Complete Japanese Translation (ZIP file containing all chapters)

Individual chapter PDF files
– Forward by Translator
– Profile of Translator
– Preface to Japanese Translation (by Author)
– Foreword (by Murray Turoff)
– Preface
– Chapter 1: Intimations of a New Order
– Chapter 2: Virtual Organization
– Chapter 3: Information Commodities
– Chapter 4: Mobile Capital and Instant Payments
– Chapter 5: Standardized Business Relationships
– Chapter 6: Emerging Virtual Enterprises
– Chapter 7: Privatization of Government, Expatriation of Business
– Chapter 8: A New Political Economy
– Chapter 9: The Virtual Manor: Consumption, Work, and Identity
– Chapter 10: The Virtual Manor: Family and Community
– Conclusion
– Bibliography

Virtual organization presents two different faces to the world. One face reveals an ability to enhance the efficiency and effectiveness of management, and to achieve greater flexibility of action. The other shows the dissolution of traditional relationships in the course of realizing these desirable ends. In a word, virtual organization is a disturbing agent of social change and thus provokes ambivalent responses. It is most clearly evident as an innovation in business management, especially within multinational firms and in e-commerce. But virtual organization has implications for society as a whole and is thus treated in this book in its broad social context.

It is neither possible to understand nor to exploit this innovation effectively without delving into its social roots and implications. The virtual team, for example, can be an effective instrument for leveraging resources within a company in carrying out a project; but it relies on mediated communication, rather than face-to-face interaction, making it more difficult to develop mutual trust among team members. Establishing trust in this new kind of social environment poses challenges of a social and psychological nature that require managers to look beyond normal business practices.

The management principle that underlies virtual organization is dependent upon loose coupling between social units. To achieve improvements in efficiency, effectiveness and flexibility, it is essential to keep cooperating parties at arms length from each other. If, for example, a supplier is bound to a company by strong social ties, it is not possible to switch to a new supplier without serious disruption to the company. It is evident that virtual organization requires computer-communications infrastructure for its realization. Equally indispensable are information markets, standardized organizational interfaces, and risk-management tools needed to support loose coupling between social units.

These innovations challenge traditional patterns of social interaction. Information markets are extensions of labor markets. Just as the latter supplies labor as a commodity, the former serves up knowledge, skill and information in the form of computer-based products and services. One major stimulus to the growth of information markets is software re-use. Although still immature, software component markets are destined to become a major factor in software development. The aim of software re-use is to improve the software development process by lowering costs, increasing efficiency and enhancing reliability. These ends are to be achieved by reducing dependence on human programmers. Such reduced dependence is central to the purpose of information markets in general which aim to substitute computer-based for human-based knowledge in production.

Standardized social interfaces are needed to transform outsourcing into routine management practice. Changes in business relationships entail costs and often cause problems. Switching from contractor S to contractor T for some service, for example, involves at the very least altering database entries in accounting systems, and may also require legal work to produce new contracts. What is more, even small incompatibilities between T’s service and the one provided by S, or misunderstandings between the new contractor and the contracting organization may cause serious problems. These issues are clearly recognized in the literature on outsourcing.

Protocols that standardize interfaces between organizations and individuals will help to resolve these issues in a way that is familiar from the history of standardization in manufacturing. Instead of screw threads, social protocols apply to connections between social units, but the function is the same in both cases, namely, to make parts – whether physical or social – fit together with little or no adjustment.

In addition to information markets and standardized interfaces, virtual organization requires instruments for managing risk. The evolving management paradigm facilitates switching between contractors and partners on a global basis, and switching may intensify the exposure of businesses to political, currency and trading risks. Financial tools such as futures and options contracts have been used for several centuries. These tools have been extended and refined in recent decades to enable the use of sophisticated hedging strategies suited to the risks of conducting business in a fluid international arena. Moreover, global computer-communications infrastructure makes it feasible to offer round the clock electronic trading instead of being confined to the limited hours of the New York, London, Tokyo or other traditional stock exchanges. Being able to buy and sell anywhere at any time further reduces business risks in the often turbulent international environment.

As noted above, the socio-technical innovations needed to realize virtual organization pose a challenge to traditional patterns of social interaction. Implementation of the management paradigm underlying virtual organization favors a particular personality type, one capable of forming and dissolving social ties at will, guided by criteria of self-interest largely devoid of emotional content. Trust and loyalty need to be re-defined for such personality types. However this may be, it is clear that virtual organization weakens attachments of loyalty to persons and places. More generally, it signals the loss of community and attenuates the power conferred by group membership. If the advantages of virtual organization are to be secured without unduly weakening affective ties and group solidarity, some – as yet undetermined – adjustments in its application will be required.

Virtual organization is attractive because it extends personal freedom by allowing organizations and individuals to define and re-define themselves easily. At the same time it poses tough challenges because it tends to minimize affective ties in human relationships and thereby may diminish the cohesiveness of traditional groups and communities. However it unfolds as a socio-technical innovation in the future, virtual organization will be incorporated into the standard operating procedures of management simply because it confers competitive advantage.

Overhauling and strengthening regulatory oversight of financial markets is a sensible step, but not enough to prevent a recurrence of the frenzied pursuit of profit that precipitated the crisis. Not all mortgage lenders succumbed to the lure of higher profits through securitization of loan portfolios.

Many local and regional banks, for example, continued doing business as of old. They held to the traditional policy of making prudent loans to qualified borrowers in their communities, and keeping on their books the mortgages they issued to home buyers. Such policy acts as a brake on greed by underscoring the lender’s interest in making sure potential borrowers can repay their mortgage loans; it also reinforces prudent behavior on the part of realtors and appraisers because the lender needs a realistic assessment of the market value of a house as collateral for a loan. Moreover, by insisting on documenting income sources, traditional policy reinforces the honest behavior of borrowers.

The essence of traditional policy is a direct connection between lender and borrower. When that connection is broken by securitizing mortgage assets, the incentive for actors in real estate and financial services to act prudently and ethically is substantially weakened.

A marketable security based on mortgage assets is an abstract financial instrument that carries no information about borrower and lender. An investor who purchases such a security is concerned only about its current price, potential for future price appreciation, and the dividends it pays. There is no direct relationship in the financial marketplace between borrower and investor or between lender and investor.

The parties to a real estate transaction are related to each other only by the formal roles they play in the transaction; the informal relationships that are essential to reinforcing appropriate behavior in any group are entirely absent. So, it is not surprising that predatory and abusive lending practices had become widespread, and that lenders were less than eager to meet with financially strapped borrowers to resolve problems.

The set of relationships defined by a real estate transaction has come to resemble a virtual team in which the members are place markers for required roles. Each role – agent, broker, lender, and borrower – can be played by one individual today and another tomorrow. Ideally a virtual team shares a common purpose. The parties to a real estate transaction may or may not have a common purpose. Be that as it may, even if there were a shared goal, it would be extremely difficult to ensure that each member of a virtual team contributes to that goal to the best of his or her ability, since personal relationships are weak or non-existent.

If transactions in the financial marketplace continue to reflect the kind of disconnection prevalent among the individual and institutional actors in the real estate bubble, the absence of effective mechanisms of social control evident in virtual teams will inevitably facilitate new crises in the future.

The process of purchasing a house consists of a long chain of transactions starting with a ‘meeting of the minds’ of buyer and seller, usually mediated by a real estate agent representing the seller. Once an agreement has been reached, the buyer must arrange financing. Here is where the trouble starts.

Let’s say the buyer uses the services of a mortgage broker to find a bank or other lender willing to issue a mortgage on the house. Having no responsibility for the future behavior of the buyer, and receiving a fee for its services, the mortgage broker’s interest is to place as many mortgages as possible. Real estate agents and property appraisers have a similar interest. Both work on fees or commissions based on sales, so their aim is to generate as many sales as possible.

In the ‘old’ days – before the housing bubble of the past decade – the bank or mortgage company issuing a mortgage on a given property would generally hold the paper until the debt was discharged. This relationship between home buyer and lender changed as mortgages were bundled into pools of financial assets to be securitized and sold. With securitization the lenders’ interests became aligned with those of realtors, appraisers and mortgage brokers.

Commercial banks and other mortgage originators realized they could increase their profits through securitization. By using pools of mortgages as assets for new classes of securities, and selling these securities to investors, additional funds could be made available for yet more lending. Investment banks entered at the end of the chain to package, underwrite and sell the mortgage-based securities to investors.

None of the actors in this chain was overly concerned about the borrower’s ability to repay a loan. Borrowers’ equity increases when house prices rise. Under these conditions even subprime borrowers could cope with adjustable rate mortgage resets by using the additional equity to refinance their loans. Alas, all good things must come to an end, and house prices cannot rise forever. When prices ceased to rise, and adjustable rate mortgages reset higher, many subprime borrowers could neither make their payments nor refinance their loans.

Mortgage holders started a wave of foreclosures that eventually depressed house prices by increasing the inventory of houses on the market. The wave of defaults and foreclosures led to price declines for mortgage backed securities, and suddenly major financial institutions had to take write downs on billions of dollars worth of securities on their balance sheets. This led to the collapse of major financial institutions and necessitated intervention by the Federal government.

A vast amount of ink has already been spilled on this issue, so why retell the story here? Missing from the picture painted by the media is the underlying cause of the debacle. No doubt greedy and unscrupulous lenders, real estate agents, property appraisers, mortgage brokers, commercial and investment bankers and rating agencies, together with irresponsible borrowers are the villains of the piece. But greed and irresponsibility have always been with us and these human traits are not likely to disappear any time soon. It is necessary to identify the greedy, unscrupulous and irresponsible parties, but such identification is not sufficient to prevent a recurrence of similar behavior in the future.

To be continued in Part 2 …

The first reflection (to appear soon) will focus on a symptom of the drift into virtual feudalism, namely, the resurrection of indentured servitude. A college degree has long been the ticket to a stable job assuring at the very least a middle or upper middle class life style. However, the cost of the ticket has increased to the point where relatively few families can afford to absorb all of it. As a result, students incur substantial debt in the course of obtaining a college degree. Being saddled with $30,000 to $50,000 or more in debt obligations upon graduation limits a student’s options. For the lucky few whose ambition in life is to make a lot of money, and are able to do it, the obligation can be discharged fairly quickly. Those with other ambitions may not be so fortunate because the debt burden will of necessity influence their career choices. A low paying public service job, for example, is not a realistic option. Nor is it possible to explore the world a little before putting one’s nose to the grindstone.

The increasing cost of higher education can be traced in large measure to declining sources of governmental support. I will make the case that this trend is a consequence of applications of virtual organization that support and encourage shifts in power and resources from the public to the private sector.

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“Before Internet (BI), the historian Stavrianos (1976) wrote, “The Western world today is re-experiencing the decay and despair of its early post-Roman centuries.” Despite opposite causes – technological stagnation in the Roman Empire versus unbridled technological development in the modern West – both periods bear similar marks of decline…”

Reviews:
“…is a meditative and thought-provoking discourse on how modern information technology molds and transforms society itself… Virtual Organization is highly recommended reading which delves deeply into serious and complex forces driving the growth and change of our modern society.” – Library Bookwatch Review

“Does what few, if any, works on information technology and its impact on society do — it goes beyond mere descriptives to offer a carefully argued theory of how it is that this technology has so dramatically and permanently reshaped social institutions the world over. Like Karl Marx and Adam Smith before him, Mowshowitz turns to the forces of production as the key to understanding the essence of this technology. The neo-feudalistic picture of society that emerges is surprising and provocative. This book is a “must read” for anyone interested in technological innovation and the future of society.” – Dorothy McKissick President, Jacquard Corporation

“With historical analogy, and interdisciplinary acumen, Abbe Mowshowitz dissects the global virtual organization which, if not checked, is likely to usher in what he calls virtual feudalism. With concepts borrowed from mathematics, computer science, and international business, Mowshowitz shows that the new virtual organization has the hallmark of displacing the nation-state as the main wielder of authority and appropriator of social services and basic needs of the citizenry…. An intriguing book which puts it into a class by itself.” – Elia Zureik Professor of Sociology, Queen’s University

“Mowshowitz has an enviable knack for bringing social and historical factors to bear on our understanding of the consequences of technological change…. Some of his views of potential outcomes may be shocking and disturbing, but they cannot be ignored. In other writings he has pointed out the need for “radical criticism” as a necessary perspective on understanding technology and guiding society. In this book he has clearly taken his own advice. The result is a very refreshing and stimulating view of the future and the issues we must face.” – Murray Turoff, Distinguished Professor Information Systems Department, New Jersey Institute of Technology