Rise Of The Network Commonwealth

THE DAILY RECKONING GREATEST HITS: First aired September 7, 1999.

Sooner or later, one way or another, the U.S. stock market will almost certainly be downsized. Creative Destruction will take care of many of the stocks listed on the NYSE. The rest will be battered by a falling dollar, higher interest rates, recession and/or inflation. But what will happen to the government in the post-Bubble age?

One of the annoying realities of modern life is that government has so far resisted the trend towards downsizing. Taxes and spending by government in America, as well as most of the rest of the developed world, are at their highest levels ever.

This may come as a shock to new readers of the Daily Reckoning. Bill Clinton disavowed Big Government four years ago. We’re supposed to be running a surplus [still]. Government is supposed to be shrinking in the post-Cold War era. There is supposed to be a “peace dividend” – a bonus that results from not having to worry about Soviet expansionism in the New Era.

But people are turning away from politics – because politics are becoming less important. Membership in political parties in both Britain and America is dropping rapidly. People are abandoning mainstream parties they way they have been abandoning mainstream religious affiliation since the 1950s. One way or another, government is about to change. The nation-state and big government are products of the special conditions of the 20th century. When they pass into history… so will government as we have known it.

What will take its place?

My old friend, Jim Bennett, has done a lot of thinking about this. In fact, he’s writing a book on something he calls the “Network Commonwealth.” This is the form of government that he expects to gradually replace the nation state.

Part of Bennett’s inspiration, it turns out, is a book originally published in France called the End of Democracy. The book makes the point that the nation- state is merely a passing phenomenon, not an eternal reality.

Before our century, even France — the quintessential nation-state — was more a collection of different regional groups with local loyalties — who spoke languages that were very distinct from one another. The Burgundians, the Picardians, the Limousins, the Poitovin, and so forth. Gradually, French replaced the local dialects and gradually people began to see themselves as French, rather than as members of a local group.

The nation state had great advantages in a world where national groups confronted each other. The Germans could easily defeat Northumbria, for example, but defeating all of Britain was a bigger challenge. Thus, nations consolidated… and taxes rose.

But contrary to Francis Fukayama, this is not the end of history. Political evolution continues. And Bennett believes it is evolving in the same general direction that business is evolving – towards looser networks unified by common culture and common purpose.

The economists of the 20th century used the metaphor of the machine to understand how a nation-state should function. They created, in fact, a “Machine state”… where they tried to regulate everything using a command and control model. This led them to abandon constitutional restraints in the West… and moral restraints in Germany, Russia, China and Cambodia. Machines are not constrained by “silly bourgeois sentiments.”

But the economists of the 21st century are more likely to look to the Internet…and to Internet commerce…as the metaphor for political organization. The Internet is the marvel of our time…just as the machine was the marvel of the late 19th century. And the Internet suggests a different, more ambiguous form of organization.

For example, political organizations of the 21st century are likely to be less concerned with geography. I can speak and do business with someone in New Zealand, over the Internet, more easily than I can deal with the guy in the apartment upstairs. The Network Commonwealth might exist in cyberspace…and in any territory that wanted to be a part of it. It would also tend to be much more voluntary. If a group of people did not want to be part of it…they could probably “opt out” as one does from an Internet discussion group. Thus the new Network Commonwealth might be more like the Hanseatic League of the Middle Ages, which endured for some 500 years… but with an organization so loose it was never completely clear which cities were members.

The most important component of the Network Commonwealth would be their reliance on common culture. Communication, understanding and trust are the key ingredients in voluntary groups. These are very difficult to achieve across different cultures with different languages and different levels of “trust.”

Trust, by the way, is a concept that was explored at some length by Francis Fukayama. He noticed that some cultures were characterized by high levels of trust — when people said they were going to do something… they did it. Other cultures have lower trust levels. In them, you cannot believe what people tell you…nor can you believe that the laws are what they seem to be…or that they will be administered in sensible, transparent and reliable ways. Low trust societies are typically poor societies – like those in Africa…and some neighborhoods in American cities. High trust societies, by contrast, benefit from ease and reliability of doing business…and create more wealth. That is true of Northern Europe and Japan – which Fukayama identifies as the most high trust societies.

Bennett believes that the cost of trying to do business over the Internet with people with different cultures and levels of trust will be prohibitive. People will order a sweater, for example, from Lands End in Michigan…but not from a factory in Nigeria. Thus, Network Commonwealths will arise among groups who share the same language and culture.

Fukayama identifies France as a country with both high trust and low trust features. I think he doesn’t really understand the French. It is a high trust society…but it operates in a different way from the Anglo-Saxon world. This difference is important…because it is why the French and the British have so much trouble getting along. They don’t understand each other. They don’t speak the same language. The costs of trying to operate according to the same rules with a shared agenda are too high.

Meanwhile, Britain’s leaders are trying to shoehorn the country into an awkward partnership with France and the Continent. Even now…at the dawn of the Internet age… most of Britain’s trade is with North America…not the Continent. Most investment in Britain comes from North America…not its EEC partners. And the trend is being amplified as the culture of the Internet becomes more and more developed in the Anglo-Saxon world.

The most obvious Network Commonwealth is of the English- speaking nations…America, Canada, New Zealand, Australia and Britain. William Rees-Mogg, writing in the Fleet Street Letter UK, has already proposed it. A simple arrangement between the English speaking nations to honor free-trade, free movement of people and capital, and each other’s currency. It would be the biggest free-trade group on the planet…with the biggest market…the most fluid labor pool…and the most advanced technology.

The effect would be to downsize the nation-state. Since business would be done freely across national boundaries …national identification would become less important… except perhaps at sporting events.

Your networked correspondent,

Bill Bonner

Paris, France September 5, 2000

*** Bill is at Ouzilly today… and so Addison, here in Paris, is bringing you, once again, a shortened – but no less thrilling – rendition of the Daily Reckoning… followed by yet another greatest hit from deep within the ’99 archives vault.

*** First, let’s see where we stand for the post-Labor Day opening… the barbecue is cool and greasy (still needs to be cleaned), the beer’s all drunk… friends, neighbors and children have all gone home. It’s back to business as usual…

*** Today millions of average American investors – will wake up strap on their pants (one belt loop looser) and – once again – tune in to CNBC… for another dose of eye- salve and Get-Rich-Quick advice from the Money Honey herself, Maria Bartiromo, host of “Who Wants to be a Zillionaire?” – the network’s daily game show, which might otherwise go by the title: Fleecing the Amateur.

*** Of course, “…the [real] question for millions of investors who rely on CNBC, CNNfn, Bloomberg, TheStreet.com, CBS MarketWatch.com and a dizzying array of financial newspapers, magazines and commentators is just how much such tips are worth,” suggests an article in Newsweek. “The trigger-finger media misfired … last week when Bloomberg News, CNBC, Dow Jones and others blindly touted a press release-which turned out to be an utter fraud-about accounting problems at the fiber-optic firm Emulex, whose stock plummeted more than 50 percent in just 15 minutes…” Que sera, sera.

*** Apart from ramped rumors in the press, “this is a market that has literally priced out risk” says Richard Russell “…risk is just not even considered in price. Which is one reason why when a stock doesn’t meet quarterly ‘expectations,’ it is dumped unceremoniously by the funds and may lose 20% to 50% in a single session.”

*** “As we go forward this fall,” echoes Silicon Investor’s William Fleckenstein, “it will be interesting to see whether we can continue to believe in the best of all possible worlds – slowing economic activity, the pipe dream of no inflation and strong earnings growth to support stocks. The bubbleonians sure do seem to think they can have it all ways…”

*** Fleckenstein continues: “I remember vividly in 1984 when the Fed backed interest rates up to 14 percent because folks were so freaked out about inflation, even though we had Paul Volker in control and it was headed to 4 percent. Now we’ve got Mr. Magoo running the show, which is guaranteed to produce more inflation (and already has), but folks are willing to give him the benefit of the doubt. It’s the perfect bookend to the previous era.”

*** “Last Thursday, Snyder Communications (who?), P/E 205 with – 100% sales growth, gained 4.5%… It’s not even a tech stock; it’s a marketing company,” writes Fleet Street Letter’s Lynn Carpenter “But what really hurts? Carnival Cruise Lines, one of my favorite sad sacks with a P/E of 12 and superb growth, sales and financials shed another 4.5%… where’s the order in that?” (see: Big Tech: You’re Out of Order! http://www.dailyreckoning.com/body_headline.cfm?id=412)

*** Meanwhile, European investors seem to be getting ready for another go at the wild speculation that kicked off the year 2000, too. The Eurotop 300 index ended yesterday’s trading session at a ‘lifetime high’ of 1704. Paris, Amersterdam, Copehagen and London’s FTSE all broke intra-day records. Leading the charge on the London exchange… an Internet directory called Scoot.com – up over 20 points.

*** Here in France, Jospin’s Socialist government, with the ‘right-winger’ Chirac as President, has benefited greatly from the ‘American-led’ global economic boom starting 1997.

*** But the French have a saying: Plus ca change, plus c’est la meme chose. The phrase, which I’m told by Isabelle here in the office can only be used when speaking about government reforms, means roughly: the more things change… well, you get the picture. Headlines in the Financial Times today indicate talks between the truck drivers’ syndicate and the government over high petrol prices have reached a boiling point. The drivers barricaded the tunnel at Dover on September 1st, effectively stopping the flow of oil and gas from across the channel… petrol stations are already beginning to run dry.

*** Going Postal… a myth? In attempt to salvage the morale of over 900,000 employees and discourage the pejorative use of the term ‘going postal’, the U.S. Postal Service Commission On A Safe And Secure Workplace, issued a report last week that revealed postal workers were only a third as likely as others in the ‘national workforce’ to be victims of homicide at work. Comforting news for one and all, I’m sure.

*** Today is Paul Volcker’s birthday; he turns 73.