Topic: Technology
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Evgeny Rogovsky

PhD, Economics. Center for Military and Industrial Policy Institute for US and Canadian Studies

The Democratic-led U.S. administration and hi-tech community located in San Francisco (often referred to as Silicon Valley) have always relied on each other. But according to recently published articles, there appear to be complications in their relationship. Currently, the most divisive difference between them seems to be innovations associated with the anonymous digital currency (“bitcoin”).

The Democratic-led U.S. administration and hi-tech community located in San Francisco (often referred to as Silicon Valley) have always relied on each other. But according to recently published articles, there appear to be complications in their relationship. Currently, the most divisive difference between them seems to be innovations associated with the anonymous digital currency (“bitcoin”).

Silicon Valley, Wall Street and Washington

Wall Street is often criticized, but it also has many defenders who argue that without Wall Street, Silicon Valley wouldn’t exist. Studies of the initial capital in start-up companies show that 75 per cent of the original capital is brought in from foreign financial markets. The authors of one study, Alicia M. Robb and David T. Robinson, have also found that firms that take advantage of external loans have been the most successful.

In fact, without the capital attracted from outside Silicon Valley, it simply could not exist. It is widely known that most of the initial investment in Apple was provided by private angel investors (family and friends). However, the impressive growth of the corporation was made possible with the help of the capital attracted in the financial markets.

This suggests a close connection between Silicon Valley and the capital markets, the financial institutions of Wall Street in particular.

REUTERS/Jonathan Ernst/Pixistream
Julien Nocetti:
Obama: Silicon Valley rather
than Putin

On the other hand, Silicon Valley has always been deeply affiliated with the federal government. In his well-known book The Party Is Over: How Republicans Went Crazy, Democrats Became Useless, and the Middle Class Got Shafted, former Republican Party member Mike Lofgren, who served for 28 years in the U.S. House Committee on the Budget and the U.S. Senate, notes, “the National Security Agency and the CIA could not do what they do without Silicon Valley. In effect, it became part of the activities of the NSA. The heads of some companies are definitely trying to hide that fact.”

 “Internet Freedom”

“Internet Freedom” is a priority in the international communications and information policy in the U.S. Department of State. In 2013, the Department of State’s total investment in innovative programmes exceeded $125 million. Through this policy, the United States classifies the principles of “Internet Freedom” to the democratic values ​​of the highest order, and believes that the use of uncensored communication should be a right to all worldwide citizens.

The U.S. Government considers “Good Users” (those who do not violate US laws) "free citizens," who do not have a nationality and do not recognize any state sovereignty within global cyberspace. Under the pretense of protecting those users’ rights, the United States justifies intervention in the internal affairs of other countries.

A part of the programme includes projects that help create and promote specialized online tools to circumvent firewalls that governments of certain countries use to censor national segments of the internet. Today, as indicated by the American press, more than one million people living in such countries use online tools on a daily basis to get past national firewalls. (This is usually software code that allows users to communicate and publish materials online by sending their internet traffic through other countries to avoid being spotted by national law enforcement agencies and maintain some anonymity on a national scale.)

Hillary Clinton has repeatedly said that the United States would use these methods to “help” dissidents in China, Iran, Syria and other countries, whose authorities filter content available to its citizens. According to The Washington Post, the creation and distribution of such instruments is paid for by the U.S. government under the “Internet Freedom Act.” In particular, the U.S. Department of State, along with the independent U.S. government Office of Technology, Services and Innovation of the Broadcasting Board of Governors, finance this project for non-profit organizations and commercial companies.

President Obama at the White House
Science Fair on April 22, 2013

Michael Horowitz, who served in the Reagan administration, has shown support for the “Internet Freedom” programme, believing that the fight for Internet freedom is the Cold War of the 21 century. “I can’t imagine anything more cost-effective or strategic for the United States to do,” he said, while calling for an increase in annual funding for the “Internet Freedom” project to $100 million.

The tools and means (software) used for getting around censorship in China and other countries are known as “Ultrasurfing” and are in great demand throughout the internet. Since millions of people in countries with state censorship have modern communication devices, but do not have computers, the United States has developed a version for mobile phones. The peak traffic times for these programmes are usually noted during times of crisis and political instability, when many users try to access independent information and news at the same time.

Other tools of this kind are CGI proxies that have been created within the Tor Project, which have become popular among drug traffickers and other criminals online acting. The criminalization of “Internet Freedom” was noticed by the staff of the Tor Project themselves, but they argued that this was the price to pay for distributing tools to counter censorship. “Criminals are always the first to adopt new technologies,” said Karen Reilly, director of engineering for the Tor Project.

The concept of “Internet Freedom” is at the heart of the global open financial markets. More than ten years ago, University of California Professor of Economics Maurice Obstfeld noted that this trend of the 1990s “has restored a degree of international capital mobility not seen since this century’s beginning.” [1].

The Shaky Relationship between Silicon Valley and the White House

Despite the generally positive attitude of Silicon Valley towards the Obama administration, it has for various reasons been noticeably cooler over the past year.

Members of the hi-tech community were shocked by the fact that the U.S. President supported military action in Syria. In particular, the U.S. internet company bosses admitted that they “just groaned in irritation” when it came to light that the National Security Agency (NSA) had used technologies developed in Silicon Valley to spy on American citizens. The clearly unprofessional launch of the website also unnerved sponsor companies of the Democratic Party.

Another reason for frictions was the systematic contributions to the campaign funds of both Democrats and Republicans. In 1997 and 1998, politicians raised about $195,000 in Silicon Valley per month (in 1993 and 1994, the monthly donations amounted to $117,000). We do not have any information on monthly contributions in 2014, but according to the above comparison the total amount is to the tune of $500,000.

Hi-tech companies have largely contributed to the rapid political rise of Barack Obama. According to the Center for Responsive Politics, computer and internet companies made contributions of about $7.8 million to his 2012 election campaign, more than double the amount raised by his Republican opponent Mitt Romney.

The corporations of Silicon Valley are well aware of the importance of political lobbying. But "we do not want to just give money to politicians, who have not grown up in the technology industry, who do not realize how important it is, how fragile it is, and how hard it is," said Reed Hastings, President of TechNet, an association that lobbies for the hi-tech industry and businesses.

At the beginning of the 21st century, the СATO Institute published a text by T.J. Rogers listing reasons of why Silicon Valley should not normalize relations with the Federal Government of the United States. One of the most important reasons is that the ideology of Washington politicians is hostile to both hi-tech capitalism and to the modern process of creating real wealth in general.

What Does the Future Hold?

In conclusion, the question about the differences between Washington and Silicon Valley seems very important. Silicon Valley, the largest financial institutions in New York and Washington have long struggled for cultural and economic influence, as well as young talent. There is a storm brewing in Silicon Valley that is developing into a war with the rich.

The internet has dramatically reduced the cost of all kinds of telephone communication, making them widely available and, more importantly, separate from commercial monopolies such as the old AT&T. However, it turns out that innovation on the internet is a double-edged sword, one that can easily be turned against the Federal Government of the United States.

Back in late 2013, the Wall Street Journal published the opinion of respected Stanford University professor Balaji S. Srinivasan, who is also a successful businessman and geneticist. He claimed that Silicon Valley aspires to be a leading national “centre of power”, while all other (non-technological) centres can be considered “irrelevant from the point of view of the country’s future.” He was supported by other experts who believe that the most wealth is now being created not in New York, Washington or even in Los Angeles, but in Silicon Valley, whose hi-tech companies are at the heart of innovation and can play an important role in addressing global problems.

A real drama is currently unfolding between Silicon Valley as “an island of entrepreneurial capitalism and real freedom,” and Washington, which represents the state bureaucracy, striving to restrict the freedom of entrepreneurship and get control over the resources of rich companies. After the revelations of Edward Snowden, the corporations of Silicon Valley began to protest against the actions of the NSA.

Serious problems have arisen in the field of government contracts (including defence contracts). Silicon Valley is no longer a major supplier to the government and mainly sells its products to private individuals and companies, rather than the military. After the financial crisis of 2008–2009, hi-tech companies eschew the problems that modern America is facing. Most venture capitalists, super rich angel investors and managers of startups turned their focus to the development and sales of mostly meaningless applications for social networks, and to solving “the problems of the rich.” Many show their contempt for the real social problems plaguing America and do not accept overly stringent regulations of the contract system (for example, the majority of hi-tech companies refuse to disclose data on the gender, race and age of its employees, claiming that such data is a trade secret) and do not wish to have anything to do with government contracts.

One of the main problems is the United States’ financial system. Different camps in the country are now fighting for the right to shape it. There are two fundamentally different ways of its future development: transparent and anonymous (which are generally poorly reflected in the stark differences between the views of the Republican and Democratic parties of the United States).

The bitcoin economy

With regards to transparency, we are talking about the development of technology for the collection and processing of large data, in other words, the U.S. government’s capacity to control the financial operations of business (e.g. tax payment) and, ultimately, the whole body of relations between the Federal Government and the people.

On the other hand, the supporters of greater anonymity focus on innovations that enhance the confidentiality of financial transactions (e.g. a peer system of direct contacts between the users of information networks, as well as an anonymous cryptocurrency commonly referred to as “bitcoin”).

It should be emphasized that from the point of view of information technology, the "bitcoin" payment and settlement system is a specific internet protocol based on the CGIProxy systems of the Tor Project. Thus, the instruments for circumventing state censorship commissioned by the U.S. government have laid the grounds for new and effective tools for tax evasion (in other words, for undermining the economic well-being of the government).

As far as bitcoin and related technologies go, Silicon Valley is clearly ahead of the U.S. Federal Government, as the politicians in Washington are not accustomed to it. They do not yet see the possibilities of using bitcoin for their own well-being and instead regard it as a very unreliable and speculative financial instrument at best. Therefore, Washington is trying to contain the growth and expansion of bitcoin throughout the technology industry.

However, bitcoin is becoming increasingly popular among Silicon Valley businesses, who consider it the epitome of the highest technology that will certainly dominate in the future. The relatively high popularity of bitcoin among customers of leading IT companies, such as Overstock, Dell, and Microsoft, convinced these companies to accept bitcoins as payment for their products. Many firms in Silicon Valley have invested millions of dollars in bitcoin, believing that the emerging trend of the bitcoin purchasing power growth will continue.

Moreover, at the beginning of April 2015, the global telecommunications giant Orange unveiled plans to open a special company to work with the bitcoin currency in Silicon Valley.

Apparently, President Obama is now facing a tough choice. He used to support Silicon Valley and all its innovations. However, his very position precludes him from supporting the creation and development of an uncontrolled currency system that undermines the U.S. tax system. In the immediate short term, relations between Washington and Silicon Valley will largely depend on whether the U.S. government can control the circulation of the virtual currency or not.

According to recent news, the New York-based IBM corporation intends to use bitcoin technology to create a new state-controlled virtual currency to compete with bitcoin. It appears that this currency (which would replace the dollar!) might be able to take on the dollar-dominated U.S. currency market, if the Republicans win the presidential elections in 2016.

[1] Obstfeld M. The Global Capital Market: Benefactor or Menace? // Journal of Economic Perspectives, Fall 1998. P.11.

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