Governance & Sovereignty
What Red Mars can teach us about risk: Breakups; Fintech Regulatory Turf Wars; Breaches Continued; Sensing; Revenge of the Multi Cloud; Cyber State
But lies were what people wanted; that was politics.”
― Kim Stanley Robinson
Risk Developments this letter:
Fintech Regulatory Turf Wars
Revenge of the Multi Cloud
Martians and Algorithmic Governance
How will the first settlers on Mars organize themselves? What would a martian government look like? On a new planet, far from established power, laws and stories, will a small band of settlers have the same ideas about the aims and methods of establishing social order, or will they create new alternatives? “Red Mars”, by Kim Stanley Robinson, is the first of the Mars trilogy. The science fiction epic, written in 1992, imagines what it will be like for the first 100 people on Mars to form a community.
The year is 2026 and Ares, the largest interplanetary spacecraft humans have ever, made by a joint American-Russian endeavor, travels to Mars to establish a colony named Underhill and an outpost on the Moon Phobos. Soon a rift between the colonists begins to form between those who seek to terraform Mars and those who prefer to preserve it.
The main characters, John, Frank, Maya, Nadia, Sax, Arkady, Ann and Hiroko take sides on a variety of issues. John, the first man on mars and therefore a celebrity, is mysteriously murdered and Frank, head of the American contingent becomes the de facto leader. When Ann, a geologist, and Sax, a physicist, disagree about whether humanity should preserve or terraform Mars, it creates splits the community in two. The “reds” side with Ann and the “greens” Sax. Ultimately the argument is settled by the United Nations Organization of Mars Affairs (UNOMA).
Meanwhile, Arkady, a Russian anarchist, has been arguing for self government, and while neither a red or a green, he rejects the premise that Mars residents should accept UNOMA’s decision. While John was alive, he had supported this view, but with him out of the picture and the Russian leader, Maya in a romantic relationship with Frank, there is little political will to support Arkady. One dissenter is Hiroko, who leads a mystical religious group called Aerophany. Being in support of life, the Aerophanists side with Sax, but they are also for sovereignty, putting them at odds with UNOMA or any other power that tries to impose rules on Martian society.
Back on Earth, transnational corporations (transnats) have grown so powerful they have taken over governments. With smaller countries effectively renting out their sovereignty, transnats gain control over UNOMA and use their unchecked power to extract all terrestrial resources, which, when coupled with new longevity treatments, leads to overpopulation.
Transnat troops under the auspices of UNOMA have taken control of Mars, and Arkady launches a revolution that has some initial success before a violent backlash leads to the destruction the base at Phobos, a massive flood and the death of Arkady. Meanwhile a world war breaks out back on Earth, and the transnats, seeking protection, align themselves with highly militarized developed nations. On Mars, the remaining initial settlers, including Sax, Ann, Maya and Nadia have all joined Hiroko in hiding, raising the first generation of children on Mars.
The Mars trilogy was written from a normative perspective, as Kim Stanley Robinson makes clear in this talk from 2016. He describes his center left sympathies, which have as their foundation three beliefs. First, that the current state of the world is an emergent phenomenon run by financial interests that are unwilling to incorporate the full costs of our actions as they relate to climate, social problems and human misery. Second, that governments, although currently controlled by these financial interests, can be controlled by the people. Third, that a grassroots movement to nationalize finance and the industries he terms fundamental (healthcare, housing, agriculture and food production) to a baseline of human happiness can set things right.
That we do not live in an ideal world is universally accepted, although there is disagreement about in which ways it is not ideal. The second point about who controls our system of social organization is the most contentious. The third is simply prescriptive, based on the premise that government is currently controlled by financial interests, but can be controlled by the people. This world view is manifested throughout the Mars trilogy and especially in the first of the series. Robinson’s personal political perspective aside, he does a good job of elucidating the factions, incentives and personalities involved in governance disputes.
One way in which Red Mars is poignant about governance is in its representation of the three schools of International Affairs theory, discussed here previously. These three schools are realism, liberalism and constructivism. UNOMA, the reigning power at the outset is a liberal fantasy. The trouble, as Robinson sees it, is that powerful financial interests, the transnats, find loopholes in the global government by taking over smaller states with a seat at the table. This realist takeover of a liberal utopia further splits the already fractured martian settlers into factions over the issue of sovereignty.
Sovereignty, the Westphalian type specifically, is the bedrock of the international order. Sovereignty, as opposed to governance, is the idea that a state’s rulers should have complete power over its internal affairs. Governance is the mechanism by which power is distributed and used. Following the Thirty Years’ War (1618-1648), 109 delegates representing 82 states and 38 interest groups met to define the terms of peace in Europe. The Thirty Years’ War was the deadliest European conflict until WWI and was preceded by the French Wars of Religion, the second deadliest European conflict at the time. These wars, due in part to schisms between Protestants and Catholics, although compounded by political ambitions, demonstrated what can happen with a breakdown of moral unity.
The Peace of Westphalia, unable to undo the effects of the reformation and unify the church, opted for the next best thing, subordinating religion to the state. As long as freedom to worship was tolerated, the local ruler would be allowed to choose the state religion and exercise full authority within their domain. Established the sovereign as absolute ruler within their domain enraged the Pope, but as a practical solution, it worked to minimize continental conflicts between great powers until the 19th century.
The Napoleonic Wars (1803-1815) can be seen as wars of governance. Although the solution of sovereignty had put aside questions of religious and moral unity, the mechanisms by which the sovereign is granted and wields power were left intact. The French Revolution upended this governance structure, and sovereigns from Austria, Britain, Prussia, Saxony, Sweden and Russia viewed this as a threat. With the defeat of Napoleon, the monarchs attempted to put republicanism back in the bottle at the Congress of Vienna and the Treaty of Paris (1815). This was the culmination of the Balance of Powers approach to international relations, that would set off a calamitous chain reaction leading to World War I.
Getting back to Mars, we can see how issues of governance cannot wholly be separated from sovereignty. Sovereignty may be seen as a liberal concept, in that it creates an international set or rules and norms. The two main forces that exist outside of the system of sovereigns are businesses and religions. Business, at least in the Mars trilogy universe, is a realist actor, while religion is constructivist. Historically, we saw how the constructivist Reformation upset the real Fuedalism leading to the liberal Westphalian system. Robinson inverts this, using the real upsetting the liberal, leading to the constructivist.
I am not suggesting a formulaic approach, in part because whether a movement, leader or nation is well described by a school of international relations theory is a matter of perspective. Take recent American events. While there is little disagreement that the Democratic party is liberal (in the rule following sense), there has been an uproar over whether those storming Capitol Hill were live action role-playing (constructivist) or mounting an insurrection (realist).
To take another contemporary example, look to Dan Wang’s 2020 letter about China. The years of sloganeering in China have forged a novel governance mechanism, that viewed from the outside is often described as either as a realist dystopia or a liberal utopia, when in reality it is neither. A constructivist social order based on periodically revised dogma has proven surprisingly robust. Dan finds:
“Thus I’ve arrived at the idea that a commitment to centralized campaigns of inspiration, represented by the tendency to fix clear goals, is the booster stage required to leave the gravitational pull of decadence and complacency. Ross Douthat laments that “a consistent ineffectuality in American governance is just the way things are.”
And he references Jacques Barzun, who defines a decadent society as one that is “peculiarly restless, for it sees no clear lines of advance.” As a society turns developed, its main problems become social: an organizational sclerosis, which no technology is sophisticated enough to solve. No great effort is required to identify the comprehensive paralysis in the US. And that is the political and social current that Xi is trying to reverse in China.”
This is the high point for Dan’s praise of Chinese governance, as he goes on to define problems with the slogan approach, which include both its difficulty with uneven implementation and crowding out of other ideas. His line of reasoning is as follows:
It’s difficult to draw a clear line from tighter speech restrictions to worse economic outcomes. Greater censorship over the last decade has coincided with still-impressive levels of economic growth as well as the growing competitiveness of many more companies. And I think it’s worth considering that the authoritarianism of the late-Prussian and early-German state coincided with the creation of the modern research university as well as fantastic advances in chemistry, physics, and electrical engineering.
But there’s more on-the-ground evidence that ordinary people are growing nervous. In so many settings, one has to tread on eggshells in a public discussion in China, with organizers taking pains to remind audience members of sensitivities. Sometimes even in private, people beg off with an embarrassed laugh that they can’t discuss a subject due to unspecified difficulties. WeChat blocks sensitive keywords, which today includes “decoupling” and “sanctions.” It’s now inconvenient to use the app for professional conversations, and I’ve been pretty insistent to my contacts to use Signal instead. And since I brought up Germany, I wonder if the right analogy for China today is as a successful East Germany.
This certainly sounds different than a slogan based, constructivist style of governance. China as a successful East Germany would be a cybernetic utopia. This would be a country devoid of capitalists, petite bourgeoisie, managers and professionals, with only two career paths, politics or labor. Governance would be accomplished by algorithm.
Returning to the U.S. and Douthat’s claim that “a consistent ineffectuality in American governance is just the way things are,” it should not be lost on readers of Red Mars that the last chapter in the book is titled Shakita Ga Nai, meaning roughly, “it is what it is.” Kim Stanley Robinson, a proponent of big government, imagines a world in which unchecked financial interests and dystopian global government are ultimately defeated by… a company called Praxis.
This lines up with Ben Thompson, of Stratechery’s latest piece on Internet 3.0. In his estimation, Internet 1.0 was technical realism, Internet 2.0 economics centralized power in big tech and Internet 3.0 will distribute power and usher in a political age. Combining Dan and Ben’s analysis, we come to a consensus about the critical role of algorithms in governance, but competing worldviews about who will control the algorithm, governments or businesses. Given the close ties between governments and businesses, I’m not sure China and the U.S. will be so different. When rival systems compete, they often end up influencing each other much more than providing a reason to be different.
Red Mars spends far more time on the question of who controls power than governance itself, in part because Robinson’s view is so simplistic. Dan and Ben have much richer views of domestic politics and international relations, which leads them to analyze the mechanisms behind great power conflicts. If many smart people agree we’re heading towards algorithmic governance systems, such as reputation, smart contracts, justice tech, public health algorithms and more, it’s time to start understanding and preparing for that world now. I’ll leave you with two links, the first (below) to help understand and the second to help prepare:
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Two big splits in tech are happening, one more recently than the other. The $5.3 billion dollar Plaid Visa deal is off due to a Department of Justice (DoJ) antitrust suit. Former DoJ antitrust target IBM announced last fall that it is splitting into two companies, one focused on developing new cloud services and technologies and the other on legacy on premises customers. One reading of these two events is that Brandiesian antitrust is back in vogue.
What does that mean exactly? Supreme Court Justice Louis Brandies held a view that monopolies were bad, as such, and not just bad when they lowered consumer welfare. This perspective values competition as a check on poor governance. What he is essentially saying is that companies, left to their own devices, have poor governance, and that it is only through a balance of power that organizations are forced to take care of all of their constituencies, rather than just customers and shareholders.
This lines up with the Visa Plaid breakup, in which it really does appear that the two are compliments, not competitors, but combining the two would create a firm so powerful that it could afford to have worse governance. On the opposite end of the spectrum is IBM, the once powerful monopolist, now beset by competition on all sides.
In an effort to align interests and reform governance, the firm is splitting into two, self sovereign and more easily governed firms. Key to this decisions are financial and acquisitions strategies, which explains why the former CFO is taking over the NewCo dedicated to managing legacy infrastructure for clients. This business is essentially an in the money put option or an annuity, that will collect decreasing amounts of revenue in perpetuity, until its costs eclipse its sales. The other firm, focused on cloud services and software, already owns RedHat, and now has plans to acquire container security firm StackRox. This is an out of the money call option on novel cloud technology. While there are clearly engineering synergies between the two companies, IBM is famously sales focused, and making these two types of sales are diametrically opposed.
So should Visa and Plaid shareholders be happy about the governance problems the DoJ is saving them? Not exactly. Governance is sticky, and good governance can last quite a while under its own momentum, and maybe more importantly for shareholders, good governance quite often isn’t even necessary or helpful to share price. Still, I wouldn’t be especially worried as a shareholder either. The IPO window is still open and Visa still has a plenty strong market position. If anything Visa might consider whether its current bundle of legacy and cloud services is best governed by the current arrangement.
Fintech Regulatory Turf Wars
As Fintech continues to heat up regulators are angling for control over this new a nebulous market. The Consumer Financial Protection Bureau has thrown its hat into the ring, even though much of fintech is not consumer facing. Still, protecting consumer interests goes beyond the financial services that directly touch consumers, so they have some claim. A stronger play is being made by the Office of the Comptroller of the Currency (OCC), but this Federal regulator is a bureau of the Treasury Department, raising concerns about whether they are captured by banks.
Pushing back against the OCC, although not exactly advocating for the CFPB is the New York State Department of Financial Services (NYS DFS), which has been staking its own claim to be top financial services regulator. As a matter of precedent, banks have been granted charters by state regulators, and New York’s prominence as a financial center has made DFS the de facto banking and insurance regulator. The internet upset geographical dominance in finance and new technologies are continuing to poke holes in a 20th century regulatory framework.
One such hole is decentralized finance (DeFi). While current regulatory systems can jostle and compete for digital versions of analog services, it’s harder to know what to do with whole new constructs such as DeFi. We’ve talked about the theory of the firmhere before, and if a firm really is just a nexus of contracts, why not make a nexus of smart contracts? A self executing, self allocating, self governing algorithm. Well, for one thing, completel automation lacks accountability. Who is responsible for the decisions a series of algorithms make and what reasoning can be provided to assure regulators? We’re not there yet, but as the OCC hands out its first charter to a crypto bank, we’re getting closer.
The SolarWinds breach isn’t over, and likely won’t be for some months, and possibly years to come. One salient feature of breaches is that they have a long tail. The number of third parties impacted and the length of the cleanup means that the costs are spread out, often over years, while markets often overreact to initial news and then quickly recover. In any field prone to wildly speculative overreactions, it’s important to focus on the small actions people are taking, not on what they say or the headlines.
Amid the SolarWinds news T-Mobile’s breach has gotten a lot less attention. It was by no means catastrophic with only 0.2% of customers affected, yet it is interesting to note that this occurred at the same time that T-Mobile notched its biggest net additions ever. With T-Mobile’s emerging leadership in 5G, this could be symbolic of their emphasis on growth over attention to detail.
Another small thing is the uptick in crypto mining using docker images. With AWS presumably saturated and security improving, attackers are targeting the frontier, where security is often weakest. Security is a lagging indicator of adoption, so it makes sense for attackers to stay at the cutting edge. This poses a difficult governance problem, where innovation, already uncertain, may create added security risks. InfoSec folks have long talked about security as an enabler of innovation but failed to deliver on that promise. If accounting for breaches and the long tail of their costs improves, maybe we’ll get both the security and innovation we need.
The security sensors are heating up. Building access control super giant Johnson Controls and startup Alcatraz AI are touting a new touchless access control system using facial recognition. Meanwhile, another large conglomerate, Teledyne, is buying FLIR, the world’s largest thermal imaging company. Thermal imaging and touchless access both have a 2020 ring of covid-tech to them, but the uses go far beyond the pandemic, from military, to exploration and logistics, sensors are becoming increasingly critical infrastructure. Algorithmic governance requires data and data requires sensors, so expect sensing to grow in importance.
Revenge of the Multi Cloud
After years of AWS dominance and cloud promises to lower infrastructure costs, the multi cloud is back. Sutter Hill Ventures (incubator of Snowflake) incubated firm Lacework lands $525M for multi cloud security automation. F5 Networks, which has seen lots of ups and downs, has been particularly acquisitive over the last few years. Now they’re making another purchase, this time multi cloud management startup Volterra. Entrepreneurs are fond of Steve Jobs quote of the Wayne Gretzky quote that one should skate where the puck is going, but sometimes there’s more money to be made helping people move rinks than there is watching the puck.
Lastly, the U.S. State Department has approved plans for a new bureau, The Bureau of Cyberspace Security and Emerging Technology (CSET) after a slow start and rocky initial feedback. The Government Accountability Office found that CSET hadn’t coordinated with the Department of Homeland Security, and the Federal government lacked coordination on cybersecurity in general. Like with financial regulation, cybersecurity issues don’t quite fit our analog institutions. Still, cybersecurity, long the domain of the Pentagon and Intelligence Community, requires diplomatic solutions more than ever. Here’s to hoping that CSET succeeds.
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