The Net Effect, Part 4
Post-January 20 AoS Chronicle, No. 30
Today we finish with the Net Effect series. No new publications to mention, and nothing to add from last week on the prospects for a savagery essay. Still pondering that. So without further ado:
. . . Consider, fifth, that the U.S. government has frequently run a deficit over the past half century or so and has piled up a huge cumulative national debt—$30.02 trillion at this point. Before the advent of post-Cold War globalization the size of the debt relative to GNP was relatively small for the most part, except during wartime. (So was the capitalization of the stock market relative to GNP, but that’s another matter.) No longer. And today a much larger percentage of those holding the U.S. debt are not U.S. nationals, so the old saw that “it’s money we owe ourselves so who cares?” no longer palliates. Of the roughly 30 percent held by foreigners, a good chunk is held not by individuals but by sovereign wealth funds. China’s roughly 5.6 percent share, totaling more than $1.18 trillion as of 2020, is a key case in point.
Why does this latter fact matter? Simple: A large collection of individuals cannot act in concert, but a state can. This is why the state-centric design of the Chinese economy will always draw more media attention to Chinese project developments abroad than to those of most other countries. For example, the Malaysian government negotiated with the Chinese government for its East Coast Rail Link project, and that drew lots of attention. But Putrajaya would not negotiate with the U.S. government over Dell or Microsoft investments in-country, even investments of larger economic import, because they are with companies and not a state.
Now, an unfriendly state would cut off its nose to spite its face if it acted aggressively with regard to its financial leverage in ordinary times, so we assume such a state will not do self-injurious things. In a geopolitical/military crisis, however, no certainties exist. Historically, governments have on many occasions made themselves vulnerable to others—nobles and bankers mainly, and mainly from within—by borrowing from them. But major-power governments making themselves vulnerable to potentially hostile state actors? This is historically uncommon. The fact that just the interest from China’s holdings of U.S. debt is enough to finance its estimated annual defense budget—something like $244 billion as of a few years ago—about twice over is also, almost needless to say, historically uncommon.
Even more notable, perhaps, in the past the percentage of states in any given state system that decided to engage in deficit spending and financing was relatively small. It happened mainly in wartime, the common hope being, if we go back far enough in history, that new loot would pay for ongoing operations. Today a large percentage of the 193 extant states engages in deficit spending and borrowing to finance it. Why? Because they can, given the vast liquidity that now resides within the aggregated pools of an expanded international banking setup, and the far advanced technical/administrative capacity to keep track of and service the loans.
This does not necessarily make the practice wise, even at relatively low interest rates, and even when growth rates stimulated by borrowing exceed interest rates. That is because the distribution of benefits from growth may be skewed by the function of borrowing itself, which can generate rentier and patronage phenomena within political economies that may have long-term negative consequences for most people. Large borrowing creates new accumulations of power, and that power can and often will make “special interests” politically stronger.
We know that elites in authoritarian states often do not care much about ordinary people, at least compared to their own fortunes and those they choose to patronize for political purposes. But what about democratic states? Can special interests feeding off the Net Effect become so much stronger that it fundamentally warps their sense of community with their own country? Well, yes.
But why specifically has the U.S. national debt grown so large so fast? The answer is not analogous to the causes, say, of a toothache. The causes of a toothache can usually be identified as having to do with a decayed and infected tooth or its adjacent gum tissue. The causes of a national debt metastasizing are not so simple.
One cause is cultural. In the case of the United States, but not only the United States, most people have come to believe that they are entitled to maximum feasible and virtually unlimited material accumulation, environmental consequences be damned or, more often, pretended or pretexted away. And if they cannot pay cash on the barrelhead for it, little stigma remains against borrowing to acquire it. Banks throughout the West and beyond now make more money from teasing improvident acquisition habits into debt than from any other source; advertising chicanery abets the lurid material cravings by manufacturing ever more other-directed people determined to keep up with the Joneses; and the nadir of traditional religion abets all that and more, its absence enabling the substitution of values like expressive individualism and spectacle-driven conspicuous consumption for older virtues like patience, providence, humility, and intergenerational responsibility.
But cultural factors only account for the demand for improvident behavior; without a supply of funds to borrow to sate that demand, the toxic desires of American hyper-consumers would go at least partly unrequited. But there is now a supply: A huge percentage of the aforementioned massive reservoir of global cash liquidity migrates regularly to be invested in the United States for lack of safer or more lucrative destinations. The numbers have become so large that in many cases they have come to dwarf the legacy administrative techniques formerly evolved to manage them safely. It is impossible to take in so much money and still guard against consequences that in selected but hardly trivial cases derange market psychology—“irrational exuberance,” Alan Greenspan once called it, possibly because he would not be caught dead uttering Keynes’s perfectly adequate coinage “animal spirits.”
Can the American nation really afford all the stuff it buys, much of it in the form of imports that create massive trade imbalances, if it must go so deeply into debt to do it? Any sensible person would answer “not for long.” So why, then, does the American political class enable such individual and socially self-destructive behavior, as it has done for decades? Simple: They do not wish to be the adults in the room, scolding and admonishing others; and they themselves are often not exactly adult-like in their own conduct.
To its rare credit, the Trump 2.0 Administration has raised this issue to prominence, particularly via some of the things Treasury Secretary Scott Bessent has said publicly. Protectionist tariffs do have a potential to cut frivolous and excessive spending by dint of pricing items out of reach, for the elasticity of demand for junk is not infinite. But tariffs also pose a dangerous inflationary potential that ultimately would affect interest rates and the costs of servicing debt. Whether the Administration can do anything coherent and effective on this score remains an uncertain prospect. The Supreme Court is supposed to rule this week on the constitutional legality of the President’s tariff impositions. The law is clear: He cannot do these things beyond a minimal point without congressional approval, and what he has done isn’t minimal. Bur clarity in the law has not stopped the Roberts Court before, and it probably won’t stop it again.
Risk versus Uncertainty
Consider, sixth, that the sum of items one through five, taken together, constitute a higher-order phenomenon: the inversion of risk and uncertainty.
The current system of global financial interactions arguably reduces risk for individual corporate and high net-worth actors. Data and the means to analyze it have never been more abundant and easier to use. Business owners and managers can now be more precise than ever in personnel and resource decisions, as well as with calculating inventory, transportation, and insurance costs. These capabilities in effect discount the cost of time, which is never free, and magnify the efficacy of scale, at least to a point. Not only do leaders and managers typically know more about the environments in which they operate than ever before, they can also now shape and manipulate consumer markets to their advantage as never before.
But while risk has arguably declined, uncertainty has grown with the Net Effect. To understand this, one needs to know the difference between risk and uncertainty. As Jessica Einhorn has explained, think of a fisherman in some rural valley far away and long ago. When he makes his way to the river in the morning with rod, tackle, and bait, he takes a risk that the fish won’t be biting, that his line will get snagged, that the weather will turn too foul to endure, and so on. But he can mitigate the risks, the major ones of which he understands from experience. He knows the relevant variables; he just doesn’t know their magnitudes on any given morning. Now imagine that one day the fisherman goes out to the river and finds it gone because an earthquake upstream, far beyond range of his hearing, diverted the river’s flow during the night, probably flooding out someone else’s crop patch over the next ridge. That was a variable he could not reasonably have been expected to anticipate. That is not risk but uncertainty.[1]
The difference between risk and uncertainty in business life, whether for individuals, corporations, or even sometimes whole economies, resembles in some ways a mini-max problem in game theory. Incursions of risk into normal life are frequent-to-constant factors, but usually low-impact ones; incursions of uncertainty into normal life are rare but high-impact. Globalization has increased uncertainty relative to risk by: amalgamating separate small business cycles into one much larger cycle; by raising the stakes of being first-past-the-post providers of high-end goods and services; by magnifying the incentives to employ offshore tax havens; by amalgamating capital pools and starving local economies of investment funds and control and thus exacerbating rural/urban divides; and by enabling massive and dangerous levels of personal and national indebtedness. This shows that complexity and diversity are not the same, despite having certain base characteristics in common. To equate this situation to one prone to generating the occasional “black swan” is so ludicrously understated as to embarrass any self-respecting swan.[2]
Since incidences of structural uncertainty as opposed to calculable risk are rare, it is possible—indeed, inevitable given human nature—that the danger of low-probability but high-impact structural uncertainty incursions will be reckoned as zero, as, for example, with reckoning the odds of a superpower nuclear war. But the probability of both is only low—it is not zero. In this sense, the broad financial aspects of globalization constitute not only a capacious set of interlocked processes, but also a major wager. Science fiction already offers futuristic scenarios of an age of massive “expansion” collapsing into an age of massive “contraction”—Paolo Bacigalupi’s 2009 novel The Windup Girl, for example. The question is: Will this scenario remain fictive? Or are we bound to see a remake of the Daedalus and Icarus Show, not as myth but (with apologies to Giraudoux) as the privilege of the elders to watch catastrophe from a terrace?
Dysfunctional Wealth
The point of this brief analysis is that a relatively recent technological innovation—the digital cyberlution—did not by itself create the avalanche of socio-economic change and attendant disruption of recent years. But it has synthesized and magnified what had been a series of disparate effects that now sum to a qualitatively major impact. Nothing has been quite the same since, to the misty extent we actually understand what has been happening.
Affluence as it existed before the Net Effect destabilized its own socio-economic base and that in turn had several and significant autonomous effects on American culture, and as such certainly affected its politics. With the Net Effect stimulating concern over the fragility and lopsided distribution of our affluence—its potentially malign social impact as well as its future sustainability—a new dimension of affluence’s effect on American political dysfunctionality has been added. This is all about what capitalism is, has become, and will become in the future.
As already noted, when we speak of capitalism our taken-for-granted mind’s-eye image is that of a noun, and so capitalism appears flat and relatively unchanging. But capitalism, like all abstract concepts hinged to the human social world, is more like a verb, literal grammar notwithstanding. It is always changing and does so recursively. It affects social structure and culture, and within culture education and science and technological innovation. Its susceptibility to recursive change means that causal arrows always flow backwards and orthogonally as well as forward and linearly.
In my view, the Net Effect is a major inflection point in the evolution of capitalism because, not least, it reduces qualitatively the informational uncertainties that divide supply from demand, and so changes the process of producing price-points. It puts us well beyond garden-variety late-20th century plutocracy, and at least a light year beyond the plutocratic phase of the rapidly industrializing post-Civil War period that was eventually tamed by the reforms of the Progressive era and its own multifarious internal developments. We now have a globalized form of rentier “turbo”-capitalism, to employ Edward Luttwak’s apt 30-year old term for it.[3] One characteristic of it is that American workers short of symbol-manipulation-enabling college degrees are competing in a wider, more integrated global labor market not only with other Americans but with people from much of the planet. As virtually every sober American soul has by now discovered, a lot of those other people are very smart and many are better educated at basic levels than Americans have become, so more than low-earning echelon U.S. jobs are being out-competed in a more integrated international labor market.[4]
That means in turn, as already noted, that present and future forms of capitalism may produce many more relative losers than winners in the United States, perhaps by an order of magnitude over what was the case just a quarter century ago. This will not severely affect most people’s absolute standard of living and it will not condemn many additional Americans to dire poverty. But it will affect the standard of living at the margins and it almost surely will exacerbate income and wealth inequality. It will also change further the mix of what kinds of personalities, educational achievement levels, and skill sets do relatively well and which will fall behind. That is plenty sufficient to cause politically salient social perturbations.
This will not quite redeem Marx’s erroneous prediction of capitalism’s immiseration of the masses, a failed prediction that set off no end of Ptolemaic epicycles designed to save Marx’s image and post-funereal uses. It will not forgive his blindspot to the entire world of growth economics; alas, Marx, too, thought capitalism was a noun, albeit with verb-like effects on society. (He wrote of the bourgeois era, remember, that “all that is solid melts into air”—his poetical way of describing Ferdinand Tönnies’s far more granular analysis of the epochal movement from Gemeinschaft to Gesselschaft.) But it will—it already has—created a psychology of the déclassé even absent the very sharp negative impact on social mobility that the term implies. That is a key ingredient in right-of-center American populism today, and it is the main grievance—along with the array of counter-humiliation reactions, mostly articulated in culture war vocabulary, to the insufferable arrogance of liberal cultural elite—that Donald Trump has exploited and still exploits for political purposes.
Not to underestimate the political power of the culture wars at national scale, but the power of the political economy to shape the political sphere is probably greater in the longer run. If we as a nation do not reform the political economy so as to interrupt and reverse the process of making perhaps two-thirds of the population losers from globalized rentier capitalism, we will not be able to preserve a liberal constitutional political order for very long. This is especially so in a cultural environment in which the deep literacy necessary to sustain our Enlightenment-born institutions is rapidly giving way to a New Orality whose very nature cannot support and transmit the values and attitudes associated with classical liberalism. Both of these sets of factors—cultural divides and political-economy trends—matter enormously to the American political future, and a few lesser other factors, too. It is no use thinking in unifactorial terms, as too many of us do; that will only mislead and confuse.
Searching for the Next Capitalism
What could a new capitalism, one that works for most of We the People, look like? Many observers have given thought to this question. Some argue that less government regulation will revivify markets more or less on their own.[5] That view ignores the plain fact that the erosion of social trust, and basic civic virtue with it, can flow from concentrations of non-government power, in the form of plutocratic corporate industrial folklore, as well as from overreaching public concentrations of power. Less regulation will not revivify small-shopkeeper capitalism because small-shopkeeper capitalism has gone the way of the dodo.[6] The same is true for tariffs reviving the U.S. manufacturing sector; it takes a lot of time and lot of skill training to build a best-practice manufacturing infrastructure, and anyone who believes that such a transformation can happen more or less overnight is, well, a dodo.
Contrarily, a relatively small number of Americans want the state to eliminate markets altogether in classical “hard” socialist “command economy” mode, but this has always been and remains a very marginal view in the American context. Some want the state merely to do more, so that private markets do less, but do it better for the commonweal as a whole.[7] But that begs the question of who gets to decide the balance, and what “better” actually means to differently interested constituencies. It’s a good applause line but it is not a solution to the basic problem. It is merely a restatement of it that, if adopted as a direction, would in due course return matters to the constipated politics from which we already suffer. If your mattress is no good anymore, if its springs are shot and its shape bent beyond repair, merely flipping it over is not going to help you much, if at all.
More creatively, but also with far greater difficulty in the face of political inertia, others want to shape technology and technique (again, not the same things) to reduce hierarchy in the labor force so that fewer people work for others, and more work for themselves or work in smaller scale industrial and agricultural enterprises and voluntary communes.[8] Some want to supercharge the progress of AI-infused automation to essentially eliminate the need for most people to work at all. Generous Guaranteed National Income schemes sometimes elide on this vision, but to those who care about whole humans and not consumer aggregate demand spending data this looks more like a future dystopia than a utopia, more liable to produce a nation of H.G. Welles’s Eloi, with politically empowered techo-feudalists (and their associated machines) playing the role of the Morlocks.
A good deal of the variance here comes down to questions of scale—remember Leopold Kohr?—specifically: What ratio of human agency to the size of machine-enabling organization is best for human flourishing? If we proceed as though material output is the highest-priority goal, in other words affluence in its most decontextualized form, the very question disappears and we risk harming both individual humans and the social nesting that sustains them. The Net Effect is pushing us that way not just because the material results seem so alluring, but also because the novelty and mystery inherent for the technological elite in the process of getting it to work is all but irresistible. This is, however, an unwitting road to ruin and regret; concentrations of power of every kind, whether public or private, whether well intentioned or not, whether furthered by mindless habit or by the mesmerizing influence of the gaming elements in innovation, are dangerous to human flourishing. And they are dangerous for what should be an obvious reason: They undermine and even destroy human agency, reducing people to instruments of more powerful and wealthier others, and so extinguishing their freedom.
Alas, this is a discussion that is barely audible within today’s agora. It would be wrong to say that it has not begun at all, but rather that it has fallen into relative abeyance. The problematizing of human scale to technological effusions is not new, and long predates the digital revolution and the current outsized nature of the Net Effect.[9] When debate does recommence in earnest, if it ever does, it will be a debate about the future not just of affluence, but finally, one hopes, a debate about affluence in the context of moral reasoning about what constitutes a truly good and virtuous society. It will be a search for a form of affluence that produces not decadence but human flourishing. It will certainly require a knack for something we currently think very little about: a way to use the engines of change to channel change so as, as Alvin Toffler put it more than fifty years ago, “to humanize distant tomorrows.” It is a debate that will at long last fully integrate the “how” questions of politics with the “why” questions of politics, a feat that, in our headlong developmentalist mindset these past several centuries, we have never seriously come close to achieving.
I wish us, “us” in the form of the next few generations, the best of luck in getting this right, and doing so first here in North America. The flexibility and self-correcting mechanisms built into our constitutional order at least allow for success, even though nothing can guarantee it. That is a good reason why preserving that order at this historical tipping point produced by the Net Effect is so critically important as the Constitution comes under ever more vigorous threat from an unhinged populism lorded over by a para-literate malignant narcissist. Almost needless to say, the stakes are mountainously high: If America loses the flexibility that its constitutional DNA provides, a Randianesque retrograde elite will quickly produce a Hobbesian consequence: a socio-economic order that, for most Americans, will be nasty, brutish, and very short on social comity.
[1] Jessica Einhorn “The Leopard and the Housecat,” The American Interest VI:3 (Jan.-Feb. 2011)
[2] But it does appeal to some; note the popularity of Nissim Nicholas Taleb’s The Black Swan: The Impact of the Highly Improbable (Random House, 2007). A similarly grounded argument, directed to a slightly different phenomenon, is Michelle Wucker, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore (St. Martins, 2016).
[3] Edward Luttwak, Turbocapitalism: Winners and Losers in the Global Economy (HarperCollins, 1999). It was remains interesting to compare and contrast Luttwak’s take on what was generically known as globalization and the much rosier view, published in the same year, of Thomas Friedman in The Lexus and the Olive Tree (Farrar, Straus & Giroux, 1999). Luttwak understood the Net Effect aborning; Friedman apparently didn’t.
[4] Note for example Amelia Tang, “Singapore’s Primary 4 pupils are the world’s best in reading,” Straits Times, May 16, 2023. Tang is reporting the latest Pirls scores (Progress in International Reading Literacy Skills) for 4th grade. The U.S. score did not even make it into the top ten.
[5] See for example the valiant but unpersuasive argument of Luigi Zingales, A Capitalism for the People: Recapturing the Lost Genius of American Prosperity (Basic Books, 2012).
[6] A striking example resides in the Reagan-era debate over the Fairness Doctrine in media, repealed in 1987 to the delight of plutocrats and market-fundamentalist jihadis from coast to coast. During that debate a media industry lawyer named Mark Fowler lampooned the notion that broadcasters had any special role or responsibility toward the public. In a Washington Post op-ed dated February 6, 1983, Fowler wrote that, “The perception of broadcasters as community trustees should be replaced by a view of broadcasters as marketplace participants.” A television set spewing snake-oil commercials, he wrote, “was just another appliance—it’s a toaster with pictures. We’ve got to look beyond the conventional wisdom that we must somehow regulate this box.” See Steve Rendell, “The Fairness Doctrine: How We Lost It, and Why We Need it Back,” Vanity Fair, January 2005.
[7] For example, Mike Konczal, Freedom from the Market: America’s Fight to Liberate Itself from the Grip of the Invisible Hand (New Press, 2021).
[8] This is my preferred approach; see Brink Lindsay, “Envisioning the Next Level: An Exercise in Definite Optimism (Part I),” The Permanent Problem, May 9, 2023.
[9] See Kirkpatrick Sale, Human Scale (Coward, McCann & Geoghegan, 1980) and, even earlier and better, E.F. Schumacher, Small is Beautiful: Economics as if People Mattered (Blond & Briggs, 1973). Sale’s Human Scale has been updated: Human Scale: A New Look at the Classic Case for a Decentralized Future (Chelsea Green, 2017). I confess to being influenced while still in my 20s by Schumacher and, less so, by Sale. It was only later than I looked into Schumacher’s teacher, Leopold Kohr, whom we discussed in “Altered States: Leopold Kohr and the Question of Scale,” Post-January 20 AoS Chronicle, No. 24, September 22, 2025.