The Rapid Rise of a Digital-Corporate Neo-Feudalist Dystopia

As digital firms move to displace more government roles over time, from room-letting to transportation to commerce, citizens will be increasingly subject to corporate, rather than democratic, control.

By Frank Pasquale, a Professor of Law at University of Maryland Francis King Carey School of Law, and cross posted from openDemocracy

Economists tend to characterize the scope of regulation as a simple matter of expanding or contracting state power. But a political economy perspective emphasizes that social relations abhor a power vacuum. When state authority contracts, private parties fill the gap. That power can feel just as oppressive, and have effects just as pervasive, as garden variety administrative agency enforcement of civil law. As Robert Lee Hale stated, “There is government whenever one person or group can tell others what they must do and when those others have to obey or suffer a penalty.”

We are familiar with that power in employer-employee relationships, or when a massive firm extracts concessions from suppliers. But what about when a firm presumes to exercise juridical power, not as a party to a conflict, but the authority deciding it? I worry that such scenarios will become all the more common as massive digital platforms exercise more power over our commercial lives.

A few weeks ago, the Friedrich Ebert Stiftung (a think tank affiliated with the Social Democratic Party in Germany) invited me to speak at their Conference on Digital Capitalism. As European authorities develop long-term plans to address the rise of powerful platforms, they want to know: What is new, or particularly challenging, in digital capitalism?

https://www.youtube-nocookie.com/embed/GzOTuQ1sJbc?rel=0

My answer focused on the identity and aspirations of major digital firms. They are no longer market participants. Rather, in their fields, they are market makers, able to exert regulatory control over the terms on which others can sell goods and services. Moreover, they aspire to displace more government roles over time, replacing the logic of territorial sovereignty with functional sovereignty. In functional arenas from room-letting to transportation to commerce, persons will be increasingly subject to corporate, rather than democratic, control.

For example: Who needs city housing regulators when AirBnB can use data-driven methods to effectively regulate room-letting, then house-letting, and eventually urban planning generally? Why not let Amazon have its own jurisdiction or charter city, or establish special judicial procedures for Foxconn? Some vanguardists of functional sovereignty believe online rating systems could replace state occupational licensure—so rather than having government boards credential workers, a platform like LinkedIn could collect star ratings on them.

In this and later posts, I want to explain how this shift from territorial to functional sovereignty is creating a new digital political economy. Amazon’s rise is instructive. As Lina Khan explains, “the company has positioned itself at the center of e-commerce and now serves as essential infrastructure for a host of other businesses that depend upon it.” The “everything store” may seem like just another service in the economy—a virtual mall. But when a firm combines tens of millions of customers with a “marketing platform, a delivery and logistics network, a payment service, a credit lender, an auction house…a hardware manufacturer, and a leading host of cloud server space,” as Khan observes, it’s not just another shopping option.

Digital political economy helps us understand how platforms accumulate power. With online platforms, it’s not a simple narrative of “best service wins.” Network effects have been on the cyberlaw (and digital economics) agenda for over twenty years. Amazon’s dominance has exhibited how network effects can be self-reinforcing. The more merchants there are selling on (or to) Amazon, the better shoppers can be assured that they are searching all possible vendors. The more shoppers there are, the more vendors consider Amazon a “must-have” venue.

As crowds build on either side of the platform, the middleman becomes ever more indispensable. Oh, sure, a new platform can enter the market—but until it gets access to the 480 million items Amazon sells (often at deep discounts), why should the median consumer defect to it? If I want garbage bags, do I really want to go over to Target.com to re-enter all my credit card details, create a new log-in, read the small print about shipping, and hope that this retailer can negotiate a better deal with Glad? Or do I, ala Sunstein, want a predictive shopping purveyor that intimately knows my past purchase habits, with satisfaction just a click away?

Amazon warehouses provide more goods than ever to consumers worldwide. Image: Scott Lewis, CC2.0.

 

As artificial intelligence improves, the tracking of shopping into the Amazon groove will tend to become ever more rational for both buyers and sellers. Like a path through a forest trod ever clearer of debris, it becomes the natural default. To examine just one of many centripetal forces sucking money, data, and commerce into online behemoths, play out game theoretically how the possibility of online conflict rebounds in Amazon’s favor. If you have a problem with a merchant online, do you want to pursue it as a one-off buyer? Or as someone whose reputation has been established over dozens or hundreds of transactions—and someone who can credibly threaten to deny Amazon hundreds or thousands of dollars of revenue each year?

The same goes for merchants: The more tribute they can pay to Amazon, the more likely they are to achieve visibility in search results and attention (and perhaps even favor) when disputes come up. What Bruce Schneier said about security is increasingly true of commerce online: You want to be in the good graces of one of the neo-feudal giants who bring order to a lawless realm. Yet few hesitate to think about exactly how the digital lords might use their data advantages against those they ostensibly protect.

Forward-thinking legal thinkers are helping us grasp these dynamics. For example, Rory van Loo has described the status of the “corporation as courthouse”—that is, when platforms like Amazon run dispute resolution schemes to settle conflicts between buyers and sellers. Van Loo describes both the efficiency gains that an Amazon settlement process might have over small claims court, and the potential pitfalls for consumers (such as opaque standards for deciding cases).

I believe that, on top of such economic considerations, we may want to consider the political economic origins of e-commerce feudalism. For example, as consumer rights shrivel, it’s rational for buyers to turn to Amazon (rather than overwhelmed small claims courts) to press their case. The evisceration of class actions, the rise of arbitration, boilerplate contracts—all these make the judicial system an increasingly vestigial organ in consumer disputes. Individuals rationally turn to online giants for powers to impose order that libertarian legal doctrine stripped from the state. And in so doing, they reinforce the very dynamics that led to the state’s etiolation in the first place.

This weakness has become something of a joke with Amazon’s recent decision to incite a bidding war for its second headquarters. Mayors have abjectly begged Amazon to locate jobs in their jurisdictions. As readers of Richard Thaler’s “The Winner’s Curse” might have predicted, the competitive dynamics have tempted far too many to offer far too much in the way of incentives. As journalist Danny Westneat recently confirmed,

Chicago has offered to let Amazon pocket $1.32 billion in income taxes paid by its own workers.

Fresno has a novel plan to give Amazon special authority over how the company’s taxes are spent.

Boston has offered to set up an “Amazon Task Force” of city employees working on the company’s behalf.

Stonecrest, Georgia even offered to cannibalize itself, to give Bezos the chance to become mayor of a 345 acre annex that would be known as “Amazon, Georgia.”

Note that these maneuvers–what Tracey Kaye calls “corporate seduction” via tax and other incentives–are not new. But as they accelerate, they mark a faster transfer of power from state to corporate actors. The mayors are in a weakened position because their tax revenues are not high enough to support high quality municipal services, and now they’re succoring a corporate actor with a long history of fighting to push taxation even lower. Similarly, the more online buyers and sellers are relying on Amazon to do their bidding or settle their disputes, the less power they have relative to Amazon itself. They are less like arms-length transactors with the company, than they are like subjects of a despot, whose many roles include consumer and anti-fraud protection.

Even the federal government may soon privatize critical procurement functions, relying on Amazon’s giantism to extract deals that the Defense Department is itself unable to demand. Procurement premised on public purpose could contribute to a Green New Deal. When it is, instead, premised merely on the cheapest cost, it’s an open invitation to continue the same unethical sourcing that has plagued so much government purchasing.

Solutions to Amazon’s power will, no doubt, be hard to advance as a political matter—consumers like 2-day deliveries. But understanding the bigger picture here is a first step. Political economy clarifies the stakes of Amazon’s increasing power over commerce. We are not simply addressing dyadic transactions of individual consumers and merchants. Data access asymmetries will disadvantage each of them (and advantage Amazon as the middleman) for years to come. Nor can we consider that power imbalance in isolation from the way Amazon pits cities against one another. Mastery of political dynamics is just as important to the firm’s success as any technical or business acumen. And only political organization can stop its functional sovereignties from further undermining the territorial governance at the heart of democracy.

5 thoughts on “The Rapid Rise of a Digital-Corporate Neo-Feudalist Dystopia

  1. Wolf won’t allow anyone who disagrees with him to comment on the articles there… so he would not allow this comment on your Mexico article … so I am posting here:

    Peak México – Oil Production is COLLAPSING

    Click 5 Year View:

    https://tradingeconomics.com/mexico/crude-oil-production

    The transformation of México in the second half of the 20th century reads like a fairy tale. The country went from being a tinhorn dictator puppet colony of the Great Powers — a lampoon backdrop in the films of Cantinflas — to a prosperous and trendy middle class democratic socialist country with less absolute poverty than the United States.

    In recent years nearly as many USAnians have flocked to the medical centers, second home sites and loan-free universities of México as there are would-be gardeners and tradesmen slipping North. Not that long ago it appeared as though the two countries were in the process of exchanging populations.

    In Bottleneck: Humanity’s Impending Impasse, William R. Catton called our modern humans Homo colossus — those among our kind living in industrial countries and consuming massive amounts of fossil fuels to motivate and control machines that do orders of magnitude more work than humans or animals could do otherwise. Homo colossus is gradually replacing Homo sapiens as industrial development spreads like a cancer across the Earth.

    Fossil fuels artificially boosted carrying capacity for human occupancy, at least to outward appearances. It could never last.

    Contrary to what Elon Musk, Peter Diamandis or other technoutopians might tell you, there is zero likelihood that current solar income can replace concentrates of ancient sunlight gathered and stored over millions of years. Nuclear power, with its dwindling supply-chain, nation-killing meltdowns, and Easy-Bake bomb potential, is a death wish. Renewables simply will not scale to a consumer society trying to fulfill the desires of seven billion Homo colossus. A reorganization is coming.

    One thing is certain. While Homo sapiens, with a stable population under one billion, might have stood a reasonable chance of being around for another two or three million years, Homo colossus hasn’t a prayer.

    In 2004, the Astronomer Royal in Britain, Sir Martin Rees, assigned humanity about a 50/50 chance of surviving through the 21st century. He was being generous. Earth has already passed tipping points in seven of ten essential life support systems for humans — biodiversity, climate change, nitrogen cycle, phosphorus cycle, ocean acidity, land fertility, and freshwater availability — and the other three — ozone, atmospheric aerosols and chemical/radioactive pollution — have yet to be fully quantified but may have already been exceeded as well.

    In evolutionary biology a population bottleneck is where radical change to the environment causes a species to lose of all but the most hardy of its population; hardy, that is, in terms of the selection pressures arising from the change. If there are no sufficiently hardy individuals left, or the ones that manage to survive cannot reproduce sufficiently to repopulate, the species goes extinct. We are quickly approaching that reckoning but we have yet to understand what is happening, never mind change course.

    México is a poster child for the present schizophrenia. On November 3rd the national oil company, Petróleos Mexicanos (Pemex), made headlines across the world: “Pemex makes México’s biggest onshore oil find in 15 years. ” México’s President, Enrique Peña Nieto personally made that announcement, standing shoulder-to-shoulder with his energy minister, Pemex’ chief executive, and a range of other government and union officials at the Tula refinery in Veracruz. He proudly announced that Pemex made its historic discovery by drilling its onshore Ixachi well near the municipality of Cosamaloapan, and that the overall field is believed to hold some 350 million barrels of proven, probable and possible reserves.

    Pause for a second and consider that number. True, it is the biggest find in 15 years. Equally true it represents less than one year of the oil México produced at its peak, in 2003, and perhaps 18 months worth at present rates of production. In the United States, its largest trading partner, it would keep the lights on and the filling stations operating for all of 17 days, 18 hours and 20 minutes, unless it arrived at a holiday travel time.

    But even the number 350 million is suspect. First, that number is “proven, probable and possible;” three very different categories. If it was all proven reserves, bankers would be lining up to lend capital to develop the find. Instead, México has had to go to Big Oil looking for venture partners, and dropped its expectations from a majority holding, to 49% and now 40% and still no takers.

    México has a long history of remaining independent of the oil giants, going back to the 1930s, when Lázaro Cárdenas refused to be extorted by Franklin Roosevelt and built his own refineries. The Mexican miracle came in 1972, when fisherman Rudesindo Cantarell Jiménez complained to the authorities that his nets were clogged with black tar.

    By 1981 the Cantarell complex was producing 1.16 million barrels per day (180,000 m3/d). However, the production rate dropped to 1 million barrels per day (160,000 m3/d) in 1995. The nitrogen injection project, including the largest nitrogen plant in the world, installed onshore at Atasta Campeche, started operating in 2000, and it increased the production rate to 1.6 million barrels per day (250,000 m3/d), to 1.9 million barrels per day (300,000 m3/d) in 2002 and to 2.1 million barrels per day (330,000 m3/d) of output in 2003, which ranked Cantarell the second fastest producing oil field in the world behind Ghawar Field in Saudi Arabia. However, Cantarell had much smaller oil reserves than Ghawar, so production began to decline rapidly in the second half of the decade. Unfortunately, the nitrogen has migrated into the gas, lowering its heating value and thus, economic value, and soon will require treatment to remove the nitrogen from the gas, to be able to use the gas as a fuel.
    — Wikipedia

    Pemex spent US$6 billion in 2017 to arrest Cantarell’s decline at around 325,000 nitrogen-contaminated barrels per day but nothing can prevent eventual collapse of the field. The shortfall is having a negative effect on México’s annual government budget, its sovereign-credit rating, and the exchange rate of the peso (it dropped 25% just this week). México’s trade balance was 10.7 billion dollars in the red after the first 11 months of 2017, 50.6 percent of that from imported petroleum, which explains why the small discovery in Veracruz was so important to Peña Nieto. Earlier in the year an attempted auction of offshore leases — a political football punted away by every president prior to Peña Nieto — failed when no buyers showed up for the plays being offered. Another auction is scheduled for January.

    The billions of pesos México had been receiving for crude export revenue once contributed as much as 40 percent of its budget. It paved roads, built parks and schools, and allowed still more exploration for new reserves. Now that figure has dropped to under 20 percent and the pinch is being felt at every level of society. The public has lost confidence in police and only 7 out of 100 crimes are reported. Of those reported , only 4.46 percent are caught and convicted. Police are unable or unwilling to stem gang violence.

    “The high levels of violence not seen in years and the impunity with which crimes are treated put investment at risk,” a spokesman for the Mexican wine industry told the Financial Times of London. The director of the National Association of Private Transportation, which includes the main users of road freight transport, told the newspaper that it is not only the robberies, but that criminals “are selling these products in illegal markets below the price of production and compete with our products.”

    Gang violence hurts tourism, México’s second cash cow. Rising petroleum prices will kill tourism, and not just in México. As one big field after another goes into terminal decline, and the best technology in the world cannot find more, squeeze more, or make more at a price anyone can afford, the airline industry will be one of the first to feel the higher prices. Bargain flights from Paris to Cancun may be replaced by train trips to mountain castles in Bavaria.

    It is hard not to notice that all of México’s most popular tourist destinations lie closer to the sea than New York City or Miami. The most intense Atlantic Basin storm ever measured, Hurricane Wilma, hit the Mayan Riviera in 2005, dropping beachfront high-rises like dominoes.

    View story at Medium.com

    Trump better expedite that wall!!!

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      1. He removes comments when they demonstrate that he is wrong.

        1. He stated that the global economy would be able to continue to prosper if population growth fell to 0 (steady state) — when I posted that this was not possible he gently chided me

        I then pulled up a comprehensive study from Yale University that indicated that roughly 1/3 of global GDP is attributable to the increase in population.

        Wolf deleted the comment and banned my account.

        2. He has written articles claiming that EVs are the way forward — as is renewable energy.

        Any post that contradicts him gets deleted:

        For instance:

        Electric vehicles in Hong Kong could be adding “20 per cent more” carbon to the atmosphere than regular petrol ones over the same distance after factoring in the city’s coal-dominated energy mix and battery manufacture, a new research report found.

        Investment research firm Bernstein also claimed that by subsidising electric vehicle purchases, the government was effectively “harming rather than helping the environment” at the expense of the taxpayer.

        “The policy is to encourage drivers to be green, but they are actually subsidising vehicles that create more emissions of CO2 and particulates from power plants,” said Bernstein senior analyst Neil Beveridge.

        http://www.scmp.com/news/hong-kong/health-environment/article/1935817/electric-shock-tesla-cars-hong-kong-more-polluting

        “To provide most of our power through renewables would take hundreds of times the amount of rare earth metals that we are mining today,” according to Thomas Graedel at the Yale School of Forestry & Environmental Studies. So renewable energy resources like windmills and solar PV can not ever replace fossil fuels, there’s not enough of many essential minerals to scale this technology up. http://energyskeptic.com/2014/high-tech-cannot-last-rare-earth-metals/

        Anyway — in terms of the Mexico story …. the fundamental cause of the symptoms we are seeing there is related to collapsing oil production.

        Mexico is simply running out of cheap to produce oil (as is the world) — and prices cannot move high enough to encourage more exploration — because ‘According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices’

        Oil Discoveries are at record lows https://assets.bwbx.io/images/users/iqjWHBFdfxIU/icbkDFACM4iA/v2/800x-1.png

        Like

      2. Thomas, while the decline of Pemex has certainly played a vital part in Mexico’s current trials and tribulations (something I’ve documented in numerous articles), I would certainly not place it as the number one cause. As most informed people in Mexico will tell you, the most important two problems the country faces right now (and indeed for the last 30-odd years, if not longer) are corruption and impunity. Without them, Pemex would almost certainly be in better health, as would the nation’s finances as a whole.

        Like

      3. As you point out Don — corruption is nothing new to Mexico. And corruption within Pemex is nothing new.

        So what has changed?

        Very obviously total oil production — and revenues – have gone off a cliff …. exports are virtually nil.

        A country can survive corruption — but when that corruption is fueled (and to a significant extent its economy) – by revenues generated by a key resource such as oil — and those exports dry up — then you have a situation where the country faces economic collapse – corruption or no corruption.

        That is what is happening in Mexico – right before our very eyes — but nobody is talking about the elephant in the room.

        If the price of oil were to rise well above $100 and stay there for a prolonged period — would we be having this discussion? I think not.

        Would Venezuela and Saudi Arabia – both EXTREMELY corrupt, socialist countries (KSA is the king of socialism given the hundreds of billions it distributes to its population to quell them) — be on the verge of collapse? I think not.

        And herein lies the problem:

        Oil prices cannot remain at $100 (or anywhere near that level) without massive consequences for the global economy

        https://www.imf.org/en/Publications/Policy-Papers/Issues/2016/12/31/The-Impact-of-Higher-Oil-Prices-on-the-Global-Economy-PP77

        Even $60 oil is a massive headwind.

        Unfortunately Mexico — and almost all producers need $100+ oil to break even. This is the true break even point — not the number that the MSM quotes — because that number does not include taxes. royalties, dividends, exploration etc etc etc etc…..

        Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000.

        “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said

        http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

        Council on Foreign Relations: Saudi Arabia’s Break-Even on Oil is Approaching $120 per barrel

        http://www.cfr.org/oil/fiscal-breakeven-oil-prices-uses-abuses-opportunities-improvement/p37275?cid=ex-cgs-oil_breakeven_discussion-levi_use-113015

        Without oil prices well over $100 — these producers will eventually collapse.

        As expected — producers are slashing capex… they are giving up on finding new oil that can be produced at prices that the global economy can handle

        This is all going to come to a head at some point soon …. HSBC says this year:

        HSBC: Brace for the oil, food and financial crash of 2018

        80% of the world’s oil has peaked, and the resulting oil crunch will flatten the economy

        View story at Medium.com

        So yes Mexico is corrupt. I have lived around the world for 25 years now in some very corrupt countries – including Indonesia and China. They continued to function.

        Of course Mexicans are going to point to corruption as the source of their woes.

        If you show them this chart and suggest that the problems they are facing have a different cause — they will look away – because the implications are horrific

        https://tradingeconomics.com/mexico/crude-oil-production

        But show that to a reasonably intelligent 10 year old and ask him do you see a problem here? And I guarantee he will response with — they are running out of oil.

        The 10 year old is not smarter than the average Mexican – far from it. He can be honest because he would not understand the implications of the chart. He would not understand that it means collapse of his country — and the suffering that this would cause.

        The 10 year old is like the child who pointed to the Emperor and said – he’s got no clothes.

        This is the fundamental cause of Mexico’s woes — and there is no solution. Corruption as it has always been… is a side show.

        On a global level this is also the cause of the never-ending financial crisis we are experiencing…. or as James Kunstler calls it The Long Emergency.

        I leave you with this superb analysis from the head of research at Tullett Prebon, a company that provides energy data and insights to investment banks and other financial clients:

        THE PERFECT STORM (see p. 58 onwards)

        The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy.

        But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel.

        http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf

        Mexico is the tip of the iceberg.

        Like

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