“The Rise of the Western World: A New Economic History,” by Economics Nobel Prize winner Douglass North, is a classic text in institutional economics, the branch of economics that describes the optimal size of the firm. In this history, North describes how an increase in the size of the most efficient military unit due to technological innovations reduced the number of independent polities needed, leading to the Hundred Years War.
“Taken together, the [14th and 15th] centuries show a transformation in warfare and led to an ever-growing fiscal crisis. The financial resources necessary for survival, i.e., to quickly field a modern army, exceeded those available in the traditional feudal barony. The result was an era of almost unbelievable turmoil, amalgamation, terror, murder, internal and external strife, intrigue and counter-intrigue...Whether by marriage, purchase, perfidy, intrigue or military conquest, the nation-state replaced the feudal barony as the seat of coercive power by the end of the period.”
Today, information technology has done something similar for an essential feature of politics: narratives. Narratives can now scale much more smoothly than in the past, which has led to an era of globalization and, within the US, nationalization. Older methods by which narratives were traditionally disseminated, such as local news and organized religion, have fallen by the wayside. Turf warfare by street gangs has fallen, as illicit commerce can now be facilitated by mobile phones; yet it has correspondingly increased in formal politics, driven by the power to regulate social media platforms.
In equilibrium, these changes can be positive, leading to higher expectations on public governance. The increased surveillance ability of the government and corporations is balanced by an increased monitoring ability by citizens themselves to monitor the government (leading to Black Lives Matter), or corporations (#metoo). We are however far from equilibrium, and the disruption from such technological changes forms as good an explanation as any of the ‘culture wars’ in US politics.
Twitter emerges as a political player
The first important fact to understand about the tech sector is that it’s big business, with all of the usual political implications. With valuations soaring (until recently) in an era of unprecedented activism by the Federal Reserve – at the same time that rust belt manufacturing remained moribund – it has come to symbolize money itself. When San Francisco, the highly liberal industry center, visibly mishandles local issues like housing, therefore, it casts popular doubt on the liberal agenda on the national level.
As businesses, social media companies depend on their branding, which arises from content moderation. Different platforms have different user reputations. For instance, Twitter is known to be a more liberal platform, while Facebook leans conservative. (It remains to be seen how Elon Musk’s recent takeover of the former might affect this positioning.)
On January 8, 2021, two days after an attempted mob takeover of the Capitol, Twitter permanently banned then-president Donald Trump, highlighting its immense political power. In some sense, this is the same power that traditional media has always held, and some prestige mainstream publications have indeed survived the tech era perfectly fine. Social media is however associated with what conservatives have dubbed ‘cancel culture,’ or the ability for the masses to target individuals with precision, sometimes with real-world effect. In fact, the term is amorphously defined, and has more to do with technology than culture. The right has spent the past two years while out of power theorizing about how to deal with this phenomenon.
Social media regulation may not be the area of US politics of greatest short-term significance, but in fact, it is one of the most interesting. Unlike most topics, which are currently defined by rigid ideological coherence, its novel nuances make genuine debate possible to some degree.
Smarting after January 6
The drama of January 6 notwithstanding, any serious scenario for a ‘cold civil war’ must start with the Supreme Court. The Capitol rioters would have needed to enable several more legal maneuvers to successfully influence the transition of power.
The conservative makeup of this court is the culmination of decades of efforts by organizations such as the Federalist Society, spanning all levels of government. Following the Dobbs decision in June, which overturned an almost 50-year-old precedent on abortion, the influence of the court is now starting to be felt on a popular level. Based on this case, as well as others influencing the election process, legal experts and liberal popular media are starting to question its impartiality, which used to be somewhat of a political taboo.
Besides election dispute resolution, another one of the areas that is being watched most closely is First Amendment caselaw. For decades, conservatives had successfully argued for a maximalist view of corporate free speech when it came to campaign financing. In 2017, the Trump administration also rejected “net neutrality,” which would have prohibited internet service providers (ISP) from discriminating among network traffic on the basis of speech. The politics surrounding this decision were unusual, as a sizable minority of Trump’s supporters had assumed he would take the opposite position.
Social media has come into the spotlight since the Capitol riot. Here, however, conservatives have taken the opposite position on corporate speech: platforms act more as public utilities than newspapers, or even than the ISPs that facilitate their services. Florida and Texas, both controlled by Republican legislatures, have both passed laws preventing social media platforms from moderating content. The Florida law has been struck down by a regional court on First Amendment grounds.
The Texas law, however, is more far-reaching, and has been upheld so far. It prohibits “censorship” on the grounds of “viewpoints,” as well as geographic location. The latter restriction is attracting much attention, as it could prevent social media companies from leaving the Texas market altogether, in contravention of longstanding principles of free commerce. The law is written so broadly that it could even make Wikipedia illegal. “Is this the beginning of the end of the Internet?” asked a recent article in The Atlantic. Depending on the interpretation, implementation of the law would make it impossible for large platforms to curate their own communities, a key element of their value proposition.
Before upholding the Texas law, the 5th Circuit Court of Appeals had already generated headlines for challenging longstanding interpretations of federal law. Last year, it ruled that the main administrative enforcement method the Securities and Exchange Commission has used for the past 100 years is unconstitutional, forcing the agency to use a different, more time-consuming procedure in Texas, Louisiana, and Mississippi than in the rest of the country.
Because of the different interpretations offered by the two appeals courts, the Supreme Court is likely to visit the issue at some point, and to thereby decide on the future of the internet.
Finance is also scalable
It’s easy to focus on the ideological facets of the culture wars, but would be is a mistake to expect too much consistency. In fact, to a striking degree, the current fissures correspond to those during the Civil War more than 150 years ago, so the cultural aspect is not new. Economics offers a much more comprehensive explanation than legal theory for the timing of current tensions, and it can also highlight areas where the culture wars are likely to go next. In particular, finance seems like a likely target.
Fintech has enabled passive investment strategies in which a small number of centralized nodes can control massive capital flows. International ESG investors have used this capability to deny capital to fossil fuel projects, a sector that has always been close to the Republican party.
ESG has however developed somewhat differently in the US from its international variant – as “woke capital” with a much stronger focus on the social element than the environment. Over the past few years, Diversity, Equality, and Inclusion (DEI) training has become quite common. Its functional significance is likely limited, yet this is one of the elements of the culture wars that generates some of the strongest strong personal reactions. Critics call it a waste of time, or even actively antagonistic towards white participants. There are no DEI index funds, but a similar dynamic does exist of smaller companies versus larger ones exposed to broader capital markets, or even headquarters versus branches within larger corporations. Compliance is enforced stochastically by social media.
Conservatives tend to oppose ESG investing, despite their longstanding pro-capital orientation. In 2021, Republican Florida Senator Marco Rubio introduced the Mind Your Own Business Act to the US Senate, marketed against “woke capitalism.” “…taking aggressive positions on woke cultural issues that tear at our national fabric might seem like an easy way to avoid boycotts from activists,” he wrote in an editorial at the time. “But those of us charged with keeping America strong recognize that these positions are the greatest threat to our long-term viability.”
The same editorial also endorsed labor representation on corporate boards, a position that had previously been associated with the pro-labor left. Associated debates underscore the current fluidity of thinking on corporate power.
The long game
The theory of the firm forms a powerful lens with which to understand the current situation. It shows, first of all, that the boundary of the firm is the frontier at which risks can be most easily defined in legal contracts. Current generations of artificial intelligence are plagued a problem of explainability, which makes content moderation decisions difficult to integrate with the outside legal system. Regulation has a difficult road ahead, particularly if it is to remain relevant beyond a single technological iteration. Nevertheless, both parties will make persistent efforts, due simply to the stakes involved.
Any attempt to do so should start with a theory of market failure – which is more than just an observation that markets work differently than they did before. Why are advertisers (as well as possibly socially responsible investors) ineffective in constraining platforms’ behavior in the long term?
On an international level, the theory of the firm can even explain the recent increased geopolitical tensions. Whoever controls Taiwan controls its ability to narratives at scale, which is ultimately as valuable for the US and China as its ability to mass-produce semiconductors. Current tensions will end not just through a return to the status quo, but with a marginal iteration of the state itself. The concept that has defined the world since Medieval times remains a work in progress.
Within the US, every election for the foreseeable future is now pivotal, not as much for specific federal legislation, but for the ability to influence the Supreme Court. In 2016, for instance, a Republican Senate blocked a Supreme Court nominee of then-president Obama, on the basis that there was almost a year left before the next presidential election. Even state-level elections will be important for the ability of states to sometimes affect national-level elections and policy discussions.
Individual companies who are not offering platform services will not be forced to take decisive sides in the culture wars, as in Hong Kong – although some may do so voluntarily. At the same time, because of the growing importance of social media, anyone doing business in the US should be aware of broader political undercurrents. US political culture is quite idiosyncratic, and for anyone finding it difficult to follow, DEI courses may not be a terrible place to start.