Get the best of Commons Magazine — FREE!

Not Just Peak Oil, But “Peak Hierarchy,” Too?

Can the economic crisis be traced to large, hierarchical institutions that are dysfunctional in an open, networked environment?

Most of us have heard about the impending arrival of “peak oil,” after which oil supplies will inexorably dwindle, causing all sorts of havoc as societies try to cope and remake themselves. But my friend Michel Bauwens of the Peer to Peer Foundation, recently suggested that we may be approaching another inflection point of equal or greater significance, if we have not already – the arrival of “peak hierarchy.” By this, he meant the time at which distributed organizations become stronger and more versatile than centralized hierarchies.

Traditionalists scoff at the idea that big, familiar institutions are vulnerable. But the events of the past two months might well be taken as a warning of disruptions to come. The fall of Bear Stearns and Lehman Brothers, the bailout of AIG and Citicorp, and the impending bankruptcies of General Motors and Chrysler – and not to mention troubles at dozens of lesser-known but important corporations – might be seen as different aspects of the same financial crisis. But it may make equal or better sense to see the current turmoil as evidence of structural deficiencies of large institutions.

Photo of statue of Albert Gallatin in front of the U.S. Treasury Department, by BostonBill, via Flickr, licensed under a Creative Commons Attribution, NonCommercial, ShareAlike license.

The liquidity problem in financial markets is more accurately described as a failure of social trust. People increasingly don’t believe that their money will be safe with large, once-reliable institutions even when the U.S. Government is providing backup guarantees. That’s why Injecting lots of new money into companies isn’t necessarily improving liquidity. The deeper problem is a lack of trust – and money alone can’t solve that.

Why should we trust large, centralized institutions that are not transparent in their dealings, and that allow well-placed insiders to game the system to their own advantage? There are all sorts of legal and regulatory checks that are supposed to prevent abuses of the system, of course. But when these safeguards are vested with large, centralized institutions that have themselves been compromised and gamed – the credit rating companies, the SEC and other regulatory agencies, Congress itself – then it should not be surprising that fraudulent, self-serving behaviors occur. The financial crisis is simply a confirmation of what many people already knew: we were (and are) caught up in big-time institutional lying (and evasion, spin and denial).

It always makes for better drama to have a Michael Milken, Ivan Boesky or villain who betrayed his duties or the public trust as an individual. But the crisis that we now find ourselves in is not just about a few bad apples (though there are plenty of them!). It’s about institutional failure on a colossal scale supported by pathological cultural norms.

The real problem is getting the economy started again is restoring trust. Existing institutional structures are not trusted. The culture of spin, evasion and lying has become so pervasive, and so institutionalized in the everyday practices of business, that it is hard to imagine re-booting the economy afresh. Everyone has the reasonable suspicion that no one is to be trusted. Everyone clings tightly to his or her money. And the economy stagnates and declines.

Think of the many institutional shams that were, and are, treated as credible: television’s Sweeps Weeks as a gauge of a network’s base audience, EPA’s risk assessments of chemicals, the mainstream press’ pre-war reporting on Iraq, the energy and auto industry’s dismissals of global warming; the safety of subprime mortgage securities and credit default swaps. The list could easily be expanded.

A friend of mine who is trying to raise money for a startup tech company put it this way: “Businesspeople realize that they were lying – and they know the people they were doing deals with were liars. And they know that the other guys know that they had been lying.” How, then, in this rampant culture of deception, the logical endpoint of a laissez-faire market without effective government oversight, does one begin to restore trust?

In a way, it all backs up to George W. Bush. When you lie as a tactic for starting a war and torturing civilians and suspending due process of law – among dozens of other mendacious official policies – and no one holds you to account! – it should not be surprising that leaders of major industries think that they, too, can shave the truth and get away with it. The very idea of responsibility becomes the province of suckers.

It is of a piece, then, that Treasury Secretary Paulson actually proposed a $700 billion taxpayer bailout without bothering to explain or itemize how this unprecedented sum would actually be spent. (Now – surprise, surprise – the congressional Government Accountability Office has found that the accountability mechanisms for the bailout plan are grossly inadequate.) When the Big Three automakers came to Congress, asking for a bailout, they didn’t even take the trouble to describe their plan for rehabilitating themselves or how they would spend the money. And of course, the CEOs all flew into Washington on their vastly expensive corporate jets. Large and insulated from the market, GM staked its fortunes on selling high-profit-margin gas-guzzlers and SUVs for a generation. It reasonably thought it could make the market rather than have to respond to it. Now the bill has come due.

The common denominator of large institutions is their ability to manipulate and escape the on-the-ground realities that lesser mortals must abide by.

Which brings us back to “peak hierarchy.” The vignettes I cite may be explainable by all sorts of industry-specific realities and by the collapse of financial markets. Yet the larger point may be that large, centralized institutions are more brittle and less trustworthy than we may have suspected. And there are increasingly viable alternatives that are smaller and more innovative, flexible and socially attractive.

In a more diversified, modular marketplace, the failure of a company is no big deal. In a concentrated market dominated by a few big players, the incentive structures are all wrong. Why innovate and compete? Why operate transparently? Why work to cultivate social trust? If sheer market power or political lobbying won’t solve a problem (or steamroller over it), glitzy marketing will at least tamp it down.

Large institutions invariably find ways to leverage their powers to serve their own interests and defeat accountability – especially when their overseers (politicians and government agencies) are themselves large institutions who share the same bed. Large companies can often structure their markets and business practices in self-serving ways. They can carry out questionable dealings in the shadows. They can deploy their lobbyists to win government sanction for dubious business practices. And then, if anything goes wrong, they can invoke their sheer size and number of employees, are argue that they are too big to fail. Government must come to the rescue or the consequences for innocent third parties will be too severe.

The second part to this argument about “peak hierarchy” is the alternative: an environment of smaller, more distributed players. Michel Bauwens makes a powerful case for the ascendance of peer production, governance and property. It is not a moralistic case, but a functional one (which happens to have more socially benign and democratically attractive outcomes).

Anthropologists who study evolution believe that once a group of humans becomes larger than 150 people, they need to invent hierarchies in order to structure relationships and assure social trust. What is new about our times – the age of the Internet – is that you can now functionally coordinate small groups of people on a global scale. Social trust doesn’t need to be organized by hierarchical organizations; it can arise from the bottom up and self-organize into small groups that share common values and purposes. Such distributed networks have given us GNU Linux and open source software, Wikipedia, social networking, the Public Library of Science and other open-access journals, and countless other online commons.

This is something new under the sun: a new and functional mode of organizational life.

For the moment, the peer production economy is mostly occurring online, dealing with intangible products like creative works and information. But the social dynamics of peer production are proving to be astonishingly effective in organizing the creative energies of huge numbers of dispersed people. Could it be the template for similar changes in the “real world” of conventional industry? Will its institutional norms of mass participation, transparency and accountability begin to “compete” with hierarchical institutions?

We are already seeing this kind of change. Think Wikipedia vs. Encyclopedia Brittanica. Think how the Obama Internet-driven campaign out-maneuvered McCain mass-media campaign and raised huge amounts from small donors. Think how bloggers, news aggregators and Craigslist are undermining daily newspapers. Think how open source software continues to expand its domain of influence at the expense of proprietary software. Think how small groups of ethnic exiles use the Internet to affect politics in their native countries, or how the record, film and television industries are being challenged by YouTube, Facebook and countless user-driven websites.

The peer production vision is still relatively small and undeveloped, and large institutions remain quite entrenched and powerful. But no one said that the era of hierarchy is over; just that the “peak” may have passed, and that the future belongs to a different kind of logic. There will be denials, just as “peak oil” is still contested by some. But it is an illuminating perspective when considering the deep origins of our current crisis.

Tomorrow: a summary of portions of Michel Bauwens’ recent talk at UMass Amherst.