How intelligence moves to the fringe of the network: an interview with author Michael Lewis

(The idea for "Next: The Future Just Happened" came to Michael Lewis while he was doing research for his book "The New New Thing." Lewis, who also wrote the much-acclaimed "Liar's Poker" about his years on Wall Street, consistently found himself running into people -- particularly young people -- who were using the Internet in ways not always anticipated by experts, or the media. These people became the basis for both this newest book, and TV series, about how the Internet is shaping our society, not always as we hoped it would it. Recently, Lewis talked to us by phone while on the road for his book tour. Here is part one of that conversation:)

Monitor: I wanted to start off talking about one of the quotes in the book that really interested me: "Intelligence always moves to the edges of the network." Can you expand a bit on that, and how you saw it happening in the research that you did for the book and the TV series.

Lewis: Andy Kessler, from whom that comes .. It's an aphorism in Silcon Valley, you hear it now and then. But Kessler was particulary useful, because he was not just a financial person he was a technologist too. He had worked at Bell Labs. I think that that phrase come from his days at Bell Labs.

When technologists say that, they are talking specifically about the consequences of ever faster processing power. They saw in the computer world the center crumble. There used to be great super computers everywhere. Remember Cray. Remember back in the days when people talked about supercomputers and the computer everybody talked about was Cray. In a big room behind bullet proof glass and so forth. Well, you don't hear about that so much any more because the PCs on the fringe have gotten so much faster. They can do so much more than a supercomputer 15 years ago could do. It's a technical metaphor that comes out of the computer industry. But it's a metaphor that I found interesting applied to social situations.

The first instance when it was really clear to me that it applied was in the capital markets. You could see it starting, oh, around the time the Internet went boom, maybe a bit before, the drift of financial people out of the big financial institutions ...

I take that back. When it really started was in the 80s with leverged buyout firms. And since then capital has been gropping toward the fringes in a way it never really has and capitalists have too. This was shocking to me because I came of age financially at the center of things in this big institution, Soloman Brothers, that controled large chunks of the financial markets and where everybody assumed, probably correctly, that the smartest people would work for a place like a Soloman Brothers or Goldman Sachs.

That was only 15 years ago, 1985 when I went to work for them. Since then, that conceit has completely disappeared. Everybody understands, even now and this is what is so interesting, even now, after this choas that has gone on in the stock market, that the action is in private equity of one form or another. And the action is being out there with little guys who are starting things. But outside the big corporations.

That's a really interesting development because that means that these resources are available to people who are on the edge of things, people who are not in big hierarchial organizations. And therefore it creates this huge incentive for intelligence to drift that way because there are resources there for them.

I think the Internet is a great accelerator of this trend, because it brings information to the fringe. And the farcical stories that I've related in the beginning of the book -- Marcus Arnold (a 15 year-old who built a following giving legal advice on the Net) is a real farce, Jonathon Lebed is something more than that -- but Jonathon Lebed is a great example of the fringe being empowered. (Lebed was a 14 year-old who made more than $800,000 trading online and was the subject of an SEC investigation.)

I think the world changes so fast. It either changes so fast or it changes so suddenly, I can't decide which, but it changes and people just ignore the fact that it has changed. It is amazing to me that the Jonathon Lebed story was regarded as a curiosity when it hit, rather than as something that is actually profoundly interesting. That a 14 year-old boy could have at his fingertips esentially all the information that a Wall Street trader could have. And could figure it all out, sort through it, and then simulate a Wall Street life out of a suburban middle-class New Jersey home.

Monitor: The fascinating part for me was the way his friends responded to it.

Lewis: That it spread. That fifth period study hall was a little Wall Street. I mean it's great. What I probably failed to convey in the book as well as I should have, is just how inverted the relationships had become between the young people and the old people. The kids, some of these kids were running their parents' pension funds. The parents saw that the kids were good at trading on the market and just ceded this responsibility to the kids. Which is an amazing thing. And the kids just thought it was kind of normal.

I mean, when you were in high school was there a group of sophistocated business types? There wasn't anybody like that I can remember in mine. There were a group of kids in this high school who were little sharks. I mean, they were little capitalists, and they were starting businesses and thinking about busineses in terms ... I mean, there weren't Junior Achievement kind of terms. They were thinking, "I want to make six-figures by the time I'm out of high school."

Monitor: Earlier this week I was reading the NY Times and they had an interview with four of the big folks in high-tech in Silicon Valley. And the question of Napster and Gnutella came up, which are, of course, things that you are talking about in your book. And the quote that Judith Estrin, the co-founder of Packet Design, had, which I thought was quite amusing, was that when she was asked "How do you solve the Napster Problem?" her response was "You teach them some values."

Lewis: (Laughs) Right. Exactly. I did laugh when I read it because I thought, my goodness, you're going to be waiting a long time. Where does she think they learn how to do what they do? One of the unspoken themes of these kids' narratives, is that we live in a very hypocritical society. Where we want to teach our kids values that are different from the values of the marketplace. But that most people are living the values of the marketplace. And its not surprising that the kids do as we do and not as we say. And Jonathon Lebed is, again, a wonderful illustration of this.

Monitor: He is the poster child for that attitude.

Lewis: He was a quick study, he figured out how people moved stocks on Wall Street. They had the opportunity to go on CNBC and do it. He didn't, so he used the Internet instead. But that's how it works. But what was astounishing to me was when I got one this story, which was last fall sometime, I think that the SEC was genuinely ignorant about how Wall Street worked. And they said to me, in that uncomfortable, unpleasant showdown in Arthur Levitt's office (former head of the SEC), that the distinction between Jonathon Lebed and Wall Street ananylysts that I was missing, was that Wall Street anaylysts didn't own the stock they plugged.

I don't know if you've been watching the newspapers the last few weeks, but not only is it becoming clear that they own the stocks they plug, they owned shares in the company before it went public sometimes, making millions of dollars off these recommendations. There was one analyst who was shorting the stocks he was recommending. Once the boom bust and the dotcoms started falling, all these analysts still felt they had to keep their buy recommendations on all these stocks so that they wouldn't alienate the companies. But at the same time, this guy was shorting the stock. Telling other people to buy, and he was shorting it. Which is an amazing thing.

And how can you be morally outraged by a 14 year-old boy who behaves this way, when the pillars of capitalism are behaving this way. I just can't get my mind around that.

Monitor: One of the things that I was writing about in my weblog this week is that the RIAA is trying to force some ISP to knock users of Gnutella and Napster offline, to cancel their accounts...

Lewis: That's interesting! Don't you think that the end result is that someone else will provide these people with accounts.

Monitor: Yes, but the second part of the story, is that kids are now hacking into computers and using them as 'transit' points, and then going into chat rooms and telling their friends, "I hacked into this computer, you can download songs from there." And so they have three or four hours where they downloading songs like crazy until they are discovered, and then they just go and hack into a new machine.

Lewis: This was very clear to me...I didn't appreciate this until I sat down with Daniel Sheldon (a young English boy who palyed a key role in the promotion of Gnutella) and asked him to rip off some music for me, how irrelevant from his point of view the Napster suit was. It wasn't that he has any great technical aptitute. There were Napsters all over the world tht he could access that had huge databases of songs that he could download.

There are two things going on: one is a conversation between the big entertainment companies, the music labels, The Time Warners of the world, and the capital markets, where they are trying to persuade investors that their business is not fundamentally threatened by the technology. So the accounts in the press are very important to them, because perceptions shape financial decisions. And if accounts in the press say that all is lost, they concede the game. They realize that one day this technology is going to undermine their business, and that's when investors head for the door. That's one thing that's going on.

The second thing is that they can't stop it, but they are slowing it down. And I think that they think, and they might be right about this, that if they slow down the undermining of their copyrights, they might find a clever technical solution to the problem that enables them to capture the business. Bertelesman is on to it. If Napster can be designed so that people pay small amounts for downloading songs, it may be that most people would rather do that then go to the trouble of stealing it. If you make it easier to pay a little bit for it, a little bit, micropayments kind of thing, then maybe that would dissaude most people from piracy. And that might happen. That might be a new business model the music companies can live with.

Monitor: To use another example from your book, Marillion, what I see happening is ... the music companies have lost either way. Because if you do convince people to buy online, well, that will make it a lot easier for bands like Marillion, or other artists, to go "Why should I do business with a record company, when I can just set up my site, they are use to paying online, I can charge them a certain amount ..."

Lewis: You're right, this is what will happen. But what they are depending on is the inertia of the artists, which is probably considerable. And it will take some time. I'm sure they realize that if they aren't a dying industry, they are an industry in decline.

And what will happen is that intelligence will move out of the industry. Smart people won't want to work in the record industry. So it's going to be, like, savings and loans or government bonds, or other industries that were kind of hot, and that economic forces changed, and undermined them and made them kind of dull, and much less profitable and sexy. I think that's what will happen.

Or they maybe able to morph into something else where they are not just selling records. If you think what a record company is, it's several different things at once. For most musicians it's a bank. It bankrolls them. Well, Marillion has shown us why that won't be necessary, possibly. It's a distribution mechanism. Well, this is the great problem the Internet poses. The Internet is a much better distribution mechanism than record stores. But it is finally a PR firm. And the key to their PR strength is their relationships to the radio stations and record companies can get records played. And those relationships are valuable. And my guess is that is their most durable asset, is their public relations ability, so that is maybe what happens.

(In part two, coming Thursday, Lewis talks about how the Internet will change the political culture, and now many of the early supporters and architects of the 'Net are growing uneasy with what it may become.)