New Types of Organization and the Myth of the Return of the City State

David Galbraith
Nov 30, 2019 · 5 min read

Below is a summary of the argument about city states vs nation states that I’ve delivered as part of several recent presentations either publicly or internally at Anthemis.

Organizations such as living things, companies, cities and nations have characteristics that are determined by physics. Specifically, they are local areas of organization that appear in flows of energy (living things) or information, capital and trade flows (companies, cities, nations). In physics terms they are areas of low entropy order that exist as open systems within an environment that as a whole maximises entropy (creates more waste than directed output). In other words, things like cities traditionally sat on flows like rivers, but today these flows can be capital or information, and their very existence increases these flows — as a company grows it consumes more capital and as a city grows it consumes more resources while they both produce more. This is a feedback loop and operates much like an engine does, with cycles where the flows of fuel create more flows which produce power or growth. The exact nature of this growth and the comparison between companies and cities has been examined by Geoffrey West.

There is no trend to city states per se (the resurgence of China shows the opposite, but in the West there may be) and new global flows of capital and information are changing the way that all organizations work, from nations to cities to corporations.

The last time this happened was in the period before the Reformation when trade and capital flows were transformed by the discovery of the New World and information flows were restructured by the invention of the printing press. The end result was new types of organization — from organized religion (the Protestant Reformation), changes in the fortunes of nations (Spain & Portugal and then England & Holland) and the prosperity of cities (Hamburg vs Lubeck) and changes in labour organization as guilds and trade fairs were replaced by joint stock companies and capital markets.

There is a direct correlation between distance from both the printing press in Mainz and Atlantic trade with the replacement of guilds. Cities needed to be close to both, as Hamburg was, to prosper and replace feudal organizational structures with post feudal ones (Seville was too far from Mainz and Lubeck, although only 30 miles from Hamburg was on the Baltic not Atlantic, so both retained their guilds till much later).

Much of the current talk about the Internet being the 4th industrial revolution is too simplistic, misses the link with new capital flows through globalization and the Chinese renaissance and doesn’t create a narrative that explains why everything from social interaction to politics to organizations is changing. The current period is far more like the period before Reformation and what is happening is not a new Reformation but the changes that precede one. The last time this resulted in the Reformation and eventually the Enlightenment and the Industrial Revolution. This time we could see new quasi-religions around new age superstition and reactions against science and technology (such as anti-vaccinationists), new types of organization (networked organizations), the rise in relative importance of some nations (China) and the rise in importance of some cities which leverage the new flows of trade, information and capital (Singapore).

We are not in the 4th industrial age, we are in the post industrial age and the period of the post industrial age we are in will produce completely new organizational structures just as the shift between feudal to industrial did.

The current fashion for claiming that city states are replacing nation states ignores what is happening on a global scale, where the return to China and India being responsible for the majority of global GDP, as they were for 18 of the last 2 centuries, may represent the opposite. Global cities in the West that can take advantage of these macro flows can leverage remote production in China at the expense of production in their hinterland within the same nation state, so the nation states decline relative to these globalized cities like London. Within these cities, diversity and superficial tolerance flourishes as people prosper locally, but at the expense of intolerance both towards and by the nation state as a whole, as the hinterland is neglected. This is what is fuelling Trump, Brexit and the Gilets Jaunes, where the global level of poverty is reduced but at the expense of rising inequality and poverty in currently rich nations.

What is this post-industrial, networked organization type and how is it different to a joint stock company?

We don’t know yet, but I suspect it will share characteristics of equity based capital input (i.e. Venture Capital is as important as the creation of the joint stock model of organization). We tend to view the companies that have been created in the Bay Area as the result of San Francisco being the equivalent Florence in the Renaissance but San Francisco is more like Amsterdam at its peak and the most important organizations may be the Venture Capital firms of Sand Hill Road, which are the equivalent of Dutch financial systems that funded trade in the East Indies.

Unlike a guild which pooled internal capital, joint stock companies used external capital to create leverage to tackle bigger endeavours with bigger risk but more reward, this increase in leverage is what makes the Venture Capital model structurally different, but for it to go mainstream it will have to have a model based on dividends, so that returns can be achieved with sustainable organizations rather than requiring an ‘exit’. Employee options pools will need to expand to include the entire workforce and entities that are effectively bound to their own capital market will enable smooth release of capital through secondaries.

Venture Capital funding is not the only characteristic of these new organizations, it may be that some of the features of Internet platforms constitute the way they operate more as an ecosystem, a federation of entities.

For workers it may be that the gig economy model of multiple jobs becomes commonplace, providing that a new social pact emerges, possibly through more mutualized ownership structures (like John Lewis in the UK) and the decoupling of social benefits like healthcare from employers, paid for by increased taxes and more, not less, powerful states.

Here is a talk that goes into this further: https://www.youtube.com/watch?v=d53rzvkc3GY

Anthemis Insights

Thoughts on the future of financial services from the Anthemis ecosystem

David Galbraith

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Architect: I used to design buildings, now I design companies. http://davidgalbraith.org

Anthemis Insights

Thoughts on the future of financial services from the Anthemis ecosystem

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