The Internet causes connections to multiply and strengthen, creating a frenzy of positive feedback, which can drive people apart--not together
Optimists have long dominated the cyber-landscape, firm and vocal in their belief that the Internet creates a more transparent world, and that the quick and easy access to information it provides is bringing the global population together into one enlightened chorus of harmony.
My perspective is different, and my goal in this, the first in a series of posts for The Atlantic, is to lay out the implications of an Internet-driven world.
I have been deeply concerned that the Internet has created a centrifugal force that has the potential to tear us apart. The Internet's reinforcement of uncompromising positions during acrimonious budget debate in Washington, the Internet-facilitated, high-frequency trading driving volatility in financial markets, and the use of Twitter to organize the recent street riots in the UK brought to mind Eric Hobsbawm's 1994 book, The Age of Extremes. The book is about the extreme historical events of what Hobsbawm called "the short 20th century." But he could just as easily have been writing about the 21st century, the Internet age.
Hobsbawm wrote: "The world of the third millennium will therefore almost certainly continue to be one of violent politics and violent political changes." What he left out were all the extremes that result from living in an Internet-driven, overconnected world. Of course, 1994 was a bit early to reach such a conclusion.
Central to my own viewpoint is the concept of positive feedback. I use the phrase as engineers use it (I confess to being an engineer). The term "positive" refers to the fact that change reinforces or adds to change, rather than the desirability of the outcome. For example, if you had a savings account as a child and it paid two percent interest, that interest got deposited back into your account, fed back, and drove the exponential growth of your savings. In 36 years, your account would double in value. But if you could find a bank that paid you five percent instead, the increased level of positive feedback would double your account balance in just 14 years.
As the Internet causes connections to multiply and strengthen, positive feedback driving our economic, financial, political, business, and social processes increases. And too much positive feedback drives situations to extremes.
The Internet is positive feedback's best friend. By strengthening interconnections, it compounds the amount of feedback in systems and drives them to extreme states. In Egypt and Tunisia, the Internet carried messages on Facebook and Twitter that helped to magnify the social unrest -- a desirable effect of positive feedback. The Internet played an important role in powering the explosive growth in over-the-counter derivatives, from $60 trillion in 2000, to over $600 trillion in 2007 -- an undesirable effect of positive feedback. This growth could never have taken place without the information backbone provided by the Internet. Without the Internet, how could Lehman Brothers have dealt with the 980,000 derivatives it had on its books at the time of its bankruptcy?
Everywhere you look, positive feedback abounds. Consider what I call thought contagions, which I will discuss at length in a later post. Others give different names to essentially the same phenomenon. Malcolm Gladwell used the label "tipping point." And the great 20th-century sociologist Robert Merton coined the term "self-fulfilling prophesies," which came true because people believed they were true. For example, when people believed a bank was going to fail, they mobbed the bank and withdrew so much money, otherwise sound financial institutions collapsed. Positive feedback, which is always a factor when it comes to thought contagions, lay at the core of such events.
Both the Internet stock bubble and its subsequent crash in early 2000 were fueled by positive feedback processes. People bought stocks on the way up because they believed they would continue to rise. Day traders spreading rumors and promoting the stocks over the Internet created much of the buying push. When the bubble burst, one of Merton's self-fulfilling prophecies kicked in, sending prices through the floor. Stockholders believed the prices would fall and rushed to sell. The falling prices caused others to panic and sell.
Monopolies are the natural state of many businesses in highly-connected environments. One reason is something called network effects. When things are connected, the value of one person doing something increases the value of others doing the same thing. Facebook became a monopoly because you started using it because most of your friends were on it. Once you joined Facebook you made it more valuable to those who were already there. Network effects fueled the success of Intel, Microsoft, Google, Amazon, and Apple.
The Internet also plays an important role in increasing income inequality in many countries. It facilitates the off-shoring of jobs. Using the Internet, companies can gain precise control over their supply chain. An off-shore facility can be managed as efficiently as one located next door. As a consequence, factory workers in the United States compete with workers at Foxconn in China making around $300 per month. At the other extreme, hedge funds employing "rocket scientists" to program computer-driven high-frequency trading schemes make billions. When you look under the covers of job off shoring and high-frequency trading, you will find many positive feedback processes at work that are facilitated by the Internet.
The Internet can be a powerful vehicle for creating thought silos. Most of us tend to read material that supports our opinions. Liberals usually listen to NPR. Conservatives get their news from the Fox network.
On the Internet one can find a thought silo supporting almost any imaginable idea -- pro-life vs. pro-choice, cutting government spending vs. taxing the rich, Muslim extremists vs. moderates, Tea Party absolutists vs. moderate liberals. When people get trapped in these silos, their positions tend to harden creating a world of thought extremes and polarized political positions.
Look almost anywhere at anything in any place and you will find a process made more virulent and extreme by the Internet. Using the Internet, when running for President Barack Obama was able to raise a record $750 million, more than George W. Bush and John Kerry in the 2004 campaign combined -- a new political fund raising extreme.
Foreign currency trading has soared to $4 trillion a day, up by almost a factor of ten since the late 1980's. This increase has been driven primarily by increases in speculation. Or look at the stock market, where high-frequency trading using the Internet constitutes around two-thirds of the trading volume, up from a very low level a few years ago. Leveraging the Internet creates speculative extremes.
Hobsbawm predicted a world of "violent politics and violent political changes" well before the Internet had made its deep and striking impact. Were he to revisit his topic today, Hobsbawm would find not only that his prediction had become a reality, but that the Internet played a starring role in extreme situations he never considered.
Image: David Blackwel/Flickr.
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