Technology and Innovation Archives

FreedomLab In Economy, FreedomLab Insights, Media, Mobility, Technology and Innovation

Crowdsourcing morality for autonomous systems

Written by Sjoerd Bakker
February 25, 2021

With the advent of autonomous machines, such as autonomous vehicles, robots and even weapons, comes a need to embed some kind of morality into these machines. By definition, autonomous systems have to make choices of their own accord, to go left or right, to kill or not to kill, and we want these choices to reflect our own values and norms. One way of achieving this is for developers to translate explicit normative rules into code. Another way, arguably more democratic, is to crowdsource morality. For instance, by asking the public to “vote” on all sorts of moral dilemmas (e.g. the well-known trolley problem) or to let autonomous systems learn from our actual behavior (e.g. from observing how we drive). Interestingly, such forms of crowdsourcing could actually result in autonomous systems whose behavior aligns with local values and norms, instead of some kind of desired universal morality. The downside, however, would be that those systems, especially those that mimic our behavior, would not be able to make “better” decisions than we humans can.

Burning questions:

Would these forms of crowdsourcing morality lead to increased public trust in autonomous systems and allow for greater societal acceptance?
Is the end-goal of moral AI systems to have them align with our norms and values, or is there potential for robots to behave better than we do?
Could machines ever become morally superior to humans and what would this mean for the future of humanity?

FreedomLab In Economy, Politics, Society and Culture, Technology and Innovation, The Macroscope

Does the future belong to Keynes and Mazzucato?

Written by Sebastiaan Crul
January 14, 2021

In the past year, Keynes made a comeback into the soul of European economic policy. First intended to keep the economy going, then with a view to establish a sustainable and inclusive economy in the future. In order to facilitate the latter, Keynes was modernized with the mission-oriented innovation policy of economist Mariana Mazzucato. Together, they provide a substantial economic policy framework for governments to combat the “wicked problems” of the 21^st century.

Our observations

Because of the coronavirus crisis, for the first time in twenty years, poverty is on the rise again. Depending on the severity of the economic crisis, an estimated 150 million people will join the ranks of those living below the poverty line, making the sum total nearly 10% of the global population. A wealthy continent such as Europe, despite there being more social security than elsewhere, is no exception to this trend.
In the past, crises have sometimes been great equalizers: In wartime, equity and capital evaporated more quickly than gunpowder. This does not apply to the coronavirus crisis, which has only exacerbated social and economic inequality in several ways.
CO2 emissions decreased by 8% in the past year and we’re unlikely to ever again reach the global peak levels of 2019. The main concern is now whether emission levels will be reduced fast enough, and which part of the population will “bear the brunt” of the decreased emission rates.
With the coronavirus as a tipping point, governments are now striving for a more active role in the economy to deal with the abovementioned “wicked problems”. In the course of the year, aid packages came to be accompanied by recovery packages meant to correct the unbridled neoliberalism of the past years. These recovery packages are largely made up of investment funds with a lot of reference to mission-oriented innovation policy, which gradually seems to be gaining ground in Europe.
The recovery plans and investment funds are crystal clear in one respect: sustainability is the main goal. The German government devised a green recovery plan of 130 billion euros which focuses mainly on hydrogen. The French government, unwilling to lag behind, presented a 100 billion euro plan soon after, of which 30 billion is reserved for the ecological transition. And recently, regulations on spending the European recovery fund of 672.5 billion euros were tightened, so that a significant percentage of the subsidies and loans would have to be used for sustainability purposes. The same applies to the Dutch growth fund of 20 billion euros, which initially incurred much criticism for the gray and traditional economic set-up of the investment fund, but has now become much greener.

Connecting the dots

Economists generally disagree. Put two economists in a room and you’ll get three opinions, the old economic saying goes. The consensus among economists about the global aid policy of governments was therefore surprising. Economists have rarely been this unanimous in their agreement on the necessity of government intervention. Moreover, with the financial crisis still fresh in our memories, central banks are asking governments not to start phasing out financial aid too soon. The rising government debt has been taken for granted so far; the fear of long-lasting economic stagnation unequivocally takes precedence over the fear of inflation. Initially, the emphasis was on keeping the economy going. Now, we’re becoming concerned about the future. The government wants to stimulate economic growth as well as realize societal goals such as reaching sustainability and social justice at the same time.

This will be one hell of a job. Classical Keynesian undifferentiated innovation policy is no longer the solution, as not all innovation is good and not all consumption is wanted. Keynes needs an update. The neoclassical economic idea that innovation is ultimately best judged by the market, is abandoned in the innovation policy of economist Mariana Mazzucato. Her ideas include a preceding process of elimination by civilians and the government, who join hands in formulating ambitious societal goals, or “moonshots” as Mazzucato likes to call them.

In Europe, in part because of the coronavirus crisis, Mazzucato’s ideas have gained much momentum. Following the Green Deal, governmental aid packages often contain clear references to mission-oriented policy, with social justice and sustainability as the most prevalent missions. These societal missions are ambitious and this is precisely the point, according to Mazzucato, so that passion will return to government policy, which otherwise is at risk of becoming uninspired and providing a culture with little direction. Yet, the economic reality presents a challenge for European policy makers. Mission-oriented innovation policy is a three-fold struggle in which crises from the past, present and future influence each other.

The legacy of the past is a financial system in which capital is (too) profitable. Indeed, private savings abound: in the year of the coronavirus, European savings accounts and nest eggs were amply stocked. Moreover, central banks are copiously adding to the money supply with their extensive buy-back programs. Because of this, collecting money isn’t the problem, but, eventually, this money should be flowing into the real economy, which has been an issue for over a decade. The way the financial system is organized ensures that returns on stocks and capital are often more interesting than risky innovation. It speaks volumes that in the year of the coronavirus, more young people opened a private investment account than ever before, and house prices merrily kept on rising during the crisis. Speculation counters innovation and discourages companies from making daring long-term investments.

The legacy of the present is simply the economic damage of the current crisis. Inequality has increased in many domains. The crisis greatly divides society, resulting in clear winners and losers. Consequently, we’re witnessing increasing resistance against some forms of public spending, especially where climate policy is concerned. Economists therefore advocate a joint approach to reaching sustainability and economic equality. Their approach boils down to higher (environmental) taxes for the upper class, and tax exemptions or financial compensation (e.g. for road pricing) for the lower and middle classes to restore their disposable income. According to economist Dirk Bezemer, tax and wage measures should be in one and the same package as sustainability laws, otherwise, the intended acceleration of the green transition in Europe would be completely unrealistic.

Our “legacy” for the future is the advance we’ve taken on this future and the necessity of growth to be able to pay this back. With sufficient economic growth, government debt becomes lower in relative terms and tax income rises, so that it becomes easier to pay interest charges without this affecting other expenses. And it’s not just government debt that makes economic growth desirable. The future pension costs and increasing healthcare costs of an ageing population, make economic growth essential to Europe.

Economic growth is thus very desirable, but to what extent are economic growth and societal missions reconcilable? This is a controversial question, especially as regards sustainability. Too much emphasis on quick recovery in the form of a single-minded focus on economic growth would have disastrous effects on, among other things, absolute emission rates. Yet, an economic downturn, is not the time to experiment with economic paradigms that do not center around growth. The fact that societal missions are still mostly framed as interesting investment opportunities for growth is exemplary of the dilemma governments face. Innovation, it is still felt, is mostly meant to be interesting economically, and only to benefit society by derivation.

Thus are government policy-makers forced to struggle with the legacy of a financial system marked by perverse incentives, with the economic downturn of the current crisis, and, finally, with the considerable loan we’ve taken out from future generations. If Mazzucato’s ambitious mission-oriented innovation policy is to have any chance of success, this threefold legacy will have to be taken deathly seriously.

Implications

There are risks involved in a more active role for government. If we fixate too much on the promises made, we’ll lose sight of the fact that in the past decade, many companies have become too dependent on the government, with dire effects on innovation. Economic renewal requires the creative destruction of old and lumbering companies that should not be able to keep getting handouts from the government or obtaining debt obligations at extremely low cost. Economists have long feared the rise of zombie companies, that are all too eager to look to the government for bailouts. Like unbridled neoliberalism, this “sunflower capitalism” (i.e. these companies turn to the government as a sunflower turns to the sun) creates the wrong conditions for innovation.

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FreedomLab In Geopolitics, Research, Society and Culture, Technology and Innovation

The Retroscope 2020

Written by Freedomlab Thinktank

2020 was a year in which society and the economy were hit hard. At the same time, it was also an interesting year in which many issues that had already arisen in the previous years were brought into much sharper focus. Last summer, we explored all of these issues in our scenario study “The Resilient World”, in which we reflected on the different worlds that could emerge from this crisis. In this Retroscope, we look back on the past year and consider the current state of affairs regarding the most significant uncertainties we formulated in our study.

Technological cycle

The corona crisis has profoundly affected the technoscientific self-confidence of modern societies. First and foremost, the crisis has taught us that our modern technology is still not able to tame nature to the full. Yet, it may also open our eyes to the fact that we have failed to make the best of our technological capabilities. So, could the coronavirus crisis indeed lead toa different perspective on technology? Will it trigger us to solve our structural problems and thus prevent another crisis?

The tech-fix illusion is nearing its end

Overnight, the world came to a standstill because of a virus, as our technological solutions only worked to a moderate extent in combating the pandemic. The strongly intertwined global network society is even identified as one of the most important causes of the rapid spread of the virus. In addition, even before the pandemic, large technology companies were under immense societal pressure, which does not appear to have abated. Many believe they are partly responsible for societal unrest, caused in part by floods of disinformation, and polarization. After another excellent year on the stock market, their innovation is perceived to mainly benefit shareholders.

The partial loss of confidence in technology and its makers does not contribute to the development of possible forms of technological prevention. For example, in the past year, we’ve seen how prevention often coincides with different forms of surveillance. Especially in the West, citizens tend to be wary of the use of technology because of an expanding and monitoring government. Especially the collection of data by governments or private companies worries citizens. Although we acknowledge the potential advantages of a data-driven economy, when it comes down to it, we are reluctant, as has also become clear with the coronavirus app. Despite high expectations and long ethical deliberations, too few citizens have turned out to be willing to install the app. In addition, due to ethical concerns, the app has been modified to such an extent that its potential contribution to containing the pandemic has become minimal.

In the public debate of the past year, technocratic ideals and civil liberties were posited as opposites, difficult to unite. This is not wholly surprising in a year when we were mainly told not to do certain things. The tension we all experienced in the first lockdown, consisting mainly of fear and a certain degree of excitement, has given way to the fragmented fatigue and frustration of the second, current lockdown. While technology (partly) enables us tocontinue working, shopping and enjoying ourselves, we are now harshly confronted with the limitations of the current technological solutions. As the crisis unfolded, the emphasis in speeches began to shift increasingly to human behavior. Ultimately, technology cannot be thesole answer and humans need to adapt their behavior as well, according to scientists and most government leaders. A such it seems as if the tech-fix illusion is nearing its end.

Technoscientific culture will prevail

Yet, there is another possibility. Taiwan and Singapore are continually cited as examples of countries where strong trust in technology has in fact paid off. China too, in addition to strict non-technological measures, has relied strongly on technological means to fight the pandemic, and successfully so. Even though these countries have different models of governance and other cosmotechnics than we do in the West, they could still show us how a different, arguably more determined, perspective on technology could help to prevent new crises in the future.

Indeed, there is no reason to be shy about our technological prowess. The record-breaking development of multiple vaccines may indeed provide us with the necessary level of confidence. In the coming months, the (prosperous part of the) world will be vaccinated and we will be able to continue our old lives. Thus, the development of the vaccines will probably go down in history as the absolute turning point of the crisis and modern technoscience will profit from this success for years to come. Criticism of technology will become less vehement and technoscientific culture will prevail (again).

In the same vein, Big Tech, despite the growing resistance against their power and behavior, and our digital infrastructure, kept the economy up and running during the lockdown. This stay-at-home economy will prove to have lasting, partly positive, consequences in our daily lives in the coming years.

A new technological order

All in all, we possess all the technological ingredients to make work of a new technological order that is geared towards preventing new crises in the future. Indeed, governments have been seriously contemplating how to deal with the vulnerabilities of the international traffic of humans and goods and fragmented value chains. The current market system is too efficiently and cost-effectively organized, which makes us vulnerable to shocks such as this. “Resilience”, “reshoring” and “redundancy” are the political and economic key words of the year. In short: we’re in the early stages of a truly thriving enlightened technocracy, aimed for the common and long-term good. As such, the corona crisis may end up putting us on the right track with respect to our perspective on technology. With the right technological changes and political determination, which have now been set in motion, crises will be more easily prevented in the future.

Hegemonic cycle

The past year raises questions about the fate of globalization. The president of the United Sates blamed China for the global COVID-19 pandemic, after attempting to sabotage economic relations between the two countries in several different ways. Meanwhile, internal relations in Europe remained high-strung, with Poland and Hungary turning against the European course increasingly often. How should these developments be understood in a wider context? Is globalization as we’ve known it in the past decades coming to an end, as the stagnating growth of world trade seems to indicate? Will we have stronger borders between countries or are we merely on the brink of a phase of globalization in a new form?

The strategic reorientation of the West

The era of Atlantic hegemony, the hegemonic cycle of the past five centuries, is nearing its end. But it’s too early to determine whether a new hegemon will rise, or, with the end of this cycle, a new order will come into existence in which no country is dominant. Before we can answer that question, the current power relations will continue to change, causing the world to move towards a new order in several domains (e.g. finance, technical standards, strategic technology).

In the Western world, 2020 was a moment of strategic reorientation. The United States is renouncing the Trump model of exerting strategic pressure on rivals and partners alike. The Biden administration will attempt to breathe new life into American alliances, though this will be arduous in many places because of conflicting interests. In addition, Europe broke free from its geopolitical paralysis. In the past year, the European Commission and EU member states created more momentum for the ideas of strategic autonomy and European sovereignty, though it’s as yet unclear how this will take shape. Both Western superpowers are thus facing a moment of strategic reorientation. Furthermore, we’re in the midst of a period of “Westlessness”, lacking a clear idea of the West.

Thus the economic center is shifting east, and so the complexity of globalization will only become clear when we truly understand what is currently happening in, among other countries, China and Russia.

A different path of globalization

In the West, China is often perceived as a “challenger” of the world order, but in many areas, China is as supportive of international norms, rules and treaties as Western countries are, if not more so. Meanwhile, in the past year we saw investments in the Chinese Belt and Road Initiative project decline. Not because China is weakening, or other countries are less willing to cooperate with China, but precisely because China is becoming a mature global power. The country now more strategically and responsibly considers foreign investment, as the U.S., Europe and Japan have done for decades. During the coronavirus crisis too, the stability of the Chinese global power has become apparent. In fact, the rapid recovery of the Chinese economy soon turned out to be a vital driving force of the global economy. In addition, in 2020 China was the largest economy to sign the RCEP trade deal of 15 countries, the biggest trade deal in the world. While the Western world is skeptical about accelerated integration with the global economy, Eastern countries actually embrace further economic globalization.

In 2020, Russia stayed in the background, but it’s precisely this that shows Russia is notably changing its course. It’s becoming a geo-economic power that leans less on military capacity than we think and is creating more influence with strategic economic policy. The Eurasian Economic Union is an important Russian initiative to strengthen economic ties with Eastern countries, so that Russia gains a stronger position than the West in respect to Europe. Russia’s biggest ambition is to create “technology transfer” – to import high-grade technology from Europe, Japan and South Korea to revive its own economy. With its new, remarkable course, Russia is laying the groundwork for this strategic move.

Thus, the complexity of globalization will become apparent in the coming years. The first responses to the coronavirus crisis, containing phrases such as “reshoring” and “the end of globalization”, seem to have been based on false hope. There has not been a fundamental reappraisal of efficiency in value chains either. Globalization will continue, but in a different way. There will be different types of globalization, as there are different elements to the world order. Many non-Western countries still embrace economic globalization, while Western countries, under the influence of certain political groups, are becoming more skeptical. Because of these dynamics, political globalization, in the form of multilateralism and the protection of human rights, is becoming more difficult – rising countries such as China are less active in this area. Furthermore, new domains of globalization are emerging, such as the digital domain, where countries will be in direct opposition to each other with different digital models, projects and strategies, such as the Chinese New IP internet protocols, the Russian Runetand the European internet and data strategy and the GAIA-X platform. All of these projects gained momentum in 2020 and will take shape in the coming years.

Hence, in 2020, two major implications of the new complexity of globalization became clear.

First, there are stronger borders between the superpowers. The alliance between the U.S. and Europe is no longer a given. The stakes are getting higher because of the rise of other Eurasian countries and the cooperation between Western superpowers will become more opportunistic. The conflict between the U.S. and China will outlast Trump. 2020 also saw India and China butt heads with military clashes in the border region and mutual economic sanctions. The borders between superpowers are becoming harder in these times of hegemonic shift. Second, an opportunity is arising for a new model of globalization, in which Europe could play an important role. Efficient value chains will remain the driving force of economic growth and most developing countries will stay amenable to the model of economic globalization.

Precisely in this world, where the conflict between the U.S. and China is threatening the current model of globalization, an opportunity is arising for Europe to break new ground. With regulation, digital models and multilateral strategy, Europe may come to lead the world increasingly often in its own way, a way that would allow for a new phase of globalization.

Socio-cultural cycle

Prior to this crisis, several contrasts in societies were becoming starker: between left and right, young and old, progressive and conservative, city and countryside, rich and poor, center and periphery, culture and nature. Individualization of citizens and countries is often identified as the cause of this development, but during the coronavirus crisis, collectivist initiatives among countries and citizens have also come into existence. Will this collectivist development persist or will the coronavirus crisis in fact accelerate individualization in the end, if cooperation proves too arduous?

Time to decide

In order to answer this question, we must first better understand the term “coronavirus crisis”. The word “crisis” is etymologically derived from the Greek krinein, which means to distinguish or decide. This makes a period of crisis a moment of truth: a decisive moment when we’re obliged to make judgments on what’s really important and what isn’t, what’s right and what’s wrong. A crisis always forces us to make a political and ethical choice to transform the current situation into a better and brighter future. At the same time, the coronavirus crisis is not a clear-cut phenomenon as it pertains to themes such as ecological degradation, our ideas on sickness and health and the fact that Wuhan changed from a small village to a city of millions in the course of a few decades and China has become integrated in international economic, political and tourist flows. In other words, the coronavirus crisis is a highly complex phenomenon, with different “aspects of crisis” that require us to make political and ethical choices for the future. If we follow this dialectic now, what will arise in the sociocultural domain?

First, the issues we’re faced with now are not easy-to-solve “puzzles” but wicked problems. The question how long bars should stay closed so that enough hospital beds will be available for covid patients, suggests a conflict between healthcare and the economy, but ultimately makes us realize how deeply healthcare and the economy are intertwined. Another wicked problem is the question how many civil liberties we’re prepared to sacrifice to restore our society to health.
Because of the uncertainty and complexity of the issues, it’s no wonder that countries with a capable institutional structure have done relatively well in this crisis. The same structural problems that are at the root of the pandemic will cause more of these complex issues in the future. The first example that comes to mind is of course the climate crisis, of which the coronavirus crisis has just been a small preview. Similar to the coronavirus pandemic, it’s not easy to tell whether the climate crisis is a fully man-made or natural phenomenon, and solutions to it require a new understanding of humankind and our relationship to nature. Another issue is the rise of “uncontrollable technology”, including synthetic biology and AI, the outcomes of which aren’t fully predictable by humans, and which will eventually fundamentally change our ideas of life and being human. In the same way that the coronavirus – the smallest lifeform to shut down human superorganisms such as our healthcare and education system – has forced us to reconsider our relationship to our fellow humans and society.

The coronavirus crisis has made many of us aware of the fact that, as humans, we’re embedded in wider social, technological and ecological structures, and that we depend on other people and countries. And yet, it’s unclear whether this insight will inspire a more collectivist attitude in citizens and bring countries closer together, as the failure of joint efforts could in fact lead to further individualization. For example, economic inequality translates to medical inequality and the debate on ethnic inequality and racism has reached boiling point during this crisis. Both themes are high on the agendas of policy-makers; during the U.S. presidential elections, for example, or in discussions on the future of the financial system. In addition, younger and older generations are affected differently by the economic and health crisis, and as such, respond to and reflect on it differently as well. There is also no consensus as yet about the future of work after the coronavirus crisis. Neither is there an answer to the questions whether virtual practices are a desirable and viable substitute for physical and social interaction, and whether coronavirus-related mental problems (e.g. loneliness, anxiety) require more, or less technologization of our living worlds. In fact, even our collective faith in established institutes and structures of knowledge and truth is under severe pressure.

The “moods” of metamodernism

In other words, in the past year, we saw a high degree of ambivalence around sociocultural issues and possible solutions, with which we are confronted by different aspects of the coronavirus crisis. But what does this mean for us, our society and the wider sociocultural developments following the coronavirus crisis? In any case, the coronavirus crisis shows us a specific palette of “moods”. These moods bring aspects of reality to light which, in ordinary times, would have remained obscured from theoretical, abstract thought. Specific moods thus lead to new ways of relating to the world, pertaining to globalization and sustainability (stress versus hope), political initiatives (insecurity versus confusion), spirituality (boredom versus fear).

These moods aren’t purely subjective, not “all in our heads”, but are in fact intersubjective: they arise when we relate to and interact with the world and other people around us. The fact that(almost) all of us act like a “superorganism” that is focused on a single phenomenon and acts accordingly (e.g. developing a vaccine, staying in quarantine) also makes the coronavirus crisis a metamodern concept. And with the adoption of the metamodern perspective, new sociocultural transitions are made possible. We no longer revert to modern objectivism and naiveté, but neither do we succumb to postmodern pessimism or irony. In other words, the metamodern coronavirus crisis could thus form the idealistic foundation for the new metarules of new societal, economic and political systems.

So from the subjective mind (moods), we are now arriving at the objective mind and reality (metamodernism) of the corona crisis. We’ve known for over a hundred years that God is dead, but we’re still living with the nihilistic base mood in which there are no grand narratives anymore. The coronavirus crisis confronts us with a harsh reality from which we can no longer escape: that we are mortal, finite beings, that sickness and death are a part of life. Like Trumpism, which should also be understood as a complex and metamodern phenomenon, the coronavirus crisis has created an enormous “memeplex”. This is a new, metamodern way of dealing with such phenomena. Memes and other forms of culture help us to find meaning, ethics, politics, a relationship between the community and the individual. There’s a reason the coronavirus crisis is seized upon by artists and scientists, politicians and conspiracy theorists alike to reflect further on this theme and incorporate it in art, culture and a new structure of feeling.

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FreedomLab In Economy, Geopolitics, Technology and Innovation, The Macroscope

Europe’s double digital ambition

Written by Sjoerd Bakker
December 18, 2020

The European Digital Strategy is beginning to unfold. Following the GDPR, which was geared towards protecting personal data, a number of agreements are rapidly being made with which Europe hopes to gain more of a grip on the European digital Stack. These agreements pertain to the storage of data, secure data sharing and better, more honest digital services. The EU is thus attempting to reclaim the digital sphere from large (non-European) tech companies and simultaneously work towards a strong, just and prosperous Europe.

Our observations

Earlier this year, we wrote about the digital ambitions of Europe and the possibility that they might actually lead to a European model for the internet. Such a European model, or European Stack, would put the user and citizen first, much more emphatically than the American and Chinese model do, and take away power from central (private or public) actors. Now, more has come to light about the different initiatives of the Union on different layers of the Stack.
On the infrastructure layer, the GAIA-X is meant to form a European ecosystem for cloud storage and computing.
The GDPR determines the rules of play, in line with European values, regarding the use of (personal) data.
In order to fully utilize the potential of data, as well as protect citizens’ and companies’ data, the Commission recently launched the Data Governance Act that seeks to realize a level playing field for the exchange of data.
In early 2020, Europe already presented plans for data spaces for specific sectors that have much to gain from pan-European data exchange. At the same time, the Commission presented its white paper on Artificial Intelligence, in which it describes how Europe could responsibly become the frontrunner in AI.
As regards the service layer, the E-Commerce Directive has been in effect in the EU since 2000. This will be replaced by the Digital Services Act, which was launched this week and will address the responsibility and liability of online services. With respect to financial services, the PSD2 has been in effect since 2015.
Concurrent with the DSA, the Digital Markets Act should become operational as well, which is meant to curb the power of (foreign) tech parties.
All of these measures are expected to contribute to a stronger Europe that converts the opportunities of digitalization into increased prosperity, but where, in the long-term, digital technology will also strengthen the European democracy and safeguard sovereignty.

Connecting the dots

With its digital strategy, Europe is striving for a globally leading digital economy that will, moreover, expressly benefit society and, openly and honestly, serve the interests of its citizens. This endeavor comes at a time when Europe is in fact lagging behind digital giants such as the U.S. and China. In that sense, this will be a double challenge: Europe must catch up with the U.S. and China, as well as realize a large number of societal ambitions. These goals could easily be interpreted as conflicting, as the societal preconditions could be considered a roadblock to innovation and the adoption of new technology and services.

Europe, however, presents this as a coherent strategy in which societal values are actually prerequisites for catching up technologically and economically. The thinking is that other countries, sooner or later, will have to set similar requirements, simply because their societies are also harmed by the unbridled growth of digital platforms. The first proof of this can be found in the U.S., where the curbing of big tech is gaining momentum amidst growing interest in GDPR-like regulation. By being in the forefront of regulation and giving substance to European values and norms, Europe could also come to take the lead in the development of platforms and services that tie in with these values and norms. Moreover, the European internal market is of great importance and the large international platforms will have to abide by European rules. This so-called “Brussels effect” makes Europe a potential “regulatory superpower”.

What’s interesting about the digital strategy is that different laws and initiatives cover every layer of the digital Stack, from infrastructure to data, intelligence, services and, ultimately, the governance of the digital sphere. Together these laws and initiatives are supposed to amount to the development of a truly European model for our digital future. On the infrastructure layer, at the initiative of Germany and France, Europe is working on a European ecosystem for data storage and cloud computing. This so-called GAIA-X project is meant to ensure that the entire Union will have an interoperable system that’s open, honest and secure.

Where data is concerned, the European regulation for the protection of (personal) data, the GDPR, has helped ensure that online service providers can’t just collect, use or sell all user data they can get their hands on. Other countries (and the state of California) are considering implementing the same rules, either for the protection of their own citizens or because they want (their own) companies to be better tailored to the European market.

The recently presented Data Governance Act aims to provide a data governance structure for sharing (public and private) data for the benefit of European governments, companies and citizens. With this act, the Commission hopes to create a level playing field (and end the hegemony of the current players) and inspire trust, so that citizens and organizations will be more willing to share their data, especially when this serves public interest and enables open modes of innovation. In early 2020, Europe presented plans for several data spaces. These data spaces should facilitate the easier exchange of data in specific sectors, such as healthcare, energy, transportation and agriculture. This could be done by means of clear protocols on data structures and agreements on open access.

Regarding the service layer, the EU has been trying since 2000, by means of the E-Commerce Directive, to create a single, harmonized market for digital services. The Commission follows up on these measures with the Digital Services Act. Essentially, the DSA will restrict the freedoms of online services and should create more clarity on the responsibilities and liabilities of these platforms. The emphasis here, is on the protection of consumers and service providers (such as delivery drivers or handypersons) and it will mostly be platforms on which products or services are sold that will come under scrutiny.

Concurrent with the DSA, the Digital Markets Act is also to come into effect. The DMA is meant to prevent large online platforms, which presently hail from the U.S. and China, from abusing their market power to thwart other, smaller (and mostly European) players. The DMA will therefore entail rules for so-called gatekeepers respecting the preferential treatment given to their own services, the bundling of services and making certain data available to other parties.

In early 2020, the Commission also presented its white paper on Artificial Intelligence. In this paper, as yet without any legal framework to support it, the ambition is expressed to make Europe a frontrunner in the application of AI and, at the same time, to expressly uphold European values and norms. A group of 14 countries, including the Netherlands, has already responded with a plea for a soft law approach, which should ensure that the development of technology (and applications) is not inhibited by legal barriers before it even begins.

Whether and how these laws and initiatives will actually put Europe back in the lead remains to be seen. One of the (typically European) challenges will be the balancing of interests of different member states. We’re currently joined in battle against a number of foreign platforms, but the question is what will happen when a French, German or Spanish platform dominates (part of) the market. Will there still be consensus to combat that? The same applies to the European cloud ecosystem; will that be a truly European ecosystem, or will it remain a French-German affair for which other countries will be unwilling to sacrifice their own standards (and companies)? Ultimately, the European good will partly have to take precedence over the national good in order for these plans to be realized and to prevent us from all losing in the end. If we fail to do that, we will see the added value of technology flow to other economies and will be stuck with technological solutions that don’t align with our ideas about the Good Life.

Implications

While Europe is known for its reticence regarding technology (cf gen tech), of which the GDPR is an example, this strategy shows that Europe is in fact looking for ways to turn this reticence into a(n) (economic) weapon.
Large foreign tech platforms will be confronted with far stricter rules concerning the products they offer, which data they are allowed to collect and what they may do with it, and how to deal with local service providers. They might also be confronted, even more so than in their own countries, with attempts to dismantle their monopolies.
The package of European measures could be interpreted as an illegitimate form of protectionism (by hindering foreign parties and supporting Europe’s own industries) and this could lead to a new (digital) trade war, e.g. between the U.S. and Europe.

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FreedomLab In Economy, Politics, Society and Culture, Technology and Innovation, The Macroscope, US

Biden: neither friend nor foe to big tech

Obama’s presidency was paradise for big tech. After that, Trump was a gift from the gods, tax-wise, but caused some rocky and restless years in Silicon Valley nonetheless. Biden will partly restore peace in the Valley, but we shouldn’t expect a return to the heyday of the Obama administration. During Biden’s first term, we will see a relationship with big tech that is less than clear-cut in terms of amity or enmity. Big tech and Biden need each other and don’t appear to want to make life difficult for each other, but the tension between big tech and society and Silicon Valley and Europe won’t be easily resolved.

Our observations

For tech companies, there will be a large contrast between Trump’s fiscal policy and that of his successor Biden. Trump’s tax reforms were a present to big tech, which was able to withdraw money from abroad at low cost and drive up its own share price by buying back shares with this money. Biden wants to tax large companies more heavily by raising corporate taxes to 28%. In addition, he may want to make it more difficult to deposit money on offshore accounts untaxed or to transfer it to tax havens.
As a consequence of Trump’s immigration policy, tech companies struggled to attract foreign talent. Biden is a proponent of a friendlier immigration policy and has promised that, during his presidency, it will become easier to apply for a permanent visa again.
Under Biden, we can also expect a reintroduction of net neutrality. He has repeatedly expressed approval of net neutrality, which was instated by Obama but subsequently repealed by Trump. Without net neutrality, telecom providers are able to discriminate between content providers and slow down access to certain websites or platforms or charge differentiated fees.
Trump and Biden are different in many respects but both of them want big tech to take more responsibility for content moderation. The debate centers around Section 230. In the early years of the internet, Section 230 was devised to give digital platforms legal immunity regarding the content posted on the platform. The law is widely criticized now, though it’s helpful to understand it in the context of the rise of the internet as a free public space.
The left flanks of the Democrats have long advocated the forced sale of business units to tackle market concentration and big tech monopolies. Biden is less eager to break up tech companies and has indicated that it’s still too early to discuss this.

Connecting the dots

During the Obama presidency, big tech companies were given a free hand regarding growth and the president frequently sang the sector’s praises. Obama was (too) friendly with big tech. Under Trump, things became a bit more ambivalent, leaning towards hostility. Trump often expressed criticism of tech platforms. Moreover, he became the key player and catalyst in the societal problems that currently characterize the industry (e.g. misinformation, polarization, foreign interference, etc.). At the same time, it’s mostly tech companies who seem to have reaped the benefits of Trump’s fiscal policy (e.g. cheap repatriation of foreign cash and lower taxes). Societal criticism became immensely widespread, but the share price rose with it. With Biden, we’re starting a new chapter that’s more difficult to define in terms of amity or enmity towards big tech. The consensus is (see observations) that Biden will implement stricter regulation of big tech and higher taxes, so it would appear as though there’s some hostility. But in other respects, Biden and big tech are completely on the same page and mutually dependent.

First, to expect that big tech has some rough years ahead because of the extra regulation would be misguided. After all the (internal) unrest and increasing societal criticism, more regulation, even if it affects companies’ profitability, may even be desirable within the sector. The fact that big tech, despite Biden’s campaign promises of fiscal reform, made prodigious donations to the Biden campaign, supports this theory. Moreover, Biden and Harris have close ties with the tech sector, so there might be an assumption that in (a divided) Congress, the lobby will have enough room to water down propositions. And perhaps regulation might benefit big tech anyway: the GDPR is widely held to serve the big players, who are far better able than their smaller competitors to build the necessary infrastructure. For smaller companies, this is likely to be very expensive and time-consuming.

Big tech welcomes Biden but the reverse is true as well. Among other things, Biden plans to rejoin the Paris climate deal and seems to be of a mind to revive multilateral institutions. But in other domains, he will want to continue Trump’s protectionism and protect big tech. Commentators all agree that stricter regulation of big tech will play into the hands of Chinese competitors, and this will certainly be taken into consideration by the Biden administration. It looks like Biden is aiming for a softer, more differentiated version of Trump’s America First policy, so the trade-off between protective industry policy and restrictive competition policy could work in big tech’s favor.

There is, then, enough amity and/or mutual dependence in the relationship between big tech and Biden, but under the surface, hostility and tension remain. Breaking up big tech is one of the most radical plans of the Democrats and was a spearhead in the campaign of other candidates, such as Elizabeth Warren. Because Biden has never made any such extreme statements and there was no “blue wave”, this plan doesn’t seem to be a priority. Nonetheless, CEOs will not rest easily after their recent hearings with the House Judiciary Committee’s antitrust subcommittee. In a lengthy report, the latter considers the monopolies or market forces of big tech proven and urges the forced sale of business units or subsidiaries. It will be difficult to get this through Congress, but the battle for the Senate is not over yet, as a new voting round in Georgia will decide who gets the last two seats in the Senate. It should be noted here that not all big tech companies are the same. Especially Mark Zuckerberg will have sleepless nights, because Biden and his tweeting deputy communications director seem to have set their sights on Facebook in particular.

Ultimately, we shouldn’t set too much store by Biden’s current intentions and campaign promises and stay attuned to what happens societally and ideologically. Societally, in his close-to-victory speech, Biden presented himself to the world as the president of reconciliation. But in the unfortunate case that the power concentration, misinformation, polarization and societal tensions in the digital realm continue to increase, so will the pressure to act on this. Finally, we are in the midst of an ideological reappraisal of the internet itself. Among academics, politicians, organizations and platforms, there’s a growing push for an overhaul of the digital economy, with the foundation of a decentral and open infrastructure of the internet. At its core, this ideology criticizes the way tech companies have been able to privatize the open space of the internet in the past decades and seeks technological alternatives. The strength of this new ideology could have more severe consequences for the revenue model of big tech than Biden’s policy.

At this point, it’s not easy to draw any straightforward conclusion about the consequences of Biden’s first term for big tech. Despite stricter regulation, big tech seems to be headed for a period of amity under Biden, but with subterranean long-term insecurities that could result in some heavy blows for companies.

Implications

Compared to Trump, Biden will undoubtedly be more eager to cooperate with Europe, but this doesn’t pertain to tech policy. In this regard, the EU and U.S. have drifted apart in the past years, among other issues because of privacy and data regulation, and Biden apparently doesn’t intend to change much about that.
In addition, though at first glance Biden seems tougher on big tech fiscally and appears to comply with Europe’s desire to tax American tech companies more fairly abroad, when we look closely, it’s clear that he plans to give big tech free rein in certain fiscal areas to remain a strong competitor of foreign counterparts. European countries, for instance, have been pressing for years for a tax on digital services that would affect mainly American tech companies, but Biden – like his predecessors – isn’t likely to respond to this call. Biden, it seems, wants to limit the power of big tech somewhat, without inordinately weakening Silicon Valley economically.
Nevertheless, there is still agreement and room for mutual inspiration. Europe is able to indirectly exert influence with its own tech policy. The European model of internet and the local legislation that’s derived from it could inspire other democratic countries (e.g. GDPR, Digital Services Act, etc.), including the U.S. In 2018 the GDPR, for example, led to similar privacy legislation in California, which, in one fell swoop, gave forty million Americans the right to request their data, correct it if necessary and prohibit its sale to third parties.

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FreedomLab In Economy, Politics, Society and Culture, Technology and Innovation, The Macroscope

The sharing economy is dead, long live the rental economy

Written by Sjoerd Bakker
October 22, 2020

After hearing a lot about the sharing economy in the past ten years, the craze now seems to have passed. Society is more critical of the use of the term and the actual added value of platforms that offer these services. However, this doesn’t mean that the as-a-service-model has become any less popular. In fact, the coronavirus crisis seems to create even more demand for access to products and services at low cost and with minimal obligations. The difference is that this is now grouped under the much more pragmatic heading of the “rental economy”.

Our observations

The term sharing economy has been bandied about in the past decade by various digital platforms in order to portray themselves favorably. The term suggests that platforms and services make valuable contributions to society. That is, that they bring people closer together and liberate the world from its abundance of things. Misuse of the term by companies that are actually not a part of the sharing economy has considerably weakened the craze surrounding the sharing economy.
Whereas the sharing economy is essentially based in consumer-to-consumer services, the rental economy, now coming (back) in vogue, is more focused on business-to-consumer services. The use of this term as opposed to the more idealistic “sharing economy” reflects a pragmatic shift, both rhetorically as well as regarding the services referred to. In the rental economy, low costs and minimal obligations are the main objectives.
A number of these rental services initially suffered because of the coronavirus crisis. Especially services to do with travel and mobility were hit hard at first. Airbnb and car rental services are examples of this. Now, these and other rental companies have found ways to profit from the coronavirus crisis (e.g. by providing an alternative to public transportation or offering temporary workspaces). Business models based on temporary use are as old as the economy itself. Since the early days of the car industry, cars have been rented out to people who can’t afford their own car or only need one occasionally. Telephone companies such as AT&T even obligated their customers to rent phones from them, supposedly so they could guarantee the quality of the phone connection.
Because of digitalization, a lot of things or spaces can now be rented out that previously could not. First, this is because supply from large numbers of providers and demand can be more efficiently brought together, with digital means of communication also awakening much latent supply and demand to become manifest (e.g. people with a car in the driveway who would be open to renting it out can do so more easily by signing up to a platform, while people with a smartphone can quickly find a car near them). Second, administration costs have decreased dramatically, making it more lucrative to process modest transactions (from cheap products to short-term rentals).

Connecting the dots

One of the most significant promises of digitalization is that it can make a wide array of transactions simpler and cheaper. This is where especially the rental, lending and sharing platforms excel; they enable us to have a simple and real-time overview of the availability of various goods, to book them and pay. This provides us access to an assortment of products and services, without having to purchase anything or being tied down by long-term contracts.

In the past decade, the term sharing economy was widely applied. In the ideal sharing economy, consumers offer their own means when they’re not using them themselves. This allows for all sorts of capital goods to be used more efficiently, leading to a decrease in the use of natural resources and pollution in the manufacture of these goods. This would enable consumers to (partly) earn back their investment and increase their wealth. Moreover, the sharing economy would stimulate social cohesion by bringing people together and could revive old practices of shared ownership.

Now, the term sharing economy has lost much of its cachet and, both in the framing of this market as well as in the services involved, we’re seeing a shift to a more traditional rental economy. The framing of the sharing economy has been done away with because the practice has failed to live up to the ideal, with all sorts of companies claiming to be part of the sharing economy without actually contributing anything in regard to the values the sharing economy purportedly upholds. Many of these companies (such as Uber) are in fact more a part of the gig economy or operate partly or entirely in a traditional rental market (such as Airbnb). As such, these companies have failed to contribute anything to achieve the societal goals of the sharing economy. With respect to the services involved, we can now carefully conclude that real consumer-to-consumer sharing is not without disadvantages. Although digital platforms are specifically able to bring together supply and demand and facilitate financial transactions, this doesn’t mean the transaction is always smooth, cheap or fair in the end. In practice, the use of a private share car is more complicated than hiring a car from a 24-hour car rental service; think of the key exchange and possible damage claims. On the side of the private provider, there are still high costs involved; a rented-out residence needs to be cleaned afterwards and acquiring good ratings requires time and effort. In other words, amateurism is inhibiting the growth of the real sharing economy.

Nonetheless, the demand for cheap and temporary services is increasing and the (digital) rental economy is eagerly playing into this. Before the coronavirus crisis, it was already clear that the as-a-service model, in mobility for instance, caters to the needs of new generations. The crisis has enhanced this. First, because it has led to a demand for temporary solutions, e.g. regarding work space and office furniture and personal mobility solutions. In the longer term, the crisis will also leave us with lasting economic and societal trauma, and chances are that many of us will not be very eager to commit to any long-term obligations for fear that another crisis, of any nature, will create problems for us. This kind of no-strings-attached mentality plays into the hands of as-a-service providers.

The rhetorical and factual transition from a sharing economy to a rental economy is also interesting and relevant with respect to the long-term success of this kind of service. We could view this as the unmasking of the supposedly socially committed millennial. The sharing economy has specifically fed into this image, with its ideals such as cohesion and sustainability, but it now appears that millennials mostly want user-friendly services at low cost and with minimal obligations. In the longer term, this offers better (economic) perspective for providers of rental services than the “youthful idealism” aimed for by the sharing economy. The same appears to apply to Gen Z, who are said to have had an overprotective upbringing, causing in them a strong aversion to any potential source of worry. The success of Swapfiets is telling in this respect; Gen Z are more than willing to pay for services that relieve them of responsibilities.

Implications

The pragmatic transition from the sharing economy to the rental economy means that the platforms offering services of the latter kind are likely to be successful in the long-term, as they are less dependent on ideals that may go out of fashion. Nonetheless, the professional rental economy could still contribute to a more efficient use of resources and goods and serve (some of) the ideals of the sharing economy in this way.
With the label of the rental economy, these parties are now once again expressly part of the regular economy, subjecting them to stronger regulation (already visible in the fact that Airbnb and its lessors are now treated more like regular hotels in many places).
The demand for professional rental services, not offered by “amateurs”, will also compel some of the platforms to operate in a more “asset-heavy” way. This trend was already incited by an increased need among platforms to gain more control over the user experience and acquire more data with their own hardware. This does mean, however, that because of the investment costs, these platforms will be less scalable and there will be less of a winner-takes-all dynamic.

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FreedomLab In Out of the Box, Philosophy, Technology and Innovation, The Macroscope

The politics of strategic technology

Short Insight written by Alexander van Wijnen
October 22, 2020

What do semiconductors and artificial intelligence have in common? Both have great impact on the economy as well as national security. Historically, such “strategic technologies” trigger a predictable pattern of politics, as shown by Jade Leung. The pattern pertains to the role of the state, firms and researchers, whose roles change in each phase of technological development. During the first phase of emergence, there is primarily synergy between them as the state supports its firms.

However, in the second phase of commercialization, fearful images arise as the impact on security gains more attention, and in the third phase of maturation, a big shift occurs as the state attempts to take back control to prevent foreign actors from gaining access to its strategic technology. We have seen this happening in the semiconductor industry and it is likely to happen in AI as well. Part of the pattern is that some firms will cooperate with the state (e.g. Palantir), whereas others publicly distance themselves from the state (e.g. Google). Overall, the politics of strategic technology will shape the future of semiconductors and AI.

FreedomLab In China, Economy, Media, Politics, Technology and Innovation, The Macroscope, US

Who do we trust in the stack war?

Short Insight written by Arief Hühn
October 7, 2020

After threats from Trump to ban TikTok on security grounds, Oracle, Walmart and TikTok’s mother company Bytedance have proposed a deal in which the U.S. will have a 20% stake in TikTok Global. Furthermore, Oracle will host the service for the U.S. as a ‘trusted technology provider’, in order to guarantee the safety of U.S. citizens’ data. However, the deal will not involve the transfer of the service’s algorithms.

The fight over services and underlying algorithms and user data seems to be a progression of the tech war that mostly has been focusing on lower layers of the stack, whether it be rare-earth metals, hard infrastructure (Huawei) or soft infrastructure (new IP). Even though the deal still has to be approved by the U.S. and China, we can already expect that the dependency on trusted providers and tech could become a future template for popular services that aim to operate across adversarial national stacks. In fact, Apple and Amazon are already subjected to a similar treatment for their services in China.

FreedomLab In China, Economy, Hegemonic Shift, Technology and Innovation, The Macroscope

The new power of technical standards

Written by Alexander van Wijnen, september 25 2020

Behind the global “interoperability” between technical systems, the shadow of Western dominance still lurks. This will change, however, now that China is playing an increasingly important role in the development of standards for 5G, blockchain, facial recognition, AI and network protocols. Technical standards are thus becoming the new battlefield of the economic and cosmotechnical power struggle between countries.

Our observations

A number of international organizations set global technical standards, such as the International Organization for Standards (ISO), the International Electrotechnical Commission (IEC), the International Telecommunication Union (ITU) and the 3rd Generation Partnership Project (3GPP).
A recent paper shows that China’s influence in the most important organizations for technical standards has increased rapidly. A clear sign of this is the number of Chinese in leadership positions. Zhao Houlin is secretary-general of the ITU. Shu Yinbiao is president of the IEC. From 2015 to 2018, Zhang Xiaogang was president of the ISO.
Last year, China submitted 830 technical proposals to the ITU – more than the following three countries, South-Korea, the U.S. and Japan, combined. Since 2014, 16 out of the 65 proposals in the ISO and the IEC have come from China.
Huawei is working on new internet protocols for the ITU. The Chinese company is proposing a “New IP” model in which the state has more influence on digital infrastructure compared to the TCP/IP network protocols developed in the U.S.
Chinese companies such as ZTE, Dahua and China Telecom have introduced standards for facial recognition and other forms of surveillance to the ITU.
This month, he ITU approved blockchain standards developed by Huawei, the People’s Bank of China and the China Academy of Information and Communications Technology.
Since 2017, SC 42 (subcommission 42), a collaboration between the ISO and the IEC, has been the most important subcommission for AI standards. At its first meeting, which took place in Beijing, the China Electronic Standards Institute presented a white paper.
In the book The New Global Rulers: The Privatization of Regulation in the World Economy (2011), the authors note that the decision-making process of the large organizations (e.g. ISO, IEC, ITU) is more political than we think. Oftentimes, there is no optimal technical solution. According to the authors, the key to successfully setting technical standards is to speak with one national voice (companies and governments that are on the same page in their thinking), which might work to China’s advantage.

Connecting the dots

Where does geopolitical power come from? The term “geopolitics” especially connotes armies, capital or energy. These are important, but every age will also create new forms of power. Our age included. The technical standard is such a new form of power, which does not receive much attention. The forcefield around technical standards is changing rapidly and China is already playing an important role. Besides being of economic value, the Chinese technical standard will give China more influence by spreading the Chinese perspective on technology around the world.

In the current system, technical standards are determined by international organizations such as the ISO, IEC and ITU. Many countries participate in these organizations through associations between governments and businesses, and standards are developed in committees with engineer workgroups. One theme has long been central to this system: the worldwide interoperability of technical standards (to improve efficiency, scalability and innovation). At the same time, however, this system has been used by Western countries to exert power. The ISO was established in 1947 and the ITU joined the UN in 1949. In the post-war period, the U.S. and Europe dominated the world and the development of technical standards was part of this. That has begun to change. China has taken great strides in the fields of 5G, facial recognition, blockchain and AI. Moreover, China has created a strong position for itself within the most important organizations.

The question is what the impact this greater role of China will have. Two types of impact are already noticeable. First, China will economically profit from setting technical standards. This became clear, for example, when the U.S. government recently gave American companies permission to continue to collaborate with Huawei in the standard organizations, for fear of being excluded from the international process. In the coming years, Chinese companies will increasingly profit from their current role in setting fundamental standards. Because, for instance, their existing products and competencies meet these standards, which gives them a lead on international competitors. Second, the Chinese cosmotechnics (the Chinese way of thinking about technology) will become more influential – and incur more resistance because of it. Technology is always connected to culture, and this holds even more true in our time of digital technology, in which, for instance, SC 42 is attempting to determine how we should regard transparence and the explainability of AI systems. Modern technology (more so than railroads or electricity networks in the past) is programmed in advance, according to certain rules that derive from cultural values. This has become apparent in the development of facial recognition, which more and more American companies are pulling out of, and Chinese companies have seized the opportunity to set the global standard.

Technical standards are geo-economic (countries become dependent on each other, which can create political pressure) and cosmotechnical (shaped by “foreign” cultural values). There is thus much at stake, especially to a hegemon (the U.S.) witnessing the decline of its influence. This means that the battle over technical standards might harden in the coming years, putting companies in a vulnerable position.

Implications

Through the Belt and Road Initiative, Chinese companies will increasingly use technical standards to create lock-in effects in rising countries in Asia and Africa. This applies not only to digital technology but also to industries such as the railway industry and the energy industry.
In the battle over technical standards, momentum for open-source platforms could increase. Recently, the open-source chip design platform RISC-V chose to move from the U.S. to Switzerland to protect its appeal in a geopolitical world becoming increasingly strict where technology is concerned.

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FreedomLab In Economy, Politics, Technology and Innovation, The Macroscope

The future of monetary policy and central banks

Written by Pim Korsten, september 25 2020

In the past months, central banks and governments have announced enormous economic aid packages to prevent their economies from freefalling after the coronavirus crisis. This crisis has accelerated macro-economic trends and, in response to this, central banks are reformulating their key objectives and common purpose. By viewing the economic issues of the twenty-first century from a perspective of long-lasting, economy-transcending developments, we will gain insight into the future of monetary policy.

Our observations

The Fed has recently been making a thorough analysis of the theoretical framework on which it bases its monetary policy. Last month, Jerome Powell, president of the American central bank, announced that the Fed will maintain an average inflation target of 2% as well as strive for “maximum employment”. This new approach to monetary policy means that the Fed will only raise interest rates in case of maximum employment and when inflation is higher than 2%, rather than when employment is below the level of maximum employment (which would mean wages would increase and monetary policy would have a delayed effect on the economy) as it has been the case until now. A flatter Philips curve, indicating a weaker relationship between unemployment and inflation, as well as the deflationary effects of globalization and digitalization, will ensure that low inflation remains the norm for a long time. And by expanding its employment mandate, the Fed is committing itself to stimulating more inclusive economic growth.
Christine Lagarde, president of the European Central Bank, has promised that the ECB will include sustainability goals in its operations, such as buy-back programs for corporate bonds. This makes the ECB the first large central bank to actively include sustainability goals in its monetary policy. Since her appointment in December 2019, Lagarde has announced that the ECB will begin with a “strategic review” of the ECB objectives, with climate change seen as a “mission-critical” priority, and that the ECB will take on an active role with respect to Europe’s (geopolitical) sustainability strategy.
Last month, Shinzo Abe, Japan’s, longest-serving prime minister, announced that he would be stepping down because of health concerns. The new prime minister, Yoshihide Suga, has said he will continue Abenomics, Abe’s controversial economic policy since 2012 that has three pillars: i) very loose monetary policy by the Bank of Japan, ii) active fiscal policy to stimulate the Japanese economy and iii) structural reforms. The Bank of Japan buys government bonds to keep interest rates low (a strategy called “yield curve control”, because of which the Japanese government has insufficient financial means for its fiscal policy. As a consequence, Japan has the highest government debt-to-GDP ratio in the world, about 240% of GDP, which will nevertheless remain fundable because of the low interest rate. Since the coronavirus crisis, more countries – either implicitly or explicitly – are following this strategy to finance economic measures. In the longer term, this strategy will become more popular as a result of green investments, ageing populations and the increasing need for investments in resilient systems (e.g. strategic production chains, global value chains, the care system).
As a consequence of the coronavirus crisis and the accompanying economic monetary and fiscal measures, government debts will rise considerably (an estimated 20 percentage points of global GDP). But even before the coronavirus crisis, global debt had been rising in the past decade because of the financial crisis of 2007-2008. Extending the timeline, we see that global debt has risen strongly since the 1980s due to the financialization and liberalization of world trade and capital accounts inspired by neoliberalism. And yet, the economic literature provides few guidelines regarding the optimal amount of government debt. Though it was previously assumed there was a natural ceiling, Modern Monetary Theory (MMT) holds that debt ratios (for countries that issue their own currency) are irrelevant, as are budget deficits in an environment of low inflation and unemployment.

Connecting the dots

There are largely three major paradigms to be distinguished in macro-economic theory on monetary policy. The first began after the Great Depression of the ‘40s and was based on Keynesianism. This paradigm emphasized the role of contra-cyclical fiscal policy, as the market and economy are not naturally correcting mechanisms. This was institutionalized more broadly in the post-war Bretton Woods system, but after relinquishing the gold standard in 1971 (the “Nixon shock”) and the problems of stagflation (high inflation combined with high unemployment) that appeared unsolvable in the Keynesian scheme, the emphasis shifted to money supply to keep inflation low. According to this “monetarism”, governments were to focus on creating the right conditions for sustainable and long-term growth while monetary policy kept the business cycle in check. This paradigm was specifically inspired by the theories of Milton Friedman and his work on the role of money supply in the macro-economic problems of the Great Depression. From the ‘90s, a synthesis between these paradigms emerged, with independent central banks formulating an explicit inflation target for the medium and the long term, making use of short-term interest rates and monetary policy geared towards guaranteeing sufficient liquidity in financial markets. Price stability was seen as the most important condition for growth, and a crucial factor here is that the monetary instruments to achieve this are in the hands of independent, technocratic central banks, at the cost of a democratic deficit (central bankers aren’t democratically elected but have enormous power), while fiscal policy is geared towards balancing government debt (expenditures) and the redistribution of wealth (taxes).

But since the financial crisis of 2007-2008, we’ve been seeing a number of new problems that can’t be solved with this paradigm, such as persistently low inflation and unemployment (a “broken” or “flat” Philips curve), growing inequality, both private as well as public debt, and structurally lower aggregate demand. The coronavirus crisis has accelerated many of these macro-economic trends, and reassessed the relationship between monetary and fiscal policy. Structural characteristics of a post-coronavirus economy will definitely include: i) structural micro-economic inefficiencies (e.g. restaurants and hotels with fewer guests, more safety precautions in production chains, larger reserves and supply for strategic sectors), ii) a larger role for the state in the economy, iii) higher public debt, iv) lower consumer spending and corporate investment due to high insecurity leading to lower inflation. The latter is why the growing. debt remains fundable, but also why there is limited room for tightening monetary policy by, for instance, raising short-term interest rates based on predictive inflation indicators.

Governments and central banks respond to this by fundamentally contemplating their common purpose and reformulating their key objectives. Some decide that monetary policy should stimulate growth and have more milder inflation targets (as in Japan), others that fiscal policy should be unrestrained when it comes to stimulating economic growth (e.g. MMT), while a radical group even advocates negative interest rates (e.g. as a redistribution mechanism and to stimulate spending and investment). Outside of these macro-economic developments, there are also broader, economy-transcending developments determining the future of monetary policy and central banks.

First, back-to-back technological revolutions (e.g. the steam engine, the automobile, IT) have led to industrial modernity with certain rules of play or “metarules” (e.g. strong productivity growth, the use of fossil fuels). Besides enormous wealth, these rules also lead to persistent socioeconomic inequality as well as ecological degradation and climate change. To solve these problems, it will not suffice to merely double down on technology or organize individual systems more efficiently: nothing less than a Deep Transition is required to thoroughly redefine these metarules (e.g. the principle of circularity, internalizing externalities). Central banks and monetary policy can be important stimulators and coordinators by not only allocating capital where it will be most profitable in a narrow economic sense, but by playing a facilitating role in a broader system change. Reforms in the financial system, and with that, “incentive structures” are an important prerequisite for systematically changing the behavior and actions of companies, governments and consumers. In Europe, the ECB is taking the lead in this when it comes to climate change and likewise the Fed in the U.S. They could set an example for other regions.

At the same time, a more “geo-economic” outlook on economy is emerging, bringing fiscal and monetary policy with it. In the ‘90s, central banks became politically independent at the height of American hegemony and when the world was widely believed to be becoming “post-historical”. There was a less strategic approach to technology and economic policy, as the general expectation was that countries would develop into liberal democracies with free market capitalism and mutual differences would become negligible. But now that we’re on the brink of a new hegemonic cycle, the role of central banks and fiscal policy in the economy is being reconsidered in regard to matters such as national security or strengthening countries’ own geo-economic power as compared to their rivals’. This is also the underlying geo-economic reason why the trade war between the U.S. and China is fundamentally a technology war, why production and value chains are now being evaluated more strategically (e.g. “sensor-based technologies” such as 5G, AI or quantum technology, natural resources, medical materials for a coronavirus vaccine). And that also means that central banks may become more politicized in order to fund fiscal and geo-economic policy (e.g. weak exchange rates for a stronger competitive position, monetary loosening for strategic industries and financing government spending such as on defense).

Finally, we’re seeing that technological innovations can change the effectiveness of instruments and the core of central banks’ monetary policies. Because of fintech, more and more financial transactions and interactions are taking place outside of banks and established financial institutions are disintermediating (e.g. peer-to-peer lending). In addition, digital tokens and cryptocurrencies are offering new instruments for central banks to conduct monetary policy: i) the reallocation of risk and guarantee of stability within the financial system through citizen deposits directly to central banks, ii) a more substantial grip on the effects of monetary policy as money is managed digitally more often and iii) allowing technology companies to enter the financial sector so that data can be utilized towards more financial innovations and competition, leading to higher price efficiency. This way, central banks can combat different forms of market failure (e.g. growing inequality due to the “search for yield” of capital investors), gear monetary policy more towards (geo)strategic objectives (e.g. climate change, strategic innovations), stimulate innovation (e.g. through financial inclusion based on digital credit scores, a more decentral economy with less systemic risk). Central banks and monetary policy are thus becoming important drivers of innovation and new economic models and principles.

Implications

The above-mentioned technological innovations make the scenario of negative interest rates even more realistic, because cash is falling into disuse, banks are further becoming disintermediated (creating more substantial effects of monetary policy instruments on the real economy), and central banks are more directly influencing consumers. But a regime of negative interest rates also entails significant macro-economic risks, such as when inflation rises (and central banks can’t raise interest rates given the high debt) and further destabilizing the financial system.
In fragile democracies and authoritarian countries, there’s a high degree of “economic populism” with a strong emphasis on economic growth and income redistribution, while the risks of budget deficits, inflation and other external limitations (e.g. international market reactions to policy) are trivialized. This has always led to higher political risk in these countries, as international investors can see through this and appreciate independent central banks. Now that democratic-liberal markets are taking a more political and (geo)strategic view of central banks’ monetary policy, the geopolitical will increase in capital markets, resulting in higher inefficiencies and new forms of market failure (such as the preservation of important but loss-incurring industries, i.e. zombie markets).
Besides climate change and growing inequality, another important sociocultural system change in societies is ageing, and the accompanying changes in consumer spending, fiscal positions and pressure on the care system. Japan is a precursor in this, with a severely ageing population, and one of the reasons the central bank finances the government’s fiscal policy, as it includes investing in technologies for gray economies where the average life expectancy is 100 years.a

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Technology and Innovation

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Technological cycle

The tech-fix illusion is nearing its end

Technoscientific culture will prevail

A new technological order

Hegemonic cycle

The strategic reorientation of the West

A different path of globalization

Socio-cultural cycle

Time to decide

The “moods” of metamodernism

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While Europe is known for its reticence regarding technology (cf gen tech), of which the GDPR is an example, this strategy shows that Europe is in fact looking for ways to turn this reticence into a(n) (economic) weapon.

The package of European measures could be interpreted as an illegitimate form of protectionism (by hindering foreign parties and supporting Europe’s own industries) and this could lead to a new (digital) trade war, e.g. between the U.S. and Europe.

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With the label of the rental economy, these parties are now once again expressly part of the regular economy, subjecting them to stronger regulation (already visible in the fact that Airbnb and its lessors are now treated more like regular hotels in many places).

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Through the Belt and Road Initiative, Chinese companies will increasingly use technical standards to create lock-in effects in rising countries in Asia and Africa. This applies not only to digital technology but also to industries such as the railway industry and the energy industry.

In the battle over technical standards, momentum for open-source platforms could increase. Recently, the open-source chip design platform RISC-V chose to move from the U.S. to Switzerland to protect its appeal in a geopolitical world becoming increasingly strict where technology is concerned.

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