, could be sent messages tailored for them.  For governing, the ability to coordinate a vast citizenry in such a manner is an innovation more significant than radio, more significant than television, and more significant than direct mail.

How is such a movement to be directed by a sitting President? After all, the President does not represent supporters, a President represents all of the People.  David Brooks has pointed out that while Mrs. Clinton sounds like a traditional executive, gathering experts, forging a policy, negotiating a crisis and making a final decision, Mr. Obama sounds like a cross between a social activist and a flannel shirted software CEO, a nonhierarchical collaborative leader inspiring autonomous individuals to cooperate for the sake of common concerns (see David Brooks article).  In some ways, controlling an Internet social network is about channeling its energies in moments of need, but otherwise just providing it tools and then allowing it to undertake its own path.  Many Obama campaign messages have not been things the campaign has created but items created by the crowd that the campaign chooses to highlight.  (see Fortune Magazine article)

Government in an Obama Administration will likely consist again of setting the basic message and then establishing the tools to reach the policy makers in government.  my.barackobama.com will likely be supplemented, but not replaced, with whitehouse.gov and refinements to other government websites.  As I noted in a prior post (see The value of transparency to (nearly) everyone), in his first term as a United States Senator, Mr. Obama cosponsored a bill with the Republican Senator from Oklahoma Tom Coburn, which would create a searchable database of government contracts, grants, insurance, loans and financial assistance with the goal of making finding information about federal spending as simple to use as a search of the Internet.

Mr. Obama perceives the role of the taxpayer and of the citizen in a very business like way.  In his book, The Audacity of Hope (see my book review), Mr. Obama credits Reagan for seeing what Democrats didn’t see.  “Reagan’s central insight - that the liberal welfare state had grown complacent and overly bureaucratic, with Democratic policy makers more obsessed with slicing the economic pie than growing the pie-contained a good deal of truth.  Just as too many corporate managers, shielded from competition, had stopped delivering value, too many government bureaucracies had stopped asking whether their shareholders (the American taxpayer) and their consumers (the users of government services) were getting their money’s worth.”

An Obama Presidency may approach both government bureaucracy and obstacles to Obama’s policy prescriptions the same way the Obama campaign has come to dominate caucuses against the Hillary Clinton campaign: provide supporters (and citizens) in depth information on how to team up and then explain to them the steps they have to take to prevail.

Some signs of how Mr. Obama intends to act can be seen in his policy prescriptions.  Mr. Obama wants to use “the most current technological tools available” to promote citizen participation in the actual business of government (see his website).  He plans to not just solicit the opinions of the public in the work of government agencies and policy makers, but to tap “into the vast and distributed expertise of the American citizenry to help government make more informed decisions.”  He also intends to have a website, search engine, and other tools that enable easy tracking online of federal grants, contracts, earmarks and lobbyist contacts with government officials.  He intends to use whitehouse.gov to give the American public the chance to review and comment on any non-emergency legislation for five days.  When the media expresses skepticism that he can get a healthcare policy passed, Mr. Obama indicates that while he himself can’t, he knows how to get everyone to the table for discussions, make those discussions open and transparent, and invite the American people into the conversation.  He intends to require his Cabinet officials to have periodic national online town hall meetings to answer questions and discuss issues before their agencies, and to employ technologies (such as blogs, wikis and social networking tools) to modernize internal, cross-agency and public communication and information sharing.

While Mr. Obama may be further along in understanding the implications of these tools then his rivals, they are so potentially powerful that it is likely at some point we will have a Digital Presidency, even if Mr. Obama does not obtain the Presidency.

While it is clear Internet tools will have profound effects, it is not yet clear what those effects will be because it is not clear how such tools will be managed. The most advanced Internet social network technologies are controlled by private companies such as Facebook, Myspace and Google/Youtube.  Although these companies follow political issues, they do not have a strong political axe to grind.  Hopefully they will act as a counterweight to social networks that are motivated by a political cause.  In the political sphere, the most advanced and people rich Internet social networks appear to belong to the candidates for the Presidency.  By the nature of their cause, they attract the most attention and have the most capital both in money and people to develop their platforms.  Intriguingly, with a big enough brand name an individual is far less reliant on the party apparatus if they are able to develop or build their own Internet social network.  Perhaps this means that once a candidate has run for President once, they will be in a good position to run again.

In The Audacity of Hope (see my book review) Barack Obama describes the advantages of politicians who already hold a political office as being: (a) name recognition, (b) a fund raising advantage, (c) gerrymandering (where the already elected representatives redraw their districts to in effect choose their voters), (d) most politicians are pretty likable, and (e) the already established support of grass roots organization (which is as important as cash).  Mr. Obama interestingly states that these advantages of incumbent politicians push rival candidates to look for the support of the opposing political party.  What do the political parties bring to a candidate?  Organization.  They own the list of donors, of voters, of volunteers.  They can help with raising funds, finding the right voters to hear a message, or even crafting the right message to tell.  For Democrats organization means unions, environmental groups, and prochoice groups.  For the Republican party organization means the religious right, local chambers of commerce, the NRA, and anti-tax organizations.

Clearly the political parties, the unions, religious organizations, and cause motivated organizations are behind the technological times.  While these organizations have amassed databases of supporters and potential supporters, for the most part they have not created active, vibrant Internet social networks.  Perhaps they will do so in the future as they seek to preserve their role and power in the political ecosystem.  Despite the obvious privacy concerns, perhaps the government will create its own Internet social networks, for any citizen who wishes to use them, authenticated in some manner.  Perhaps some of these networks will even be accessible to all politicians to use to reach their constituencies.

Use of these new tools has profound implications for the American form of government. America was founded on the principle that sovereignty lies with the people, but also with the somewhat contradictory principle that the people’s representatives should be removed from the worst passions and impulses of the people.  The founders were aware that factions form when people care deeply about something, and that although factions are unnecessary, they can also fail to think dispassionately, becoming ruled by emotions and an allegiance to their faction.  Many of the founders of America held in high esteem the idea that representatives would be chosen by the people, but would be disconnected sufficiently from the people to take whatever action was wise.  They disliked mobs grouping together to take action.  Even Thomas Jefferson, who formed the first political party of a young America and secretly started a very partisan newspaper to give it a voice, detested what he perceived as the necessity of doing so.

Yet the system of governance we have today is one where representatives are in the long term accountable to the people, but in the short term look for support to various factions, either special interest groups (such as unions, the NRA, etc) or monied interests (such as companies, wealthy individuals, etc).  These factions end up having an outsized influence on what representatives are chosen and they make any representative who wishes to support a policy that goes against their chosen factions pay a severe price for the disloyalty.

By increasing the involvement people have with their government, or the involvement they feel they have with their government, the Internet can change, for good or ill, the relationship between citizens, such factions and government in ways that may have horrified the founders. One vision is to transform America’s modern republic into something more similar to an Athenian democracy, where every governmental decision is watched and weighed in upon by a connected populace.  Another vision is to increase the transparency and accountability of government, but still keep the baser angels in check.  Yet another vision is to prevent even a majority of moderate thinkers from impressing their particular policy prescriptions upon those who simply want the liberty to disagree.

To coordinate a mass of people when the issues being discussed are technical and complex, to retain the attitude of a reasoned debate and not descend into purely factional allegiances, is a significant challenge.  Even if a moderate consensus emerges on major issues, it is not clear that a moderate majority acting through coercion to force others to adopt their particular policy feelings is something to be esteemed.  A broader movement, a more open and transparent system, can be an improvement, but it can also be a curse.  The task of reconciling these visions lies ahead.

However the political world evolves, the greatest safety citizens have may reside in the design of the Constitution and the Internet. The Constitutional design makes changing the judicial branch of government a slower process, no matter what the popular will, and it entrusts the judiciary to protect the minority’s rights even in the face of a coordinated hostile majority.  The Internet is designed in a manner that permits any device, any software, and any new service to be reached through it.  New forms of organizing people on the Internet are constantly being invented, from Google to Wikipedia to Facebook.  Each new tool creates different systems of behavior, has different strengths and weaknesses.  If these new tools allow one person, through a cult of personality, or one faction, even if it is a sanctimonious majority, to amass unchecked power, to choose popular whim over in depth thought, it will likely be because the citizens and their judges ignore other voices, other social networks, and their own better natures.