Digital Dreamers, Markets, and "the Internet of Everything"

There is a story to the rise of the Internet larger than a history of who invented what. The information age has a broader context. The online networks connecting personal computers  first grew from the heads of intellectuals and economists who wanted  more technologically and transactionally efficient markets. These ideas proved consequential for the people who made the products and public policies. The intellectual genealogy of the expansion of digital technologies is traced in two new books: The Third Wave: An Entrepreneur’s Vision for the Future by innovator Steve Case, and The Inner Lives of Markets: How People Shape Them—and They Shape Us by economist Ray Fisman and business writer Tim Sullivan.

Case borrows his title from Alvin Toffler’s book, The Third Wave (1980). The late futurist spoke of first and second waves, the economy of agricultural communities and the economy of the industrial revolution that disrupted those communities and formed new ones around urban factories. Toffler’s third wave was to be a generally postindustrial and digital global village. Its services and information would be allocated for virtual communities based not on geography but shared interests.

Reading Toffler’s prediction of the coming digital economy, Case, then a student at Williams College, wanted to make it happen. He was inspired to go on to cofound America Online. His three waves, however, are smaller waves within the big third one of Toffler.

Case’s first wave refers to his generation of innovators, such as Steve Jobs and Bill Gates, who built the personal computer and the Internet. The second is the generation of Mark Zuckerberg, who created platforms to connect the Internet with new mobile devices, apps, and sites. The third is not here yet, but Case has been to the mountaintop and offers his advice for potential tech titans.

According to the author, the first generation was not disruptive, but worked with existing firms, companies, and government agencies and officials. The second generation startups like Facebook, in contrast, prided themselves on challenging established corporations and ignoring government consultation. But the third wave will have to act more like their grandfathers than their fathers, Case argues. He thinks their job will be to integrate already invented apps and devices with every aspect of our lives, from healthcare to education, in order to become as ubiquitous  as electricity is now. They need to work within given structures. That way our current “internet of things” can become “an internet of everything.”

Like Toffler, Case does not substantially address whether it is good or not for digital technology to be integrated everywhere or how to handle the trade-offs. Instead, he seems to presume the end goal and advises on the best means to achieve it. He writes bullishly about “when historians write the story of technological evolution.” His prescriptions coincide a bit too much with his autobiography, although he gives some sound advice: work with local schoolboards and hospitals, invest in startups in the American Heartland, and partner with already established companies.

Also, he provides a notable example of a larger trend in the rise of computers and the markets they host: They began as thought-experiments before they became technological and economic experiments. After he toned down his first job applications “breathlessly predicting the dawn of a digital age,” Case went on to engineer a failed modem at a Warner Communications division. It was, he writes, “a means to the real end, becoming a consumer online service company” by “crafting easy-to-use software and services that could demystify the online world.” Since he left AOL over a decade ago, Case has been investing in future businesses that fulfill this vision. He intends to make his “Third Wave” a reality.

Other digital creators have done similar things. When Gordon Moore, for example, posited in an academic journal his discovery of a “Law” about how computers’ circuit capacities double every two years, he was not describing what happens naturally but what his company, Intel, was going to enforce in the market. His lawgiving was less like that of Isaac Newton and more like that of Lycurgus of Sparta. Case resembles Moore in this respect. What starts as an academic idea becomes an actual trend not by description but by prescription—less by easing into existence what was predicted, more by making something happen by edict.

In this sense, one can understand why Ray Fisman and Tim Sullivan, in The Inner Lives of Markets, refer to economists as “market makers” and “worldly philosophers.” What Case imagines to be the greater application of digital technologies is the result, they write, of “expansions in the scale and scope of markets—the result of the migration of many transactions online.” It is no coincidence that Google began as a computer-science dissertation at Stanford in the late 1990s. More efficient markets and technologies such as Amazon also have intellectual ancestors in the ideas of economists. Their influence stretches beyond academia, spilling over into markets that integrate with more and more areas of our lives.

A longer story is to be told about the economic architecture underlying what appears to mostly be a shift in technology. While Case’s book reads part autobiography and part business memo, Fisman and Sullivan give a fascinating and sobering history of theorists and their ideas that undergird our lives and new technologies. We are, say the authors, in the midst of  an “experiment” whose “principles” were made “in the pages of esoteric journals by economists, in the labs of high-tech companies, often” marked by “a particular political orientation that comes with being starstruck by the efficiency of the market.”

Historically, political economists had emphasized concrete and particular economies, but economists after the Second World War began to use mathematical models, such as game theory, to make the most general descriptions of how to adequately allocate resources. They went for abstract efficiency with models in their heads. It took a second generation of economists to focus their research on applying these equations to particular circumstances in which policymakers and companies would implement them. These thinkers were trying to understand the real world, but their ideas then began shaping it.

To explain the efficiency of market signals, Fisman and Sullivan begin with a 1945 paper, “The Economic Organisation of a P.O.W. Camp,” by British-born war veteran R.A. Radford. He had been at a German camp where soldiers used cigarettes as a currency to allocate Red Cross supplies. The authors contrast this situation with Japanese camps where Allied soldiers were forbidden to barter or trade, and were thus not able to survive as well as they should have. Radford’s paper illustrated the informative capacities of a market economy, and began the mathematical modelling in economics.

The job of mathematicians is to make up problems and try to solve them, the authors note, but they “aren’t necessarily interested in building better mousetraps or figuring out a strategic response to the Soviet nuclear threat.” In this mathematical transformation of their field, they created better models which would have a long-term influence. “I don’t care who writes a nation’s laws,” the Nobel economics laureate Paul Samuelson quipped, “if I can write its textbooks.” And he did write the textbooks. But as they came into more contact with commerce and policy, economists did transform the POW camp of Radford into better mousetraps and strategies for society.

They also can indicate  the limits of knowledge in a market. In his 1970 paper, “The Market for ‘Lemons’,” George Akerlof created what the authors call a “toy model” of a situation: A used car salesman provides a car that looks good and runs well up to the point of sale. After you buy it, a defect arises. It turns out the salesman knew about a problem you did not. It turns out the buyer has in principle potentially less information on the product than the seller.

Fisman and Sullivan tease out the lesson for online platforms today, writing that it’s a matter of trust that one develops among parties prior to the market that makes the transaction possible and worthwhile. In platforms, the market-maker ensures that both parties show up and can walk away with better outcomes than if they had been “left to be guided only by the invisible hand,” they write. Platforms are where human action occurs rather than impersonal transactions. The need for these middlemen illustrates that markets do not exist in a vacuum, but have a social context. They depend on prior relationships that nurture markets and mitigate market frictions.

The authors’ ideal counterexample is from 12th century France. A local nobleman, at his fair in Champagne, France, provided the physical platforms for different guilds to sell on different days, and he provided various courts to hold sellers and buyers accountable from across Europe when they deceived or did not pay. Thus, when a Florentine merchant once fled to London to avoid paying a vast sum of money, the nobleman and his men asked the lord mayor of London to return the merchant, or English sellers would be forbidden at his fair. The mayor responded, and the money was paid.

The lesson is the need for trustworthy actors rather than mere spectators only guided by efficient but impersonal allocation. Once outside the frictionless world of perfect markets, write Fisman and Sullivan, there is a potential role for an intermediary to sit between the two sides.

But not everything is suited to a platform model, notwithstanding the copious amounts of money now being poured into platform businesses. Sometimes it is just a matter of having a better model since markets are usually more efficient sources of knowledge. One card-carrying socialist who runs a foodbank subsidiary in western Michigan, they recount, learned to love auction-style allocation for the national foodbank because of its efficiency.

Efficiency is not the only consideration, of course. While auction models have improved how American baseball teams bid for rising Japanese players, for example, there may be areas where having a market to allocate goods is morally ambiguous, such as selling kidney donations. Likewise, “the much-vaunted internet of things is to bring us yet another generation of platform business models, some amazing, some terrifying, and some,” the authors say, “a bit of both.” These authors show, as Case did not fully, an awareness of limits to the online.

Their point can be applied to theorists, as well. Consider the father of modern auction theory, the late Canadian-born economist William Vickrey. He helped rebuild the postwar Japanese economy under General MacArthur. He also commuted at absurd times of the day and roller skated from the subway to his office at the Columbia Economics Department. This method, he calculated, was the most efficient among all possible alternatives, and he became irked that his colleagues did not follow suit. These economists were failing to practice what they professionally preached about making the world more optimal. Underneath the stereotype that economists are undersocialized lies the truth that economic ideas fail to capture nuances in human relationships. As Monty Python says of Camelot, “It’s only a model.”

The economist Evsey Domar came up with a helpful analogy that the authors borrow. Domar compares economists’ theories to writers’ novels. An economic model, Domar writes, “consists of snatching from the enormous and complex mass of facts called reality, a few simple, easily-managed key points which, when put together in some cunning way, become for certain purposes a substitute for reality itself.” Economists can confuse the maps for actual land. Thus, The Inner Lives of Markets is about economists who enforce their own ideas, make their theories a reality, or at least substitute ideal markets for the real ones. But we citizens remain test subjects for these market-makers, they write, subject to the very startups Steve Case wants to begin.

To be fair, Case is not a technocrat—he emphasizes the need for trust in businesses and relationships that makes possible the building of technological networks. His call for investments in tech-hubs outside of Silicon Valley is worthwhile. Yet, he does not consider the trade-offs of his third wave.  Fisman and Sullivan have a better handle on things, writing that “We’re in the midst of a grand social experiment that has elevated efficiency above all other virtues.” For the fact is that consumers are also citizens. We decide what will happen with our votes and our wallets, our computers and our phones.

The difficulty is that the virtues of excellent citizens are not always encouraged when rapid technological change comes with a new emphasis on the instantaneous over the slow and deliberate, or when impersonal market expansion coincides with a decline in communities, as Robert Putnam has documented. Technological and economic networks depend upon prior social and local networks that can be supplemented but also eroded by technologies and markets.

Ironically, the term “third wave” was actually invented by the first published academic, Plato, who wrote a dialogue in which his teacher Socrates imagines with his students the perfect city, and the third thing it needs is wise philosophers who rule as kings. The modern economists, futurists, and innovator-philosophers somewhat follow in this tradition. But in the Republic, this perfect city remains only an idea. Fisman and Sullivan make that point when it comes to the visions of men like Case. We decide not just how to swim the realized ideas of entrepreneurs and economists, but whether or not their ideas even make a splash.