Wealth of Networks?
Abstract: This article is based on recent discussions on topics such as
networks, standards and optionality. The article argues that networks set
standards and that taking the networking perspective thus implies imposing standards.
The associated coercion makes that networks cannot rise out of the Era of Government.
Instead, it makes more sense to regard relations and arrangements as
basically bi-lateral and start from there.
A.Networks versus Hierarchy
Back in 1993, an article appeared in Optionality with the title
Hierachy is obsolete; the future is networks. This article argued
that the networked nature of small businesses is superior to the
hierarchical structure common in large organizations. In the typical pyramid
structure of large organizations, a single leader sits at the top, giving
instructions to managers who in turn pass on these instructions to lower
staff. Networking, by contrast, is more dynamic, more decentralized, less
hierarchical. Through networking, small businesses can combine to respond
quickly to the demands of new growth areas, deliver more innovation, adapt
faster to changing demands, etc.
In the Information Age, networking is clearly superior to the monopolies and
hierarchical structures that date back to the Industrial and Agricultural
Ages. The question is, however, if networking can maintain this superiority
beyond the Information Age. Is networking the most suitable organizational
structure to face future times? Is it helpful to select any specific
organizational structure as the perfect solution? Doesn't it make more
sense to assume that there is no organizational structure at all and to
regard relations and arrangements as basically bi-lateral?
B. Wealth of Networks?
A classic work on market economics is Wealth of Nations (full title: An
Enquiry into the Nature and Causes of the Wealth of Nations), by Adam
Someone who is playing with the idea of updating this work, may look at
Wealth of Networks as an obvious title that seems to fit the
purpose like a glove. Such a new title may indeed better reflect current
circumstances, but how far does it look into the future? The strength of
Wealth of Nations is that it contained a wisdom that even now, a few
hundred years later, few seem able to grasp. How long, by contrast, would
any current update remain valid? If measured this way, Wealth of
Networks may never rise above a trendy work that is doomed to become
out of fashion within a decade or so.
Indeed, there is scope of improvement in the title Wealth of Nations.
But why not start with wealth? The term wealth does invoke
images of greedy businessmen, corrupt politicians, professors in economics,
capitalism, property, money, contracts, financial transactions, law
enforcement, etc. Such images have many negative connotations. Therefore,
it makes sense to use the term prosperity rather than wealth.
Of course, an alternative title such as Prosperity of Networks kind
of takes the punch out of the line, i.e. the reference to Adam Smith would
be less apparent. If prosperity does count as an improvement, how
much of an improvement is the replacement of nations by
networks? Can the term network rise above the nationalism
inherent in the term nations?
Firstly, what is a network? There are different types of networks, but in
many cases there is a single party that sets the rules and that pulls all
the strings, as in a headquarters-and-branches network. A network can be
centrally controlled or decentralized. In other words, a network is not
per definition decentralized. Similarly, a network can be dictatorial in
that it enforces standards, etc. The concept network is simply quite vague,
it can be just as dictatorial as a national governmment. Many religious
cults can be described as networks. So can many of the tribal and feral
cultures that are gaining much popularity.
In other words, one can question whether concepts such as plurality,
freedom, independence and decentralization are innate to networks.
If networks have changed and if we like those changes, should we not focus
on what makes up those changes, rather than to try and capture those
changes with the word network?
C. The Internet
The word network derives much of its present popularity from
the Internet. For many, the Internet symbolizes decentralization and
diminishing control of governments. This may well be the reason
why a title such as Wealth of Networks seems to appeal to
those who welcome such developments. But didn't the Internet grow out
of the combined effort of US government departments, in particular Defence
and Education? And isn't the Internet just another protocol, largely
controlled by governments, in particular the US Government?
Does the Internet not impose a single standard on communications, in the
very way governments have always tended to control and standardize
In the past, many computer-networks were centralized, with all communication
controlled by and taking place via mainframes. The network was not
intelligent, terminals were dumb, each hanging at the end of a line in a
master-slave relationship with such mainframes. Today's personal computers
have much more intelligence, giving network nodes greater independence,
if you like a basis of equality. In theory, each Internet address has
the same potential. These changes took place in networks not because of the
inherent nature of computer-networks, but due to long-term developments
such as more innovation, globalization and decentralization triggered by
basic, on-going economic drives towards greater performance, reliability,
flexibility and versatility, supplied at ever lower prices and with ever
higher rates of efficiency.
Such developments defy national borders, they prompt global networks to
cross national borders with increasing ease, in the process undermining the
authority of national governments and making governments increasingly
So how much does the Internet, or the concept of contemporary networks in
general, symbolize this accumulation of developments? Do networks deserve
more credit than, say, computers and telecommunications? Many regard
computers as difficult bussiness tools or addictive entertainment.
Telecommunications furthermore is typically organized on a national basis,
with each country having its own national carrier. Networks seem able to
rise above such nationalism, by leasing lines from such carriers and using
computers to guide traffic, thus building independent topologies on top of
this. For many, the Internet symbolizes the best of computers and
But networks, and the computers and telecommunications that make up such
networks, are all part of infrastructure. The struggle to control
infrastructure is already quite out of date in the current Information Age,
in which content is king. All terms such as the Internet, routers,
satellites and fibre optics, reflect control over infrastructure.
Technology can only facilitate change, it can only carry the content that
has to be considered in the minds of people.
Of course, Marshall McLuhan's the medium is the message clearly
applies to telecommunications and computer-networks as well.
As such, the Internet does symbolize innovation, globalization and
decentralization, as well as empowerment of the nodes. But networks also
enforce a standard from above and in doing so they determine the shape of
communications and influence the content. This is why networks remain in
many respects stuck in the Age of Government. In order to connect to any
network, computers all have to abide by a single set of rules, standards
and protocols that is enforced networkwide, which again disempowers the
nodes. Instead, it is much preferable for the initiators of communication
to mutually agree on the best way to communicate, which will most likely
result in many different ways of communication taking place simultaneously.
Standards claim to make life easier for consumers - the promise of
standards is cheaper products through larger markets, no incompatible,
outdated equipment, etc. But today, products become outdated not so much
because a new supplier does the same thing differently, but because of the
rapid pace of technological innovation.
One example where standards have been very rigidly enforced is telephony.
The basics of telephony date back more than a century and have changed
little since. Horrific sound quality is the result. It's as bad as the old
78 vinyl records. In sound equipment, the industry has gone through
high-fidelity analog to CD quality digital sound. Remember the low
quality sound cards on PCs? Now it's all CD-quality. Not so telephony.
In the old days, few were concerned about the sound quality of telephones,
because the microphones and speakers in those days could not produce a
higher quality anyway. Now, at the verge of the 21 century, we are still
stuck with sound quality that dates back to the 19th century. All because
some misinformed people and some populist politicians believe that it is a
good idea to have standards.
The very essence of a standards is to reduce diversity and to prevent
co-existence of alternatives. Standards are barriers against change, they
restrict innovation and reduce opportunities for new entrants into the
market. In order to set standards, suppliers have to compromize on just
about everything. Standards are often outdated before they are implemented,
thus preventing alternatives that would be far easier.
A standard - by definition - reduces a market, it prevents alternatives to
appear and the effect of putting the market into a straitjacket will mean
reduced growth. Without standards, market growth and competition will cause
prices to come down and this will sort out the non-performers. A 'market'
shaped by a standard is a less-performing, undersized market that lacks
innovation, that invites corruption, cronyism, nepotism, etc.
The argument that standards result in larger markets and cheaper products
and services, is false. Standards prevent growth by restricting innovation
and encourage overpricing and unfair exploitation of consumers. In the end,
any standard is restrictive and thus inferior. Standardization made its
mark shortly after the Industrial Revolution, but is out of step with the
dynamics of modern times. Standardization has now become the playball of
politics. Politicians being politicians, they like to agree on a standard.
Bill Clinton's (or rather Al Gore's) Information Super Highway statements
a few years ago took the Internet out of the hands of the technical
experts into the realms of brick-and-mortar politics.
There are de facto standards and de jure standards. De facto standards are
bad, they make a single company dominate an entire market through control
over such a standard. Many therefore call on governments to encourage open
standards or set de jure standards that are public, they call for standards
that are controlled by governments, by independent bodies or by a multitude
of participants. But when big business and governments collude to set
standards, the consumer equally is the victim. The end-user is effectively
denied input in the matter, and even if there is such input, the
technicalities of the standards-setting process are beyond the reach of the
Instead of calling for public standards, it makes more sense to support
legal prohibition of de-facto standards by anti-trust and anti-cartel
legislation. Standards are increasingly recognized as barriers against the
implementation of a pro-active competition policy.
In international politics, coexistence of different views and methods is
an inevitability, while the methods of dictators
who seek to mould people into their standards, are doomed to fail.
But again, calling for government intervention is no definitive answer to
the problem of monopolies. After all, governments themselves are
monopolies. Politically, standards are a more convenient solution than
a pro-active competition policy. Therefore, politics can only go that far
in consumer protection, politicians tend to prefer replacement of
monopolies with business cartels, rather than to empower the consumer.
In today's world, the basis of power has shifted from possession of
territory to control over information. In this Information Age, networking
is clearly superior to the monopolies and hierarchical structures that date
back to the Industrial and Agricultural Ages.
The problem of networks is that they come with standards that, by their
very nature, restrict innovation. Fighting over standards only endorses
calls for government intervention, i.e. restrictive solutions.
From an ideological viewpoint, networking is unable to go beyond the
Era of Government. Consequently, networking as an organizational structure
will lose its glance as governments - as institutions that control
our lives to such a large extent - are gradually phased out.
All governments, being tied to geographical borders, will become
increasingly unworkable and irrelevant. Governments derive their
power from coercive control over specific territory - if they
lose this control, their power fades away.
In the current Information Age, success is measured in financial terms as
if it abides by the economic rules of cycles and of supply and demand.
Both science and economics are part of this world that is about to become
irrelevant. Economics is about money, contracts, ownership, etc, all of
which are controlled by governments and their laws. Education and science
is largely funded, controlled and exploited by governments to keep up the
false appearance that rules make sense. Worship of rules makes people pawns
in the hands of governments that struggle to survive. Laws, rules and
standards are all part of the old world that is rapidly fading away
Governments are fighting a desperate struggle for survival in which they
find it increasingly difficult to cope with modern times of global
realities. Governments follow the simple strategies of enforcing
territorial borders, fabricating scarcity and privileging those who
collaborate. This scarcity principle fails in regard to information -
the fact that someone uses specific information does not stand in the way
of someone else using the same information elsewhere. The fluid nature of
information also makes a mockery out of territorial borders. The easier it
gets for information to cross borders, the more difficult it will be for
governments to exercize their control. Globalization will expose the local
monopolies set up by governments. These monopolies will be recognized more
and more for their evil character, their inclination towards corruption,
cronyism, nepotiosm and unfair exploitation of consumers, their prevention
of innovation, their denial of responsibility for the huge damage they
inflict, etc. etc. As the pillars of government power collapse, governments
will become increasingly irrelevant. The ideology of territory-based rules
enforced by coercive control will evaporate. The most
prominent ideology in future times will be optionality!
Ownership laws over information become increasingly hard to enforce, while
at the same time, there is ever less reason to worry about this.
Costs to access information will become negligable. Consequently,
debates about copyright and other intellectual property rights
effectively become non-debates. The wealth that is perceived to be
reflected by and incorporated in standards, networks and information will
be eclipsed by the prosperity resulting from conditions that nurture
creativity. In future times, the key to prosperity will not be
control over networks or the information they carry, but the key to
prosperity will be the ability of people to develop and express their
talents and creativity. Instead of passively adopting standards that are
imposed by networks, people will prefer bi-lateral arrangements that are
self-initiated and guided by optionality.
Appendix A The Microsoft Monopoly
In the world of datacommunications, IBM once ruled the networks and there
still are many who prefer such a centralized approach. But despite IBM's
control, a single processor that controls many dumb terminals has proven
to be inferior compared to multiple processors.
The biggest problem with networks is their inclination to enforce a single
standard. From the computer perspective it used to be IBM's SNA, while for
a long time the telecom carriers cartel fronted by the ITU tried to enforce
X.25 and OSI. Innovation didn't like either of the bullyboys and chose TCP/IP,
hence the victory of the Internet.
Thus, the victory of the Internet was more a choice between alternative
evils, than that the Internet offered something intrinsically different.
The fact that we have once more ended up with a single standard shows the
limitations of network decentralization, and indeed the very limitations of
applying the concept of networking to social and cultural change.
With the statement The nice thing about standards is that there are so
many of them, IBM tried to convince people that IBM's own, proprietary
standards were as good as public standards such as by IEEE and ISO.
It turned out that public standards were more acceptable, not because
they were necessarily superior in a technical sense, but because
innovation was even more restricted by IBM than by the standardization
bodies. IBM's fate was to repudiate its own network protocols such as
APPN, and the PC and networking in general. IBM's salespeople were
simply more interested in selling one new, larger mainframe to replace
various existing computers, than that they were serious about networking
the existing computers.
For a while, the Internet appeared to demolish the positions of IBM, the
ITU, the ISO, as well as Microsoft. The one-click hyperlink of the World
Wide Web simply was more appealing than the double mouse-click of existing
computer operating systems. WEB-browsers enhanced with dynamic HTML, Java
platforms of Microsoft. When Microsoft realized this, it set out to
dominate the Internet browser market, using all the muscle-power it had as
a software monopoly.
Microsoft's behavior should of course be rejected, but is legal anti-trust
action against Microsoft the answer? Aren't the monopolies controlled by
governments, such as in health care, law, science and education, security
and finance just as bad or worse, because their sheer size and scope dwarfs
even a company the size of Microsoft? Instead, how about withdrawing
the support governments now give to Microsoft in the form of copyright protection?
Also, legal solutions can only go that far, in the end a far more effective
deterrent will be the insight that investors make a bad choice by backing
monopolies. Investors - not the Department of Justice - should demand such a
monopoly to be split up in such a way that the subsequent parts can
each compete equally in each area. While condoning Microsoft's position, or even
a compromise in this matter may result in some short term profits for Microsoft,
continuing down the monopoly road will do tremendous damage to Microsoft's
reputation and thus its share value in the long term.
As discussed in appendix B, in future times, success will be measured
more in terms of asset appreciation, than in short-term profitability.
This will similarly apply to information as well, information will
become more easy to access and cheaper all the time. There will be no
problem with monopolies as it will be futile to fight over access to
information when information will be available in such abundence.
In terms of prosperity, the emphasis will be on stimulating creativity and
developing vision, not on controlling existing information.
Slogans such as Wealth of Networks and New Rules of the
Information Age do not express much vision. The Information Age is
still part of the Era of Government. To envisage future times that
DonParagon refers to as the Post-Government Era, let's try and look beyond
computers and information, let's try and look beyond networks, let's
Appendix B Reflections on where the Markets are going
At present, investors that seek short-term profits still have a big
influence on politics and society in general. But dividends will become a
poor measure of success as all around the world local monopolies have to
give way to global competition. As a result, the focus of investment will
gradually shift towards appreciation, rather than profits. There will no
longer be huge profits, as there will no longer be monopolies to exploit.
There will only be small profits for the ones that deliver attractive
services. As a result, increases in appreciation will be more attractive
to speculate on for those with money to spend.
Intangibles such as developing products for new growth markets,
establishing quality contacts, the constant improvement of services,
software and content and building up a name, reputation and goodwill are
all vital to success.
Improvements and innovation of products and services includes the ways
they are marketed and presented to users. Many companies have understood
that the new paradigm is: appreciation through creation of new options! They
structure themselves in flexible, dynamic and versatile ways that allow them
to change rapidly to respond to new demands and to technical innovation.
They examine, evaluate, analyze and rethink everything on an on-going basis.
They look out for new trends, watch the competition, are prepared for change.
If there is a shortage of funds, they issue extra stock, spin off parts
and sell them, pay staff in stock rather than salaries and seek partnerships
and alliances where there is synergy. Conversely, they sell off
non-essential parts that restrict such dynamics, thus creating more
flexibility to adapt, raising money and giving themselves choice where to
get services that were previously supplied in-house. Growth makes it
possible to constantly issue new stock. Consequently, they do not bother
about investors that seek short-term profits, instead they enter into
partnerships and alliances aiming for long term appreciation! The policy
of paying staff in stock adds too much new stock anyway.
There is also a risk attached to this policy. Microsoft now is the third
most valuable company on Wall Street, its shares were worth 56 times its
earnings in the past year. As described in this article, a company cannot
sustain such rates of appreciation in future, purely based on the prospect
of future earnings. Such high earnings can only be achieved by exploiting
a monopoly and the Department of Justice has clearly moved against this.
One can argue that Microsoft owns sufficient assets to back up its share
value, such as patents and copyrights, and a talented staff of software
developers. By comparion, a company like Dell that merely assembles computers
from existing components, has reached a stock market value greater than
General Motors. Dell is selling at a price-earnings ratio of 68, all without
Many companies pay staff in stock options as an instrument to inflate
profitability. According to London financial analyst Smithers & Co, had
Microsoft accounted in the full cost of issuing stock options, its 1996
profit of $US2.8 billion would have been a $US10 billion loss. Of course,
many Microsoft employees would have accepted lower salaries than what they
achieved through stock options. But creative accounting such as paying staff
in stock options and selling off parts and buying other companies, makes it
difficult to predict a company's real profitability.
As more and more companies adapt the new paradigm, companies that now have
built their high asset value on such creative accounting, will lose their
edge. Instead, investors will seek for more than a flexible business
structure. Companies will flourish that can link the creative talents of
many people into innovative new products and services. But as soon as such
linking develops into an elaborate network, its flexible character
disappears. Microsoft, through its shere size and its continued ambition to
maintain its monopoly and exploit its intellectual property rights, is
heading in the opposite direction, to the point where Microsoft will isolate
itself by default. Many short-term investors may gamble that Microsoft will
generate profits. But long-term, Microsoft is more volatile due to the constant
threats of anti-trust and other legal action against it, and its reliance on
continued copyright protection. This makes it less attractive as a predictable
[Editor's note: the above article was written for appearance in Optionality
Magazine in May 1998. Like other articles, it's added for reference purposes.
It should be obvious that parts of the text may be out of date.]