Digital Governance Book Review: Cloud Empires (2022)

Lehdonvirta, Vili (2022). Cloud Empires. How Digital Platforms are Overtaking the State and how we can Regain Control. Cambridge, Massachusetts: The MIT Press, 283 pages.

By Matthias Finger
Vili Lehdonvirta is one of the rare academics who has not only the ambition (many do, of course) but also, more importantly, the professional, intellectual, and cultural baggage necessary to understand digital platforms and how public policy could or should react to them. He is a professor of economic sociology and digital social research at the Oxford Internet Institute, University of Oxford. Therefore, he is particularly qualified to comment on the adverse effects of digital platforms on society and to propose potential ways to reign them in. As a former member of the European Commission’s Expert Group on Digital Transformation, he has a unique insight into the issues the EU (and other countries) is dealing with and, especially, the way it is struggling to come to grips with the rise of these global digital non-European platforms. As a resolutely interdisciplinary thinker, he certainly draws on the most relevant, but regrettably more or less defunct, intellectual traditions: heterodox economics, in particular economic sociology, but also science, technology, and society (STS) studies. Also, he brings a unique Finnish approach to all this. At the interface between Russia, Asia and Europe, this translates into some unorthodox, intriguing and, at times, slightly irreverent insights and statements.

This review is structured as follows: In the first section, I will expound on the author’s underlying ideas and assumptions, as he does not do this very explicitly in his book. In the second section, I will follow the structure of his book and present some of his key lessons. In the third section, I will discuss his more analytical conclusions.

Underlying Ideas and Assumptions

Whereas most of the current authors of digitalization work with the implicit assumptions that there is a close relationship between the governance of the physical and the digital realities (spaces), Lehdonvirta sees a parallelism between the evolution of the two. There is, on the one hand, the physical reality (or space) where producing and consuming goods and services has to be coordinated (by government). On the other hand, there is the parallel digital reality, the cyberspace, where the same will eventually occur as well.

Lehdonvirta’s focus is on the evolution of the governance of cyberspace. He is mainly interested in the lessons we can learn from the governance of the physical space for the governance of cyberspace. But he is not really interested in the way the physical space (governments tied to their territories) can control or govern cyberspace … to the extent that he does not really believe in it. According to Lehdonvirta, the governance of the physical space has evolved since the Middle Ages in Europe and has been institutionalized during 18th and 19th centuries in modern territorially defined nation-state governments. Yet, the governance of cyberspace has barely emerged, due to its novelty. Similarly to the evolution of the national governments’ physical space, the same evolution will eventually have to take place in cyberspace, he argues, and it will be an equally conflictual and painful process. Yet, the final outcome will probably not be very different.

According to Lehdonvirta, this is basically because, both in the physical and in cyber-space, governance has to respond to exactly the same social challenges, specifically the challenges of coordinating or arbitrating actors with their own interests. Yet, astonishingly, the author never uses the word “coordination” that stems from institutional economics. Instead, he operates with more sociological and political concepts of balance of interest or balance of power. Although nation states and their respective governments have evolved over time to develop institutions (rules and regulations) for the balancing of the interests of consumers, entrepreneurs, and workers, similar rules have yet to be developed for the digital platforms that operate in cyberspace.

In short, we are mistaken to consider digital platforms as being businesses that operate in a market. Rather, they are “governments” or “virtual states”, with the only difference being that their leaders “enjoy immense power without a commensurate level of accountability” (p. 3). If they have any business, it is the business of rule-making whose purpose, if unchecked, is solely to increase their own control, power, and profits. Also, there is no market for platforms; rather, platforms are themselves organizing markets, just as governments are: “platforms are institutional frameworks, and the choice between alternative institutional frameworks is not an individual choice that can be resolved on a market, but a collective choice” (p. 9). They set the rules for the way the “market” actors or participants, including the producers, the consumers, and the laborers have to interact with each other. Therefore, platforms are not as exceptional as they claim to be, and they are certainly not an alternative to the state. There is also no point in attempting to regulate them, as they are themselves the “regulators” of the markets they have created. The best governments can do is to nudge them into setting the rules in such a way that their activities will be more generally accepted by the different actors of the “markets” they command.

Insights or Lessons Learnt

The book is structured into ten chapters, each illustrating one of the points Lehdonvirta tries to make by way of lessons learnt from some of the most important personalities in cyberspace. This makes the book easy to read but, at the same time, somewhat confusing about the underlying arguments. Clarity comes only in the conclusion.

  • There is first the story of John Perry Barlow (Chapter 2), the libertarian hippie idealist from the Californian 1960s, who co-founded the Electronic Frontier Foundation (EFF). He dreamt, like so many others until today, of a free Internet, of a global social space (a global village) free from state intervention. This free and open Internet would be at the service of the “netizens” of the world, where everyone would behave just like in his Wyoming village. But Barlow failed to understand some of the basic rules of sociology: Whereas, in his physical village, social control disciplines his fellow citizens, the same does not apply in the global cybervillage. Consequently, this libertarian cyberspace has failed, according to Lehdonvirta, to solve the problems of “exchange” and “reciprocity”, i.e., the problem of making law and order. Hence, a venue for nation states had opened up to step in and establish some sense of order. Needless to say, this libertarian ideology of an open and state-free cyberspace continues to live on, not the least because it is in the interest of the Californian tech companies and their investors.
  • Then there is the story of Pierre Morad Omidyar (Chapter 3), the founder of e-Bay, who wanted, like Barlow, to create a peer-to-peer market free from government intervention. Omidyar created the world’s first online-reputation system in order to avoid that governments regulate his platform, only to realize that he himself became the creator of rules and the regulator of his global marketplace, without being liable and accountable to anyone. In the words of Lehdonvirta, “one form of authority was replaced with another one” … “the outcome simply reflects the difficulty – perhaps the impossibility – of realizing self-organizing markets” (p. 52).
  • The next story is the one of Travis Kalanick, the founder of UBER (Chapter 6), another Silicon Valley libertarian who was convinced that free markets are the alternative to corrupt and bureaucratic government, or rather, “algorithms determine what the market is, making choices on peoples’ behalf” (p. 101). But unlike Barlow and Omidyar who gradually lost their illusions about the free market in cyberspace, from the very start, Kalanick was convinced that “his company’s planning algorithms would produce the same outcomes as a free market” (p. 103). In short, they would replace the free market by nudging people into behaving as if they were in a free market. This is not only the best chapter of the entire book but also the one that best captures Lehdonvirta’s thinking: specifically, the idea that digital platforms are, in essence, centrally planned “markets”, a sort of Soviet Union 2.0. Moreover, the USSR would have done precisely this, had they only had the technology at that time. As Lehdonvirta says, “all the tech giants impose plans on their users that are ultimately designed to enhance the company’s – or the leadership’s – own power and wealth” (p. 106).
  • And this is how we logically arrive at Jeff Bezos, the founder and majority owner of Amazon, the everything store (Chapter 7). Tellingly, Jeff’s adoptive father fled from Fidel Castro’s Cuba … and later Jeff did the same as Fidel, yet now on a global scale. He notably took control of the customer experience by deliberately creating and exploiting the suppliers’ dependency upon the platform and, most interestingly, by (vertically) reintegrating the physical value chain into the platform business. As in Fidel Castro’s Cuba, “in Amazon’s everything empire, entrepreneurs live in constant fear of having their business taken away from them” (p. 129), yet without having the legal recourse or the political means to avoid this.

I summarize here only the four chapters that best illustrate Lehdonvirta’s underlying argument, specifically that platforms behave like the feudal states of the late Middle Ages did before the emergence of the modern (more) democratic nation state, albeit now at a (potentially) global level. Four other chapters in his book make similar arguments with the examples of labor markets (Chapter 5), online jobbing (e.g., Digital Turk, another Amazon platform company, Chapter 9), app development (Chapter 10) and online education (Chapter 11). Two chapters do not really fit into the book’s overall narrative but are nevertheless very interesting and relevant. In these chapters, Lehdonvirta makes the argument that technology cannot replace governance, be it in the case of the darknet in the example of online drug trading (Chapter 4) or in the case of cryptocurrencies (Chapter 8); Lehdonvirta calls these cases the failed “quest to replace politics with technology”.

The Main Takeaways

Although the bulk of the book is rather anecdotal, the concluding chapter (Chapter 12) is analytical. In it, Lehdonvirta draws the main lessons from his own learnings, as described in the ten case studies, beginning with his understanding of the “big betrayal” of the original Californian free-Internet-market dream. This is the original dream of the Internet freeing, once and for all, the markets from the tyranny of governments and, by doing so, delivering a truly global democratic village of netizens. This dream, he says, was illusionary to begin with, and might even (my addition) have been actively pushed by the tech companies to obfuscate the issue, thus enabling them to be free to develop themselves in the shadow of government. Nevertheless, digital platforms are institutions and extremely powerful ones for that matter, i.e., rules that have to be elaborated over time and to be enforced by an authority. Indeed, platforms have come to “assume for themselves the role of the coercive authority that they had been trying to abolish” (p. 207). As such, platforms have come “to function as infrastructures that help internet users to buy, sell, work and pursue interactions” … “analogous to the infrastructures that were set up by states and market towns that multiplied trade and innovation in early modern Europe” (p. 209). “The same forces that once favored the rise of the state now led to the rise of the platforms” … “A lot of what technology companies now do is thus in a certain sense just statecraft” (p. 210). Even Mark Zuckerberg had noted that Facebook has ended up “more like a government than a traditional company” (quoted in Lehdonvirta, p. 211); except that the Facebook government is not accountable to the netizens it governs.

Using this analysis, Lehdonvirta assesses the current efforts made by both the US government, and even more actively by the EU, to reign in the platforms. The three following assessments are certainly worth considering and can be seen as the main three takeaways from Lehdonvirta’s book:

  • First, there are the attempts by the US and the EU to control platforms by means of breaking them up by using competition laws. But a platform’s product is not a commodity; rather, platforms are more like governments operating in the “market for rules”. However, competition among states and governments does not work very well, to say the least, as states prefer to make war rather than to compete. And (my addition) competition regulation, as applied to states, would be mostly illusionary; it suffices to look at the fate of the World Trade Organization. Besides, if the EU is trying to break up the US or Chinese platforms, it would only backfire, “ending up stoking a geopolitical race towards platform nationalism” (p. 228). Not to mention that breaking up platforms reduces their value for people but would not eliminate the network effects that created them in the first place.
  • Second, there are the, admittedly much less advanced, attempts to regulate platforms as monopolistic infrastructures; these attempts are analogous to the utilities regulation in the US and the network industries regulation in the EU. However, as platforms are “not a commodity like transport or electricity but an institutional framework that consists of complex rules and regulations … a truly effective way of governing platforms would have to be so detailed and tie platform managers’ hands so tightly that the platforms would in effect fall under government administration” (p. 224). Nevertheless, we can still be somewhat inspired by the unbundling regulation, as applied by the EU to the network industries. Indeed, “Amazon the regulator should doubtlessly be separated from Amazon the merchant” (p. 222).
  • Third, there is the EU’s attempt, in its proposed Digital Markets and Data Governance Acts, to make data more openly accessible and, by doing so, to stimulate an innovative European data-economy. According to Lehdonvirta, this has a “romantic appeal” to it and reminds him of (John Barlow’s) Electronic Frontier Foundation’s recent proposal “to introduce interoperability to services by requiring large platforms to open up their data troves and permit interconnections from competing services” … so that “competition would bring platforms to heel, and we would, once again return a little closer to the creative anarchy of the old Internet – without the government having to regulate platforms more closely” (p. 225). Therefore, it is an equally illusionary attempt, as are competition-regulation efforts for breaking up the gatekeepers.

As this review is a summary to help the reader understand the essence of the book without having to read it, my aim is not really to make a critical analysis. Still, I find that Lehdonvirta’s book offers intuitive insights, rather than academically solidly grounded analyses. It is also weak in terms of practical implications and policy recommendations. Nonetheless, it is an excellent book.

This edition of the Digital Governance Book Review was authored by: Matthias Finger, Emeritus Professor, C4DT

Image credit: Cover of Cloud Empires. How Digital Platforms are Overtaking the State and how we can Regain Control. by Vili Lehdonvirta, published by the MIT Press.