Intermediated of the world, unite!

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I have the pleasure to report here the English translation of the article that Stefano Quintarelli, a pioneer of the Italian Internet, wrote for Il Foglio some days ago. I have been astonished by the capability of this article to easily explain and summarise in few chapters how the digital revolution is changing the world and what should be done to keep a fair balance between innovation, market economy and human welfare.

***

Intermediated of the world, unite!

Intermediati di tutto il mondo, unitevi!

Intermediados del mundo, unìos!

Intermediados do mundo, uni-vos!

Intermédiés de tous les pays, unissez-vous !

 

The industrial revolution, the class conflict and its solutions

The industrial revolution led to a profound social reorganization with respect to the previous predominantly agricultural economy. Economic power, very concentrated, conditioned the political power. In the USA the so called robber barons, thanks to their control over steel and oil, strengthened their economic power by controlling the economy and society to a great extent. The working class of salaried workers was born, and, with it, the conflict with the capitalists who owned the means of production. The market pressure was discharged on the workers who often lived at the limits of subsistence, and the social conflicts, that sometimes resulted in violent movements, were intensified. The rich oligarchs conditioned information, political power and the judiciary.

Thanks to the power they had, not mitigated by institutions and protecting regulation, added value was accumulated by capital, to the detriment of workers.

From the mid-nineteenth century and for most of the twentieth century the world divided on the basis of alternative solutions to the conflict in the distribution of the value between capital and labor.

The paradigm of this conflict was summarized in the final words of the Communist Manifesto of Marx and Engels which ended with the famous phrase “Workers of the world, unite!”.

An answer from the socialist states were state companies, disconnected from the market in order to isolate the pressure on wages, together with a strict regulation of labor relations mediated by the Party. In the West there prevailed a more articulated model of regulation that saw the emergence of institutions such as the unions with their right to strike; legislative interventions that defined minimum and incompressible rights for workers in matters of work, retirement and health; the progressive possibility of worker participation in the widespread ownership of companies; the birth of the Antitrust Authority to mitigate economic power and with it the influence of economic powers on politics. The Western model that emerged victorious after the end of the Soviet utopia is however put on the ropes by the Digital Revolution and needs a rethinking or, at least, some significant interventions.

 

Computers: where we come from, where we are headed.

Basic research leads to developments in physics which in turn are incorporated into the electronic devices we use every day. The famous Moore Law foresees an exponential growth of processing, archiving and communication capacity, thanks to a periodic doubling of the performance / price ratio of electronic devices, motivated in a capacity to create increasingly miniaturized base components. The marginal cost of processing, archiving and communication is therefore (or rapidly) substantially nil and the possibilities enormously greater. Artificial intelligence is the terminology coined to identify the product of the exponential growth of processing possibilities; Big Data to identify the possibilities of large storage; Internet of Things for the possibility of interconnection. All this in a synergistic game so that, at ever increasing speed, increasingly cheaper devices spread and interconnect more and more; the related data are recorded and archived, analyzed and processed. Some visionaries believe that it will come to a time when machines will have superior capabilities to those of a human and that human beings will widely include electronic parts to restore or increase their habilities. This moment of human-electronic convergence is called singularity. That this exponential growth may continue for a long time to reach singularity is nevertheless an act of faith. The ITRS roadmap (International Technology Roadmap for Semiconductors) is the development plan defined by the electronics manufacturers and sets in 2021 the year in which the physical limit of miniaturization will be reached. The miniaturization of electronic components can not go further due to quantum interference on atomic dimensions. Singularitarians answer that this wall will be overcome and the exponential development will continue thanks to the invention of something still unimagined. This is the act of faith.

Nevertheless, even if singularity is not achieved, the effects on society will be very significant. Once the physical limit of development has been reached, competition that can no longer be expressed in performance increases will be expressed in price reductions and electronic devices will permeate the world at a scale hard to imagine. Our ability to access our computing systems, the storage of our data and their communication will no longer be physically confined to our devices but widespread. Our “computer” will be defined by our ability to access such widespread processing and data, by recognizing our identity (the ultimate competitive asset), wherever we are.

From the computer on our table, from the computer to our pockets, we will arrive – literally – to live in a computer. Thanks to the zero marginal cost, everything that can be calculated will be; everything that can be sensed and archived will be. Everything that can be interconnected will be.

 

Where we stand

All these phenomena has accelerated over the last twelve years, with the development of cellular wireless networks, in a virtuous circle of increase in possibilities fueled by the synergy of increase in server processing capacity, the transmission capacity of networks, the processing capacity of pocket computers (smartphones). All this accompanied by an unprecedented speed of diffusion of technical means, by a democratization of access to technologies. In every system where information is introduced, entropy decreases and the system is optimized. Our ability to solve problems, to optimize the use of resources, has increased enormously in recent years. Just think about the availability of information and the possibility of collaboration of researchers in the medical, energy or food fields; optimization of transport and logistics thanks to navigation systems with full coordination and knowledge; to fine grained production control and inventory reduction; to the dematerialization of many activities, reducing the material impact on the planet.

For over ten thousand years the world has experienced drastic changes but much slower, which required generations to unfold, allowing society to understand and adapt (even if sometimes such adaptations were violent).

In this case, this development of the intangible economy was sudden. It would seem that Divine Providence intervened on a world that consumes material resources at a level well above the possibilities of sustainability, offering an incomparable optimization tool.

Every human sector is impacted and so many complexities we face today are rooted in these reasons.

 

Macro phenomena of the immaterial dimension

I refer to material dimension and immaterial dimension and not to real and virtual worlds. They are not worlds but dimensions because every human activity previously based on material instruments and relations is to some extent touched by immateriality. Except for some cases of full replacement of a previous material activity with a new intangible modality, in general the immaterial does not exclude the material but integrates it, it supplements it in the same way in which the length is not an alternative to the width but supplements it. And it’s all very real, not virtual. The term “virtual”, from the medieval Latin virtualis, brings with it a connotation of unexpressed potentiality. But this immaterial dimension, in which social, economic and political relations take place, is very real, not potential or unexpressed.

The basic rules of the immaterial dimension are very different from those of the material dimension. In the traditional material dimension, producing, reproducing, storing, transferring and manipulating have significant (economic and environmental impact) costs. In this recent immaterial dimension these costs are marginal or zero. Materiality is intrinsically disconnected as it is composed of objects that do not communicate with each other; its frictions require time to be overcome, cause wear and returns tend to decrease. The immaterial, which is intrinsically connected, is characterized by real-time feedback (and therefore the possibility of data collection, analysis, customization and adaptation), a lack of wear and the possibility of increasing returns.

Except for cases of great standardization and repetitiveness, assisted by specific machines, work in the material dimension is carried out by people who need production tools, input to work on, cycles of rest and leisure. With the industrial revolution, this led to the definition of work shifts and commuting to carry out the activity, with consequent impacts on the structure of cities, trade, etc.

A work that can be done in the immaterial dimension, if repetitive can be done by machines that do not know shifts; if with components of creativity and relationality it can be done by people from any place in the world, also benefiting from the effect of time zones to cover the day.

The digital umbilical cord that binds the parties in an immaterial relationship is exploited to update provided product / service with frequent releases and is customized thanks to the acquisition and knowledge of the data. This personalization goes as far as the individual, placing new questions on the availability of data as a competitive asset.

Up to now, the information available in common to a community has always been an important factor in maintaining harmony and cohesion, and has even favored the definition of social rites. With the individual personalization of the information flow, the role of the media to act as a social metronome erodes. The personalization of the information received by users, with the current incentives for those who manage the algorithms, determines the exclusion of unwelcome information and increases the frequency of messages confirming their convictions and bias, favoring with the so-called “filter bubbles” ( filtered information bubbles) the acquisition of informations you like, regardless of their degree of truth and correctness. The nil marginal costs in the production and distribution of information, eliminated the cost barriers that constituted a friction to their creation and circulation; a reduction in the potential barriers that constituted a limitation to the dissemination of information, has multiplied by orders of magnitude the spread of fake news that feed filter bubbles. The accessibility to information on each subject, even on specialized topics, previously limited to insiders, is now ubiquitous at no cost, fueling the perception of an extreme reduction of distance between experts, enthusiasts and casual readers. This leads to a perception of flattening of hierarchies that pushes the trivialization of experience, an effect multiplied by the algorithms of the information intermediaries whose objective function is not the correctness of information but the maximization of the time spent by users on their online services. The fact that this produces effects on politics is well-known: from the resurgence of interactions driven by emphasis (also determined by impulsivity favored by real time and a wrong perception of anonymity favored by isolation and instrumental mediation of communication). The effects on the electoral outcome are less known, even though Facebook has conducted social experiments that have shown that they can influence the rate of participation in the vote and recently Zuckerberg in a written letter to the European Parliament said he can’t rule out that the social network is used in such a way as to produce manipulative effects on the votes.

Private property, the foundation of the Western model of response to the challenges of industrialization, is rooted in the intrinsic properties of materiality in which goods are rival and excludable. Consequently, the assets are carriers of rights, immunities, faculties and privileges defined and codified in laws that are based on rivality and excludability. The whole legal system is also based on these two characteristics.

The control of the assets in the immaterial dimension does not take place on the basis of rivality and excludability. An information, once communicated to a third party, does not diminish the possibility of enjoying it on the part of the communicator. The aphorism of President Thomas Jefferson is famous: “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me”. In order to maintain control and replicate rivality and excludability, an intangible asset / service is not placed in the recipient’s full availability as it happens with a tangible asset but often, if the business model and market allows for it, it is provided connected to a centralized control and invariably accompanied by a contract that regulates in detail the rights, immunities, faculties and privileges, which, in a largely asymmetrical arm-wrestling, invariably favors those who provide the good / service with respect to those who use it. In the immaterial dimension, private property, for users, does not exist.

 

Technological feudalism

Starting from the 90s of the last century, while the exponential path of digital technologies (calculation, archiving, communication) began to become perceptible, policy makers decided to favor their development. There was talk of an information society with the – correct – idea that it would have had a lower impact on the planet’s resources than a development model based on a material economy. Asymmetric rules have been made to promote competition and with it the birth and growth of alternative telecommunications operators and service providers. The modalities of monetization were not clear, and neither were the business models, and neither were the times when a critical mass capable of sustaining an immaterial economy would be reached. A little at a time these clouds have thinned out. The critical mass has been reached years ago and with it the business models and the possibilities of monetization have become very clear.

By choice, pro-competitive rules were not introduced because it was believed that they would slow down and possibly halt development. Rules were introduced regarding intellectual property and systems cracking, editorial responsibility, child protection, etc., but not in terms of user contendability and competition.

Entrepreneurs have learned to exploit this regulation to their advantage by using intellectual property laws to impose restrictive contractual conditions for their users, exploiting network effects to benefit from increasing returns (winning over the first user, which needs to be convinced, costs a lot of more than not winning the billionth user who prays to be admitted to the interaction with others and hopes never to be expelled) and to introduce lock-in factors (de facto constraints in services) to limit the mobility of users.

While in other industries we impose phone number portability, credit, bank loan, electricity meter or gas portability, to promote competition, this is not the case online.

Consequently, those who conquer world dominance in a sector can hardly be undermined. Try telling your children to leave Whatsapp and start using Indoona. They will never do it. On Whatsapp they can interact with all their friends; sending them to Indoona would be like condemning them to a nearly desert island. The same applies to sellers with respect to Amazon, hoteliers with respect to Booking, restaurateurs with respect to Thefork, renters with respect to AirBnb, drivers with respect to Uber, and so on. When an operator is about to win in an industry, investors will pour huge amounts of capital in such a way as to make it the de facto choice for that sector. Competition ceases to be IN the market but FOR the market. You do not compete in the brokerage market for holiday homes, but to conquer an absolute, unshakeable leadership position in a market niche.

The marketing costs for adopting a service are today the most important investment in an intangible operator, orders of magnitude larger than technological ones. They are not technological operators, they are market intermediaries that intercept a share of the added value that flows between producers and consumers. This creates monopolistic or oligopolistic double-sided markets, with intermediaries who dictate their own laws and, on the one hand, consumers who have little or no other choice and, on the other, producers who must comply with these rules in order to gain access to the market. How many persons know that if someone downloads a software and installs it on a Macintosh, the payment goes to the software manufacturer while if it is done on an iPad or an iPhone, 30% goes to Apple? The same applies to a newspaper, a song, a book on Apple, Android, Amazon. Or that 25% of the room price (including VAT) goes to Booking? – nearly 100% of the hotelier’s margin, which must however pay the living costs, the maintenance and – not a tiny detail – the staff? Who is aware of the working conditions of a Uber driver or Foodora rider ? I do not mean these are not opportunities for occasional jobs that can constitute a supplementary income for someone in a moment of a person’s life. If they cease to be occasional and become continuous, subjected to an algorithmic control much stronger than it was previously possible in a traditional work relationship, an issue arises re. regulatory asymmetries that favor a type of activity compared to another, by inclining the competitive plan towards immaterial monopolist / oligopolistic intermediaries.

 

On the side of the immaterial monopolists / oligopolists

Let’s stand on the immaterial monopolists / oligopolists side.

They were good. They had an idea, a vision, determination, delivery hability far superior to their competitors. They conquered a dominant position in a niche of a new immaterial intermediation thanks to hard work, great skills and big capitals (at the beginning, until it was clear to the venture capitalists that the winners would be, tightening their belt).

Now they are monopolists (or maybe oligopolists); they

  • control vertical online markets at a global level, also determining prices in offline markets and therefore in the rest of the economy;
  • extract value from the intermediaries of the producers (from both the traditional categories of the nineteenth-century capital / labor conflict);
  • govern market access through control of the platforms (based on contracts that impose their contractual strength and exploit the protection of intellectual property laws), the searchability and the order in which the offers are displayed and, in some cases, moderating comments;
  • in some cases they collect an intermediation on a price, in others through auctions that they bail for a service that they offer and in which the offers are totally opaque;
  • benefit from network effects that reduce the cost of acquiring customers and lockin that limit contestability by any competitors;
  • have a regulation that exempts them from the responsibility to control the proposed contents / offers;
  • can transfer margins from one country to another thanks to royalties on intellectual property and the absence of stable organizations in the countries where they have customers (doing a tax shopping choosing the place to pay less taxes and eroding the tax capacity of the states);
  • benefit from nearly-infinite scale economies, thanks to marginal costs and / or null variable costs;
  • control the performance of the activities of the value producers (capital and labor) thanks to technological tools;
  • establish working conditions for occasional relationships with a degree of control superior to that normally existing in traditional work relationships;
  • unilaterally impose non-negotiable supply conditions to professional lenders of goods and services brokered by them;
  • benefit from outsourcing and flexibility of relationships with various types of their collaborators, exploiting the porosity of the company perimeters determined by the computerization of the activities;
  • intermediate offers between non-professional operators that reduce the rights and protections of consumers, especially the most disadvantaged;
  • influence the formation of public opinion thanks to algorithms that filter the information presented to users by wrapping them in “filter bubbles”;
  • influence scientific thought by funding a myriad of researchers, opinion leaders and policy makers worldwide;
  • keep access to the market of putative competitors through contractual restrictions imposed by exploiting the regulations on intellectual property (just think of the app stores);
  • thanks to the intrinsic properties of immateriality, escape from traditional rights / duties / privileges and immunities of private property, by superimposing their contractual conditions and terms;
  • benefit from access to facilitated finance thanks to privileged access to the risk capital market, which are often interconnected in an invisible web of synergistically managed interests,

and I surely forget some other aspects …

 

Digital revolution and Info-plutocracy

We are entering into the merits of a question that is quintessentially political. Defining politics as the tool to achieve future, socially desirable goals.

We can no longer limit the analysis to capital and labor, we must also include information in the equation and the digital revolution that expresses it.

Can we think of a future in which, for every economic activity carried out by producers – capital and labor – those who control the third variable – information – are few monopolist / oligopolistic intermediaries (monopsonists / oligopsonists) who extract value from the control of intermediation, squeezing the value from capital and, in cascade, from work?

Capitalism has found ways of balancing the conflict between labor and capital that have surpassed the socialist / communist model of collectivization of the means of production.

In just a few years, the traditional capital-labor conflict has been wrapped and dominated by another conflict, a conflict with information that, through the control of intermediation, presses on both.

In just a few years, the 5 largest companies in the world are operators that rely on their dominance on the intermediation of some vertical market. Three entrepreneurs control an economic empire superior to that of many OECD states.

We are observing a monopolization in the domination of the relevance of the immaterial dimension over the material dimension, in the creation and distribution of wealth, with a rising conflict between intermediaries and intermediated, with the compression of rights and guarantees for large social bodies and with a significant political influence.

A dominance that we could define as “info-plutocracy”.

The info-plutocracy of the intermediators is based on a centralized control of information, both in terms of data (privacy implications are an epiphenomenon) and of processes with which such data are collected, processed, communicated and used.

It is a model opposite to the one with which the Internet was born and developed.

For many decades, the Internet was built on protocols, public rules that everyone could incorporate into their software, which established the ways in which computers (servers and clients) communicated, and anyone could build clients and servers and compete. Telephony has also been based on similar mechanisms, from the devices (telephones, switchboards, exchanges, etc.) to the network devices used by the operators and the services developed on them. Two widekly known examples are text messages and e-mail. A decentralization based on a wide variety of servers and clients that interoperate so that anyone can send an SMS or an email to anyone without worrying about the operator or service used by their receiver. An opposite example are Whatsapp, Facebook, Instagram, Snapchat. centralized services which can be used only by joining the same, single service, managed by a single operator.

This closed approach, once the planetary domination has been established, reduces competition and reduces the biodiversity of the infosphere, with the effects I described above. The opposite of the spirit of openness and maximum contendability of users who gave birth and grew the Internet so quickly.

The effects of the digital revolution extend to all markets intermediated by monopoly / oligopolist operators and monopsonists / oligopsonists.

Summing up, the conflict between capitalists and workers induced by the industrial revolution of the eighteenth and nineteenth centuries has developed in the relationship between capital and labor with opposing ideologies that, after many decades, have seen the prevalence over the socialist / communist model, of a model of mass capitalism tempered with rules of protection and guarantee for consumers. The debate between right and left political sides has developed on the point of equilibrium between them.

The conflict between intermediators and intermediaries induced by the digital revolution of the twenty-first century develops in the relationship between information and production (understood as the product of capital and labor) and is starting a social confrontation between a model of management of centralized information that has developed in recent years (and supported by large technological multinationals) and a decentralized model promoted by some avant-gardes (philosophical, technological, political, etc.), a debate with profound differences between those who advocate closed systems and environments and those who fight for decentralization, to foster greater competition and the possibility for users contestability.

 

 

Industrial Revolution
Relationship Capital – Labor
Capitalists Workers
Mass capitalism Socialism / Communism
Right Left

Categories of 18th and 19th century

 

 

Digital Revolution
Relationship Information vs. Production (Capital & Labor)
Intermediators Intermediated (Capital & Labor)
Centralization Decentralization
Closed Open

Categories of the 21st century

 

or, representing the conflicts in another way:

 

Former conflict: Capital vs. Labor

 

New conflict: Information vs. ( Capital & Labor)

 

 

What future do we want to imagine?

For how long will it be possible not to detect this “info-plutocracy” and this new conflict between intermediators and intermediaries? Will we be able to allow it for a long time to expand, vertical by vertical, to other sectors of the economy, hoping that a new invisible hand will solve the problems? Does anyone think that it is possible to un-invent digital technologies and the Internet that is their expression ? Or can we think of socially desirable goals that require political intervention? And what kind of interventions?

The reduction of tax revenues, the conditioning of political opinion, the pressures on traditional operators are, as a matter of fact, just representations of different points of view of the same phenomenon: the prevalence of monopolistic / monopsonistic information on capital and labor.

I think there is not a simple answer to these problems, like increasing taxes, as some would like to do. These extra costs, save some cases, would be transferred to consumers or producers.

In some cases it has been proposed to build “state champions” (such as a public search engine, or a social network or a public platform for professional bidding). In other cases it was also proposed to consider social networking as a non-duplicable social infrastructure and someone even proposed nationalization. These are hypotheses that bring to my mind the Soviet response to the pressures of industrialization through state-owned companies.

I do not believe that such measures with a totalitarian fragrance can work; I believe they could generate bigger problems to adjacent areas (from social control to privacy vulnerabilities and other fundamental rights) than those they try to solve.

I believe we need to respond as Western society has responded to the industrial revolution, that is, with more market market oriented interventions, favouring less concentration of information and regulation of negative externalities. I believe we should not give in to the logic of the inevitability of closed systems and we must stand firmly on the side of openness.

To tackle the digital revolution we need a comprehensive package of measures that are based on the principles of what we have already done in the period of the industrial revolution: new forms of taxation, innovations in welfare, workers’ and rights, public controls on guarantee for consumers and, fundamentally, increased competition, procompetitive rules, user contendibility, interoperability of services, etc.

But this can hardly happen without an awareness of this new conflict of intermediation between information on the one hand and production (that is, the combination of capital and labor) on the other and without this awareness becoming translated into political action.

In order for this political action to take place, it is necessary for the intermediaries to demand it by coalescing into awareness:

 

Intermediated of the world, unite!

 

 

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