The Twilight of Sovereignty: How the Information Revolution is Transforming Our World

Wriston, Walter B.
1992

Chapter One

The Twilight of the Idols

Chapter One

The Twilight of the Idols

 

 

The old order changeth, yielding place to the new...lest one good custom should corrupt the world.

Alfred, Lord Tennyson

DIPLOMATS, HISTORIANS, POLITICIANS, OR PHILOSOPHERS rarely identify technological change as a decisive force in the rise and fall of nation-states, preferring to explain the course of history by the efforts of men and women like themselves.

In ancient Greece, Plato tells us, the leading men of the city did not hold engineers in high regard: "You despise him and his art," he wrote, "and sneeringly call him an engine-maker, and you will not allow your daughter to marry his son or marry your son to his daughter." Little has changed.

In today's world, many would have to concede that important technological breakthroughs may temporarily change the military or economic balance of power. Even the most jaded diplomat would agree that the balance of power in the world altered decisively on July 16, 1945 on the desert of Alamogordo, New Mexico when the first atomic explosion took place. Relations between nations were instantly altered, and the very survival of our planet came into question. Yet many of us assume that however much technology may alter the means by which nations pursue their basic geopolitical in-

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terests, those interests themselves will remain the same. This is not always the case.

The additive developments in science and technology that are often summed up in the phrase "the information revolution" are altering the shape and direction of national and international events in fundamental ways. We are witnessing a revolution in the relationships among sovereign states, in the relationships between government and citizens and between those citizens and the most powerful private institutions in society. And the "engine makers" are the leading revolutionaries.

The information revolution is profoundly threatening to the power structures of the world, and with good reason. The nature and powers of the sovereign state are being altered and even compromised in fundamental ways. The geopolitical map of the world is being redrawn. The elements of the balance of power that has prevailed for the last forty years have already been permanently disturbed and may soon be irretrievably altered or lost. Other institutions of our world, the business corporation chief among them, face equally powerful challenges to their modus operandi and will undergo profound changes that will affect all who are associated with them.

The information revolution, despite being the most frequently announced revolution in history, is still little understood. Many of the innovations that were trumpeted the loudest and earliest have never arrived: the checkless society, the paperless office, newspapers over cable TV, a helicopter in every backyard. Many of them may never arrive. But revolutions are not made by gadgets but by a shift in the balance of power. The underlying forces of the information revolution are causing such a shift in the balance of economic, political, and military power.

The information revolution is usually conceived, quite rightly, as the set of changes brought on by "information technologies," the two most important being modern communications technologies, for transmitting information and

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modern computer systems for processing it. The marriage of these two technologies is now consummated. It is impossible to tell where communication stops and where computing begins. After years of study, in an attempt to determine which bureaucracy should have regulatory power, the federal government gave up on efforts to draw this distinction. In addition to powerful effects on culture and the pace of life, this revolution has changed what we do for a living. It has made many or most of us into what Peter Drucker long ago called "knowledge workers" and is changing the way the rest of us do such traditional jobs as mining and manufacturing, selling and shipping.

Most of us would probably be inclined to say that such dramatic changes are quite enough of an accomplishment for any revolution and that this one could retire from the field with a good day's work done. But underlying and driving the information revolution are two powerful tides that are rocking the power structures of the world: The first is the vast increase and swift and widespread dissemination of knowledge and of information of all sorts. The second is the increasing importance of knowledge in the production of wealth and the relative decline in the value of material resources.

From the beginning of time, power has been based on information. Someone learned to use a burning glass to start a fire; someone was able to find out where enemy troops were. Someone knew how to build a castle wall strong enough to withstand a siege, until someone else learned how to build a catapult or a cannon. Some politician found a pollster who gave notice of what the citizens really worried about. Timely information has always conferred power both in the commercial and the political marketplace.

The dissemination of once closely held information to huge numbers of people who didn't have it before often upsets existing power structures. Just as the spread of rudimentary medical knowledge took away the power of the tribal witch doctor, the spread of information about alternate life-styles

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in other countries threatens the validity of some official political doctrines, the credibility of the leadership, and the stability of the regime.

The marriage of the computer with telecommunications, resulting in movement of information at the speed of light and to enormous audiences, tends to decentralize power as it decentralizes knowledge. When a system of national currencies run by central banks is transformed into a global electronic marketplace driven by private currency traders, power changes hands. When a system of national economies linked by government-regulated trade is replaced -- at least in part -- by an increasingly integrated global economy beyond the reach of much national regulation, power changes hands. When an international telecommunications system, incorporating technologies from mobile phones to communications satellites, deprives governments of the ability to keep secrets from the world, or from their own people, power changes hands. When a microchip the size of a fingernail can turn a relatively simple and inexpensive weapon into a Stinger missile, enabling an illiterate tribesman to destroy a multi-million dollar armored helicopter and its highly trained crew, power changes hands.

The dictionary defines knowledge as the "acquaintance with facts, truths or principles, as from study or investigation." But knowledge can also be thought of as what we apply to work in the production of wealth. Knowledge is the ultimate source of value in work.

A rabbit running free through the meadow is not wealth. It becomes wealth as a result of information applied to the work of a hunter: information about where to find game, how to stalk it, how to throw a spear or shoot an arrow, how to make the arrow, the bow, or the spear. All these bits of information taken together and applied to the hunter's work produce value, that is, dinner for the hunter, his family, or the whole tribe.

Economists have a name for the work the hunter does to

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turn rabbit into roast: value-added. Even in ancient days a considerable portion of that value-added was intellectual: the hunter's knowledge and skill. Nevertheless, in those days the bulk of the value-added was physical -- long days in the field pursuing the rabbit, long and arduous efforts in shaping spear or bow, sharpening arrow or spearhead. And, of course, the original value in the deal was supplied by the rabbit, which fattened itself up in the meadow in pursuit of an agenda somewhat different from the hunter's.

Economic progress is largely a process of increasing the relative contribution of knowledge in the creation of wealth. The value of an ear of wild grain harvested by hunter-gatherers was almost entirely material, a gift of nature. Come the agricultural revolution, and an ear of hybrid corn grown in carefully fenced, rotated, fertilized, and irrigated fields is to a very considerable extent the product of mind. The industrial revolution advanced the process further still as men greatly increased their capacity to manipulate matter and shape it to their needs.

In our time, the knowledge component of nearly all products has vastly increased in importance. As George Gilder has pointed out, the fundamental product of the information age, the microchip, the key component of all modern communications and computer technology, consists almost entirely of information. Raw materials account for about 1 percent of its costs; labor of the traditional sort for another five percent. A majority of the cost -- and value -- comes from the information incorporated into the design of the chip itself and into the design and development of the highly specialized equipment used to manufacture it.[1] 

The information technologies made possible by the chip have a profound effect on the rate of advance of all science since calculations that used to take years can now be done in minutes. Scientific knowledge is currently doubling about every fifteen years. This vast increase in knowledge brings with it a huge increase in our ability to manipulate matter,

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increasing its value by the power of mind, generating new substances and products unhinted in nature and undreamed of but decades ago.

The effort to find, secure, and transport relatively rare natural resources -- minerals, metals, coal, and oil -- has been a key theme of economic production since the onset of the industrial age. Yet the value of all these materials is declining as the power of mind, enhanced by the intellectual hydraulics of information technology, is employed to replace them or economize on their use. Plastics replace metal and stone, fiber optic cable replaces copper. Microchips are made from virtually worthless sand, and superconducting ceramics, from common clay.

As computer-assisted calculations speed scientific investigations, so do they accelerate and simplify engineering and design. Better designs produce more efficient products, from airplanes to ovens, reducing energy needs and conserving on coal, oil and other fuels. Indeed, prices of raw materials have been slumping worldwide for several decades, with only occasional and short-lived exceptions produced by OPEC (Organization of Petroleum Exporting Countries) or other political cartels.

The old industrial age is fading and being slowly replaced by a new information society. This transition does not mean that manufacturing does not matter, or that it will disappear, any more than the advent of the industrial age meant the disappearance of agriculture. What it does mean is that the relative importance of intellectual capital and intellectual labor will increase as that of physical labor and material capital declines. Knowledge applied to work has always created value, although many economists have tended to overlook its vital significance. In the world we are building, such an oversight will be increasingly difficult.

In sum, the world of work, the drama of economic production, the essential basis of our material existence, which for

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several centuries has been dominated by the brute forces of industry, is now dominated by products and processes that consist more of mind than of matter. These products and processes are faster more mobile, have less need of centralized support, and are less dependent on natural resources, physical plant, or human labor than those of the recent past and thus are becoming far more difficult to regulate or control.

Sovereignty, defined by the , as "the supreme undivided authority possessed by a state to enact and enforce its law with respect to all persons, property, and events within its borders," is one of the most important ordering ideas of the modern world, a bulwark of modern power structures. Yet it is a relatively recent idea, first given to us in a full-bodied form by the great Dutch jurist Hugo Grotius in his seminal work (Concerning the Law of War and Peace) in 1625. It is certainly possible to imagine a world in which state sovereignty as we know it did not exist or existed in substantially altered form.

As the dictionary definition implies, sovereignty has always been, in part, based on the idea of territoriality. The extent of sovereign's reach has usually been defined by geographic borders. Even the immunities enjoyed by a foreign embassy are expressed in part geographically, by defining an area into which the host country may not intrude.

The control of territory remains one of the most important elements of sovereignty. But as the information revolution makes the assertion of territorial control more difficult in certain ways and less relevant in others, the nature and significance of sovereignty is bound to change.

As recently as World War II, armies fought and men died for control of the iron and steel in the Ruhr basin because ownership of those assets conferred real economic and political power. Today these once fought over assets may be a liability. To the extent that new technology replaces once

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essential commodities with plastics or other synthetic materials, the relative importance of these areas to the vital interest of nations is bound to change.

In 1967, Egypt closed the Suez Canal, and conventional wisdom told us that the lights would go out all over the world if this waterway between the Mediterranean Sea and the Gulf of Suez were ever closed. The power of a sovereign state, Egypt, to block the flow of oil to Europe was believed to be absolute short of war or other hostile action by the Western powers. The conventional wisdom did not take into account the technology that would allow the building of supertankers that could carry oil around the Cape of Good Hope economically. This feat was achieved by relatively simple technology, but it decisively altered the geopolitics of the Middle East. Similarly, advances in military technology are making once vital strategic "choke points" steadily less relevant. The velocity of change in economics, technology, science, and military capabilities is shifting the tectonic plates of national sovereignty and power.

One traditional aspect of sovereignty has been the power of nation-states to issue currency and mandate its value. Of course, the claims kings made for the worth of their currency did not always square with the facts. In the seventeenth century the Amsterdam bankers made themselves unpopular in the royal chambers by weighing coins and announcing their true metallic value. But those bankers spoke to a small audience and their voices were not heard very far beyond the city limits. Despite the power of a righteous market, until very recently governments retained substantial power to manipulate the value of their currencies. As the information revolution has rendered borders porous to huge volumes of high-speed information it has deprived them of that power.

The new international financial system was built not by politicians, economists, central bankers or finance ministers but by technology. Today, information about the diplomatic, fiscal, and monetary policies of all nations is instantly trans-

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mitted to electronic screens in hundreds of trading rooms in dozens of countries. As the screens light up with the latest statement of the president or the chairman of the Federal Reserve, traders make a judgement about the effect of the new policies on currency values and buy or sell accordingly. The entire globe is now tied together in a single electronic market moving at the speed of light. There is no place to hide.

This enormous flow of data has created a new world monetary standard, an Information Standard, which has replaced the gold standard and the Bretton Woods agreements.[2]  The electronic global market has produced what amounts to a giant vote-counting machine, that conducts a running tally on what the world thinks of a government's diplomatic, fiscal and monetary policies. That opinion is immediately reflected in the value the market places on a country's currency.

Governments do not welcome this Information Standard any more than absolute monarchs embraced universal suffrage. Politicians who wish to evade responsibility for imprudent fiscal and monetary policies correctly perceive that the Information Standard will punish them. The size and speed of the worldwide financial market doom all types of central bank intervention, over time, to expensive failure. Moreover, in contrast to former international monetary systems, there is no way for a nation to resign from the Information Standard. No matter what political leaders do or say, the screens will continue to light up, traders will trade, and currency values will continue to be set not by sovereign governments but by global plebiscite.

The new global market is not limited to trade in financial instruments. The world can no longer be understood as a collection of national economies. The electronic infrastructure that now ties the world together, as well as great advances in the efficiency of conventional transportation, are creating a single global economy.

Commerce and production are increasingly transnational. The very phrase "international trade" has begun to sound

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obsolete. In the past, companies generally exported and imported products. On a national level, these transactions were aggregated and balanced according to the rules of a zero-sum game. Today this is no longer the rule. A product may have value added in several different countries. The dress a customer purchases at a smart store in New York may have originated with cloth woven in Korea, finished in Taiwan, and cut and sewed in India. Of course, a brief stop in Milan, to pick up a "Made in Italy" label is de rigueur before the final journey to New York. Former Secretary of State George Schultz recently remarked in a speech:

A few months ago I saw a snapshot of a shipping label for some integrated circuits produced by an American firm. It said, "Made in one or more of the following countries: Korea, Hong Kong, Malaysia, Singapore, Taiwan, Mauritius, Thailand, Indonesia, Mexico, Philippines. The exact country of origin is unknown. That label says a lot about where current trends are taking us.

Whatever the correct word for these phenomena,"trade" certainly seems an inadequate description. How does one account in the monthly trade figures for products whose "exact country of origin is unknown?" How are national governments to regulate transnational production with anything like the firmness with which they once regulated international trade? How are politicians to whip up nationalist fervor against foreign goods when American car companies build cars in Mexico for export to Japan and pay the profits to pensioners in Chicago and the Japanese build cars in Tennessee for export to Europe and use the income to refinance real estate in Texas?

On the global business front, the new word is "alliances." Almost every day one reads about an American company and a Japanese company or a Swedish company and a German company -- the list of combinations is endless -- forming an

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alliance to offer a new product in a multinational horizontal integration of manufacturing, marketing, finance, and research. As these alliances grow and strengthen over time, it will become harder and harder for politicians to unscramble the emerging global economy and reassert their declining power to regulate national life.

The global market has moved from rhetoric to reality almost before we knew it. The old political boundaries of nation-states are being made obsolete by an alliance of commerce and technology. Political borders, long the cause of wars, are becoming porous. Commerce has not waited for the political process to adjust to technology but has tended to drive it. This is especially noticeable in Europe, where the new generation of business managers is bound and determined that the integration of the Common Market in 1992 will arrive on schedule, even though political leaders often seem reluctant to see their power compromised.

Within national borders, sovereignty has traditionally entailed the government's power to regulate the leading enterprises of society, from health care to heavy industry. In an economy dominated by products that consist largely of information this power erodes rapidly. As George Gilder has written "A steel mill, the exemplary industry of the industrial age," lends itself to control by governments.

Its massive output is easily measured and regulated at every point by government. By contrast, the typical means of production of the new epoch is a man at a computer work station, designing microchips comparable in complexity to the entire steel facility, to be manufactured from software programs comprising a coded sequence of electronic pulses that can elude every export control and run a production line anywhere on the globe.[3] 

The information revolution not only makes the microeconomy more difficult to regulate; it makes the macroeconomy --

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the world of gross national product (GNP) aggregate demand, and seasonally adjusted statistics -- harder to measure and therefore harder to control. Many of the terms we use today to describe the economy no longer reflect reality. Everyone knows, for example, that all the lights would go out, all the airplanes would stop flying, and all the financial institutions and many of the factories would shut down if the computer software that runs their systems suddenly disappeared. Yet these crucial intellectual assets do not appear in any substantial way on the balance sheets of the world. Those balance sheets, however, do all reflect what in the industrial age were tangible assets -- buildings and machinery -- things that can be seen and touched.

How does a national government measure capital formation when much new capital is intellectual? How does it measure the productivity of knowledge workers whose product cannot be counted on our fingers? If it cannot do that, how can it track productivity growth? How does it track or control the money supply when the financial markets create new financial instruments faster than the regulators can keep track of them? And if it cannot do any of these things with the relative precision of simpler times, what becomes of the great mission of modern governments? Controlling and manipulating the national economy? Even if some of these measurement problems are solved, as some surely will be, the phenomena they measure will be far more complex and difficult to manipulate than the old industrial economies.

The single most powerful development in global communication has been the satellite, born a mere thirty-one years ago with the launch of Sputnik. Satellites now bind the world, for better or worse, in an electronic infrastructure that carries news, money, and data anywhere on the planet at the speed of light. Satellites have made borders utterly porous to information. Geosynchronous satellites can and do broadcast news over curtains of iron, bamboo, or adamant to anyone with a hand-held transistor radio.

One of the fundamental prerogatives assumed by all sovereign governments has been to pursue their national interests by waging war. Today this prerogative is being severely circumscribed by information technology. No one who lived through America's Vietnam experience could fail to understand the enormous impact that television had in frustrating the government's objective in Southeast Asia. Knowing in a general way that war produces violent death is one thing, but watching the carnage of a battle or the body bags being unloaded at Dover Air Force Base, on your living-room television set is quite another.

We have seen in the United States an organization publish the names of American agents in place overseas; we have read accounts in national newspapers detailing American naval and troop movements at a time of national emergency. Recently, a private company forced a superpower to change its policy. This occurred when the government monopoly on photographs from space was broken by the launching, in February 1986, of the privately owned French satellite, SPOT. When the pictures of the Chernobyl nuclear disaster taken by SPOT appeared on the front pages of the world's newspapers, the Soviet Union was forced to change its story and admit that the event was much more serious than it had previously claimed. In this instance the technology was not new, but the power to use information shifted from the government to the private sector. The event posed a continuing dilemma: What SPOT revealed about Chernobyl, it can also reveal about American military sites. There is no American censorship of SPOT pictures as there had been on a de facto basis of photos taken from the American government's Landsat satellite.

While the resolution of SPOT's picture is only ten meters, it will undoubtedly be improved. The next logical development might be for an international news agency to purchase its own high-resolution satellite. Such a purchase would be a good deal less expensive, for instance, than the cost of cov-

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ering the Olympics. If this happens, the guardians of national security will clash in space with the defenders of the First Amendment.

If democratic societies will have difficulty adapting to what amounts to a whole new definition of sovereignty, closed societies such as the Soviet Union, will have a much more difficult time. Communist regimes have always based their power in part on their ability to control what their citizens see and hear. That control was seriously eroded by technology. News of the in Eastern Europe was instantly relayed by radio and TV to the people of the former Soviet Union. The number of VCRs available in Moscow has been growing daily. Satellites are no respecters of ideology. Even the most draconian measures would be unlikely to halt the trend.

Nor can the former Soviet Union afford draconian measures. On the contrary, it faces an economic imperative to loosen controls further. Modern economies require access to huge amounts of information and the computer power to manipulate it. The free flow of scientific and technological knowledge is essential to innovation and continued productivity. Millions of researchers, scientists, and citizens in the United States now have access through their personal computers (PCs) to more than three thousand publicly available data bases, some storing billions of bits of technical, demographic, or scientific data. The Soviet Union, in which information is the monopoly of the state and where even the GNP is a classified number, handcuffed itself. If the Kremlin wishes to keep up with pace with the West, it must allow its people to participate in the information revolution. But if it does so it will lose an essential tool of state control. It is a Hobson's choice, and it will get more difficult over time. Indeed, history has resolved the dilemma with a swiftness that took all pundits by surprise.

The satellite, for all its power, is but a subset of a whole new class of "information weapons," weapons whose value

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is supplied largely by information technologies. As a rule, information weapons are equalizers that help small nations against large and favor defender over invader.

Perhaps the most dramatic current example is the use of the Stinger by the Mujahedin against the Russian invaders. The Stinger is one of the first truly "smart" missiles to be used extensively in battle. It has demonstrated decisively that "artificial intelligence" can make a weapon costing but thousands of dollars, and affordable to even guerrilla armies, the superior of multimillion-dollar aircraft affordable in any considerable quantity only to the superpowers.

A less violent, but perhaps more destructive information weapon is the "software virus," dramatically illustrated in November 1988 by the invasion of a Department of Defense computer network by one such destructive program. Scott A. Boorman and Paul Levitt, have argued that "with computer software now eighty percent of U.S. weapons system in development, attacks on the software...may be the most effective, cheapest, and simplest avenue to crippling U.S. defenses." Such sabotage may be within financial and technical reach of the smallest nations.

The challenge to national sovereignty poised by the information revolution is being replicated in various ways throughout most of the institutions of the modern world. In the business organization, the person who truly understands the impact of technology has become a vital part of the whole strategic business process. We see new corporate structures developing to manage new manufacturing methods, products, and delivery systems. Management structures are already changing dramatically. Layers of managements that used to do nothing but relay information from one level to another are beginning to disappear. Business is learning that these positions are no longer needed now that information technology allows the rapid transmission of vital information to all levels of management without human intervention. Instead, the old military mode of hierarchical organization is

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giving way to flatter structures designed for the faster response times needed to serve dynamic global markets.

A walk through a modern factory makes the point. Manufacturing plants are being run by computer hardware and software. The man with the clipboard who makes sure the widgets are in the right place on the shop floor at the right time is disappearing; the computer does it. The task of transmitting upward information on the state of the business is even more thoroughly automated. And more people in the system now have access to that information. Reports that used to take days or weeks to prepare, as well as the considerable support staff available only to senior management, are now available throughout the system at the stroke of a few computer keys. Plato wrote that democracy cannot extend beyond the reach of a man's voice, a limitation that provided a pretty good justification for the old system. In the new world, we may not see corporate democracies, but we will see the skills of command outstripped by the demand for leadership.

This sea change in our most important economic institutions (indeed in any of our great bureaucracies) will affect our daily lives and work in important ways. But as we shall see, the effects on society as a whole, while more subtle perhaps than those brought about by a revolution in the meaning and practice of national sovereignty, may be every bit as profound.

One of the recurring themes of history is our apparent inability to credit information that is at variance with our own prejudgments. Examples abound. The great historian Barbara Tuchman uses the Japanese attack on Pearl Harbor to illustrate the point. Though Japan had opened the Russo-Japanese war in 1904 by a surprise attack on the Russian fleet, American authorities years later dismissed the possibility of a similar maneuver.

We had broken the Japanese code, we had warnings on radar, we had a constant flow of accurate informa-

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tion ... we had all the evidence and we refused to interpret it correctly, just as the Germans in 1944 refused to believe the evidence at Normandy... Men will not believe what does not fit in with their plans or suit their prearrangements.[4] 

This phenomenon, unfortunately, is not limited to discrete events. Few members of the current power structure wish to contemplate its decline, preferring to cherish the plans they have made, the strategies for victories economic, political or military. But the contests for which they have faithfully prepared may never come, at least in the form expected, because the rules have been changed forever.

 
 
Footnotes:

[1] For a full discussion, see George Gilder, Microcosm (New York: Simon & Schuster, 1989).

[2] The twin organizations of the World Bank and the International Monetary Fund were conceived and funded by the Allies at a meeting in the New Hampshire village of Bretton Woods in July 1944. The bank was to promote economic development, and the IMF was to maintain orderly exchange rates to prevent competitive devaluations.

[3] George Gilder, "The Emancipation of the CEO," Chief Executive, January/February 1988, p. 9.

[4] Barbara W. Tuchman, Practicing History (New York: Ballantine Books, 1982), p. 250.