3. Anarchy = Chaos

When the trouble first ignited in March 2004, I was in Geneva, at a conference designed—ironically, it turned out—to promote reconciliation between Kosovo’s Albanians and Serbs. An adviser to Kosovo’s prime minister, a friend, drew me aside: “Three Albanian children have been killed,” she whispered conspiratorially, “by a Serb.” With deliberate portent, she added, “There will be trouble.” Curiously, she seemed excited by the news. It was as if she was relieved that, at last, something was happening.

Next day, back in Pristina, Kosovo’s capital where I then lived, it was clear that her premonition was correct.[63] Tension was palpable in that city’s polluted air, straining people’s faces. The rumors were widespread, amplified by irresponsible journalists: A Serb had driven three children to their deaths, the reporters claimed, by drowning.[165] Not only that, but they had died that horrible death in the Ibar, the very river dividing Serb and Albanian halves of Mitrovica, Kosovo’s most divided city.

That afternoon, at UN headquarters where I worked, we received reports of crowds gathering in towns and villages across the province. Suddenly, the security guards announced over the office loudspeakers that a large group of young men was approaching the headquarters. Soon, their chanting “U-Ç-K! U-Ç-K! U-Ç-K!”—roughly, Ooh-Chay-Kah—reverberated around the building, loud and aggressive. “UÇK” is the abbreviation for the Kosovo Liberation Army, the Kosovo-Albanian guerrillas who resisted Slobodan Miloševi’s repression, including during the 1999 war that led to the withdrawal of Yugoslav forces.

Without warning, the loudspeakers announced that the building was immediately to be evacuated. But there was no information on how the evacuation should proceed or where the UN staff would go. There was a sudden and anxious sense of panic. People began to run up and down corridors. Mobile phones stopped working—it was later discovered that the riots had overloaded the networks, partly because some had used their phones to organize the riots. For some reason, the elevators stopped functioning too. Some began to weep, perhaps with fear.

I was with my wife, who had come to my office for its greater security. My Albanian assistant, Besnik, took charge and ushered us down the fire escape and into a car. We drove out of the compound and back to our house. On the streets, groups of young people were gathering. Many were children. They looked excited and agitated. That night, the groups merged into mobs.

I had agreed that evening to take part in a television discussion with political leaders at the main television station in Pristina. As we set out driving to the studio, near our house a large mass of people blocked the streets. It was dark and I could not tell their number. The mass swelled and shifted; it had a shape and intent beyond its individual components. There was shouting and the bangs of what I thought at the time were firecrackers. I later realized it was gunfire. There were no police in sight.

The television debate was ugly. Along with an American diplomat, I argued that the riots must stop immediately. Parents should tell their children to go home. But the political leaders from Kosovo’s Albanian majority did not agree. According to them, the trouble was the UN’s fault. In their version, the riots had been triggered by the UN’s decision to allow Serb protesters from a village nearby Pristina to block one of the main roads to the south.

The Kosovo-Albanian leaders argued that the anger on the streets was legitimate protest at the many injustices Kosovars had suffered, past and present. From the tenor and aggression of the debate, it was clear that some of the leaders sensed a revolutionary moment where the UN, the de facto power in Kosovo, might be overthrown. They grasped the tail of the tiger. By the end of the program, my back was in painful spasm from the tension gripping me. I returned home through a city smoldering with violence.

Back at home with some Albanian friends, we sat listening to the gunfire and occasional explosions. A red glow appeared at our window. We looked out to see sparks and flames spurting into the air nearby. We realized it was the Serbian church at the top of our street, aflame. There was an awful sound: a bell ringing incessantly.

After a while, when things seemed calmer, my friend Ardi suggested we go out to see what was going on. We walked up our street to the church. It was ablaze like a summer bonfire, its steeple a column of fire. On top, the church bell rang with a desperate rhythm. The heat was somehow making it ring. Fortunately, there was no one still inside the blazing building. At last the bell stopped. Scores of young men surrounded the church. Their work done, many were sitting, gazing at the fire, smoking and chatting. Someone was selling cigarettes.

We walked away. Ardi, a Kosovo-Albanian, would not look at me. He was beside himself with anger and shame. Spent cases of plastic bullets and rifle cartridges crunched under our feet. The UN riot police had confronted the mob here. But they had been overwhelmed and retreated, leaving the church to its fate. All across Kosovo, the forces of law and order—the UN and local police and NATO peacekeepers—had lost control. In one town, a contingent of German soldiers had remained in barracks while a mob of thousands roamed the town for hours, moving from district to district, picking out Serb churches, houses and UN offices, ransacking buildings and putting them to the torch. When we later visited the town, we saw at its center a blackened hillside, studded with the shells of burnt-out houses, as if a forest fire had swept through it.

The next day, the violence continued. There were reports of busses transporting rioters around the province to attack different Serb enclaves. In southern Kosovo, a large mob was prevented from besieging a Serb Orthodox monastery by the intervention of a local Albanian former KLA guerrilla leader (he was later to become Kosovo’s prime minister). In the divided town of Mitrovica, where the Albanian children had drowned, NATO troops shot and killed several Albanians trying to cross the river to attack Serbs in the northern part of the city. Riots went on around the country into the night. Every UN office in the territory was attacked, more than a hundred fifty UN vehicles were destroyed. At least 550 homes and twenty-seven Orthodox churches and monasteries were burned, and more than four thousand people—mostly Serbs, but also Roma and other minority groups—were driven from their homes.[64]

Eventually, the violence died down. Local political leaders claimed that their calls to end the turmoil had worked, rarely confessing that these entreaties had been made under pressure from international officials. But in truth it appeared more that the chaos and violence had simply petered out. On the streets, the rhythm and the momentum of the violence pulsed through the city. Before the violence erupted, you could feel it build up as an urge needing expression. As the violence played out, that dark energy was ventilated. As it ended, somehow you could tell that the force that had driven the chaos and rage had at last been exhausted.

It is commonly held that society requires authority in order to enjoy peace and stability. Without such institutions—law, the police, the army—society will collapse into anarchy and disorder; the many will fall victim to the criminal few. In case we need reminding of what this might be like, movies abound with depictions of anarchy, even if often perpetuated by zombie hordes (28 Days Later, I Am Legend) or provoked by alien invasion (War of the Worlds). Either way, the anarchy shown is entertainingly terrifying. It seems there is only a fragile veil dividing us from the jungle. Television offers ceaseless titillating depiction—both real and falsified—of the criminals who lurk to destroy us, but for the thin blue line of law and order to hold them back.

But in these illustrations lies a clue. There is scant entertainment involved in the real and actual horrors of humanity—the Holocaust, the Khmer Rouge’s “Year Zero” or the butchery of Charles Manson. If anarchy were so close, and so awful, we wouldn’t find its Hollywood depiction entertaining; instead, we would find it horribly frightening, unwatchable.

One criticism of anarchism as a political strategy is so ubiquitous that it merely requires a reshaping of the word: anarchism = anarchy. Without a superstructure of institutions to maintain order, it is claimed, disorder and chaos will surely result—Hobbes’s “war of all against all.”

This is indeed a frightening prospect that few dare contemplate. When disaster strikes, like an earthquake in Haiti or a hurricane in New Orleans, it is never long before commentators, safe in their television studios, issue dire warning of social disorder and breakdown, as if this is more frightening than the original natural disaster. In post-Katrina New Orleans, reports of carjackings, rapes and murders flooded the news. Thousands of law enforcement agents were deployed from other states as Louisiana’s governor warned, “They have M16s and are locked and loaded. These troops know how to shoot and kill and I expect they will.” Police in one suburb neighboring the flooded city were so alarmed at the prospect of looters and other malcontents that they blocked the bridge from the city, preventing the hungry and desperate from getting help. Others cold-bloodedly shot fleeing refugees.

As the essayist Fareed Zakaria has noted, the federal government’s fastest and most efficient response to Hurricane Katrina was the creation of a Kafkaesque, Guantánamo-like prison facility in which twelve hundred American citizens were summarily detained and denied any of their constitutional rights for months.[65] Later accounts, such as Dave Eggers’s Zeitoun, told stories ignored at the time, like that of Abdulrahman Zeitoun, who after the hurricane paddled around the flooded city in a canoe offering help, ferrying neighbors to higher ground and caring for abandoned pets, only to be arrested by National Guardsmen and held incommunicado for several weeks without charge and without medical attention along with other Arab-American companions.

But as Rebecca Solnit has written, disasters in fact often produce the opposite of disorder in human society: instead of violence and anarchy, community and solidarity.[66]

A recent letter to the Financial Times makes a common claim: that civilization is fundamentally fragile and requires government to protect it. The correspondent cites the example of the arrival of the mutineers from the Bounty on the isolated Pacific island of Pitcairn:

When the nine Bounty mutineers and 17 Tahitian men and women arrived there in 1789 it was as close to the Garden of Eden as anywhere in the real world: generously endowed with water, sunshine and fertile soils, and uninhabited by anyone else. The perfect test of Hobbes versus Rousseau. In the event, Hobbes won. The British sailors fought among themselves and tried to subjugate the Tahitians. The Tahitians resisted and fought among themselves.

By 1800, 11 years later, only one of the mutineers, nine Tahitian women, and many children were left, most of the others having died unnatural deaths. The surviving mutineer created political order by establishing not just an autocracy but a theocracy, with himself as the link between God and man.”[67]

The writer concludes—quite reasonably, given the episode he offers as an example—by emphasizing “the importance of continued efforts to sustain governance organizations that bring together the specific interests that count most in the definition of a common (national, regional, global) interest, in order that, through repeated interaction, convergent interests will prevail over divergent ones.”

The writer’s conclusion is entirely correct. Unfortunately, however, it is not clear that contemporary political institutions, whether national or international, do in fact successfully give sufficient attention to the common interests of humanity. Instead, it’s increasingly evident that these institutions instead elevate the interests of the most powerful interest groups over collective interests, and neglect long-term primary needs, including the environment.

One can also argue that the worst outrages in human history occurred not in the absence of authority and government, but were instead perpetrated by governments claiming to act in the common interest: Nazi Germany, Stalinist Soviet Union, Khmer Rouge Cambodia—the list is a very long one. The criminal acts undertaken by these governments were permitted and in fact ordered in the name of the collective interest; the individual perpetrators were thus rendered immune. Democratic governments are also fully capable of terrible crimes, legitimized by government’s ultimate moral immunity of droit d’état, or “state interest” (on this, more later). But in any case, the correspondent’s argument is widely shared: Institutions protect us against ourselves, above all against what would otherwise prevail—chaos and disorder.

It’s worth examining this specific proposition in more detail by taking the opposite case: a thought experiment—imagine a world without institutions. And let us take a difficult context: the sometimes venal and secretive world of financial investment.

The gigantic Ponzi scheme orchestrated by the financier Bernard Madoff was the world’s largest fraud ever perpetrated by one man. It ruined thousands of investors and symbolized the most grotesque excesses of Wall Street. Despite the abject failure to catch Madoff by the government body established to police and regulate the investment industry, it was almost universally agreed that the best way to prevent such crimes in future was tighter regulation and scrutiny of the investment industry. The overwhelming reaction was that the government should have protected the innocent investors: Something must be done!

But there may be an alternative approach that overturns every assumption we have about how to deter, prevent and punish such crimes in future. It may be that the very rules and institutions established to protect us in fact do the opposite.

Madoff’s fraud was simple. He encouraged investors to deposit money with his firm, paying them returns that were consistently higher than the going rate. With the appeal of above-market and above all steady returns, Madoff had little difficulty in attracting new investors. Their fresh deposits would be used to fund returns to the earlier investors. All the scheme required was a never-ending flow of new investors, with deposits sufficient to fund the above-market returns to the earlier investors, and to pay off the occasional depositor who wished to withdraw their whole investment—and for obvious reasons, those wishing to withdraw from this cash cow of easy money were few.

Madoff and his coconspirators manufactured a huge volume of falsified reports and data to pretend that their fraudulent scheme was in fact a legitimate and highly successful investment business. Madoff’s cover was effective. On three occasions in the 1990s, he was elected chairman of the NASDAQ. By his own admission, he perpetrated this massive fraud for nearly two decades, and was uncovered only when the precipitous market collapses at the end of 2008 prevented him from raising the funds to pay off those wishing to withdraw their money. In the end, it was estimated, Madoff’s fraud cost his investors perhaps $20 billion.

Less simple is why a scheme of such magnitude and pervasive dishonesty succeeded for so long. Madoff lied systematically both to his investors and to the supervising federal authorities. In this criminal endeavor, he was apparently assisted by colleagues, some of whom have been prosecuted or face further investigation. But the scale of profits from his fund should have provoked more intrusive suspicion; few others within the industry tried to work out how his company could consistently make such high profits, against market trends, outperforming all competitors year after year.

The institutions designed to prevent such crime completely failed. The Securities and Exchange Commission (SEC), the federal body established in the 1930s to supervise the investment industry, conducted several investigations. Madoff himself has later said that he had “hundreds” of contacts with SEC staff.[68] Prompted by tip-offs from others in the industry who questioned Madoff’s fantastic profits, the SEC failed, however, to uncover the crime.

A later report on how the SEC missed Madoff found many failings: Staff were overspecialized, devoted to particular subsets of fraud and rewarded for pursuing that particular kind of crime.[69] Different parts of the SEC investigating Madoff were unaware of each other. Each individual part cleared Madoff of other allegations against him. Together, they managed to miss the big picture.

Elsewhere, the report revealed not only that SEC staff were often incompetent in understanding Ponzi schemes, but that Madoff intimidated SEC investigators because of his stature on Wall Street. The investigation at one point describes investigators as “enthralled” by Madoff: Some of them asked Madoff’s staff if they could work for him.[70]

This failure appears part of a disquieting pattern. It was only after the BP Gulf oil spill of 2010 that the many failings of the body assigned to monitor and regulate the oil industry surfaced. In the aftermath of the disaster, it emerged that the Minerals Management Service (MMS) had allowed BP to skip environmental assessments ahead of drilling the well that spewed millions of barrels of oil into the Gulf. MMS inspectors had also permitted oil company employes to fill out inspection forms in pencil, which they would then ink in. Others had accepted illegal gifts, consumed drugs and literally gone to bed with officials from the companies they were supposed to regulate.[71] One inspector had negotiated a job with an oil company while at the same time inspecting the company’s operations.

With Madoff, the financial industry’s own self-regulatory bodies did nothing to investigate or stop his suspiciously profitable activities. This was unsurprising given that Madoff was a prominent member of many of them. Madoff was at various times chairman or board member of the National Association of Securities Dealers, a self-regulatory securities industry organization. The Madoff family had longstanding, high-level ties to the Securities Industry and Financial Markets Association, the primary securities industry organization. Madoff’s brother Peter served two terms as a member of this organization’s board of directors.

Madoff was regarded as a dominant figure in the investment industry, one of the largest “market makers” at the NASDAQ. He and his company were major political donors: Notably, he gave nearly a quarter of a million dollars to both Democrats and Republicans, indicative not of any political preference, but more a naked purchase of influence. Some have suggested that his political connections, and links to the SEC, helped deter a more thorough investigation of his activities.

The testimony of financial analyst and would-be Madoff whistleblower Harry Markopolos to Congress, after the fraud was uncovered, was revealing. Giving evidence to the House of Representatives capital markets subcommittee, Markopolos said that he had investigated Madoff on behalf of a group of private investors.[72] After only a short examination of the numbers, he came to the conclusion that Madoff’s spectacular returns could be explained only by one investment technique: fraud. Markopolos testified that for nine years he had repeatedly tried to get the SEC to investigate and shut down the Madoff Ponzi scheme. The SEC had not only ignored these warnings, according to Markopolos, but was fundamentally incapable of understanding the complex financial instruments being traded in the twenty-first century. And here lies one clue to what might be done to prevent such crime in future.

Another lies in an uncompromising look at the investors themselves. Many suffered terribly from Madoff’s fraud, losing life savings, being forced to sell homes or return from a well-earned retirement to work indefinitely, their nest egg stolen. In many cases, their lives were utterly ruined. But why did these investors give their money to Madoff without the most cursory scrutiny of his company? Madoff’s returns were so implausible that any sensible investor should have held back, but many committed their entire life savings. Harry Markopolos told Congress that investing in Madoff was a “no-brainer” in that “you had to have no brains whatsoever to invest into such an unbelievable performance record that bears no resemblance to any other investment manager’s track record throughout recorded human history.”

Some commentators have suggested that one of Madoff’s techniques was to hint at a vague air of wrongdoing to help justify his otherwise inexplicable returns. The right to invest in his company was by invitation only, creating an air of desirable—and perhaps disreputable—exclusivity, that something special was going on, maybe something if not illegal then a little bit questionable: insider-trading perhaps, of some kind. For several years, potential investors who approached Madoff were told that the fund was “closed.” Such false allure is the classic sign of a Ponzi scheme.

In The New York Times, business commentator Joe Nocera has argued that for these investors to blame the government for their decision to give every last penny to Bernie Madoff “is like a child blaming his mother for letting him start a fight while she wasn’t looking.”[73] But here lies one explanation of why people may have invested in Madoff. The mere existence of the SEC, with its claim to supervise, scrutinize and protect, must inevitably lower people’s own sensitivity to risk. If the teacher is present, what is going on in the playground must be, in some way, acceptable.

Research suggests that when measures are in place to protect people from risk, they tend to indulge in more risky behavior. In his 2006 book Government Failure Versus Market Failure, Clifford Winston, an economist at the Brookings Institution, cites considerable and diverse research which shows, for instance, that people drive faster in vehicles that feel safer, cycle more dangerously when they wear helmets and take less care bathing infants when using child seats designed to reduce the risk of drowning.

This research makes sense. We tend to lower our guard when told that the coast is clear. Indeed, so evident is this fundamental human tendency that one can make a further, and perhaps provocative, presumption: that criminal frauds like Madoff are actually made more feasible by the presence of institutional authorities designed to prevent them. The evidence for this seemingly outrageous claim is in front of our noses: The fraud happened, right under the SEC’s nose.

Moreover, as the Madoff example has clearly shown, it is naive to expect any single authority to keep up with the massive complexity and dynamic changes of an industry like securities investment. There is a fundamental and insoluble imbalance in such supervision. Government bodies suffer the constant depredations of budget cycles, cuts and the intrinsic disadvantages of employers who can offer salaries equivalent to only a tiny proportion of those available in the industry they supervise. Given this fundamental and persistent power imbalance, it is surprising not that institutions like the SEC fail, as they regularly do, but that investors expect such institutions to keep up with the free-wheeling, greed-tainted and secretive world of securities investment.

On the broader scale, it is often claimed that the recent global credit crisis was caused by the absence—or more precisely, the withdrawal—of the correct controls on the financial industry. It is persuasively argued that it was the proliferation of certain financial instruments, collectively known as derivatives, and specifically “credit default swaps” (or CDSs), which helped spread the poison of the subprime mortgage crisis across the world. CDSs are essentially legalized gambling: They are bets on whether certain financial indices, like mortgage repayments or stock prices, will rise or fall; a financial instrument that Warren Buffett has called “financial Weapons of Mass Destruction.” Some have called them the twenty-first-century version of the “bucket shops” of the 1920s where people could bet on whether stocks could rise or fall without actually owning those stocks. The bucket shops were blamed for the wild speculation that helped fuel the Wall Street Crash of 1929. They were subsequently outlawed. In 2000, Congress passed a little known law that essentially permitted such betting again. As for the industry’s own alleged safeguards, banks paid the ratings agencies to rate and thus endorse the mortgage-based investment instruments that “sliced and diced” and concealed and spread the dangerous risk of subprime lending.

Many commentators have therefore reasonably concluded that the obvious answer is further regulation, to ban CDSs and rely on legislation to tame the industry. The problem with this analysis, however, so tempting in these turbid days, is that it rests on an assumption about the legislative process that is perilous indeed: that legislators act upon the interests of voters, and no one else. The law in question, the Commodity Futures Modernization Act, was passed in 2000 by a Democratic administration; it was proposed by the Clinton administration and passed quickly through both Houses. Not one member of Congress raised objections to this particular provision, which was secreted away in a bill of many hundreds of pages. Needless to say, that year the financial services industry, which strongly supported the bill, contributed large amounts to both Democrats and Republicans.

After the crash, politicians on both sides of the Atlantic roared their populist anger against the banks and mortgage companies that helped precipitate the crisis, then demanded massive government bailouts for their companies, while continuing to pay their executives grotesque bonuses. In all countries, political leaders queued up to decry the greed and swear their commitment to legislation that would “never again” allow such abuse to recur. But out of this bellowing public rage, the legislation actually delivered resembled more a mouse’s squeak.

The legislation is complex. In the U.S., the bill finally passed in July 2010, allegedly to “reform Wall Street,” is a document of thousands of pages.[74] Many of its provisions are highly technical in nature, allowing politicians to claim to an ill-informed public that the new law amounts to more than it in reality is. The press, in its complacency as the “fourth estate” in the body politic, did little to inquire into and explain the complexities. For instance, much was made of the prohibitions against “proprietary trading”; most people would have no clue what this actually is.

In fact, this prohibition, in any case very limited, will do almost nothing to prevent the kind of collapse that the global economy experienced in 2008 and 2009. Within months of the “reform Wall Street” legislation, banks were finding ways to circumvent this “Volcker rule” to limit trading—perhaps better known as betting—on their own accounts: precisely the activity that helped bring down Lehman Brothers in 2007.[75]

Most financial commentators agreed that there was one simple and easily explicable measure that would surely have limited the ability of banks to create the chaos that they did: limits on capital-to-loan ratios, i.e., require banks to hold more capital relative to their lending. In the confusion and obscurity of new measures, such rules were largely absent or, if present, in watered-down form. Instead, in a telltale signal that the necessary tough decisions had been dodged, Congress set up new bodies, and new mechanisms, to deal with these problems in the future. Likewise, amendments designed to address the problem of banks “too big to fail,” by limiting their capital and thus the risk they pose to the whole economy, were rejected. Instead of passing the necessary measures in the immediate aftermath of the crash, when they might have been politically possible, the congressional legislation empowers a new regulatory body to pass them in future, when without doubt still less political support will be available. In a sure sign that the legislation was indeed to the benefit, not detriment, of the banks, shares in all financial service companies significantly rose immediately after the Senate vote.

Meanwhile, at the global level, neither the G20 nor the global banking regulatory mechanism, the Basel Committee, have managed to agree on measures to ensure that banks hold sufficient deposits against lending. The “Basel III” proposals in 2010, celebrated by the banking industry as a major step forward, were judged by a more independent and disinterested group of distinguished academic finance experts as “far from sufficient to protect the system from recurring crises.”[76] Clive Crook in the Financial Times commented that the new Basel rules were an improvement on the preceding arrangements, but “not by much.”[77]

The reason for this failure is not hard to find. As soon as anyone suggested more effective measures, like higher capital-to-lending ratios, legions of banking industry spokesmen would rise as one to complain that such requirements would render U.S. financial companies “uncompetitive” in the global market place. The CEO of JPMorgan Chase, for instance, wailed that new financial regulation including stricter capital controls would be the “nail in the coffin” of big American banks, adding for good measure that this would “greatly diminish growth.”[78] This was a powerful argument in a country deeply mired in recession. But the argument rarely needed to be publicly advocated: There was precious little public debate on the bill, since politicians, both Democrats and Republicans, conspired to pretend that the bill had sharp teeth when in fact it was but a set of crummy plastic dentures.

This too was unsurprising, since the financial industry had taken care to donate generously to both sides. In advance of the congressional bill, financial institutions spent $1.4 million a day on lobbying; they had hired seventy former Congress members to their payroll, and 940 former federal employes. Senator Scott Brown, a Republican from Massachusetts, raked in “off-the-charts” donations from the financial industry while working to water down the financial bill.[79] On the Democrats’ side, President Obama’s then budget director, Peter Orzsag, left the White House and waited a seemly four months before joining Citibank, which of course was busy marketing new credit cards to indebted Americans.

The congressional debate was in fact not a substantive discussion of what was really required to prevent another financial meltdown in the future. It was instead a kind of theatrical performance presented for the public’s benefit to reassure them that “something was being done.” The Republican chairman of the House Financial Services Committee, Spencer Bachus, soon afterwards remarked with refreshing candor that “my view is that Washington… [is] there to serve the banks.”

The answer then may be to do the one thing that no one seems prepared to contemplate: Take away the teacher in the playground. Let anarchy reign. It’s interesting to contemplate what might follow. Some pointers are already available: in the behaviors and systems that have grown up on the World Wide Web.

On eBay and other online marketplaces, there are few certain methods to prevent fraud. It’s easy for a seller to take payment online for imperfect or nonexistent products then disappear into the anonymous jungle of the Internet. When eBay began, the anonymity of the Web did little to produce trust. On the contrary, buyers and sellers were quick to complain about each other—often directly to Pierre Omidyar, the founder of eBay, who in the early days would answer customer service complaints himself. He was soon overwhelmed with the volume of complaints.

Omidyar decided to introduce a system under which eBay participants could rate each other online—not just to say when they were dissatisfied, but when they were happy, too. This feedback system is one of eBay’s most well-known features: Sellers advertise their positive ratings as a selling point. Sellers without positive ratings struggle to find buyers. Thus, there is a huge incentive for sellers and buyers to treat each other well, if they are to do any repeat business. And interestingly, like the accumulation of friends on Facebook, which takes months and years to build up, the accumulation of trust indicators within this system is also a huge barrier to entry for prospective competitors to eBay.

The idea—and effect—was to incentivize sellers to behave well: to deliver what they sold promptly and in good order. The system seemed to work. Introduction of the ratings system helped drive a massive increase in transactions on eBay and a reduction in the number of fraud charges arising from eBay purchases.

In China, things have worked slightly differently, but prove the same point. Here, eBay lost market share to a competitor that understood better how customers wanted to build trust with one another. On its Chinese site, eBay did not offer ways for buyers and sellers to chat online, fearing they would close their transactions off the site to avoid paying fees. By contrast, eBay’s rival service, Taobao.com, understood that live conversations were necessary for Chinese consumers to cultivate trust, and offered an instant-message service to allow them to haggle over deals. eBay forfeited the Chinese online market to Taobao partly as a result.

The online classifieds site Craigslist did something similar to eBay, following the philosophy of its founder, Craig Newmark, that “people are good and trustworthy and generally just concerned with getting through the day.”[80] All you have to do is build a minimal infrastructure and let them work things out for themselves. The primary mechanism of the site is the red flag: If other users flag an unacceptable advertisement enough times, it will disappear. The mission of Craigslist is simple: to enable local, face-to-face transactions. This formula clearly works despite the many esthetic flaws and frustrations of Craigslist. It is by far the most popular community site in the U.S., and is reportedly viewed by forty-seven million unique users each month.

The very openness of the Web, however, has brought to the surface some of mankind’s worst aspects. But with the transparency, others are learning to combat the most undesirable and sometimes criminal activities.

For instance, in 2010, campaigners demanded that Craigslist remove its “Adult services” section because it was being used by sex traffickers to pimp underage girls. Craigslist at first refused, citing its commitment to freedom of speech, but eventually succumbed to the pressure and removed the offending section. Likewise, Amazon removed a self-published book on pedophilia after mass Twitter and e-mail protests. In both cases, the action to address the offense took place with no government intervention.

Small businesses everywhere must rapidly adapt to a world where their services and products are discussed openly and critically on the Web by customers. Discomforting for some, the enforced visibility and criticism on the Web is proving for others a liberation, and a sales advantage. The evidence is mounting that of two otherwise identical businesses, the one that responds quickly and positively, and above all transparently, to customer complaints online, will rapidly gain the better online ratings, with positive consequences for their likely sales.

A new phenomenon is emerging on the Internet, which one commentator has called the “Panopticon.”[81] The original Panopticon was an imaginary prison, designed by Jeremy Bentham, where all parts of the prison were visible from one central point, without the prisoners knowing that they were under observation at any particular moment. But the Panopticon of the Internet is not for the observation by one of many, but more of “all watching all.” As our lives are lived increasingly online, so are our traces apparent. More and more it is possible to locate, identify and examine people from their online presence.

There are obvious privacy concerns here, which we have yet properly to contend with. It is a new and disquieting world when a trainee teacher can be denied a college degree because she has posted a photo of herself, drunk, on MySpace.[166] But at the same time there is also the potential for a new form of collective security. Already, it is possible easily to access the human rights and environmental records of major companies;[82] one website allows you to research all the components, and the labor history embodied in them, of even complex products like computers or TVs.[83] It is easy to see how this scrutiny will spread more widely. Already, employers Google prospective employes to scrutinize their online history. Prospective lovers do the same. The Panopticon is already reality.

While online transparency and criticism may help improve the services offered by competing local plumbers, it’s harder to see how it may work for the securities industry, a world that is not only secretive but also so complex that many of its most sophisticated denizens (George Soros, for instance) freely admit that they do not fully understand the financial instruments now available. Here, we return to Harry Markopolos.

After conducting his own investigation of Madoff, and concluding that something very fishy was going on, Markopolos sought to inform the SEC which, as we now know, failed to follow up on his suspicions. This he was permitted to do by law. Markopolos was not, however, permitted to publicize his concerns, for to do so would have immediately made him vulnerable to punitive lawsuits by Madoff. Indeed, Markopolos testified that the failure of the SEC to investigate his complaints made him fear for his safety. The net effect, therefore, of the laws existing at the time of the Madoff fraud was not to inform and protect investors, but to protect Madoff.

Perhaps it is naive to expect ordinary investors to enjoy the expertize to scrutinize investment funds like Madoff’s, even if one might expect them to exercise more diligence than that demonstrated by Madoff’s unwise and unfortunate investors. It is not unrealistic, however, to envisage a system whereby disinterested experts might offer advice on the wisdom of investing in certain funds. Looking at the way e-commerce is developing on the Web, this might consist of several connected elements: a ratings system for buyers anonymously to rate their investment “experience,” independent sites which offer disinterested advice on various investment alternatives and, finally, investors might form groups—like cooperatives—such as that which hired Harry Markopolos to conduct research on their behalf.

Above all, the Web shows that it is transparency that wins customers. Ergo, those that eschew it—or actively reject it, as Madoff did—should pay the penalty in lost business. Madoff himself has argued that his claimed “black box” investment strategy—the series of computerized algorithms to decide equity trades—was unintelligible to most of Wall Street, let alone ordinary investors, claiming that many other hedge funds are similarly opaque to outside scrutiny: “Does anyone know how, say, Renaissance really makes its returns?” Madoff asked in an interview with the Financial Times, referring to the wildly successful hedge fund.[84]

Perhaps he is right. However, what is beyond dispute is that from 1992 onward Madoff, by his own admission, conducted no trades at all and faked the documents, pretending that they had taken place. This fraud should have been easy to detect with only the most cursory scrutiny, if the market were more transparent: It should be straightforward to corroborate the trades with the counterparties, those who supposedly bought and sold Madoff’s equity holdings. In other words, transparency does not need to reveal the secret investment strategies of successful funds, but it can—and simply—reveal other telltale signs of fraud like Madoff’s. Unlike his faked investment strategy, Madoff’s fraud was devastatingly simple.

There is perhaps a final and subtle lesson to be learned from this miserable episode. It is clear both from victims and Madoff himself that the wealth and power of big Wall Street players was a deterrent against scrutiny and investigation, intimidating those who sought to question, including the SEC. From many accounts of the Madoff scam, Wall Street appears as a layered hierarchy governed not by the SEC but by an exclusive club of powerful financiers, whom Madoff sought to join and succeeded in so doing. This club was bound by a wary but mutual trust and tacit agreement among members to forbear from questioning one another’s affairs too closely. Madoff claims that many major Wall Street figures and banks, including JPMorgan, knew what was going on. Once Madoff joined the club, and hobnobbed with its members, he was all but untouchable.

We have been culturally conditioned to accept that the prosecution of the occasional Madoff somehow proves the power of law and intrinsic justice in the system. In fact, the story unearthed by his case proves the opposite: The system is revealed as fundamentally iniquitous and persistently vulnerable to crime and violent instability. The gross inequality of contemporary society permits a culture of unaccountability and, sometimes, criminality among the richest and most powerful. The most extreme results of this imbalance are scandals like Madoff but also, with the credit crunch, economic volatility that destroys millions of jobs and endangers the entire global economy.

Methods to address this inequality will be discussed later. Money and power are of course hard to assail as sources of influence and secrecy. But what can be changed is the attitude of those outside the private circle. We should no longer be intimidated. One clear lesson of the Madoff scandal is the requirement for individual investors themselves to use greater care and scrutiny: to exercise, in short, their own agency rather than submitting their choices to the care of others. Everyone has the right to question. This is a right that cannot be taken for granted but must be continually asserted, by one and by all. The more that each of us demands it, the easier it will be for all of us.

The exercise of collective and individual scrutiny, disinterested analysis shared publicly, insistent questioning: None of these elements alone would necessarily suffice to deter or prevent future Madoffs. But together they would create a lattice of checks and balances whose collective effect would be to force greater transparency within, and scrutiny of, a notoriously closed, clubby and corrupt industry: a result that decades of government supervision and legislation have signally failed to achieve.

That lattice would not have a fixed structure, and it would likely change over time in response to changes in the industry it was monitoring. It would not have the reassuring bricks-and-mortar institutional presence, and claim to expertize and authority, of a body like the Securities and Exchange Commission—itself a comforting name, at least prior to Madoff. The lattice may not be imposed by legislation, and its origin may be in a state of affairs some might call anarchy—the absence of rules—but its result would be not the disorder usually associated with that word, but its opposite.

For two days in 2004, there was anarchy in Kosovo. The “authorities”—in this case the local police, UN and NATO peacekeepers—lost control. This was never publicly admitted. The candid admissions of failure in reports by UN officials in Kosovo itself were altered at UN headquarters in New York before they were reported to the UN Security Council, the ultimate authority which supervised the de facto government of Kosovo. It wasn’t the UN’s fault, the Security Council was told. The violence was deliberately instigated by extremist Kosovar leaders, an allegation for which there was little hard evidence.

The journalists who arrived in Kosovo after the violence chose their own convenient narratives: This was a typical, if depressing, cycle of the familiar ethnic violence that had plagued Kosovo, like the Balkans, for generations. Only a few chose to report the more complicated truth, including the fact that the violence had been in part a kind of rebellion against the ruling authorities in Kosovo—the UN. Only one NGO, a specialist in conflict whose two staff were deeply embedded in Kosovo’s complicated stories, managed to capture the many strands of what had happened there.[85]

In truth, each chosen narrative carried some weight. The story of generational ethnic hatred was, in a sense, a true one. Serbs were attacked by Kosovo-Albanian mobs across the territory; many Serbian houses were burned; some Serbs were physically assaulted; eight were killed (the remainder killed in the violence were Kosovo-Albanians shot by NATO and UN forces).[86]

A second narrative was better concealed than the first, conventional account. This was that the anger was directed as much against the UN rulers of Kosovo as it was against the Serbs. Despite having their own democratically elected government, the people of Kosovo were excluded from the crucial decisions about their own future. I saw the evidence with my own eyes. The UN was attacked in all its manifestations—offices, cars, staff. Other international organizations, such as the EU, were not attacked.

There was a deeper flux at work too. The boys and young men in the rioting crowds were not sophisticated political critics. If you had asked them why they were rioting, they would not have said it was because Kosovo’s people were excluded from political decision making about their future. They might have said, “We hate the Serbs.” But what one most frequently heard was this: “It is because we are angry.” Angry at the potholes and the lack of jobs; angry at the endless power cuts; angry because the girls and the luxury we see on MTV are unavailable to us.

So far, so political. But it was clear, because you could feel it, that there was a collective emotion at work. An emotion that was evident in individuals, but took greater force, and found expression, only when the crowd formed. The violence felt, in some terrible inadmissible way, like a release.

After the violence subsided, I returned to my work at the UN. My job had been to guide the local elected Kosovo government to adopt so-called standards of democracy: the rule of law, minority rights and other measures of a state’s worthiness to exist and be accepted in the community of nations. The “international community” in this case was embodied in a small and secretive group of six countries known as the “Contact Group” which ran international policy on Kosovo. This group had insisted that such standards be established, and in some way fulfilled, before Kosovo could be considered for “final status”—whether it could become a state, as the large majority of its people desperately wanted.

Politically, the imposition of these standards was one reason why the violence had erupted. Because Russia, the U.S. and others disagreed in principle on whether Kosovo should become a state, no one in the “international community” was prepared to say what precisely Kosovo had to do to become independent. Kosovo was caught in a state of perpetual limbo, like being ordered every day to take an exam but never told if you’d passed or failed, or indeed what a pass or fail required.

The two-day orgy of violence, therefore, represented a total failure for my work. I sat at my desk, facing Besnik, my loyal assistant, and stared at the stacks of papers elaborating the democratic, rule-abiding “standards” that Kosovo was required to meet. We discussed whether to take the papers to the street outside the UN building, make a little pile and set fire to them. In the end we decided it would be a ridiculous and futile gesture: The rioters had already done it for us.

One incident, seemingly unremarkable, stuck in my memory. On the morning of the second day of the trouble, the head of the UN mission, a former president of Finland, had summoned Kosovo’s political leaders to his office. He demanded to know what they were doing to stem the violence. Reading from a note prepared by his staffers, he looked over his spectacles at the leaders across the conference table, peering at them like a remonstrative school teacher at his unruly pupils.

And the leaders were silent. They sat glumly, looking a little shifty, like naughty schoolboys who had been caught smoking cigarettes behind the gym. A few muttered excuses, but those uttering them seemed as unconvinced as we were. There was a general air of embarrassment.

I pondered this incident. Why had the leaders not spoken up for their political demands? Why had they not blamed the UN and the international community for stoking the frustrated anger of the Kosovo-Albanian majority? Why had they resembled nothing so much as a bunch of adolescents being punished after school?

Slowly, it dawned on me. No one was prepared to take responsibility for the violence, because no one felt responsible for it. The behavior of Kosovo’s leaders was immature and childish, because that was what was expected of them. The international community had refused to give these political leaders the real responsibility to run the country, telling them instead that they and their country were not yet ready for the burdens of statehood. My work in elaborating and implementing the “standards” sent, and made concrete, this very message.

Kosovo was permitted to have elections, an elected government and a parliament, but the real power resided in an unelected official—the UN Special Representative, the Finn, appointed by the UN Secretary-General—who could veto any decision made by the local elected government.

The dramatic events in one small Balkan province (now a state) were unique, but there are nevertheless lessons of broader significance.[87] Western democracies are not on the cusp of violent disorder (although it cannot be ruled out if the current system is not improved). The violence and unrest on the streets of Kosovo, but above all the feckless behavior of Kosovo’s elected but powerless politicians, carried one crucial lesson: If people do not have responsibility, do not expect them to behave responsibly.

This episode suggests a broader lesson about democracy, stability and anarchy. Defenders of the current order argue that to abandon the system of representative democracy is to invite anarchy, a war of all against all. But the 2004 disorder in Kosovo suggests a more subtle and unexpected lesson. It is this: The less people have agency—control—over their own affairs, and the less command they feel over their futures and their circumstances, the more inclined they are to take to the streets. The best way, indeed, to invite violent anarchy is to reduce the agency and sense of control that people need to feel over their lives.

The disconnection between voters and their government, along with government’s declining ability to deal with problems of global origin, are combining in the current dispensation to produce this very effect. The frustration, disillusionment and growing extremism all too evident in today’s democracies are symptoms of this phenomenon: loss of agency. Kosovo may represent an extreme case, but for it not to become a harbinger, action must be taken. Our way of doing politics, indeed our way of thinking about politics, needs to change, from passivity to action: reclaiming agency.

And in that reclamation, we must find better ways of doing business with one another. If too distant and corruptible institutions are proving inadequate, what might work? Some believe that technology alone, and the Internet in particular, can deliver the necessary revolution. Some even believe that the Internet is the necessary revolution, and that its inherently heterogeneous and transparent nature amounts, in itself, to political change. Closer analysis reveals, however, a more complicated and ambiguous reality.

Something else is needed. And that something else, it turns out, doesn’t require fancy technology, Web-based platforms and Twitter feeds (though they may help). That something else turns out to be simple indeed.