Decentralization as a Technological Imperative

In recent decades and particularly in recent years we have heard decentralization praised as a solution to many of the world’s problems, if not even all of them as a fellow author on this very site writes. And I will not debate the merits of decentralization; privatization and local governance as the fact speak overwhelmingly in their favor. Instead, I will simply ask why we need to decentralize; if decentralization is as efficient and beneficial as we claim, why did we create these leviathan, centralized nation states in the first place?

For the purposes of this article I shall undertake the position of technological determinism, a belief that a society’s governance, social structure and social norms are shaped primarily by technology. I will argue that technological changes primarily to two key economic factors, transaction costs and economies of scale, influence the necessary degree of centralization and scope of government needed for optimal efficiency. Transaction cost refers to the cost of making a transaction on the market, the cost of acquiring adequate information, the cost of negotiating a transaction and the cost of enforcing said transaction. Economies of scale (and inversely diseconomies of scale) refers to how much more efficient or less efficient a process such as production becomes as we produce more and less capital and labor inputs are required in the production process per unit of production.

To understand the tipping of the balance between the small, nimble, decentralized state and the large, centralized and lumbering nation-state based on coercion and the so-called social contract shifting in favor of the former we must look back to when states began to centralize to a significant degree.

Prior to the end of the medieval era, governance was very much decentralized. Despite entities such as the Holy Roman Empire or Kingdom of France encompassing vast amounts of territory and population, their governance was based fundamentally on the feudal contract – a contract between lords where smaller feudal lords pledged fealty to larger feudal lords in exchange for protection with the king or emperor acting as sovereign lord charged with protecting their vassals.

The technologies present in the middle ages made production and warfare very labor intensive while requiring little large-scale mobilization especially for production, that being mostly an agricultural affair and the domain of small craftsmen. Economies of scale were also not significant – it was not much more efficient to have a single field tilled by hundreds of men if ten could do their job just as well. Warfare was labor-intensive compared to future eras as technological differences did account for a military edge but to a far lesser degree than we see later. Transaction costs were likewise high in the medieval period with low literacy and relatively high cost of travel, which was the only way to relay information, making any large-scale endeavor, business or war, very expensive. Contract enforcement was difficult and often political contracts or in some cases even business deals were therefore solidified through marriage. The middle ages was a period where centralized administration was for all intents and purposes inefficient due to technological constraints and rarely present outside the Byzantine Empire – whose advanced technology, higher degree of urban population and higher level of literacy made a centralized state a greater possibility.

It was in 1453 that Constantinople, the capital of the failing Byzantine Empire, fell to the Ottoman Turks. It has been argued that Byzantine refugees to Europe helped spark the Renaissance, a period of increased technological development that affected both transaction costs and economies of scale and consequently governance and centralization trends in the centuries leading up to the industrial revolution. Specifically, production changed as Europe’s economy transitioned from an agricultural one to one based more around secondary activities on a larger scale and the emergence of the first larger-scale manufactories. This, combined with a lower population thanks to the black plague resulted in production and war becoming more capital-intensive.

The emergence of gunpowder weaponry meant war was not only an effort that required the mobilization of many men providing their own equipment as previously but also the procurement of advanced equipment such as standardized weaponry and cannons and a standardized training regimen for effective use of said equipment. This meant that to protect one’s property from external threats larger, more centralized institutions were necessary that could muster many well-equipped and well trained men and potentially levy taxes to fund and organize large scale projects. Changing economies of scale allowed for larger scale production, trade and governance projects to become possible, especially combined with lower transaction costs thanks to higher levels of literacy thanks to inventions like Guttenberg’s printing press.

In the era leading up to the industrial revolution we saw the emergence of the stronger, more centralized states with the advent of empire – from Spain and Britain as colonial powers funding colonial expeditions across the Atlantic to France, Russia and Austria ending the sovereignty of many small states in Italy and Eastern Europe and consolidating their hold over vas swathes of territory and emerging as absolutist regimes.

This period of centralization, I would argue, was thanks to centralization simply being more efficient at the time by offering an entity the power to take advantage of increasing economies of scale in warfare and production by using lower transaction costs to direct the actions of men. While production and warfare were more capital-intensive than previously, it was still immensely labor-intensive compared to what came after the industrial revolution and forceful coercion by government into physical labor was still a very viable option.

The period of colonialism gradually transitioned into the Victorian era. This was a time when large, centralized colonial empires were at their peaks and also when technological effects on transaction costs and economies of scale first began to shift the balance away from empire and the strong, centralized state. The industrial revolution changed the nature of the economy forever – yet it was likely not even the most pertinent and important economic revolution to be discussed in this piece as our look at the internet and blockchain will point out. It made all forms of material production, from farming to industry, much less labor-intensive. This eventually allowed, for the first time in human history, for most people in the western world to find work in the tertiary (service) sector of the economy, performing services instead of producing material goods.

The process of an economy transitioning from the secondary to the tertiary sector often coincides with democratization or at the very least attempts to make governance in some measure based on consensus. This is due to the fact that while physical labor necessary for secondary sector production activities is viably extracted through coercion while the more specialized and often creative effort required in the tertiary sector is much more difficult to extract from the workforce through force as the labor market for educated workers is globally much more competitive and they require significant investment to produce. Their flight is therefore too costly for a state to simply ignore their wishes and satisfaction as citizens.

Transaction costs during and after the industrial revolution decreased further thanks to more widespread education and literacy, newly created legal enforcement mechanisms, improving institutions, lower costs transportation of goods and individuals using railways and eventually automobiles and easier access to information and communication thanks to inventions like the telegraph and telephone.

Economies of scale experienced something interesting however. Perhaps for the first time since the Renaissance we see the advent of diseconomies of scale, especially in production. Bureaucratization within companies, previously responsible for reducing transaction costs, now becomes internally overwhelming as the transaction costs of performing many activities outside the company becomes cheaper than managing them being performed internally. For the first time in centuries, markets are efficient enough thanks to new technologies and institutions that the losses from transaction costs are lower than the benefits of economies of scale. So, the idea of the lean corporation and eventually the lean state is born and solidified.

Initially, decentralization was born out of nationalism, with individuals sharing a common cultural and linguistic identity which made organizing and transacting among each other additionally cheap rising up against the empires of old, with Greeks rebelling against the Ottoman Empire, Slavs against the Austrian Empire, South America freeing itself of the colonial yoke of Spain, etc.

For a while it seemed as if nation states were to remain the universally accepted form of governance as the principle of self-determination was encouraged by both Woodrow Wilson and Vladimir Lenin at the same time. And under what were then technological and social trends nation states of varying size based around governing groups of individuals with a common language and culture - nations – seemed like the most efficient form of governance.

Yet, as changes since have shown us, nation states based around ethnic sovereignty did not serve to create ‘’good neighbors through good fences’’, partly due to a significant degree of unnecessarily persistent political and economic centralization within the nation state still breeding inefficiencies and due to conflicting territorial claims, particularly in ethnically mixed areas, creating disagreements that political systems of the time sought to solve through centrally directed economic and military application of force. And where goods could not cross borders, soldiers eventually did. Yet, I would argue, it was not through speeches and majority decisions that peace and freedom were brought about, nor through iron and blood. Instead, enter, the internet.

Arguably no tool in human history has had as profound an impact on lowering transaction costs and enabling the organization of economies at the optimal scale as the internet. By enabling virtually cost-free, instantaneous communication between essentially any number of individuals across the globe and unprecedented access to information it has reduced transaction costs to lower than they had ever been before. It has completely transformed entire businesses and economies faster than entire economic operations took to establish on newly acquired lands only half a millennium ago. With communication and business becoming easy on a global scale, limitations to free trade, movement and the exchange of ideas have become much more difficult if not cost-prohibitive. The nation state, once a driver of decentralization has suddenly come under pressure to decentralize itself as diseconomies of scale through bureaucratization and the reduction of entrepreneurial activity through central dictate reduce the efficiency of large, bureaucratized entities who attempt to manage what the market might manage for them better and cheaper, whether these entities be corporate or government. Decentralization has not only come after states but entrenched, large, bureaucratized companies as well, lumbering giants, relics of a time when theirs was a more efficient model, being hoisted down not by the overwhelming force of government but many small, nimble companies endangering their hegemony and market share like Lilliputians restraining Gulliver. Uber and its startup-born brethren may be a single company, but Uber’s edge over traditional taxi companies lies precisely in being hands-off, decentralized and allowing individuals to act with significant autonomy based on market incentives.

Blockchain, unbeknownst to many, stands today to provide the greatest revolution since the internet by decentralizing not only currency as it has begun to do but also contracts and a great many taks whose central management we have come to take for granted. Most of all, however, cryptocurrencies threaten to rob the antiquated nation state of monetary policy and the diminishing importance of the national identity in the face of cultural and economic globalization threatens to rob them of the begrudging consent needed to extract taxes and conduct fiscal policy, especially as blockchain innovations make denying them their power safer and easier. All the while, armed conflict becomes less and less viable as increased access to ever more deadly nuclear and biological weapons makes the potential human and capital cost of war prohibitive.  To quote the movie WarGames, in modern warfare ‘’the only winning move is not to play’’.

I have stated that decentralization is not a choice nation states will be free to make and that it is inevitable. Yet that does not mean that nation states and the other large, centralized entities with vested interests in preserving the status quo will rest as social and economic trends slowly undermine their centralized power. The conflict to transform governance into a form based on voluntary association and social and economic experimentation will likely not be an active and sudden one but a gradual effect of several economic, technological and social trends. And smaller entities with more sovereignty to dictate their own policies will have less to lose in this transformation and are likely to be the forerunners in the coming and by many unrecognized race to offer ever more mobile citizens the best version of the product they offer – citizenship and all the rights and obligations that come with it.