Chrystia Freeland

If you want to get a finger-tip feel for one of the most important transformations in our world today, read The Fear Index, Robert Harris’s new thriller.

Harris has been widely praised for his adept portrayal of the hedge fund universe in which his novel is set. “The greatest pleasure of this book is that it gets the finance right,” cooed Felix Salmon, the Reuters finance blogger whose keyboard often oozes acid.

He is right that Harris’s hedgies are a welcome and realistic departure from the Masters of the Universe of most popular fiction. For one thing, these are the alpha geeks, the nerdy doctorate-holders whose testosterone is channeled into equations instead of frat-house swagger.

And Harris knows his superrich. As they are being wooed to make a billion-dollar investment, over a 1995 Latour in a fine Geneva restaurant, an international group of investors energetically discusses the ways that their national governments oppress them. Dr. Alex Hoffmann, the billionaire hedge fund manager protagonist who is making the pitch for their cash, reflects: “He was remembering now why he didn’t like the rich: their self-pity. Persecution was the common ground of their conversation, like sport or the weather was for everyone else.”

But the most valuable intellectual takeaway from this riveting novel is the element that has been widely dismissed by reviewers as familiar and unpersuasive: VIXAL, the intelligent machine at the heart of the story that torments its human creator and may be trying to rule the world. Michiko Kakutani, writing in the New York Times, gave The Fear Index a thumbs up, but deemed the machine takeover “silly and contrived.” VIXAL, the evil genius computer, “seems less like a plausible villain than like a metaphor for the greed and heedlessness that overtook Wall Street,” she wrote.

Kakutani’s dismissal of VIXAL as an unoriginal and uncompelling reworking of the Frankenstein template misses the most important point. VIXAL and the parallel world the computer program creates by interacting with other machines is worth reading about — but not for the usual pulp fiction pleasure of entering a vividly rendered imaginary world.

The Fear Index is fun to read because Harris is a great novelist, but VIXAL is worth getting to know not as a fictional character, but because so much of what it does is already happening in real life.

Futurists and fantasists have been dreaming about the rise of intelligent machines for centuries. Now it is actually starting to happen.

For a drier but in many ways even more astonishing account of what is going on, read “The Second Economy,” an essay in the McKinsey Quarterly by W. Brian Arthur, a visiting researcher at the Intelligent Systems Lab at the Palo Alto Research Center in California.

Arthur’s contention is that a second, machine-to-machine economy is emerging and that it will bring deep economic, social and political change comparable to the transformation wrought by the Industrial Revolution.

“Business processes that once took place among human beings are now being executed electronically,” Arthur writes. “They are taking place in an unseen domain that is strictly digital. On the surface, this shift doesn’t seem particularly consequential — it’s almost something we take for granted. But I believe it is causing a revolution no less important and dramatic than that of the railroads. It is quietly creating a second economy, a digital one.”

Arthur describes this economy as “vast, silent, connected, unseen and autonomous (meaning that human beings may design it but are not directly involved in running it).” The second economy is manifest in transactions as quotidian as checking in for a flight with a machine and as esoteric as the algorithm hedge funds of Harris’s thriller, which use information produced by machines to trade with other machines.

Economists and novelists aren’t the only people musing about the rise of the machine-to-machine economy and its transformative potential.

Yuri Milner is one of the savviest technology thinkers in the world; he was a pioneering investor in Facebook, a bet that was wildly vindicated last week.

Milner has a presentation in which he describes the nine most important changes in the world today. Three of them are about what Arthur has dubbed the second economy: the rise of what Milner calls “the Internet of things,” or the machine-to-machine economy; the growing power of artificial intelligence; and the emergence of a “global brain,” which is the network of all of the people and the machines in the world and their connections to one another.

The one aspect of The Fear Index that is tired and familiar is its depiction of the rise of the machine-to-machine economy as murderous and menacing. That time-worn worry that the smart machines will turn on their creators isn’t one I share. I am a fan of the machine-to-machine economy and of all the ways it makes my human life easier and less expensive.

But I am concerned about something Harris only hints at. At the end of The Fear Index, VIXAL changes its hedge fund’s mission statement. The first lines of the new, machine-written version, read: “The company of the future will have no workers.”

I’m not afraid our smart machines will try to exterminate us, but I do worry that the second economy may be a jobless one.

Arthur doesn’t offer much comfort on that score. In an exchange with a reader after his essay was published, the economist wrote: “Since the second economy began, in the early and mid-1990s, we’ve had wave after wave of downsizing and layoffs, and now we have ongoing structural joblessness. I hope jobs will be created, and maybe they will. More likely, the system, as so many times before in history, will have to readjust radically. It needs to find new ways to distribute the wealth.”

This is a transcript of Yuri Milner’s presentation to the Yalta Annual Meeting in September 2011. To read Chrystia’s column about the presentation, click here.

A few months ago not three but eight leaders in the world gathered at Deauville in France at their regular G-8 meeting. But for the first time ever they invited six businessmen to meet with them and talk about the future. It’s interesting that four out of six were related to internet, and then I was among those invited. Each of us was given three minutes to say something, and I will now present to you a slightly expanded version of that presentation that I gave back then.

If we can look at the slide number 1, that you hopefully can see on the left-hand side, it basically shows the unprecedented growth of internet users globally. And I just want to bring your attention to the fact that this is probably the fastest proliferation of any technology ever, and the most fundamental fact being that right now around 2 billion people are connected to the internet and in the next 10 years you will see another 3 billion added to that number to a total of 5 billion people connected around 2020.

If you turn to the next slide, one would assume that internet is only about people, but actually it’s not. Around 5 billion devices are currently connected already, and this number will zoom to more than 20 billion devices connected to internet 10 years from now, and this will add to 5 billion human beings, so you would assume that there will be 25 billion people and devices connected and producing information.

On slide 3, I would like to bring your attention to one really unprecedented and not very well appreciated fact: how much information is actually being created. If you add all information that was generated by the mankind for the last 30,000 years beginning with the first drawings on the walls of the caves until year 2003, equal amount of information was created last year for only two days. It took two days to create equal amount of information to the one that was created by all people that ever lived from the dawn of civilization until 2003. And moreover the same amount of information will be generated in ten years from now only within one hour.

On the next slide, I want to show you that not only is information being created, but it is also being shared among people. And it is being shared at the ever increasing pace, and the pace is actually accelerating. One of the companies that we’ve invested in is called Facebook. In only two years, between 2009 and 2011, the information exchanged between people increased 28 times. And that cannot be explained by new people joining Facebook. Actually every single participant in this process is exchanging multiple times more information than only two years ago. Same applies to Twitter, where in the last two years we have seen a tenfold increase of the information that is created and distributed and exchanged on Twitter. And a very small fraction of this information is created by organized institutions like news organizations, and the vast majority of it is created by people themselves, and consumed by people who are interested to hear the newsfeed that is being produced by other people. If you are not the user of Facebook or Twitter but probably user of e-mail, you might have noticed that in the past few years the number of e-mails that you have been receiving daily was actually exploding. On average we are now receiving six times more e-mails than just four years ago.

And on the next slide I want to explain where it’s all leading, and it’s all leading to really unprecedented proliferation of Internet media compared to traditional media. The largest newspaper in the United States is only reaching 1 percent of population. We are kind of assuming that Wall Street Journal, USA Today, and other newspapers are very important. Yes, they’re extremely important, but only to 1 percent of the population on a daily basis. And that compares to internet media, which is used by 25 percent of the population daily and growing. The largest TV channel is reaching maximum of 10 percent of the population, and this ratio is constantly going down with the increasing number of channels that people watch and the further fragmentation of people’s attention.

On slide 6, one can see a very important trend which is accompanying this creation of information and emergence of internet businesses that are actually much more efficient than traditional offline businesses. Big internet company on average is capable of generating revenue of $1 million per employee, and that compares to 10 to 20 percent of that—$100,000 to $200,000—that is normally generated by traditional offline business of comparable size. And this efficiency is not going away; it’s with us to stay for a long time. And that creates alongside these efficiencies serious challenges for offline businesses trying to compete with online businesses. I was really deeply impressed by one fact that became apparent to me when we first invested in Facebook. Each single engineer in Facebook is capable of supporting 1 million users. There are only around 700 engineers working at Facebook, and there are more than 750 million users of Facebook, so that level of efficiency is really unprecedented and unheard of, and it never happened before. And this efficiency will deeply influence every single sector that we recognize as a traditional sector.

And on the next slide 7 I would claim that every type of human activity will be deeply influenced by internet. And the next sectors to be impacted I would forecast will be health-care and education. With digitizing clinical records and new educational institutions emerging allowing outstanding scholars to address tens of hundreds of thousands of users at the same time. In this September semester at Stanford, there is one experimental course of teaching artificial intelligence that is read by an outstanding professor for the first time online with 58,000 students signing up—not only from Stanford, but from every corner of the world—and this course is actually free.

On slide 8, I want to emphasize the next big trend, which is the accelerated emergence of artificial intelligence, which is capitalizing on all the information that is being generated everyday and every minute. We used to think about companies like Google as really a part of our lives and pretty static. We go use Google today, we use it tomorrow, and we believe that it is the same algorithm. But in fact algorithm is changing every week based on searches that we make and based on the feedback that users provide by using the service. And that’s what makes companies like Google so pervasive and almost monopolistic that their algorithms are constantly adjusting to better cater to our needs based on our feedback. And this virtual cycle continues at an ever increasing pace, making these companies even harder to catch up with. The same applies to Amazon which is trying to sell us new goods based on the ones that we already purchased, and Facebook, which is trying to form our relationships based on the relationships we already have. They have a very interesting feature that suggests new relationships to us, and these algorithms are so good right now that there is a more than 50 percent chance that we will accept friendship based on this artificial intelligence recommendation. And I clearly see that times that are not so far off where companies like Facebook will be in fact forming our social connections to a very significant extent.

And on the last slide today, I just want to draw a little bit of a futuristic picture, which is the emergence of the global brain, which consists of all the humans connected to each other and to the machines and interacting in a very unique and profound way creating an intelligence that does not belong to any single human being or computer but really spread out and living its own life and defining significantly the actions of each particular individual in the not so distant future. One striking fact is that about 20 percent of the global energy 10 years from now will be dedicated solely to maintain this global intelligence, and this number is around 10 percent already today in developed countries. And that actually can comfortably compare to 20 percent of calories that our human brains consume daily to support our traditional intelligence.

Get ready for the global brain. That was the grand finale of a presentation on the next generation of the Internet I heard last week from Yuri Milner. G-8 leaders had a preview of Milner’s predictions a few months earlier, when he was among the technology savants invited to brief the world’s most powerful politicians in Deauville, France.

Milner is the technology guru most of us have never heard of. He was an early outside investor in Facebook, sinking $200 million in the company in 2009 for a 1.96 percent stake, a decision that was widely derided as crazy at the time. He was also early to spot the potential of Zynga, the gaming company, and of Groupon, the daily deals site.

His investing savvy propelled Milner this year onto the Forbes Rich List, with an estimated net worth of $1 billion. One reason his is not yet a household name is that he does his tech spotting from Moscow, not a city most of us look to for innovative economic ideas.

Milner was speaking in the Ukranian city of Yalta, at the annual mini-Davos hosted by the Ukrainian pipes baron and art collector Victor Pinchuk (disclosure — I moderated at the event). What was striking about Milner’s remarks was how sharply his tone differed from that of the other participants.

The Americans — among them the economists Lawrence H. Summers and Paul Krugman — were glum about their country’s economic stagnation and its political inability to adopt policies that could end it. The Europeans — a group that included the foreign ministers of Sweden and Poland, and Jürgen Fitschen, who has been named co-chief executive of Deutsche Bank — were worried about the sovereign debt crisis.

Even the Turks and the Indians, whose economies grew more than 8 percent last year, were anxious about uneven development at home, and the threat of economic tsunamis coming from abroad.

Milner’s perspective was entirely different. For one thing, at a time when where you sit so often determines where you stand, Milner almost perfectly represents a global technology elite whose frame of reference is planet Earth. He mostly lives in Moscow, but has recently purchased a palatial home in Silicon Valley. He addressed the Ukrainian conference by video link from Singapore.

From that vantage point, the most pressing issue in the world today isn’t recession and political paralysis in the West, or even the rapid development and political transformation in emerging markets, it is the technology revolution, which, in Milner’s view, is only getting started. Here are the changes he thinks are most significant:

• The Internet revolution is the fastest economic change humans have experienced, and it is accelerating. Milner said that two billion people are online today. Over the next decade, he predicts that number will more than double.

• The Internet is not just about connecting people, it is also about connecting machines, a phenomenon Milner dubbed “the Internet of things.” Milner said that five billion devices are connected today. By 2020, he thinks more than 20 billion will be.

• More information is being created than ever before. Milner asserted that as much information was created every 48 hours in 2010 as was created between the dawn of time and 2003. By 2020, that same volume of information will be generated every 60 minutes.

• People are sharing information ever more frequently. The pieces of content shared on Facebook have increased from 140 million in 2009 to four billion in 2011. We are even sending more e-mails: 50 billion were sent in 2006, versus 300 billion in 2010.

• The result, according to Milner, is the dominance of Internet platforms relative to traditional media. “The largest newspaper in the United States is only reaching 1 percent of the population.” he said. “That compares to Internet media, which is used by 25 percent of the population daily and growing.”

• Internet businesses are much more efficient than brick-and-mortar companies. This was one of Milner’s most striking observations, and a clue to the paradox of how we find ourselves simultaneously living in a time of what Milner views as unprecedented technological innovation but also high unemployment in the developed West. As Milner said, “big Internet companies on average are capable of generating revenue of $1 million per employee, and that compares to 10 to 20 percent of that which is normally generated by traditional offline businesses of comparable size.” As an illustration, Milner cited Facebook, where, he said, each single engineer supports one million users.

• Artificial intelligence is part of our daily lives, and its power is growing. Milner cited everyday examples like Amazon.com’s recommendation of books based on ones we have already read and Google’s constantly improving search algorithm.

• Finally — and Milner admitted this was “a bit of a futuristic picture” — he predicted “the emergence of the global brain, which consists of all the humans connected to each other and to the machine and interacting in a very unique and profound way, creating an intelligence that does not belong to any single human being or computer.”

More than most of us, Milner understands that changes in what he calls “the offline world” can have real bite: He lived through the collapse of the Soviet Union, and the politics and economy of Russia today are no cakewalk. But, in a year that has seen the Arab Spring and the threat of the collapse of the euro, Milner’s predictions are an important reminder that the most significant revolution may be happening in cyberspace.

The Russians are coming. So far, the invaders are both welcome and unexpected — these aren’t the Cold War comrades who aspired to geopolitical domination or the first wave of oligarchs with their treasure chest of natural resources. These Russians propose to conquer the world’s new frontier — the Internet — and they are every bit as cocky as their forebears.

Russia’s arrival as a would-be technology superpower was announced this week when Yandex, a Russian Internet search company, made its debut on the Nasdaq stock exchange in the biggest U.S. Internet listing since Google went public in 2004.

With characteristic Russian bravado, Ilya Segalovich, the company’s chief technology officer, told my colleagues Alina Selyukh and Megan Davies that Yandex was superior to the behemoth Google: “Google is a great company, but we are better.” Yandex is “very focused on what we are doing, and the focus is technology and search.”

If you think of Russia either as the land of K.G.B.-style repression or that of yacht-owning, supermodel-dating oil-rich oligarchs, this claim to technological prowess will be surprising. But ever since imperial Russia’s scientific modernization campaign, Russians have prided themselves on their mathematical and engineering skills — remember Sputnik.

For Yandex’s chief executive, Arkady Volozh, that human capital gives Russia the potential to emerge as a technology superpower. “Russia is famous for its resources,” he said. “But Russia also has a lot of talent.” He added, “Russia deserves to have a technology company of a global level.”

Silicon Valley has understood Russia’s technological savvy for some time. Right now, the Valley’s hottest investor hails not from Sand Hill Road, the epicenter of the region’s famous venture capital community, but from Moscow. Yuri Milner was such an aggressive and pioneering supporter of companies like Facebook and Zynga that he earned his way onto the Forbes billionaire list this year and has an investing approach (lots of cash, no board seat) named after him. Soon, Mr. Milner will be a physical presence, too: Last month, he paid a reported $100 million for an estate in Los Altos Hills in the Valley, though he and his family will continue to make Moscow their main home.

Another sign that the smart money in America thinks we could be at the crest of a Russian technology wave: Earlier this year, the New York-based General Atlantic, a fund with extensive emerging market and technology expertise, invested $200 million in Kaspersky Lab, a maker of security software. That was one of the flashiest foreign direct investments in Russian technology to date and paves the way for another Russian technology offering in three to five years.

All of this is good news for the Kremlin, particularly President Dmitri A. Medvedev, whose big campaign at the moment is a modernization drive. Its centerpiece is a plan to build a Russian version of Silicon Valley in a neighborhood on the outskirts of Moscow known as Skolkovo. That effort tends to provoke skepticism among Russians, who have an affinity for cynicism, particularly when it comes to their government. But even if you aren’t a world-weary Slav, there are reasons to wonder if Russia can conquer the Internet.

After all, in the great debate about the social effects of digital technology, the Arab Spring has provided pretty powerful evidence that new media and old dictators don’t mix. If you are unconvinced, ask the Chinese comrades, whose fear of Tunisian contagion prompted them not merely to block online references to the Jasmine Revolution, but also to ban the sale of the flower.

Those repressive reflexes have prompted many of the digerati to question, at least in private, whether authoritarian regimes can ever permit the free-spirited, open-ended, often frankly rebellious style of thinking and working that innovating on the Internet requires. Dictatorships might be good at manufacturing iPads — but could they invent them?

In the case of Russia, we may be discovering that authoritarianism and invention can coexist more easily than liberal democrats might hope. That is largely because Prime Minister Vladimir V. Putin’s genius has been to devise a form of government you might call authoritarianism lite. State rule in Russia isn’t exactly soft — just ask Mikhail B. Khodorkovsky, whose conviction on embezzlement charges was upheld by a Moscow court this week — but it isn’t Big Brother either.

In the world of ideas, Mr. Putin has understood the state doesn’t need to rule everything — only the mass, opinion-forming media, which in Russia is broadcast TV. On the radio, in elite newspapers and on the Internet, the intelligentsia can say pretty much what it chooses. This isn’t entirely new for Russia: Both czars and commissars allowed the intelligentsia some latitude, on the theory that the chattering class didn’t really count. But Mr. Putin has taken this much further than the apparatchiks did, allowing, for instance, extensive foreign travel.

As the Russian journalist Valery Panyushkin wrote in a New York Times op-ed article, “In Russia today, journalists are murdered like Anna Politkovskaya, beaten like Oleg Kashin and intimidated like me, but — as terrible as this will sound — that is not the real problem. The real problem is that journalists are ignored.”

The Kremlin has done a similar deal with its oligarchs. They can be rich, so long as they don’t seek to influence how their country is ruled.

These two bargains — freedom and political impotence for the intelligentsia; wealth and political impotence for the oligarchs — are Mr. Putin’s version of the social contract. For Russia’s rising technology elite, that fragile combination of personal liberty and a lot of money may be good enough.