Browsing posts in: Economics

Temples and Rats

Was thinking this morning about inflation and deflation and the incentives they create. People using inflationary money are incentivized to adopt a high time preference, preferring immediate gratification to a monetarily induced guarantee of less gratification in the future. People using deflationary money are incentivized to adopt a low time preference meaning all purchases made towards immediate gratification must pass a much higher bar in regards to the satisfaction they produce.

That is to say, Keynesian writ large produces a desperate death spiral of consumption as present generations consume the well-being of future generations knowing if they don’t consume their current purchasing power then time itself will. In contrast, a society operating on deflationary money would seem boring and spendthrift, loosening its purse only to consume that which builds and maintains the road by which the future carries its goods to the present.

That is to say Austrian Economic and free-market monetary systems are the decentralized, inter-generational construction project of a temple to the future of our species, and Keynsianism is the screeching howl of a thousand desperate rats trapped in a burning house.

So, to speak.

How “Moonshots” Destroy Wealth

In a previous post, we discussed the “false promise of the moonshot”, a technological project undertaken with with little regard to success or profitability. In short, the allure of the moonshot is the notion that one can make great technological leaps into the future by simply applying unique thought processes with new technology. The Moonshot places a lot of emphasis on ideas. It suggests that there is a hidden path to the future that can be uncovered if we’re clever enough. Proponents of this kind of thinking often point to innovators of the past as examples of how moonshots work, however in these revisionist histories the grinding labor and years of capital accumulation that precede the supposed “moonshot” are rarely mentioned. Also rarely mentioned, a realistic portrayal of the fate of projects that are developed without a capital structure based on commercial viability. Once these factors are taken into consideration, it becomes pretty apparent moonshots are vehicles for destroying wealth and, as such, do more to push the future away than bring it closer.

To demonstrate this, I’ll begin by taking a knife to the sacred cow that is NASA’s Apollo project, the etymological mother of the term “moonshot”. I have nothing against the exploration of space, per se; my favorite book growing up was Ender’s Game, I’ve watched every episode of Star Trek, and I the only fiction I bother reading is science fiction. The fact of the matter is, though, that $110 billion dollars (in today’s value) was spent on the Apollo project. This is a massive investment in what was essentially an enormous geopolitical pissing match between the United States and the USSR, however, as soon at the USA no longer needed the marketing campaign of moon travel, the entire lunar project withered and died. Many at this point will claim that the lunar project inspired millions and created vital, valuable new technologies. To be sure, those are some of the effects that can be seen. What’s not seen, however, are the original holders of those dollars (taxpayers) and the businesses and markets they would have invested that $110 billion dollars in. While less inspiring than a rocket to the moon, a new shoe factory or delivery service expands the productive capacity of the economy as a whole. This small growth in wealth is then reinvested and growth begins to compound, over time building the levels of capital wealth that may be necessary to support commercial space travel. French economist Frederic Bastiat called this the “seen and the unseen”.

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen… Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil. -Frédéric Bastiat

Evil may seem a strong word, but consider the legal environment that was left behind in the wreckage of the Apollo project. Prior to Ronald Reagan, private companies interested in space exploration had to obtain 17 permits to send a vehicle into space, my friend Mark Frazier’s project to build a commercial spaceflight special economic zone in Liberia was quashed by the Carter Administration, and SpaceX has had to jump through dozens of hoops to compete with the industrial space complex which has metastasized out of our initial foray into space.

This means that not only did we lose out on hundreds of billions of potential economic growth, in our attempts to yank the future into the preset we created legislative artifacts which began to actively work against the commercialization of space.

Imagine another scenario. Imagine private companies, perhaps with public partnership, working to build profit producing commercial projects instead of a moon mission. How much wealth would have been created if we had received GPS 5 years sooner? If all our investment had gone towards simple means of getting technology into orbit that had an ongoing commercial benefit to those of us here on earth? Imagine a sky full of satellites and the sudden realization that there’s a massive commercial opportunity to keep this airspace clean. More complex space projects emerge. Soon, perhaps, even a need for people in space to manage these systems. Throughout this process, the investments made compound into new wealth for new investments and commercial spaceflight becomes actually commercial; no longer vulnerable to the short attention spans of political institutions.

Perhaps we “reached” the moon in 1961, but at what cost? Isn’t it possible that in our rush to manifest space travel we ended up delaying its meaningful execution? Over 50 years after our space travel “moonshot”, human civilization, much to my personal dismay, still isn’t wealthy enough to consume space travel commercially. In fact, XPrize, the company whose sole, stated purpose is to create “exponential change” through innovation challenges began with a $1 million prize to make space flight commercial, the result was a high altitude shuttle that has limped along on a $600 million investment from Abu Dhabi and commercial support from Richard Branson’s Virgin Galactic. Hardly “commercial”. Most of their other challenges have produced similar results.

Google and their moonshot factory “X” should take note of this. Even though the search and advertising section of their business produce virtually all of their revenue their company still spends about $1 billion a year on “moonshot” projects, virtually none of which have achieved commercial success. That’s a billion dollars a year that isn’t being rolled into the small “boring” problems which provide the seed of scalable future capital systems.

These failures highlight, in my opinion, the power of resources-based incrementalism and the importance of robust commercial and capital structures. We’re told by the moonshot club to think about the “big idea”, to search for big problems, but in my opinion, this leads to anemic capital structures that turn to dust the moment the public loses interest. New frontiers of economic and social possibility are fashioned out of an impossibly complex weave of commercially valuable solutions to real, small problems. If we wish to reach these frontiers as quickly as possible, we need to move more slowly and more deliberately, building strong, vital capital structures that can grow and compound with time.

The False Promise of Moonshots

After becoming a giant in the search and advertising industry, Google has set its sights on other more lofty endeavors. Determined to make an impact, they’ve organized Google into a larger umbrella company called Alphabet, under which they house smaller companies which are dedicated to what Google calls “moonshots”. A moonshot is a risky, exploratory project undertaken without regard to near-term success or profitability.  According to “X”, the company responsible for incubating Google’s moonshot efforts, the projects they undertake seek to solve big problems with groundbreaking technology and radical thinking. These projects certainly stir the imagination and inspire wonder, but in my opinion they also distract from the process that has historically been necessary to create sustainable long-term innovations which positively impact the quality of our lives.

Roughly implicit in the concept of the moonshot is the idea that what stands in the way of tremendous leaps and bounds in innovation are a lack of imagination and the adoption of innovation strategies that are too conservative. Proponents of moonshots as a method of innovation such as Peter Diamandis, founder of XPrize, are constantly suggesting that what’s really needed to push humanity forward is “10x” thinking, or imagining a solution or outcome that’s ten times as big as what you might normally imagine. I recently watched a lesson Diamandis gave on “exponential thinking” and he used Elon Musk as an example. In great detail Peter described Musk’s vision and mindset. Diamandis then suggested that young people should follow in Elon’s footsteps, eschewing economic activities that don’t ignite their “passion” and to focusing on solving problems that will have a massive impact.

My passing familiarity with Elon’s personal and professional history leads me to believe this conceptualization of his success is extremely disingenuous. There is no doubt that Elon carries an inspiring vision for the future of our species, and it’s undeniable that his vision has guided and motivated his activities, but the vision says nothing about the activities that carried him from point A to B; only about what he believes B should be.

In fact, if you follow the activities Musk engaged in after leaving South Africa, you begin to notice a pattern that looks decidedly opposed to what Peter Diamandis suggests is the recipe for creating massive impact. Following a double major in physics and economics, Musk moved to California where he intended to pursue PhD work centered around battery technology, an area which he felt was vital to his vision of the future. However, during this time the internet began to grow enormously and Musk left his degree program to pursue wealth in the internet boom. His first company Zip2 had nothing to do with space colonization or planet-wide green energy. It was simply something that filled a general market need and could produce a profit. From the “grand-vision” strategy posited by Diamandis and Moonshot proponents, this would seem to be a step backwards. This is 1x thinking; linear, not exponential. However, in the creation and sale of Zip2, we begin to see the secret star in Elon Musk’s career: capital resources.

Capital resources at their most fundamental are tools or processes that can be used to transform raw materials or inputs into items of greater value. For example, a paperboy’s bicycle, used as a capital resource to deliver paper around town, is more valuable than the steel tube and rubber sheets it used to be. The machines that bent and formed the steel and rubber to make the bike are capital resources as well. When you have chains of capital resources that feed into one another turning raw materials into outputs of greater and greater value, you have a capital structure. Capital structures are vitally important to not only enabling the innovation of new technology, but also shepherding those innovations to market maturity.

With this in mind, we can see as we continue to follow Musk’s career, a process of capital accumulation and the construction of larger and more capable capital structures. Following the sale of Zip2 for $22 million, Musk invested $10 million in another company which would later become PayPal. The sale of PayPal brought Musk $165 million in profit, $100 million of which he would later invest in starting SpaceX. And, to be clear, money isn’t the only component of his capital structure either. His knowledge, abilities and skills are capital resources as well, resources he’s been developing since he began programming video games as a small boy.

Moving through his personal and professional history it quickly becomes apparent that SpaceX is a value producing machine that has been many, many years in the making. Not only that, many of the the tools SpaceX uses to quickly prototype and design their machines at such low cost, tools like additive manufacturing, are just now starting to come into their own, themselves the fruit of a long development of increasingly complex capital structures.

And so, at this point we must ask if Musk’s genius lies in deciding that the colonization of space is goal worth pursuing, or whether it lies in the incredible, decades-long process of accumulating capital and stewarding it to a place and time in which it could be released in a brilliant display of awe-inspiring vision? I believe it’s the latter. The moonshot narrative would have us believe the former, however. It suggests that innovation and astounding technological progress are made by adopting the right mindset and selecting a “big enough” problem. However, this narrative shows a wanton disregard for the complexity of the kinds of capital structures that are essential for not only providing the tools of innovation, but also for developing markets for the products needed to sustain innovation.

Look past the glamorous post-success rationalizations of most companies and innovations and you’ll find either an accident or a long drawn out process of people trying to solve a “boring” (but real) problem. Before Uber was “The Ridesharing Economy”, it was just some entrepreneurs trying to figure out how to make the boring taxi experience better. Before Facebook was “The Global Social Network of the Future”, it was more or less an online, interactive version of Harvard’s already existing online directory system which was called, unsurprisingly, the facebook. Before AirBnB was “The Sharing Economy of Space”, it was a couple of broke entrepreneurs who realized they could rent out an air mattress on Craigslist for money; hence the name “Air Bed and Breakfast”. None of what I’m describing is to denigrate the hard work and effort put into building out these ideas and turning them into vast global markets, rather it is to point out that the innovators and entrepreneurs most lionized by our society put a lot more time and effort into building up their skills and resources and solving “boring” problems than into participating in moonshot thinking, and that is what must be done if we are to drive innovation forward in a sustainable way.

The future cannot be divorced from “boring”, small problems, because solving these problems creates value, and complex capital structures grow towards value like plants towards the sun. While moonshots tantalize us with the possibility that the future can be aggressively jerked into the present, we must recognize the fact that without capital structures of appropriate size and specialization, the present cannot support innovative solutions that are realized prematurely, especially when they are solutions to problems that only exist in our imaginations.

Value Potential Graphs via Machine Learning

After watching a few videos on machine learning, I feel like there’s a very, very large opportunity in using it for what might be known as “job placement”. I put that in quotes, because I think in the future that concept as we know it now might be pretty foreign, because I don’t think it will be divorced from education, and I don’t think it will be as structured as it is now.

It seems that whenever we, and this is potentially me projecting here, discuss something like job placement it has a very structured, top down feel. A central body evaluates you and points you somewhere else. However, if there were instead a machine learning network in place, you could perhaps do monthly little learning boot camps and provide feedback on how you enjoyed it, and be served feedback on how quickly you picked it up. That would turn an aspect of your skillset into labelled data allowing your self to be further sorted towards value activities of best match.

Machine learning isn’t wholly a top down assignment. Semi-supervised machine learning is internally assigned values, spot-checked by participants, surfacing patterns in the data and giving you a better idea of where you can offer the most value to the world.

What if “higher education” was simply an iterative process of labeling your progress in an internally consistent machine learning network.

Then, imagine this in a world where many companies had their hierarchy mostly distributed. That means no HR department. That means a “Value Potential” graph introduces you to someone at a company and you make a contract with that person to do work for their company. This kind of completely distributed corporate hierarchy exists, and I can only imagine it will grow in popularity.

Everyone’s afraid of AI these days it seems, but what if our entire concept of what AI can do for us is wholly tainted by top-down way our societies have been managed for hundreds of years. It’s hard for us to think of anything else. But, absent of centralized state control, what can AI order us to do? Really, in that scenario, general AI isn’t a commander. It’s a tool for us to find our local maximum. To gain perspective on where we are in the mix. To turn each of us into the most informed decision makers we can be.

John Mackey’s Great Point about Min Wage

I finally watched the Reason interview with John Mackey, and he brought up a great point about the minimum wage.

If businesses are really so greedy that they want to pay absolute bottom dollar for people to work for them, barring already existing laws, why wouldn’t the company just pay people in the US 10 cents/hour? Why is it that wages at the bottom end all look pretty similar? Why is it that, even if you removed existing wage controls, they couldn’t get people to work for them at 10 cents/hour?

It’s because they don’t control those prices. Wages are controlled by a dynamic market process that depends on individual productivity. You can’t imagine a price floor for human labor any more than you can imagine up a price ceiling. You can’t demand they pay $15 an hour any more than they can demand you pay $10/pint of Ben and Jerry’s ice cream.

While it may seem counter-intuitive, businesses aren’t the central arbiter in wage pricing. If they want to continue as a business, they have to set prices according to labor markets. Pay people more than they produce and the business dies. Pay people less and the business dies.
You can’t ascribe absolute agency to the business, and you can’t pretend businesses are operating under different economic laws than you are.