Will We See the End of Nation-States? A Forecast for the Digital Era

This article is an excerpt from the Shortform book guide to "The Sovereign Individual" by James Dale Davidson and Lord William Rees-Mogg. Shortform has the world's best summaries and analyses of books you should be reading.

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If nations ceased to exist, what would take their place? How could such a societal change happen?

James Davidson and William Rees-Mogg believe that technological developments will profoundly impact social structures in the 21st century. Circumstances will favor small, efficient organizations over large ones. Ultimately, we’ll see the end of nation-states as they’re replaced by city-states and individuals.

Read more to understand why Davidson and Rees-Mogg expect nation-states and national governments to decline and ultimately disappear.

The End of Nation-States

After the end of the medieval era, feudal monarchs disappeared because new technology gave nation-states an economic and military advantage over them. Writing in the 1990s, Davidson and Rees-Mogg predict the end of nation-states, asserting that they will soon disappear in the same way and for the same reasons as new technology renders them economically unsustainable and makes their military power irrelevant.

Economic Insolvency

Davidson and Rees-Mogg expect economic activity to migrate from local and national markets that governments can tax and regulate to encrypted online markets that are beyond government control. If this migration makes paying taxes largely voluntary, most national governments stand to lose their largest source of income.

This is a serious problem because, as Davidson and Rees-Mogg point out, most national governments are already deeply in debt. They attribute government debt largely to the welfare-state mentality, whereby the government is expected to levy disproportionately high taxes on the rich, distribute some of the money taken from the rich to the poor, and fund extensive public works. The cost of welfare projects already exceeds tax revenues, forcing governments to endlessly borrow money.

And, the situation is only going to get worse for welfare states. Not only will the online economy allow people—especially wealthy people, who pay most of the taxes in developed countries—to avoid paying taxes, but the authors also expect the income gap between rich and poor to increase significantly in most countries

The Role of Bitcoin in the Decline of Nation-States

Given that Davidson and Rees-Mogg attribute much of the prospective decline of nation-states to economic insolvency, the ongoing prevalence of fiat currency is probably one of the major reasons that nation-states have not yet dissolved.

As Stephanie Kelton explains in The Deficit Myth, governments that issue their own currency face negligible consequences from running a deficit. This is because a nation that issues its own fiat currency (currency whose value isn’t pegged to another nation’s currency or a commodity like gold) can never run out of money. A nation can always create more money to fund its programs or pay its debts (as long as it doesn’t issue so much money so quickly that it triggers runaway inflation). This allows welfare states to fund almost unlimited programs.

As long as nation-states control the money supply, they can remain in control of their own economies, and their sovereignty remains difficult to challenge. Davidson and Rees-Mogg implicitly acknowledged this but predicted that proprietary digital currencies would replace national fiat currencies. This hasn’t happened yet, partly because of technical limitations on transaction volume or speed and partly because cryptocurrencies have not yet established the same level of credibility or acceptance as fiat currencies that the US dollar has.

The credibility issue stems mostly from the fact that when private companies such as banks or crypto companies issue their own currency, they often issue more of it than they can back with gold or other commodities. This leads to the devaluation of their proprietary currency when the discrepancy is discovered, fostering distrust. 

However, as Saifedean Ammous points out in The Bitcoin Standard, Bitcoin is one digital currency that is truly decentralized. There is no company, government, or other entity that can alter the global supply of bitcoins or even reverse a bitcoin transaction that has taken place.  So, at least in theory, Bitcoin solves the credibility concern. Ammous recommends that Bitcoin be adopted as a global reserve currency (a standard to which all other currencies are pegged). He argues that this would curtail wasteful and counterproductive government spending by eliminating fiat currencies. If Bitcoin is ever adopted as a global reserve currency, as Ammous recommends, that would be a significant milestone in the transformation that Davidson and Rees-Mogg predict.

The reason for increasing income inequality is that virtual assistants will enable a smaller number of highly skilled people to do a much larger fraction of the work. As conditions increasingly favor small, efficient companies, there will be a push to increase efficiency throughout the economy. This will result in the elimination of many bureaucratic or otherwise unproductive positions, and compensation will increasingly be based on output, rather than hours worked. Jobs for which you get paid just for showing up will disappear. As such, exceptionally productive people will see their incomes rise, while everyone else sees a loss of income.

So, the rich will get richer, the poor will get poorer, and a larger fraction of the population will be poor. This will make welfare programs increasingly infeasible, as the number of eligible recipients skyrockets while most of the funding disappears. And, governments won’t even be able to soften the blow by printing more money and inflating their currency, because fiat currencies will become worthless as the online economy switches over to private digital currencies.

Unproductive Jobs

Analysts have expressed varying perspectives on the subject of unproductive jobs.  As we’ve discussed, Davidson and Rees-Mogg believe that many jobs are unproductive, and they attribute this to economies of scale giving big businesses and big governments the advantage. They argue that larger size inevitably reduces efficiency and increases bureaucracy to some extent, and welfare states make the problem worse with frivolous programs that create frivolous jobs.

In Bullshit Jobs, David Graeber agrees industrialized nations are full of unproductive jobs, but cites automation as one of the root causes: Because industrial automation allows fewer workers to do more work, there simply isn’t enough productive work to keep everyone busy. If Graeber is right, virtual assistants would only make the problem worse. If it only takes a few people to do all the world’s work, then most people will end up being unproductive.

That said, Graeber also echoes Davidson and Rees-Mogg’s assertion that welfare states are the worst offenders when it comes to creating frivolous jobs. And the future of unproductive positions is probably linked to the future of welfare states: If the state remains strong as AI enables fewer people to do all the work, then unproductive jobs may become even more common, as Graeber would predict. But if nation-states collapse as Davidson and Rees-Mogg anticipate, then perhaps a handful of sovereign individuals will do all the work, claim all the income, and leave the unproductive masses to a rather grim future.

Military Obsolescence

Davidson and Rees-Mogg expect warfare to become increasingly computerized, which will diminish the significance of traditional military size and firepower. This, too, will contribute to the decline of nation-states, because a nation’s sovereignty is ultimately based on its ability to defend itself against other nations. 

Today’s nations rely on standing armies and physical weapons for national defense. But the authors expect that online communities and even highly skilled individuals (aided, of course, by their virtual assistants) will soon be capable of waging cyberwar just as effectively as today’s most powerful nations. 

Cyberwar as an Extension of Guerrilla Warfare

To understand the implications of cyberwar in more detail, it’s worth cross-referencing books on military strategy. Cyberwar, as Davidson and Rees-Mogg describe it, could be the ultimate form of guerrilla warfare because hackers can attack from anywhere in the world without exposing themselves.

As Robert Greene explains in The 33 Strategies of War, guerrilla warfare has always been a favorite way for smaller forces to defy large military powers. Armed guerrillas operate in small, mobile groups. They attack vulnerable positions or infrastructure suddenly, and then go back into hiding so that their more powerful opponent never has a clear target. Meanwhile, the larger force remains vulnerable, not only because it’s more visible but because it takes a lot of infrastructure and supplies to sustain a large force, creating many targets for the guerrillas.

If weaponized AI advanced to the point that hackers could disable and destroy armament and supporting infrastructure at will, then traditional war machines would become little more than an expensive liability. 
Will We See the End of Nation-States? A Forecast for the Digital Era

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Here's what you'll find in our full The Sovereign Individual summary:

  • 1990s predictions on what the 21st-century economy would be like
  • The idea that nations will eventually fragment into sovereign city-states
  • The growth of cyber economies, computerized warfare, and virtual assistants

Elizabeth Whitworth

Elizabeth has a lifelong love of books. She devours nonfiction, especially in the areas of history, theology, science, and philosophy. A switch to audio books has kindled her enjoyment of well-narrated fiction, particularly Victorian and early 20th-century works. She appreciates idea-driven books—and a classic murder mystery now and then. Elizabeth has a blog and is writing a creative nonfiction book about the beginning and the end of suffering.

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