Review: Even on the Internet, What’s Old Is New Again
Posted January 11, 2018 8:30 p.m. EST
It is indisputable that the internet — facilitated by both vast improvements in access and computing power — has had a disruptive impact on not just business but politics and many aspects of our daily lives. Demonstrating precisely what that impact is, however, has been remarkably challenging. Pronouncements on the topic have a tendency to be overblown. “Transformational,” “exponential” and “revolutionary” are increasingly favored adjectives, whether they are applicable or not.
The impression that the world is changing faster today than ever before has become conventional wisdom. Yet the magnitude of change that occurred between when America galloped into World War I on horses and dropped the atomic bomb feels more significant than that undergone since the first dot-com domain name was registered. This observation is not meant to diminish the importance of the seismic changes wrought by the digital age, but rather to suggest the relevance of historical context often absent from the conversation.
A new book by prolific historian Niall Ferguson, “The Square and the Tower: Networks and Power from the Freemasons to Facebook” (Penguin), goes a long way toward redressing this pervasive lack of perspective to a concept central to the contemporary technological “revolution”: networks.
The internet itself is a network of networks. The ability to communicate and transact across its vast reach is indeed unprecedented and represents the basic infrastructure of what has been termed the “network society.” Ferguson’s book does far more than simply track the use of the word “network” from its introduction in English language publications in the late 19th century, when it “was scarcely used,” to the modern day, when he points out that it appeared in 136 articles in The New York Times during just the first week of 2017. Rather he seeks to reframe the entirety of human history as an endless tug-of-war between eras in which powerful hierarchical institutions predominate (the Tower of the title) only to be undermined by the influence of emerging networks (the corresponding Square).
In Ferguson’s telling, these networks are invariably co-opted by reconstituted hierarchies and the process begins again. For instance, Ferguson argues it was the printing press that was largely responsible for three “network-based revolutions — the Reformation, the Scientific Revolution and the Enlightenment.” These were followed by a 100-year period of hierarchical international order dominated by five hubs (Austria, Britain, France, Prussia and Russia) leading up to World War I.
The new industrial, financial and communications networks that emerged during this time did not, however, overturn the hierarchical nature of things. This dominant structure survived both world wars, according to Ferguson, with the mid-20th century actually representing the “zenith of hierarchy.” His account shows how the ability to navigate and influence these and other nascent networks determined which empires thrived in the reconfigured hierarchical orders.
One does not have to completely buy in to the book’s reframing of key social and political turning points to find the narrative both captivating and compelling. Whether describing the surprisingly ineffective 18th century network of the mysterious Illuminati that continue to be the subject of crank conspiracy theorists or the shockingly effective 20th century network of Cambridge University spies working for the Soviets, Ferguson manages both to tell a good story and provide important insight into the specific qualities that power successful networks.
Attempting to cover so much ground in such short space (“The Square and the Tower” is less than half the length of Ferguson’s recent biography of Henry Kissinger) risks fatal oversimplification. The book’s most impressive accomplishment is to avoid such a fate. Ferguson provides a credible summary of contemporary network theory and makes clear that “a hierarchy is just a special kind of network” in which nodes communicate up and down but never connect laterally. There are no true pure hierarchies — Stalin’s Russia probably comes closest — and the greatest strength of “The Square and the Tower” is that it generally avoids caricature. Instead, it emphasizes the critical questions of what distinguishes network effectiveness and what happens when networks interact.
Ferguson brings us up to the present with a discussion of the technology giants that have emerged in the last few decades. His focus is on their political and economic influence. He includes an interesting discussion of the similarities and differences between the impact of the internet and the printing press.
There is a burgeoning literature in management journals and business books that focuses on the internet’s influence on business strategy rather than politics. In some ways, this work reflects a variation on the paradigm described by Ferguson. Corresponding to the discussion of “old hierarchies” are businesses that rely on high fixed costs to build barriers to competitive entry, whereas the disruptive “new networks” are constructed on digital platforms made possible by the internet. These new businesses, it is argued, fuel “network effects” that lead inevitably to winner-take-all marketplaces.
These analyses, however, have lacked the historical perspective of “The Square and the Tower.” In place of the nuanced discussion of how hierarchies and networks interact, is a broad-brush assertion that scale achieved through network effects is inherently superior to that based on old-fashioned fixed costs.
In fact, platforms are no more a peculiarly modern phenomenon than networks are, and their digital incarnations are not necessarily better businesses than those that came before. Analog malls had the benefit of their shoppers being many miles away from competing malls and their retail tenants being committed to long-term leases. On the internet, platform competitors are only a click away and relationships are notoriously transactional.
The important lesson of “The Square and the Tower” is that the existence of a network, or network effects for that matter, should be the beginning not the end of the analysis. The critical questions relate to the network’s key characteristics and how it interacts with other networks and hierarchies.
The same is true of platform businesses, which are of highly diverse quality depending on their structural attributes and the ecosystems within which they operate. It is not a coincidence that the two largest and most enduring purely digital platforms — Google and Amazon — are not primarily network-effects businesses, but instead are companies that benefit from leveraging multiple, complementary sources of competitive advantage including, notably, traditional fixed-cost scale.
Predicting the viability of new business models requires a careful understanding of both history and industry structure. If “The Square and the Tower” encourages digital business strategists and venture capitalists to take this to heart, it will have made an important, if unexpected, contribution.