How the Digital Transformation Changed Geopolitics

Abstract

In the late 2000s, a set of connected technological developments – introduction of the iPhone, deep learning through stacked neural nets, and application of GPUs to neural nets – resulted in the generation of truly astronomical amounts of data and provided the tools to exploit it. As the world emerged from the Great Financial Crisis of 2008-2009, data was decisively transformed from a mostly valueless by-product – “data exhaust” – to the “new oil”, the essential capital asset of the data-driven economy, and the “new plutonium” when deployed in social and political applications. This economy featured steep economies of scale, powerful economies of scope, network externalities in many applications, and pervasive information asymmetry. Strategic commercial policies at the firm and national levels were incentivized by the newfound scope to capture economic rents, destabilizing the rules-based system for trade and investment. At the same time, the new disruptive general-purpose technologies built on the nexus of Big Data, machine learning and artificial intelligence reconfigured geopolitical rivalry in several ways: by shifting great power rivalry onto new and critical grounds on which none had a decisive established advantage; by creating new vulnerabilities to information warfare in societies, especially open societies; and by enhancing the tools for social manipulation and the promotion of political personality cults. Machine learning, which essentially industrialized the very process of learning, drove an acceleration in the pace of innovation, which precipitated industrial policies driven by the desire to capture first mover advantage and by the fear of falling behind. These developments provide a unifying framework to understand the progressive unravelling of the US-led global system as the decade unfolded, despite the fact that all the major innovations that drove the transition were within the US sphere and the US enjoyed first mover advantages. This is in stark contrast to the previous major economic transition to the knowledge-based economy, in which case US leadership on the key innovations extended its dominance for decades and indeed powered its rise to its unipolar moment. The world did not respond well to the changed technological and economic conditions and hence we are war: hot war, cold war, technological war, trade war, social war, and internecine political war. This paper focuses on the role of technological and economic conditions in shaping geopolitics, which is critical to understand if we are to respond to the current world disorder and to prepare to handle the coming transition in technological and economic conditions to yet another new economic era based on machine knowledge capital

Keywords: data-driven economy, DDE, knowledge-based economy, KBE, digital transformation, machine learning, artificial intelligence, machine knowledge capital, MKC, economic rents, China, United States, European Union, Russia, geopolitics, geoeconomics

JEL Classification: F13, F52, F55, F63, L40, L52, O30, K21, K24