The Negative Digital Superhighway

Joe Nocera devoted a recent column (“Will Digital Networks Ruin Us?” New York Times, January 6) to Jaron Lanier‘s “universal theory” that the tendency of “network efficiencies” to benefit but also destabilize large organizations are the root cause of a host of problems in domains with nothing else apparently in common. Such brittleness and dysfunction is everywhere, from the National Security Agency to social media networks to Wal-Mart; from the job market to finance; to globalization, which Lanier calls merely “one form of network efficiency.”

The remedy for all these disparate crises is thus to slow down network effects, with a universal micropayment royalty system increasing transaction costs for all forms of intellectual property. Any similarities to Bastiat’s satirical proposals such as “a railroad composed of a whole series of breaks in the tracks” are presumably unintentional. But in each of Lanier’s examples, over attributing the role of network effects extenuates another common factor: The distorting effect of state subsidy on the economy.

A basic insight of Coasean firm theory is that organizations tend toward the size where scaling up’s total benefits most outweigh its inevitable costs. Thus network effects, like any other lowering of transaction costs, will indeed generally benefit larger organizations that require more internal transactions in their operation. But fallout ensues when network effects are caused by subsidies that offload transaction costs instead of lowering them.

The distortion of price signals causes malinvestment. Apparently neutral infrastructure, from highways to telecommunications to financial markets, turns out again and again to have been tailored for big businesses with lobbying pull. Smaller-scale alternatives that are more adaptive, and even more efficient when transportation and other distribution costs are factored in as per Borsodi’s Law, are crowded out. Organizations become entrenched and unresponsive to individuals, whether customers, job seekers or investors. And excessively large organizations simply become too cumbersome to function well.

The 10,000-fold decline in organizational size from Kodak to Instagram, lamented by Lanier and Nocera for eliminating middle-class jobs, is what happens when the “what was good for our country was good for General Motors and vice versa” bubble pops and GDP-dwindling ephemeralization runs its course. Undistorted by cronyist favoritism, it would reduce the cost of living just as dramatically, obviating the need for Fordist propping up of salaries.

Even at the height of 20th-century industrialism, Kodak-scale R&D was never necessary for key technological innovation. Ralph Nader notes that “[t]he firms which introduced stainless steel razor blades (Wilkinson), transistor radios (Sony), photocopying machines (Xerox), and the ‘instant’ photograph (Polaroid) were all small and little known when they made their momentous breakthroughs.”

The digital age’s behemoths are every bit as much creatures of the state — and every bit as obsolete — as was Ma Bell.

Citations to this article:

Free Markets & Capitalism?
Markets Not Capitalism
Organization Theory
Conscience of an Anarchist