When science-fiction writer William Gibson coined the word "cyberspace," he defined it as a "consensual hallucination." As people pressed him to define the word, he'd often say, "It's where the bank keeps your money."
The choice of example was not a coincidence. Anyone looking to understand the concept of "consensual hallucination" need look no further than the nearest wallet. We all know that little slips of green paper -- or, for that matter, even more evanescent notations on passbooks or entries in bank computers -- have no intrinsic worth. Yet the great majority of human energy is devoted to the pursuit, collection, care and feeding of the consensual hallucination we call money.
The hallucination is obvious. (What would you rather have the next time you're stranded on a barren desert island: a million bucks in crisp $100 bills, or a couple crates of crisp Cheerios?) And the consent is something we all provide out of pure trust. We know that -- most of the time, under normal circumstances -- our money is exchangeable for food, shelter, clothing and whatever else we might crave to upholster our brief lives. Despite the likelihood of economic turmoil, this trust is powerful enough that we readily salt away the fruits of present labor in a variety of savings accounts and retirement plans that we confidently expect will still be worth something decades from now.
Money's consensual hallucination depends on a surplus of trust over fear. The more people share the hallucination, the more solid the money; the more they doubt it, the more it fades.
Today there's a bull market in punditry focused on how the rise of digital technology changes everything we thought we knew about money. The new "network economy" will suspend the business cycle and quite possibly result in a "long boom," according to Wired magazine. In this new world of "Webonomics," many of the old principles we grew up with -- stuff like the laws of supply and demand -- work differently, or not at all, and novel concepts like tipping points, "virtuous circles" and the "law of increasing returns" are on the rise. A new book called "The Friction Free Economy" declares that we now live in "a world where traditional economic principles no longer apply."
One principle that we should not be so ready to dismiss is the one that tells us the market that goes up also goes down. Whether this week's stock market turmoil proves a mere "correction" or a pivotal downturn, it should put a welcome damper on outpourings of utopian blather.
Unsurprisingly, most of the digital-economy rhetoric has emerged directly from Silicon Valley, where the architects of the personal computer industry and the Internet have become convinced that they've discovered essential new principles for building wealth. Proudly surveying their own achievements in the software industry, they imagine that the rest of the economic world will quickly transform itself in their own image -- or vanish into the dustbin of history.
As Esther Dyson puts it in her new book, "Release 2.0," "For better or worse, Silicon Valley is becoming a model emulated worldwide -- and is a model for the future for all of us."
But is it? It's always difficult to test the hypotheses of futurists, but if you want to understand what's happening in an economy, a good place to start is with money itself. If digital technology is going to utterly transform every aspect of our lives, dissolving the material economy into cyberspace, surely it will begin by working its magic upon money itself.
"Electronic money" is one of the great meaningless phrases of our time. Define it one way and it doesn't exist yet; define it another and we're swimming in it. In her book "Virtual Money," economist Elinor Harris Solomon tries to offer a kind of taxonomy of "e-money." In the U.S. economy for 1995, it turns out, cash accounted for 550 billion transactions worth $2.2 trillion; checks, 62 billion transactions worth $73 trillion; electronic transfers, 19 billion transactions worth a whopping $544 trillion.
Today, electronic funds transfers at the bank level -- through networks like the Federal Reserve's Fedwire and CHIPS, run by private New York clearing banks -- account for more than $2 trillion a day. In other words, ever larger sums of money move electronically ever faster from bank to bank and country to country. We're all swimming in e-money. We still use cash for a large volume of petty transactions, but cash and even checks make up an ever smaller amount of total monetary activity. "Cash is dying," James Gleick wrote in a New York Times Magazine cover story last year.
But what's replacing it? The Net is full of experiments in "pure digital cash" -- online payment systems that rely on cryptography to provide the security and anonymity we associate with old-fashioned cash. But none of them -- not DigiCash (founded by e-money theorist David Chaum) nor First Virtual Holdings, nor similar approaches depending on "smart cards" with chips embedded in them nor any other ambitious, innovative scheme dependent on new technology -- has caught on.
Why not? One word, like the man in "The Graduate" said: plastic. As in credit cards.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
"Plastic is the electronic medium for consumers, and it has flourished quite unexpectedly," Solomon writes in "Virtual Money." "Plastic fooled everyone. It defied logical definitions and became acceptable around the world, even by people who were afraid to take personal checks ... Plastic has become a true worldwide money form."
Credit cards are electronic money for the average person, and now that they're in so many people's pockets around the world, there's little reason for consumers to adopt anything else. Sure, credit card interest rates are usurious -- but who says you have to pay them? You can also pay off your balance in full every month and enjoy a convenient, universal payment method. You don't have to buy into a new and untested consensual hallucination; the cards are backed by the same banks that you already trust with the rest of your money.
True, fear of using credit card numbers online has slowed the growth of credit card transactions on the Internet, and some digicash firms have tried to capitalize on that. First Virtual's home page sells its service as "The simple, safe and secure online commerce system that doesn't transmit your credit card number over the Internet."
But people are gradually realizing that providing their numbers to online merchants is no more or less hazardous than reciting it to a clerk over a telephone line. (If you think the Internet is insecure, have you looked at your cell phone lately?) And consumers are also remembering that their liability for credit card fraud is limited by federal law to $50 -- making credit cards in many ways a more secure medium of exchange than, say, anonymous digicash. (That law means that when fraud happens, Visa and Mastercard must swallow the cost -- giving them a strong incentive to keep their systems secure, as they are trying to do with new schemes like the forthcoming SET standard.)
In his book "Webonomics," Evan Schwartz dismisses the prospects for pure digital money and says the tide has already turned in favor of credit card use on the Net: "Merchants on the Web are reporting that between 75 and 95 percent of their customers are comfortable using their credit cards online." Schwartz also predicts that "value-based currencies" -- the frequent-flyer mile concept expanded to suit the relationship between any seller and buyer -- will flourish on the Web.
If he's right, it means we're going to face a panoply of ever more bewildering and annoying "frequent purchaser discounts" and bonus points that will make us long for the good old days of supermarket coupons and Green Stamps. In theory, these bonuses benefit the consumer; in practice -- even with the help of new, Web-based technologies to track them -- they're usually an annoying waste of time. Unless the merchants are able to make such systems effortless and transparent, they're likely to drive people nuts. And they'll certainly never emerge as a significant medium of exchange, precisely because they'll never become universal: Each provider will want to keep his own "points" exclusive to lock in customer loyalty, just as frequent-flyer miles are designed to encourage people to stick with one airline.
One reason to be skeptical of "value-based currencies" can be found in "New Rules for the New Economy," an article in the September Wired by Kevin Kelly, the magazine's executive editor. "The only factor becoming scarce in a world of abundance is human attention," Kelly writes. If that's true, and I think it is, who wants to spend all day tallying bonus points and figuring out whether you've got enough to trade them in for the toaster oven or the china set?
So it turns out that, despite the vast and significant new forces in the economy that digital technology is unleashing, money itself isn't changing so fast -- and when it does it will mutate in directions that are already familiar to us, like the credit card system. This is in large part because money is fundamentally different from software. Novelty and ceaseless innovation rule the technology industry; stability and security rule our pocketbook psychology. Most people want to see their money sound, stable and in hands that have a long track record -- that's why banks tell you how long they've been in business.
Gee, maybe the software industry isn't a perfect model for every other variety of economic activity. But that's not giving the digital pundits pause. Kelly's article -- which reads like a book proposal -- offers an anatomy of the new "Network Economy" as a quasi-biological business environment in which compact new companies feast on the decaying remains of the dying carcasses of dinosaurs, while the smaller-faster-cheaper dynamic of technology keeps reducing the cost of goods.
Kelly's 1995 book "Out of Control" remains one of the most wide-ranging and thought-provoking chronicles of the ideas driving the digital age. But his "New Rules" article abandons "Out of Control's" rich blend of biology, math and philosophy for the more mundane world of business-school treatises. Like both "Webonomics" and "Net Gain" -- the Harvard Business School Press book by John Hagel III and Arthur Armstrong that caused a brief "virtual community" craze among businesspeople earlier this year -- Kelly's essay offers easy-to-digest rules for thriving in the new economy: stuff like "Embrace dumb power," "Let go at the top," "Anticipate the cheap" and "Follow the free."
The trouble with this paean to the new and the cheap is that, though it often connects at the level of theory (and contains a good deal of good sense), it frequently breaks down at the level of specifics. For instance, Kelly writes: "One curious aspect of the Network Economy would astound a citizen living in 1897: the very best gets cheaper every year." He goes on to reference Moore's Law of microchips, which predicts processors "halving in price or doubling in power every 18 months."
Yet halving in price and doubling in power aren't the same thing. It's the latter that's happened with computers: the typical top-of-the-line, fully-loaded computer for the individual user has remained in the $2,500-3,000 range for about a decade now, as its computing power has grown exponentially. Even with the recent popularity of the "$1,000 box" (usually sold without a monitor so the price is deceptively low), computer systems themselves haven't gotten nearly as cheap as Moore's Law would lead you to expect -- at most, they've halved in price in the '90s.
And outside the world of computing and telecommunications, there aren't a whole lot of products that halve in price every 18 months: not cars or jeans, hotel rooms or plane flights, magazines or milk crates. Still, Kelly sees this principle spreading to all corners of the economy as the logic of the network works its magic.
"The prime task of the Network Economy," Kelly says, "is to destroy -- company by company, industry by industry -- the industrial economy. While it undoes industry at its peak, it weaves a larger web of new, more agile, more tightly linked organizations between its spaces."
Well, maybe. "The industrial economy" can mean many different things, and it is surely in the throes of change. But if it is destroyed, who will manufacture the steel for all the skyscrapers that house the cubicles of tomorrow's information workers? Who will build the roads and cars and trains to get them there (since telecommuting hasn't exactly won the hearts of corporate managers)? And who will produce the refrigerators in which they can store the leftovers of their working dinners?
These questions remind me of a joke told by monologuist Josh Kornbluth, who recalls his communist father's outline of history, proceeding from primitive communalism to slavery to feudalism: "We've learned from history that it's very important after feudalism to stop in capitalism before moving on to socialism -- because that's where you get your appliances." If the entire industrial economy is in for demolition, where, I keep wondering, will we get our appliances? Virtual entertainment is one thing -- but a virtual washer-dryer just won't do.
At their best, proponents of the all-transforming digital economy like Kelly are bearers of vitally important information. The principles they record do describe the decentralized, networked way Silicon Valley operates -- and there's plenty the rest of the world can learn from this industry. But at their worst, the libertarian visionaries of the network economy seem just as lost in the clouds as the socialist dreamers whose centrally run economies they scorn. Both ideologies proceed from abstract principles rather than concrete realities, and both are more thorough about portraying a perfect final state -- whether it is one of classlessness or "friction-free" markets -- than about envisioning how to get there from the here-and-now.
When visionaries of the digital economy view all businesses and goods through the lens of their experiences in the software and telecommunications world, pushing valuable insights to absurdly all-encompassing extremes, they make a classic goof of self-centeredness: call it egotism or hubris. Sure, information is increasingly valuable in and of itself -- but material goods haven't exactly vanished as sources of value, either. Sure, the world economy increasingly functions as a single global entity -- but the specific quirks of individual national economies still shape their separate destinies within that global system. Sure, money will find its way into novel electronic forms -- but nothing will change people's fundamental requirement that they have confidence in it.
Because their political views carry a strong libertarian tinge, the digital-economy theorists are often placed at the right end of the American political spectrum. But there's nothing conservative about their "everything you know is out-of-date" perspective. And in fact, the ideology that offers the most useful corrective to their errors is the classic conservatism of Edmund Burke.
Responding to the French Revolution's sweeping dismantling of existing social institutions, Burke built a philosophy around respect for the historical circumstances and human contingencies that shaped the world we inherit. Burke shared with today's digital cheerleaders a penchant for analogies with the biological world; but where they see nature as a destructively fertile chaos, he was attracted to its images of longevity and slow, steady, organic growth. He admonished his readers to think twice before replacing social constructs forged by history with untested abstractions devised by philosophers. And though his cautions were in part apologias for a compromised status quo, they still hold value for us as we face a new era of free-market Jacobins eager to start everything over at square one.
Level-headed voices can be found even among the theorists of the network economy. Dyson, for instance, argues in her "Release 2.0" that the Net will deeply alter human institutions but leave human nature unchanged. (That's a relief.) Still, it's easy to see where the blind spot of the digital economy's advocates lies. These smart people -- so versed in the lore of chaos theory and friction-free markets and "bionomics" -- could really use some history lessons.