Over a long and industrious career, the investor George Soros developed a theory he calls reflexivity. The basic idea is that expectations don’t form in a vacuum. They are shaped, in part, by our perceptions of what other people believe. The more widely an idea is accepted, the more likely we are to accept it ourselves and that, in turn, reinforces the collective wisdom.
If many believe that, say, the stock market will go up or that AI will create an economic boom, we’re more likely to believe it too. That belief then drives behavior: investors buy stocks, companies pour money into AI, and the prediction begins to fulfill itself. All of this only adds fuel to the fire. Nobody wants to get left out of a good thing.
Soros made a lot of money betting against reflexivity because once the pattern of self-reference and self-reinforcement takes hold, things are bound to overshoot. Expectations drift far beyond underlying reality—and eventually snap back. It seems something similar is brewing. As big institutions accumulate unprecedented power, a growing backlash seeks to take power back.
The rise and fall of Porter’s competitive advantage
For decades, the dominant view of business strategy was shaped by Michael Porter’s theory of competitive advantage. In essence, he argued that the key to long-term success was to dominate the value chain by maximizing bargaining power over suppliers, customers, new market entrants, and substitute goods.
Yet as AnnaLee Saxenian explained in Regional Advantage, around the same time that Porter’s ideas were gaining traction among CEOs in the establishment industries on the East Coast, a very different way of doing business was gaining steam in Silicon Valley. The firms there saw themselves not as isolated fiefdoms, but as part of a larger ecosystem.
The two models are built on very different assumptions. The Porter model saw the world as made up of transactions. Optimize your strategy to create efficiencies, extract the maximum value out of every transaction and you will build a sustainable competitive advantage. The Silicon Valley model, however, saw the world as a web of connections and optimized their strategies to widen and deepen linkages.
If you see your business environment as neatly organized into specific industries, everybody is a potential rival. Even your allies need to be viewed with suspicion. So, for example, when a new open source operating system called Linux appeared in the 1990s, Microsoft CEO Steve Ballmer considered it a threat and immediately attacked, calling it a “cancer.”
Yet even as Ballmer went on the attack, the business environment was changing. As the internet made the world more connected, technology companies found that leveraging that connectivity through open source communities was a winning strategy. Microsoft’s current CEO, Satya Nadella, declared that the company now loves Linux. Ultimately, it recognized that it couldn’t continue to shut itself out and compete effectively in a networked world.
Preferential attachment, power laws, and network collapse
Phil Knight built Nike into exactly the type of business Porter imagined. It created an impressive marketing machine built on partnerships with famous athletes, dominance of retail channels, including its own proprietary outlets, and an optimized supply chain that kept costs to a minimum. The company was a paragon of sustainable competitive advantage.
Then, in the early 1990s, writer and activist Jeffrey Ballinger published a series of investigations about Nike’s use of sweatshops in Asia. People were shocked by the horrible conditions that workers—many of them children—were subjected to. In many cases, factory owners lived outside the countries where the facilities were located and had little contact with employees.
As the network scientist Albert-László Barabási and his colleagues discovered, this is exactly the type of asymmetric vulnerability that even the most powerful fall prey to. A firm like Nike becomes dominant because of a phenomenon called preferential attachment, sometimes also called the Matthew effect. Essentially, the rich get richer.
What happens is that once a node in a network builds a small advantage over competitors, it is more likely to attract new connections than smaller players. That creates a power-law distribution in which the network is dominated by large hubs that are exponentially larger than their competitors.
Yet the sweatshop scandal threatened to reverse that process, making rivals without scandals marginally more attractive to consumers than Nike. That shift, however small at first, could cascade, allowing rivals to strengthen relationships with suppliers and retailers, widening and deepening their corporate networks at Nike’s expense.
At first, Knight was defiant, but ultimately, even he recognized he needed to give in. As he would later write in his memoir, Shoe Dog, “We had to admit. We could do better.” Going beyond its own factories, the company established the Fair Labor Association and published a comprehensive report of its own factories.
Backlashes, old and new
Today, we live in a new era of big business dominance. Just seven companies dominate the U.S. stock market. The economist Thomas Philippon and his colleagues have documented how the growing dominance of large firms across increasingly consolidated industries has led to a decrease in competition in the United States. A Federal Reserve report had similar findings.
We’ve been here before. The Gilded Age in the late 19th century was marked by enormous investment in a breakthrough technology: railroads. Vast fortunes were made and a breed of oligarchs like Vanderbilt, Carnegie, and Rockefeller created industry trusts that allowed them to dominate the United States, both commercially and politically.
Yet every revolution inspires its own counterrevolution. The Gilded Age was soon followed by the Progressive Era and the rise of the muckrakers epitomized by Ida Tarbell, Upton Sinclair, and McClure’s Magazine, who exposed corruption and exploitation on a massive scale and shifted the political winds. New legislation and enforcement tools, such as the Sherman Antitrust Act, led to a leveling of the playing field.
Today, we are seeing similar signs. The Australian government has banned social media for children under 17. Frustration with the low-quality content that AI has flooded the internet with led The Economist to name “slop” as its “Word for the Year.” Elon Musk’s effort to bring Silicon Valley management techniques to government with DOGE was a massive failure, which resulted in hundreds of thousands of deaths.
Against this backdrop is a growing New Brandeis movement, which seeks to reinvigorate antitrust efforts and restore competitive markets. After gaining traction during the Biden Administration, it has mostly been dormant since, but things can change quickly.
Larger risks amid lesser resilience
In 2008, when the global financial crisis hit, the world was a relatively stable place. While the U.S. was still engaged in Iraq and Afghanistan, those were fairly low-level conflicts at that point. The U.S. federal deficit was $450 billion and the U.S. national debt was $10 trillion, both less than a third of what they are now.
Today, the world is a very different place. Beyond the worsening economic situation, we have the largest conflict in Europe since World War II. Russia, China, and other bad actors are engaged in a massive information war against the West, fueling populist surges and political turmoil in Western nations. The Atlantic Alliance, once a force for stability, is in shambles.
Many would argue that, today, we are in a new Gilded Age, in which powerful industrialists, unbeholden to the rule of law, regularly engage in predatory behavior, but their actions are often shielded from view by technology, buried in complexity. When they are called before Congress, the people’s representatives seem lost, unable to meaningfully challenge their power.
And much like the Gilded Age was marked by continued cycles of government-sponsored overinvestment and financial panics, today we are likely on a path to an AI bubble that will rival the massive panics we had in 1873 and 1893. Unfortunately, unlike during the 2008 financial crisis, our capacity to manage the fallout will be greatly diminished.
Clearly, we are on a path that is taking us into rough waters. As Soros described, once the pattern of self-reference and self-reinforcement has taken hold, systems don’t correct gently. They overshoot—and the eventual snapback is rarely orderly or kind. Correction will not come from markets alone. It will come through backlash—political, social, and institutional—when those left bearing the costs decide the system no longer serves them.