The Sovereign Individual

Part of my Reading list.

My Review

I thoroughly enjoyed this book and the predictions/insights made in regards to the state of societies that empower people to become more independent, successful and creative by breaking down existing barriers to entry AND exit. I went into this book aiming to skim for the practical side of the book—unfortunately I don’t fully understand the mechanisms behind globalism, inflation and government. What I do understand is that the world around us is rapidly changing and that fortune favours the prepared.

I am aiming to consolidate my highlights and notes into a kind of ‘Sovereign Playbook’ but for now, I’ll be drilling a little deeper into the nature of cryptocurrency as part of my investment strategy, how to prepare for a world where a job is no longer a long-term position but simply a paid task, and how to take advantage of technological to boost my own signal now and into the future.

Highlights

“I know of no more encouraging fact than the unquestionable ability of man to elevate his life by conscious endeavor.” —HENRY DAVID THOREAU
in the future, one of the milestones by which you measure your financial success will be not just now many zeroes you can add to your net worth, but whether you can structure your affairs in a way that enables you to realize full individual autonomy and independence.
The more clever you are, the less propulsion you will require to achieve financial escape velocity
Wherever necessity sets boundaries to human choice, we adjust, and reorganize our lives accordingly.
In 1903, the Mercedes company said that “there would never be as many as 1 million automobiles worldwide. The reason was that it was implausible that as many as 1 million artisans worldwide would be trainable as chauffeurs.”
We expect to see amazing paradoxes in the years to come. On the one hand, you will witness the realization of a new form of freedom, with the emergence of the Sovereign Individual. You can expect to see almost the complete liberation of productivity. At the same time, we expect to see the death of the modern nation-state. Many of the assurances of equality that Western people have grown to take for granted in the twentieth century are destined to die with it.
Here are some summary points that you should keep in mind as you seek to understand the Information Revolution: A shift in the megapolitical foundations of power normally unfolds far in advance of the actual revolutions in the use of power. Incomes are usually falling when a major transition begins, often because a society has rendered itself crisis-prone by marginalizing resources due to population pressures. Seeing “outside” of a system is usually taboo. People are frequently blind to the logic of violence in the existing society; therefore, they are almost always blind to changes in that logic, latent or overt. Megapolitical transitions are seldom recognized before they happen. Major transitions always involve a cultural revolution, and usually entail clashes between adherents of the old and new values. Megapolitical transitions are never popular, because they antiquate painstakingly acquired intellectual capital and confound established moral imperatives. They are not undertaken by popular demand, but in response to changes in the external conditions that alter the logic of violence in the local setting. Transitions to new ways of organizing livelihoods or new types of government are initially confined to those areas where the megapolitical catalysts are at work. With the possible[…]
Every social order incorporates among its key taboos the notion that people living in it should not think about how it will end and what rules may prevail in the new system that takes its place
The more apparent it is that a system is nearing an end, the more reluctant people will be to adhere to its laws. Any social organization will therefore tend to discourage or play down analyses that anticipate its demise. This alone helps ensure that history’s great transitions are seldom spotted as they happen
You cannot depend upon conventional information sources to give you an objective and timely warning about how the world is changing and why. If you wish to understand the great transition now under way, you have little choice but to figure it out for yourself.
Any forecast that accurately anticipates the impact of incentives on behavior is likely to be broadly correct. And the greater the anticipated change in costs and rewards, the less trivial the implied forecast is likely to be.
The most far-reaching forecasts of all are likely to arise from recognizing the implications of shifting megapolitical variables. Violence is the ultimate boundary force on behavior; thus, if you can understand how the logic of violence will change, you can usefully predict where people will be dropping or picking up the equivalent of one-hundred-dollar bills in the future.
Other things being equal, the more widely dispersed key technologies are, the more widely dispersed power will tend to be, and the smaller the optimum scale of government
Yet “perfection,” as C. Northcote Parkinson shrewdly noted, “is achieved only by institutions on the point of collapse
The Information Revolution will destroy the monopoly of power of the nation-state as surely as the Gunpowder Revolution destroyed the Church’s monopoly. There is a striking analogy between the situation at the end of the fifteenth century, when life had become thoroughly saturated by organized religion, and that of today, when the world has become saturated with politics
The nation-state became history’s most successful instrument for seizing resources. Its success was based upon its superior ability to extract the wealth of its citizens
As the millennium approaches, the new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution
The same megapolitical revolution that killed Communism is also likely to undermine and destroy democratic welfare states as we have known them in the twentieth century
When you think closely about the terms under which industrial democracies have operated, it is more logical to treat them as a form of government controlled by their employees. Thinking of mass democracy as government controlled by its employees helps explain the difficulty of changing government policy
You may be saying that in most jurisdictions there are many more voters than there are persons on the government payroll. How could it be possible for employees to dominate under such conditions? The welfare state emerged to answer exactly this quandary. Since there were not otherwise enough employees to create a working majority, increasing numbers of voters were effectively put on the payroll to receive transfer payments of all kinds. In effect, the recipients of transfer payments and subsidies became pseudo employees of government who were able to dispense with the bother of reporting every day to work. It was a result dictated by the megapolitical logic of the industrial age
Information technology lowers capital costs, which also tends to increase competition by facilitating entrepreneurship and allowing more people to work independently. Lower capital requirements not only reduce barriers to entry; they also reduce “barriers to exit.” In other words, they imply that firms are likely to have fewer assets relative to income, and therefore less ability to sustain losses
The vast variability of output among persons employing the same equipment poses yet another obstacle to extortion. It creates a major bargaining problem about how to share the payoff. Where a relatively small proportion of those participating in a given activity create most of the value, it is all but mathematically impossible for them to be left better off by a coerced outcome that averages incomes. One software programmer may devise an algorithm for controlling a robot that proves to be worth millions. Another, working with identical equipment, may write a program worth nothing. The more productive programmer is no more likely to wish to have his income tied to that of his compatriot than Tom Clancy is to agree to average his book royalties with ours.
Information technology is laying the groundwork for a fundamental shift in the factors that determine the costs and rewards of resorting to violence
access creates globalism, and globalism disrupts political systems by making the concept of borders obsolete. As borders disappear, the concept of taxation, which supports governments, becomes increasingly fragile.… As borders disappear, the concept of entitlement—the belief that because you were born in a particular place, you are entitled to the economic advantages associated with that place—falls apart, and as it falls apart, the perks of nationhood fall apart with it. And as all that happens, the ideals that underlie nationhood—patriotism, democracy, the state, the melting pot, unification, responsible participation, whatever they happen to be in whatever nation one is living in—get relegated to the junk heap of history.
As ever more economic activity is drawn into cyberspace, the value of the state’s monopoly power within borders will shrink, giving states a growing incentive to franchise and fragment their sovereignty.
That is the fact that governments have never established stable monopolies of coercion over the open sea. Think about it. No government’s laws have ever exclusively applied there. This is a matter of the utmost importance in understanding how the organization of violence and protection will evolve as the economy migrates into cyberspace, which has no physical existence at all. For the same reasons that Lane noted in observing that no government has ever been able to monopolize violence on the sea, it is even less likely that a government could successfully monopolize an infinite realm without physical boundaries.
Unlike the past, when the inability to monopolize protection in a region meant higher military costs and lower economic returns, the fact that governments cannot monopolize cyberspace actually implies lower military costs and higher economic returns
For the first time in history, information technology allows for the creation and protection of assets that lie entirely outside the realm of any individual government’s territorial monopoly on violence.
Because it will probably be gold-linked, cybermoney will also benefit from the appreciation of gold. The price of gold will probably rise significantly relative to other commodities, no matter which of the alternative government policies predominates. Why? The real price of gold almost always rises in deflation. A deflation, after all, reflects a shortage of liquidity. Gold is the ultimate form of liquidity.
Since a greater and greater portion of the value of products and services will be created by adding ideas and knowledge to the product, an ever-smaller component of value-added will be subject to capture within local jurisdictions. Ideas can be formulated anywhere and transmitted globally at the speed of light. This inevitably means that the information economy will be dramatically different from the economy of the Factory Age.
The most primitive manifestations of the Information Age involve the Net simply as an information medium to facilitate what are otherwise ordinary industrial-era transactions. At this point, the Net is no more than an exotic delivery system for catalogues
An intermediate stage of Internet commerce will employ information technology in ways that would have been impossible in the industrial era, such as in long-distance accounting or medical diagnosis
The second stage of Net commerce will still function within the old institutional framework, employing national currencies and submitting to the jurisdiction of nation-states. The merchants who employ the Net for sales will not yet employ it to bank their profits, only to earn revenues. These profits made on Internet transactions will still be subject to taxation
A more advanced stage will mark the transition to true cybercommerce. Not only will transactions occur over the Net, but they will migrate outside the jurisdiction of nation-states. Payment will be rendered in cybercurrency. Profits will be booked in cyberbanks. Investments will be made in cyberbrokerages. Many transactions will not be subject to taxation. At this stage, cybercommerce will begin to have significant megapolitical consequences of the kind we have already outlined. The powers of governments over traditional areas of the economy will be transformed by the new logic of the Net. Extraterritorial regulatory power will collapse. Jurisdictions will devolve. The structure of firms will change, and so will the nature of work and employment.
Continued expansion of computational power will lead to better compression technology, speeding data flow. Widespread adoption of existing public key/ private key encryption algorithms will allow providers, such as satellite systems, to incorporate the billing function into the service, lowering costs
As the world grows closer together, you will have a greater opportunity than at any time in history to customize your particular place in it. Even the information you receive on a regular basis from the media will be information of your choosing. The mass media will become the individualized media
You will be able to use cybermoney to make investments as well as pay for services and products. If you live in a jurisdiction like the United States that heavily regulates your investment options, you can choose to domicile your activities in a jurisdiction that permits the freedom to pursue a full range of investment options. Whether you live in Cleveland or Belo Horizonte, you can do your investment business in Bermuda, the Cayman Islands, Rio de Janeiro, or Buenos Aires
In almost every competitive area, including most of the world’s multitrillion-dollar investment activity, the migration of transactions into cyberspace will be driven by an almost hydraulic pressure—the impetus to avoid predatory taxation, including the tax that inflation places upon everyone who holds his wealth in a national currency
This new digital form of money is destined to play a pivotal role in cybercommerce. It will consist of encrypted sequences of multihundred-digit prime numbers. Unique, anonymous, and verifiable, this money will accommodate the largest transactions. It will also be divisible into the tiniest fraction of value. It will be tradable at a keystroke in a multitrillion-dollar wholesale market without borders
As documented by Professor Roy W. Jastrom in his book The Golden Constant, gold has maintained its purchasing power, with minor fluctuations, for as far back as reliable price records are available, to 1560 in the case of England.
Note that there is no intrinsic necessity that currency depreciate or that the nominal cost of living rise every year. To the contrary. The technical challenge of maintaining the purchasing power of savings is trivial. You can see this merely by looking at the long-term purchasing power of gold
You will soon be able to deal in digital money from a private firm, issued much as American Express issues traveler’s checks as receipts for cash. An institution of greater repute than any government, such as a leading mining company or the Swiss Bank Corporation, could create encrypted receipts for quantities of gold or even for unique bars, identified by molecular signatures and possibly even inscribed with holograms. These receipts will then trade as money, with almost no possibility that they can be counterfeited or inflated
The capacity of digital money to deliver micropayments will facilitate the emergence of new types of businesses that heretofore could not have existed, specializing in organizing the distribution of low-value information. The vendors of this information will now be compensated through direct-debit royalty schemes that overcome previously daunting transaction costs
Virtual reality will create almost unlimited licensing opportunities that will nevertheless command only microroyalty payments. One day you will be able to replay the third game of the 1969 World Series, and pay microroyalties to the players whose images are used to make your virtual reality seem real
The rise of inflation in the twentieth century, as we argued in Blood in the Streets and The Great Reckoning, was intimately connected with the balance of power in the world. Increasing returns to violence dictated sharply higher military expenditures, which in turn required ever more aggressive efforts to expropriate wealth. Governments found that they could effectively impose an annual wealth tax on all who held balances in their national currencies. This annual wealth tax on currency holders could also be seen as a transaction fee for allowing the users of currency to maintain their wealth in a convenient form provided by the issuers
Thinking of inflation as a transaction fee for the convenience of holding currency may be unusual, but consider it closely. During the Industrial Age we became so accustomed to thinking of the provision of currency as a service for which one does not pay directly, that it was easy to forget that the issuers of the dollars, pesos, pounds, and francs, namely governments, did require that we pay, and pay dearly—through inflation
The emergence of digital money will not only defeat inflation once and for all; it will also contract leverage in the banking systems of the world. The ability of people everywhere to bypass regulatory authorities and shift their funds directly through the Internet is an entirely unprecedented consequence of the globalization of markets. It will be beyond the power of any government to regulate. When governments can no longer depreciate currency by printing money or defraud savers by expanding credit at will through captive banking systems, they will lose a major part of their indirect capacity to commandeer resources
This will create an obvious dilemma for most Western governments. They will face sharp drops in revenue from taxation and the virtual elimination of leverage in the monetary system. At the same time, they will retain the unfunded liabilities and inflated expectations for social spending inherited from the industrial era. The result to be expected is an intense fiscal crisis with many unpleasant social side effects
The economic consequence of this transition crisis will probably include a one-time spike in real interest rates
Governments facing serious competition to their currency monopolies will probably seek to underprice the for-fee cybercurrencies by tightening credits and offering savers higher real yields on cash balances in national currencies
The combination of credit crises, competitive adjustments by national monetary authorities, and early transitional obstacles to lending cybercurrency will lead to a yield gap in the early stages of the information economy. Cybermoney will pay lower interest rates than national currencies and will probably also carry explicit transaction costs. Offsetting these apparent drawbacks to holding balances in digital money will be enhanced protection against losses due to predatory taxes and inflation
dramatic improvement in the efficiency of resource use will arise when revenues historically engrossed by governments come to be controlled instead by persons of genuine talent.
Tens of billions, then ultimately hundreds of billions of dollars will be controlled by hundreds of thousands, then millions of Sovereign Individuals. These new stewards of the world’s wealth are likely to prove far abler than politicians in utilizing resources and deploying investment
For the first time in history, megapolitical conditions will allow the ablest investors and entrepreneurs rather than specialists in violence ultimate control over capital
Growth rates cited by the Economist suggest that economic liberty is strongly correlated with economic growth, with the most rapid rates of growth in the freest countries. The cybereconomy of the Information Age will be more free than any other commercial realm in history. It is therefore reasonable to expect that the cybereconomy will rapidly become the most important new economy of the new millennium
1 percent of the population of the United States pays 28.7 percent of the income tax, suggesting that as societies advance into the Information Age they will experience an even more skewed distribution of incomes and abilities than Vilfredo Pareto observed at the end of the last century
In the Information Age, familiar locational advantages will rapidly be transformed by technology. Earnings capacity for persons of similar skills will become much more equal, no matter in what jurisdiction they live. This has already begun to happen
Capital in the Information Age is growing more mobile by the moment. The capacity to earn high income is no longer tied to residence in specific locations, as was the case when most wealth was created by manipulating natural resources. With every day that passes, it becomes easier for people using highly portable information technology to create assets that are far less subject to the leverage of violence than any form of wealth has ever been before
Arbitrary political regulations that impose costs without creating offsetting market benefits will soon be nonviable. Powerful competitive forces are tending to equalize the prices of goods, services, labor, and capital across the globe
In the Information Age, however, the rational person will not respond to the prospect of higher taxes to fund deficits by increasing his savings rate; he will transfer his domicile, or lodge his transactions elsewhere. For the same reason that producers sort among suppliers in search of the lowest costs, they will be even more strongly motivated to seek alternative suppliers of protection
Cheap governments that have few liabilities and impose low costs on customers will be the domiciles of choice for wealth creation in the Information Age
Greatly reduced information costs will obviate most local pricing advantages. Not only will buyers be able to scan an immense number of outlets in search of the lowest prices on tradable goods; they will also be able to employ remote services to shop across jurisdictional boundaries
Consequently, profit margins are likely to fall in any field where local price anomalies can be eroded by additional information and competition.
The new megapolitical conditions of the Information Age will significantly alter the logic of business organization. Part of this is obvious. If information technology does nothing else, it dramatically lowers the cost of processing, computing, and analyzing information. One effect of such technology is to reduce the necessity of hiring large numbers of middle managers to monitor production processes
To an increasing degree, individuals capable of creating significant economic value will be able to retain most of the value they create for themselves. Support staff that previously absorbed a large part of the revenue generated by the principal income creators in an enterprise will be replaced by low-cost automated agents and information systems
“Good jobs” will be a thing of the past. A “good job,” as Princeton economist Orly Ashenfelter put it, “is a job that pays more than you are worth.”32 In the Industrial Age, many “good jobs” existed because of high information and transaction costs. Firms grew bigger and internalized a wider range of functions because doing so allowed them to capture scale economies. Corporate bloat was also subsidized by tax laws. The high taxes that predominated in the late stages of the industrial era artificially magnified the advantages of forming a long-lived firm and hiring permanent employees
In the postindustrial period, jobs will be tasks you do, not something you “have.”
In effect, if information technology evolves as it may, it will assure that governments are actually controlled by their customers. As a customer, you will first have hundreds, then thousands of options to reduce your protection costs directly by contracting a private tax treaty with a nation-state or by defecting from nation-states altogether to emerging minisovereignties
Remember, the question “Why are there firms?” is not as trivial as it may seem on casual observation. Microeconomics generally assumes that the price mechanism is the most effective means of coordinating resources for their most valued uses. As Putterman and Kroszner observe, this tends to imply that organizations like firms have no inherent “economic raison d’être”30 In this sense, firms are mainly artifacts of information and transaction costs, which information technologies tend to reduce drastically
Therefore, the Information Age will tend to be the age of independent contractors without “jobs” with long-lasting “firms.” Equally, when economic success depends upon talented individuals, they may receive outsized pay and extravagant bonuses to provide their services, much as professional athletes and movie stars command huge rewards for their talents
You should aim never to leave your money in any jurisdiction that claims the right to conscript you, your children, or your grandchildren. Whatever your current residence or nationality, to optimize your wealth you should aim to primarily reside in a country other than that from which you hold your first passport, while keeping the bulk of your money in yet a third jurisdiction, preferably a tax haven
The nation-states may be incapable of surviving on a diet of stable, much less diminished, resources. As Tainter details, when hypertrophied systems have exhausted their potential, as we believe nation-states have today, “the Law of Diminishing Marginal Returns” frequently sets in. In “many crucial spheres” the returns for increased investments in centralized sociopolitical control decline, or even become negative
Instead of paying whatever tax burden is imposed upon you by grasping politicians, you will be better positioned to prosper in the Information Age by freeing yourself to negotiate a private tax treaty

Details

Author: James Davidson
My rating: ★★★★★
ISBN: 9780684832722