Balaji Shrugged: Network States and the Limits of Libertarian Maximalism

Crypto's Tom Paine tries his hand at Common Sense. The limits and opportunities for digital community in a physical world.

Spend enough time online and you’re going to hear the name Balaji Srinivasan.

His résumé says that Balaji is the former CTO of Coinbase and a current GP at A16z. But Balaji is not another tech operator turned VC. He has, to a certain class of Tech Bro, become the One True Prophet of the crypto-revolution.

Ben Horowitz described him as, “Einstein, if Einstein had the Internet.” Marc Andreesen said that he is “the man who has more good ideas per minute than anyone else in the Bay Area.” His early-2020 predictions on COVID were tragically accurate and have shaded him as an oracle in the tech world.

Two weeks ago, Balaji published a book claiming that crypto-networks will displace nation states as the key political structure of the 21st Century.

Now – I don’t know if you know this about me – but I’m a bit of a tech and politics nerd.

Shocking, I know.

So I couldn’t wait to get my hands on his book: The Network State.

After wrestling with it last week, I can best compare it to another favorite libertarian science fiction novel, Atlas Shrugged.

The ideas of both are interesting.

The execution: entertaining.

And both are liable to make you an asshole for up to a week after you read them.

But ultimately, neither vision passes the reality test.

And look - I could be wrong about this take. Balaji has proved skeptics wrong before. And even if his ideas are not prophetic, they are going to be influential. So it’s worth engaging with them and extracting whatever kernels of insights you can.

So that’s what we’re going to do here.

So, my dear friends, touch some grass. Take a deep breath. And let’s explore the anarchic libertarian future of Balaji’s Network State.

History as Prologue: The Worldview of The Crypto Movement

The contemporary world, as Balaji sees it, is broken.

That first premise, at least, is not controversial.

The internet has destabilized the old world order. It has empowered the People and undermined traditional media and government institutions.

Balaji posits that the world’s governments have two options for dealing with this volatility: the American model or the Chinese model.

The American Model is status quo. "Yes, social media is noisy," and, "Boy these populists are annoying." But America's governing class believes in their own ability to restore control over both media narrative and the state.

Balaji sees that as unlikely.

He believes that the American Model will collapse into American Anarchy.

The Left argues against any form of hierarchy. The Right argues for total autonomy. Both will undermine the state while stoking culture wars. The result is a militarized version of Twitter. A deadlocked state left powerless in the face of political violence between Antifa and Neo-Nazi militias.

If America is tending toward anarchy, Balaji sees China as the counterrevolution.

The Chinese Model promises stability. All it will cost is freedom. The Chinese are building a techno-authoritarian state. Balaji foresees ever-greater crackdowns on political dissidents. And more worryingly, he predicts this will work. It will entice copycat autocrats who will license Chinese technology to build their own Orwellian dystopias.

So that's the context of Balaji's pitch. If the current trends continue, the world will face a choice between anarchy or authoritarianism.

But, wait, a new hope!

Into this chasm, Balaji thrusts a new type of institution that can save us: the Network State.

Nation-states, Balaji, reminds us, were first predicated on the idea of national self-determination. “Nations” are groups that share a common culture and a common vision of the future. The “state” is secondary. It is the government that the nation institutes to protect its interests.

But if nation == culture, then our nations no longer adhere to geographic borders.

A progressive San Franciscan likely shares more of their values with a progressive Parisian than a rural Texan. So – Balaji asks – if our tribal allegiance is no longer localized to our geography then why should our governments be?

The claim, of course, is that they needn't be. And the rest of this book is set up to articulate how a new state -- based on shared values rather than shared geography -- might arise.

Citizens would opt-in to these networks. They would pay taxes, and receive social and financial benefits. If the network-state ceased to represent their values, they would have the “right to exit” for a new network.

This last point is critical. It ensures that each state has total buy-in for its policies. It's what Balaji terms "100% democracy." This contrasts it with our own faded 51% sort where we have to compromise with those idiots who disagree with us.

Balaji goes on to suggest that encrypted communication and cryptocurrency allow these digital states to operate free from government interference. This amounts to network sovereignty. As a result: it is only a matter of time until these networks receive diplomatic recognition from the UN or other “legacy” states.

It’s not quite as outlandish as it might seem. Consider this:

1. Our culture is online, and our online spaces are largely already split between red and blue. So, it isn’t too much of a stretch to say we already inhabit different nations competing for control of a single American state.

2. Many functions that we associate with government are provided by the private sector. That includes social insurance, education and defense.

3. Yes, the prospect of diplomatic recognition might seem remote. But we do live in a world where imaginary internet money is a reserve currency of two very-real Earth countries.

So – maybe not completely fanciful.

If I haven’t made my own bias clear enough: this vision is dangerous.

It is, as Ethereum founder Vitalik Buterin wrote, a wonderful solution for the rich. And a tragedy for the global poor:

“This is all great for skilled professionals and rich people. [...] But what about regular people? What about the Rohingya minority facing extreme conditions in Myanmar, most of whom do not have a way to enter the US or Europe, much less buy another passport?”

To my eye, the plan recalls Wilhoit’s famous quip: ““Conservatism consists of exactly one proposition: There must be in-groups whom the law protects but does not bind, alongside out-groups whom the law binds but does not protect.”

You don’t need to fear, though, because as it turns out – Balaji’s vision has some pretty glaring flaws.

L’état c’est inévitable

Balaji provides an admirable digest of theories on the proper role of a state in his book. But let’s go with the American Constitution since it will be familiar.

That document has this handy preamble that outlines the central functions of the state.

1. Establish Justice;

2. Insure domestic tranquility;

3. Provide for the common defense;

4. Promote the general welfare;

5. Secure the blessings of liberty for us and our children.

I think the Network State can lay a legitimate claim to establishing justice within its network. I even think its social contract – predicated on 100% consent – can claim to secure the blessings of liberty. But can it ensure tranquility, provide for common defense or promote the general welfare?

Not so much. That’s because there are a few areas where we really do have to compromise to live in a society with our fellow humans.

I know.

It sucks.

But as Churchill quipped about democracy: it’s the worst option except for all the others.

So let’s take those breakdowns one-by-one.

Domestic Tranquility

Domestic Tranquility refers to the ability of a government to keep the peace within its borders. It is what Max Weber calls the “monopoly on violence.”

Balaji doesn’t really offer much of a solution to how a Network State could prevent internal violence. He writes:

The short answer is that for a long time, it doesn’t – it leaves that to the surrounding legacy society [...] Eventually, if and when [the network state achieves] diplomatic recognition from a legacy sovereign – then it can potentially take on physical law enforcement duties.

So - to be clear - the Network State – despite its claimed sovereignty– will still rely on legacy states to keep its citizens safe. Those citizens will, of course, need to pay taxes to their police services. And that police will need their usual tools (an ability to periodically vet communications and seize assets) to enforce the law.

For the record, that’s the trade every citizen already makes by living in an organized society. Meet the old boss, literally the exact same as the new boss.

Common Defense

This whole “needing to protect ourselves in physical reality” thing is a pesky nuance for the libertarian. It gets even stickier when you consider war. How do network states protect themselves from the outside world? Balaji has some thoughts, but none of them is particularly persuasive.

Option 1: The group contracts for defense with a host nation. Balaji argues that this is what America’s allies do by aligning under the US Security Umbrella.

But those alliances have heavy strategic advantages for the US. They enable America to project global power from anywhere on the Earth. They offer resource and mutual defense commitments in the event of global war.

A Network State cannot offer these assets to the US or its would-be allies. They can only pay for defense. And at that point, they are just paying military taxes for the defense of a national government. So much for an independent state.

Balaji would like his network states to retain state protection while not being subject to the laws.

That does indeed sound like a utopia for those few.

But it sounds like more of the same bullshit to the many.

Option 2: War ceases to be feasible. Balaji writes:

“A key thesis of The Sovereign Individual – and an important argument for Bitcoin and cryptocurrencies more generally – is that if a government cannot seize money, then it cannot start wars. Why? If a state can’t coerce, it can’t pay to enforce conscription, or pay the conscripts themselves, or seize the money to pay for all the equipment needed to prosecute the expensive industrialized wars of the 20th and early 21st century.”

This makes perfect sense except that it's also totally wrong. States do not need to seize money. They need to seize physical resources. Money is an expedient tool for that seizure, but it is not the only one. So even in the unlikely event that fiat vanishes from the Earth, the state would still not lose its ability to coerce (or convince!) its own citizens to serve. Religion, identity, greed – all have historically done wonders for granting the state those powers.

And having the ability to raise coercive armies, it would retain the ability to wage war. So your private key is secure -- as long as you can tolerate the pains of physical coercion from a determined military.

So much for the Pax Bitcoin.

Promote the General Welfare

Network States are rooted in a libertarian ideal of self-determination. This is Friedman economics. Humans should not be compelled to do anything. They should only freely form agreements that serve their interests.

It's a nice story. But then again -- so is Cinderella. And both have similar claims on reality. The problem with the pure libertarian worldview is obvious to anyone who has taken a course beyond Econ 101.

There’s a reason that the private sector doesn’t build highways, conduct basic research, provide social security or offer free public education.

These are goods that are inherently non rivalrous and unprofitable. But that are nevertheless important for someone to pay for. Absent a benevolent benefactor, these goods will be under-funded. The traditional way to solve these problems is to require everyone in a society to pay for them. This is where a state comes in. It is the public good funder of last resort. It is the actor that keeps the Tragedy of the Commons from being an actual tragedy.

There’s also the small matter of regulating externalities. A company that causes terrible pollution to improve profits is acting in their rational self-interest. But their rational self-interest leaves the rest of us… what’s the word… fucked.

So to protect our common interests in things like a livable planet, we need a state to regulate them.

The coercive powers of the state do not only exist to make you less free. They exist to protect you from the worst impulses of your fellow man. Even in the beautiful self-regulating market of Adam Smith, the state exists to bolster the common welfare.

"But America," our friends without an appreciation for nuance might reply, "is a capitalist country!" Sure. Except for the 15-20% of our country that works in the public sector, and the 34% of our GDP they account for. Public goods are not a luxury. They are the fruits of civilization.

And, look I'm no socialist. There are many worthwhile experiments that should be conducted to make these public welfare policies more effective. Indeed – I’ve written about a few here and here – but reform is different from opting-out. A functioning society depends on people pursuing something greater than their self-interest.

The fun paradox here is that it turns out that pursuing a common good is actually in all of our self-interests in the long run.

On the Optimistic Case for Network Unions

There actually is a lot to like in the ideas Balaji proffers. But my buy-in rests on a critical amendment. The Network cannot replace the State, but it can augment it in powerful ways. Indeed, that’s what it should do.

And in doing so, it would be part of a long tradition.

As I wrote in my first piece, the first corporations were chartered because governments saw a need that they could not meet. Those corporations evolved into a robust private sector. It includes thousands of for-profit companies and nonprofit groups that meet the needs of Americans.

These groups depressurize our relationship with the state.

We do not need the government to meet the entire Maslow’s Hierarchy of Needs because we can turn to our family, our community, our private enterprises, and our civic associations. Much of the descent in the West that Balaji sees can be traced to the collapse of critical pieces of this broader social infrastructure.

As we sort our lives – our careers, our spouses, our choice of where to live – along the lines of our political ideologies, we become more and more removed from other people that share our geographic space. This makes dehumanizing them easier. It creates the exact context needed for the American Anarchy that Balaji warns about.

But the optimistic vision for DAOs and other Network Unions (as Balaji calls them) is not to facilitate a national divorce. It's to enable a national reconciliation.

A group that shares a religious identity can and should be able to connect to achieve things together. As should a group that cares deeply about eating Keto. As should a group that wants to volunteer to take care of immigrants. And even one who really like expensive JPEGs. These are critical elements of our social identity so creating structures that can formalize and advance them is an important function for DAOs.

Importantly, those groups do not and will not neatly cleave along political lines. They provide a cross-cutting segmentation of our society that can reintroduce us to each other. In that way, they can help us stitch back together our fractured state.

That’s not as sexy or visionary as a new form of government. But in the absence of a true alternative to the state — one that would serve the broader population rather than the wealthy few — it’s the best real hope we’ve got.