A Conceptual Analysis of Network States

This article was created as part of a series of discussions with Eric Zhang regarding the implications that crypto and freedom technologies have on real-world polities.

Conceptual Roots of a Network State:

Old ideas are shrewd rent-seekers. And so new ideas often lack the capital necessary for their growth and development. The mind’s incumbents who govern its thinking ensure there is an enormous barrier to entry for any new idea seeking to compete in its markets. They deliberate and persuade the mind to legislate policy that blocks the free-flowing channels of the innovative process. Their general perception is that new ideas with any real entrepreneurial spirit are too risky and potentially disruptive. Old ideas eye them suspiciously. The preference is to stick to what is known, to what is safe and certain, and so great rewards are missed. But, of course, so are great costs, too.

Such an entrepreneurial idea is that of a network state. The aim here is to make the idea more familiar and plausible, thus pushing it into the market where it can compete––and perhaps win. Maybe someday, just like liberal democracy and natural rights before it, the idea of a network state will move from the fringes to the mainstream. Like the iPhone, once strange and unfamiliar, until its logo became the meaning of a half-bitten apple.

To motivate the idea, let us frame network states in the following way: They are the result of a particular dialectic. On the one hand is globalism: the attempt to open the doors of modernity and prosperity to the poor nations of the earth. On the other hand is nationalism and its resistance to this globalist project.

Now globalism has its failures. As Joseph Stiglitz argued in his book Globalization and Its Discontents, many countries advised by international institutions like the IMF and the World Bank were led into abysmal market failures due to their lack of appropriate institutional frameworks. The Washington Consensus, which was used to guide policy-making decisions, often resulted in economic misfortunes and misery. Forcing countries to open their markets, privatize their industries prematurely, and to restrict the use of government intervention through fiscal austerity led many astray into panic and discord, causing large numbers of people to lose their savings from plummeting currencies and inflated prices. Suppose there are no capital markets for entrepreneurs to take advantage of. In that case, they cannot read and react to the price, profit, and consumer spending signals that are vital for allocating resources. Stiglitz provides rich examples of this in his book.

Along the opposite vein, in his book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, the historian Daron Acemoglu argues that a principal reason why globalization has been unsuccessful is that the institutional legacies within those countries often lack the appropriate incentive structures to generate prosperity. Many of those institutions are what he calls extractive institutions, which extract the capital and wealth within the country and concentrate it within a few centralized hands. Forging the right institutional frameworks is a significant obstacle, and it typically requires examining a country's deeply rooted foundations.

These aren't of course the only sets of problems, either. The successful countries that step through the globalist doors pay an irreparable cost. The local nature of the communities, the long-arching past of ancestry and culture, the generations who have passed down their knowledge and wisdom are bled out as multinational corporations and conglomerates enter the markets and modernize the country. By identifying as a nation, by seeing oneself as part of a larger whole made up of unique traditions and customs, it is believed the globalist project can be fended off. Nationalism is the attempt to keep one foot on both sides of the door. It seeks prosperity while rejecting much of what modernity has come to mean: the homogenization of people and culture.

In addition to the cultural element of nationalism, there is also the macro trend toward economic nationalism and protectionism in general. A historical example is the implementation of ‘The American System’ in 1812 in the US. This encompasses adopting policies like protective tariffs on imports, instituting monetary institutions like national banks to promote the country’s currency and expanding internal capital markets for debit and credit, and subsidizing vital domestic industry. The current US administration has trended toward this somewhat neo-mercantilist approach to the economy. But it has been, and is, pivotal in burgeoning economies, both past and present. The US's severing of its dependence on British industry is a prominent precedent. China’s protectionist policies, like its restrictions on foreign investment, are a notable example today.

But this approach to economic policy has its limitations and drawbacks. This is evident in Adam Smith's initial criticisms of mercantilism in his Wealth of Nations. The more a country depends on its own industry and reduces its trade and imports, causing it to increasingly rely on its own industry and manufacturing, the less productive and efficient it will become. There is a point at which protectionist policies hinder, rather than foster, economic growth. Eventually, a division of labor between national economies is integral for further growth and the prevention of stagnation and inefficiency. Network states can operate as intermediaries between these types of transitional phases in an economy. A country can be both protectionist, in accordance with its own perceived national interests, while also having a more liberalized sector within its overall ecosystem.

To sum up, people should not have to forgo the rich traditions that are constitutive of their identities and orientations for the sake of posterity. But attaining the latter goal requires opportunities that depend on globalist infrastructure and institutions to be achieved. Network states have the potential to provide a way to do this. It could be the synthesis between these two (seemingly) opposed economic visions.

Here are some core ideas to outline and delineate a few conceptual roots of a network state:

• One-commandment: As argued in a separate, two-part Critique, for a network state to be legitimate, it must promote people’s autonomy, where autonomy is to be understood as a person’s capacity to have direct influence throughout their lives. Their thoughts, deliberations, decisions, and actions are principally a consequence of their own powers and abilities, not the result of coercive and extractive institutions. The risk of a moral community seeking sovereignty is the risk of religious zealotry and fanaticism. The moral mission must remain liberal in nature. Therefore, the moral framework motivating a network state must be for the sake of one’s natural value for deliberation, choice, and the freedom to exercise one’s individual values and desires, i.e., autonomy.
• Economically-focused: Hence, in a network state, autonomy should be primarily understood as situated within economic decision-making and the opportunities those decisions target and take advantage of. The freedoms and liberties necessary for this process should be economically-focused, i.e., rights and liberties.
• What it isn’t (or shouldn’t be): And so a network state is not aiming to establish a democracy or nationalist dictatorship or oligarchy or any other such set of government institutions for the purposes of a sovereign and independent community, free and detached from all other sovereign nations.
• The goal: To establish a framework by which digital networks can be instituted, which contain economic advantages for people to use in entrepreneurial pursuits, and with particular benefits that facilitate the entrepreneurial process and the fruits therein. The fruits produced by this process provide incentives for preexisting nations to adopt the network and allow it to operate autonomously and within its own ecosystem of regulations and policies that govern it.
• Special Economic Zones (SEZs): Network states should be modeled on SEZs. SEZs are generally circumscribed geographical areas that operate as enclaves within a nation-state. Examples are in China, Dubai, Malaysia, India, Latin America, Africa, etc. Granted, there are different models, but the essential idea is the implementation of liberal markets, private enterprise, private property, streamlined approval processes, and less strict regulation and policy, allowing the zones to function as liberal economies while simultaneously preserving the general structure of the wider society. This promotes economic growth and development within the country, and many SEZs have been successful in this endeavor, with China being a notable example.
• The Distinction: The principal difference between SEZs and a network state is the latter's more decentralized and distributed nature, as well as its specific dependence on the internet and blockchain. SEZs require land, physical infrastructure, manufacturing plants, manual labor, complex supply chains––in short, SEZs depend on a large network of physical operations. A network state aims to establish a purely digital economic ecosystem that operates through p2p systems and decentralized finance. The first goal of any network state, then, is internet accessibility––especially for impoverished areas that are aiming to achieve prosperity but are unable to because of the current global and local economic conditions. This removes much of the need for the cumbersome introduction of legacy infrastructure, such as banks for capital markets, intermediaries for transactions and exchanges, institutions for deciding on monetary policy, and enforcing property rights, among others. This will facilitate and expedite the processes for building and innovating new technologies and consumer goods by eliminating all the infrastructure necessary for establishing SEZs.
• Pushing the limits of liberalism forward––Freedom of BUIDL network state: When the power of the Catholic Church fell, and government legitimacy required new foundations, liberalism developed. In essence, liberalism claims that the government derives its legitimacy from protecting individual liberties, enforcing law and order, and safeguarding against external threats. Government, as Thomas Paine put it, is a necessary evil to ensure liberties, to deter others from interfering with those liberties, and to legislate, and then to adjudicate, the laws needed for this purpose. Over time, the aim of government has inflated, encompassing more ends than initially conceived, as new needs arose due to phenomena like externalities and market failures. Thus, individual liberties have diminished as a result of these emerging needs. A network state should aim to further liberal goals of economic liberty by developing a decentralized ecosystem run by the people according to smart contracts that are voluntary and freely consented to. Ideally, the economy centers on innovation that promotes goods that enhance privacy, security, ownership, and the freedom to build. Meaning that a goal should be to make capital open-source and available to anyone with the ambition and desire to build and create value accessible to all. People have the right to ownership, but everyone should have the right to exercise their agency through opportunities for enriching themselves and others.
• Economic Power and Democracy: As Milton Friedman observed in his Capitalism and Freedom, while economic freedom does not demand political freedom, political freedom does demand economic freedom. Once people have the freedom and space to choose where to live, decide what opportunities they wish to pursue, own property, produce and consume what they want, and so forth, they have more leverage to establish political freedom and democratic norms.
• Reciprocity: In order for a network state to be an attractive opportunity to a preexisting nation-state, the network state must supply benefits to that nation. No country will adopt a network state unless it anticipates an advantage from it. And without having recourse to a sovereign resource, it’s challenging to see how network states will get on their feet. And so it has to offer a set of benefits. The most significant and attractive benefit would be to produce a comparative advantage for the hosting country. If a network state can produce highly desirable exports or contribute to an economy by enriching its ecosystem of goods and services, then a network state would clearly be an attractive opportunity for any country seeking to improve its economic circumstances. Another example of a benefit is if a percentage of the GDP generated within the network state is taxed and used by the hosting nation.
• Cosmopolitan Framing: A global, interconnected digital economy, made accessible to anyone with internet access, allows people from all over the world to connect, build, and engage in entrepreneurial pursuits that may yield benefits for the countries and economies in which they reside. The absence of intermediaries made necessary by legacy infrastructure frees paths for people to collaborate and coordinate freely within a trustless, decentralized system. Ideally, network states are not discrete zones but nodes located within a worldwide network. Something like a globally open and available economy with opportunities for anyone to take advantage of. This fosters a global economic fraternity that anyone may be a member of.

These are some conceptual roots of network states and potential ideas for the concept's direction. Again, attention should be paid to its economic viability, not necessarily to its political and civil components, insofar as they are unrelated to economics. There are overlaps, however, and they should be taken into consideration––for example, how votes will be conducted in terms of the specifics of the regulatory framework and what voting rights individuals have––but they should not be the dominant focus. The ethics of the idea is to promote people’s autonomy, and autonomy as understood through economic opportunities for entrepreneurial pursuits. The desired social outcome is to help countries achieve prosperity.

Notes On a Philosophical Foundation:

In the previous two-part Critique on network states, part of the concern was what a moral one-commandment must look like to succeed in the long term and achieve diplomatic recognition. Two opposite worries lie at the end of this concern.

The first worry is what is required to reach diplomatic recognition by other sovereign nations. Nations look out for their own interests. They are not in the business of charity. So, a network state has to strategically position itself to attract the attention of sovereign nations. Again, that’s quite a goal. It requires extraordinary perseverance and determination of will to achieve it.

One obvious means to do so is to view the world in a particular way. A principal reason for understanding why Marxism was so persuasive in the twentieth century is that it provided a way of seeing the world as marching toward a historical destination that the iron laws of history rolled forward toward. The great tide of history ebbs and flows, but it always rises, ever so slightly, toward the liberation of the proletariat. The working class was becoming increasingly self-conscious and aware of its inexorable destiny: freedom, equality, prosperity, and a life lived according to each person’s ability and needs. The oppressed and exploited of the earth found such a worldview very attractive.

Most successful revolutions, at least historically, have demanded a willingness to sacrifice everything, even one’s life, for the purpose at hand. One will only accept that cost when one believes and feels the goal to be worthy of it. Historical narrative, stories about how the world is unfolding toward some heroic and utopic end, give people a reason to bear that cost. Network states that adopt these kinds of means to achieve their end of diplomatic recognition are worrisome and should be avoided.

Now, an essential and more fundamental philosophical ingredient in such narratives is the idea that values are written onto the world and that there isn’t an irreconcilable division between facts and values. This lack of division is most easily seen in Plato.

In his Republic, Plato derives the ideal state from the nature and order of the cosmos, rather than simply from human desires, interests, preferences, and ends. For Plato, the micro is contained within the macro. Justice, wisdom, courage, and temperance––the virtues Plato thought were integral to the good life and the ideal state––were true and objective qualities of the cosmos, and not merely situated between human relationships and the societies they comprise. According to Plato, values were inscribed onto an eternal, fixed order. Facts are informed by the values that govern the nature of things. In the Marxist worldview, for example, the objective laws of history are inherently valuable. They strive toward liberation and freedom of the working class. Again, in that case, facts are not distinct from values. They bear an inextricable tie.

This way of seeing the world can motivate radical behavior capable of undesirable violence and disruption. It can frame and justify cosmic-like struggles toward extraordinary destinies. Religious wars of the sixteenth century, for example, or Nazi and Bolshevik ideologies in World War 2 are examples of this kind of logic.

Now, the second worry is a consequence of throwing the baby out with the bath water when trying to address the first worry.

This can be seen in Enlightenment values. By highlighting a division between facts and values, and by demonstrating that they have logically distinct characteristics, those grand historical narratives lose their viability. There’s no destiny out there in the world. Nothing is unfolding toward some prodigious end. It’s the responsibility of human beings and their faculty to discern what is good. The natural world is indifferent to human needs and interests. As Immanuel Kant said, “Dare to use your own reason!” No metaphysical forces or energies will save the day. Human responsibility is primary.

The Enlightenment, generally speaking, also emphasized rights over the good. Each individual is born with natural rights that circumscribe a boundary that others shall not cross. By virtue of being born with a faculty for reason, the individual has the right to exercise that faculty according to their own desires and preferences, and may choose what to think and feel for him or herself. The government and its constitution protect and enforce the rights of the individual. It’s not the government’s job to legislate morality or enforce conceptions of the good. Its duty is to uphold the respect and dignity each person was born with.

What comes along with this is the repudiation of the big questions––questions about human nature and destiny and the meaning of it all. Answers to those questions only bring about dogma, not salvation. Science can develop the tools and techniques to manipulate and control nature; capitalism provides the right incentives and market structures for people to navigate and lead the lives they wish to; and democracy will give voice to the will of the people. And by each pursuing their own personal interests, through cooperation and a growing division of labor, and for the sake of life and liberty, society harmonizes into a productive and efficient ecosystem. Individuals themselves can answer the big questions––on their own time, and in their own way.

The worry, though, is what if those big questions demand answers. Reason, free discussion, ideas of universal respect and dignity and equality, democracy, capitalism, scientific inquiry––these comprise the legacy of the Enlightenment. However, as Peter Thiel points out in his "The Straussian Moment," they may no longer suffice, and perhaps the big questions need to be resurfaced. The goals of economic growth, the amelioration of the human condition, freedom and liberty––these values have grown brittle.

This push and pull between a politics of the big questions and a politics of a repudiation of them can be highlighted in the globalism and nationalism dialectic as well. Globalism offers Enlightenment-like progress. It aims at spreading prosperity and growth around the world. Nationalism strives toward identity, toward meaning and community that means more than material progress and individual freedom.

Network states should be positioned as a means to push this dialectic forward. It should preserve the invaluable progress of the Enlightenment. People should be free to pursue their own interests, to engage in free enterprise and the accumulation of wealth; science should remain the standard for what constitutes our best forms of knowledge; and democracy should still be seen as the best form of government available. But they should aim for the big questions, too.

A way to frame this goal is by thinking about the opportunities a network state provides for those who wish to join. Although economic by nature, the opportunities are ways for people to build a more meaningful future to live in. A way to do this is by reorienting the liberal tradition.

Philosophers like Hobbes and Locke began the liberal tradition by asserting the individual as the reason for government. In a state of nature, people consent to be governed by an administrative body for the sake of protecting their rights and liberties. A fundamental right is the right to life, meaning each individual has a right to self-preservation. And government is necessary for achieving this end. If human beings were perfect, the thought goes, then government would not be necessary. Of course, they aren’t perfect, and therefore the government is necessary to deter actors from interfering with each other’s lives and rights for life, liberty, and property.

Through the use of government and the implementation of markets and free enterprise, people can better their lives. They can improve their welfare by the industry and free cooperation of the individuals comprising the society.

This is a myopic vision of human nature and its collective goals. As Nietzsche would say, the metaphor that captures its essence is cows grazing on an abundant pasture. Behind the appearance of incredible technology, extraordinary infrastructure, efficient transportation, and complex social systems is the desire for happiness. And by happiness, Nietzsche would say what is meant is endless satisfaction. No one looks up anymore and imagines a higher future that demands discipline and will and submission to a higher principle of sacrifice and burden.

Hobbes famously said that humans are driven by fear of death and seek comfort and satisfaction to avoid it. They desire peace to assuage the natural indifference and hostility of nature. And as Locke said, through a natural endowment of reason, human beings can better their condition by recognizing and living up to the truths stamped upon it.

The fruits of that reason are rich and plentiful. One only has to look at the modern world and its astronomical rise in living standards to realize it. But the momentum behind it, the steam that has pushed history forward, is running low. There has to be more behind the operations of human enterprise and effort than self-preservation.

In building for the future, by creating ways to improve life and make it better for everyone, the results should reflect a higher purpose. The aim is not merely to improve conditions, but to create those conditions that recognize opportunities for a dignified sense of humanity. The goal should not be more apps and services that enable people to get food quicker or live more convenient lives. The goal should be to provide goods and services that raise the integrity and increase the possibility of meaning in people’s lives.

Unlike Hobbes, industry and peace are not achieved for the sake of subduing a fear of death. They are achieved by realizing something beyond it. And opportunities to exercise creative and rational capacities for the sake of attaining this end are necessary. They give those capacities space to work in, to develop. Network states should orient toward that goal.