When the anarchy has to stop

The internet was hailed as a technology beyond state control; but so, once, was radio. Now we are re

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A long, long time ago - in about, say, March 1999 - a crop of scruffy prophets trumpeted the coming of a new economy. Waving IPOs (initial public offerings) and visions of vast riches, these New Age gurus declared that technology would solve all mankind's ills and that the market had at last triumphed over all that might restrain it. Societies were now free from meddlesome authorities, they declared, and governments were all but dead.

In the new economy, it appeared, individuals - the great, the good, the weak and the small - would be free at last from the bonds that had historically tied them. They would be free to write subversive prose and avoid national boundaries and launch dotcom boutiques. There weren't supposed to be any big players in this virgin techno-land: the miracles of the internet would flatten old hierarchies to their thinnest plank. No longer tied to the corporate beast, the new woman in the grey flannel two-piece suit would leap from her cubicle, proclaim a revolution and be instantly bombarded by hordes of angel investors.

Yet today, the new economy seems reeling. Even before terrorists smashed into the heart of New York, the start-up boom in both the United States and Europe had already busted, and plummeting technology stocks cast an ever-widening shadow across the financial markets that spawned them. Are we witnessing the death of what should have been our future?

Not really. It's all just part of a fairly predictable cycle, one that accompanies most technological breakthroughs, and should have been apparent from the start. Consider what happened in 1896, when a young inventor named Guglielmo Marconi first brought his "wireless telegraph" to Britain. Nervous customs officials seized the box, claiming that it could only be used for subversion, and bureaucrats of the postal system scoffed. Later, when the magic of Marconi's radio was made apparent, average citizens flocked to hear his ethereal broadcasts and feted the inventor as a king. As radio use became more widespread, awestruck listeners claimed that it was truly a revolutionary technology - something that could never be regulated or controlled. Indeed, in the US, where radio remained unregulated for decades, investors poured into radio stocks, helping to drive the market frenzy of the 1920s.

Sound familiar? It should. What happened in the radio industry is remarkably similar to what is happening today. Then, as now, a series of technological advances led to the creation of a market space, mesmerising in terms of both its commercial and societal impact. With radio, citizens were suddenly able to pull information down from the "ether", catching whispers and music from far-off signals. People could communicate across thin air, going around governments that had long endeavoured to control communications, and launching the phenomenon of broadcasting.

From today's perspective, what is most interesting about the radio story is how quickly the technology was reined in. In the United Kingdom, for example, the government swiftly brought Marconi's empire more under its own control. It imposed significant constraints on radio traffic in 1906, purchased all of the Marconi Company's coastal stations in 1909, and then drew the whole industry to its side during the First World War. After the war, when a new round of innovators figured out how to transmit voice and music along the radio waves (Marconi had transmitted only the beeps of Morse code), the government established the BBC as Britain's radio monopoly.

In the US, government involvement was slower but no less definitive. In the aftermath of war, the US navy brought all of radio's key patents under its control and then bundled them into the newly created Radio Corporation of America. It then moved - reluctantly but forcefully - into the regulatory sphere, parsing the radio spectrum into distinct segments and allocating them to specific firms. By the 1930s, radio in both the US and Britain was a heavily concentrated, tightly regulated industry.

We see a similar cycle in the early days of the telegraph, and in the more recent evolution of satellite television. In these industries, too, an early wave of enthu-siasm gave rise to dreams of anarchy. Entrepreneurs built huge empires - John Pender's Cable & Wireless, Murdoch's BSkyB - on the back of technological innovation, and were able either to circumvent government authority or to tie it to their needs.

In far-flung places such as India or China, the new technology was seen as a distinctly political tool: a way to extend imperial power in India, a means of circumventing the government in China. And for a while, and to some extent, it worked. But ultimately, the same fate that befell radio hit telegraphs and satellites: governments moved in, the rules fell in place, and the markets returned to normalcy.

Today, the so-called new economy is experiencing the latest round of this cycle. In the heady days of the internet boom, there was a general sense that governments were dead and that markets had killed them. Newborn companies were giddy with the freedom that money had bestowed upon them and the architecture of the net seemed technically immune to control.

This euphoria lasted for roughly five years, from the IPO boom of the mid-1990s to the Nasdaq tumble that began in 2000. It is critical to note, however, that the up-and-down cycle of the new economy is not just about share prices and start-up firms. It is not just about entrepreneurs creating a buzz that ultimately proved unfounded. Rather, what is unfolding here is a fundamental readjustment of rules and power, the same kind of readjustment that occurred in earlier industries.

What is driving this readjustment has less to do with markets or money than with the fundamental demand for order. In the early days of the internet, as in any rush for wealth, people were relatively content to live with anarchy. They were willing to risk their privacy in order to list their book preferences on amazon.com. They were willing to sacrifice property rights to the joys of downloading songs from napster.com. But once the thrill of the new had started to subside, people became more cognisant of the costs that came riding alongside the net. They realised suddenly that property rights and privacy were not to be blithely discarded. They grew wary of the terrorist in the chatroom, tired of the junk mail that masqueraded as news. And thus they began to push for rules.

Developments in the financial markets accentuated these trends. Once the Nasdaq began its perilous decline, investors started to tremble anew at the emperor's potential nakedness. They began demanding more rigorous accounting practices and increased oversight of what were once market darlings. This caution set off the pessimism that dogs us today.

If we look at the current situation from a historical perspective, the next rounds of evolution are relatively clear. The internet economy certainly isn't going away, and the technologies that lie at its base will continue to affect the way we work, play and organise our societies.

In countries such as China and Saudi Arabia, where governments have historically tried to control the flow of information among their citizens, the net could well prove revolutionary, creating new places for dissidence to thrive. Elsewhere, however, the new economy seems destined to follow along the course laid out by the old.

Having passed through the initial wave of innovation and enthusiasm, markets that cluster around the information industries will begin to settle into middle age. Some firms will get fatter and more complacent. Most will not make it. Governments will impose their laws upon the internet. This will prove tricky, because the net is still a slippery medium and crosses borders imperceptibly. But governments will nevertheless enforce rules in cyberspace that their citizens are likely to obey.

This is not the vision that roused the spirits of the net's first pioneers. Governments were not supposed to trample into this new-found space or disturb the liberty that survived there. The problem with too much liberty, though, is that it turns rapidly into anarchy. And anarchy is simply not conducive to commerce. The task facing government is to step back into this once new economy and establish the rules that will allow it to prosper.

Debora Spar is professor at Harvard Business School and the author of Pirates, Prophets and Pioneers: business and politics along the technological frontier (Random House, £15.99)

This article appears in the 15 October 2001 issue of the New Statesman, A nation in panic