A Short Framework on Charter Cities & Hong Kong

Ever since I came across Patri Friedman’s writings on Seasteading, I have been very interested in the long-term need for frontier spaces where alternative forms of government can be tried. When Paul Romer made the case for charter cities, it took the idea of competitive governance to a level that seemed to have less technological risk involved.

Hong Kong is an early modern example of what we now think of as a charter city. It took a population that mostly resembled those on China’s mainland, gave them a different set of rules and regulations to live under, and demonstrated that a capitalist system with a rule of law was vastly superior to whatever we want to call the disaster that occurred under control of the Chinese Communist Party on China’s mainland. Hong Kong’s positive example led to numerous special economic zones inside China, and their explosion of wealth might be directly tied to the example set by Hong Kong’s success.

Broadly, there are three types of charter cities to be explored:

Developing world charter cities

The goal here is letting people see what people inside a country are capable of building if they import a rule of law system from the developed world. This is basically trying to kickstart conditional economic convergence in countries whose economic growth has otherwise fallen into a rut. There are many promising projects in this area, but there have also been many setbacks as governments in the developing world are often not stable enough or do not care enough about their reputation for trustworthiness to follow through on promises made to those organizing charter cities.

It is also often a mistake to take a Field of Dreams, and “If you build it, they will come” approach to charter city development. The most successful new charter cities are likely to be in Africa where new cities are being built regardless of whether they would be charter cities. A city that was going to be built anyway will have stronger economic fundamentals that a more efficient governmental system can then make even more efficient.

Refugee charter cities

The second category has to do with either reforming refugee camps or creating a space where refugees can move, live, and most importantly, work. Currently, refugee camps are not great places for people who are unable to have much control over their lives. Allowing them to participate in a modern economic system, either in the camp location or at some new city they can enter, would enable a level of self-actualization that is currently denied to them. They would also be given the opportunity to develop skills that they are currently denied in their current positions of sitting around in refugee camps and wondering if it will ever be safe for them to go home. This is not to suggest that refugees should not be fed and housed gratis, but systems which do not allow refugees even the option to work for fear of exploitation are hurting both themselves and the refugees.

This is an idea whose time has not yet come, neither the countries of the developed world nor the countries of the developing world seem eager to give up effective sovereignty over any piece of land. And in the developed world, they are incapable of welcoming refugees only into a refugee city without allowing them full access to society, which is a political nonstarter for many constituents. Creating a refugee city on national land would be a political disaster waiting to happen to all but the strongest political leaders, even if the lives of people within the city were an order of magnitude better than those inside the refugee camp from which they left.

Developed World Charter Cities

Creating charter cities with relatively uneducated workers, whether they are from stable or unstable parts of the developing world, is a tough task. Not only does lower average education imply a lower average productivity level per worker, but their lower-trust cultures might take time to adjust to fully take advantage of rulesets that allow the developed world to be relatively wealthy. It would be a much better shortcut to just take developed world workers and give them an environment with new rules where they can potentially thrive.

When thinking about new cities in the United States, Las Vegas comes to mind as the most populous city founded in the 1900’s. Since its founding, it has benefited from having a different set of rules than other places. With its legalized gambling, tolerated prostitution and mob activity historically funneling money into and around Vegas, it benefited massively from having different rulesets. But it is not exactly the type of example that inspires policymakers in other jurisdictions.

The better ideas for special economic zones in the United States to date have revolved around allowing new rulesets which might enable additional innovation in healthcare, aerospace or finance. People are moving less these days, finding a way to get lots of people to move for anything other than job opportunities has been difficult in a country whose annual mobility rate has fallen by almost half since the 1980’s. This might have just changed, as it now appears that a population of skilled developed world citizens might be induced to leave their country for one where they might find freedom.

A Hong Kong Exodus?

When China decided to pass a national security law for Hong Kong, they effectively ended the one-country two-systems policy that they had agreed to keep for 50 years past the 1997 handover. It will likely be enforced with a light touch at first, as they want to make sure that Hong Kong remains a viable financial center. But the situation has changed, and any local or even foreigner can be arrested by the CCP in Hong Kong, without recourse to Hong Kong’s famously impartial judicial system.

The United Kingdom has indicated that this is a breach of their 1985 agreement with China and indicated that they will be offering the three million plus Hong Kong residents that have or are eligible for British National Overseas status and their dependents a pathway to citizenship.

If Hong Kong citizens decide that flight is the answer, it will be one of the first large migrations of a highly productive and educated population since the Cold War ended. This potential influx of people has excited people in the broader charter city movement – a highly productive city demonstrating the benefits of alternate government rules seems within reach. And any opportunity is not going to be seized by just one group. There is going to be competition.

Old Networks vs New Networks

The problem with seasteading and charter cities has always been about core productive activities and how dependent they are on networks. If there is value without a local network of people working on various interweaving complementary and competing goods and services, as we see with offshore oil production, then there will not be the type of economic activity that can sustain a new city. A city only arises when there are valuable activities with significant network effects in various complementary industries which are able to operate relatively efficiently.

Hong Kong worked because it was a place that could handle manufacturing, or later coordinate manufacturing and other economic activities within China, along with services such as shipping and finance. If Hong Kong were relocated by an act of god, or by the great programmer of the vivid simulation, to the other side of the world, they would immediately become far less productive. With no geographic proximity to China, even with every local network intact, they would no longer be the gateway to China.

Moving people out of Hong Kong and into a new city would not just be weakening their China-dependent network, it totally snaps it. The relevant historical analogy might be the long-term decline of Venice after trade routes started going through the Atlantic around Africa, except with the trade routes shifting all at once instead of over many years. It is imperative that the professionals who are leaving behind their China-based connections find attachments to other productive networks which they can both support and benefit.

And setting up a new city somewhere far from existing cities, as various people have been proposing in the UK, is not going to cut it. Any new city needs to be close enough to existing cities to be intertwined with their networks, or those of the coming Hong Kong exodus would be better off focusing on finding their place among the many Cantonese Chinatowns around the world.

The Most Important Regulatory Change

Many people who think about charter cities like to think about fixing things that are obviously wrong. In the developing world, that is the rule of law. In the developed world, that is removing some of the burdensome regulatory overhang that is preventing the fast-moving iterative processes which can lead to significant technological advances and productivity growth in certain industries.

But for the people leaving Hong Kong, the most important factors will be whether they will be able to practice their jobs in their new location. A fast track towards approval for doctors, nurses, lawyers, teachers and other specialists would go a long way towards convincing them that your destination is right for them. Attracting the doctors, lawyers and teachers will make the destination that much more appealing to their friends and family members, some of whom might consist of specialists in technology or restaurateurs who would otherwise be able to work from anywhere.

The United Kingdom or Canada, with their parliamentary systems and historical ties to Hong Kong, might have the best shot at doing this. In the United States, once the more difficult immigration issue has been solved, the question comes down to which state to pick. States like California and New York might seem like potential cultural fits, but they have made building so expensive that they are out of the question. It would have to be a state with empty land near major cities that are willing to grow. Texas, Nevada and Arizona all come to mind. Arizona is the only state that has so far demonstrated that it is worth recognizing occupational licenses from other jurisdictions (within the US) for people who move to Arizona. It might not be a large stretch to get them to apply the same standards to Hong Kong emigrants.

Do you have a plan?

And finally, for those directly focused on building something – it may be popular to talk about charter cities but convincing a government to give up any sovereignty is always a tough fight. It is better to focus on a brand that has worked in recent history in the United States, and that has been master plan cities. Donald Bren, who acquired the Irvine Company in the late 70’s and early 80’s and built out Irvine into a city of around 280,000 people, is now worth over $10 billion dollars. Among the many advantages of the Irvine Company’s master plan community were the size of its land, its undeveloped nature despite being relatively close to a major metropolitan area, its single owner, and how it welcomed a public university into the center of its city. These advantages enabled them valuable connections to important networks combined with a level of control and flexibility that should not be underrated by those looking to achieve something similar.

Rather than ask for a country to give up sovereignty, it will be easier to ask for some HQ2-type support for a new master plan community. Amazon had cities and states around the United States bid on how much of the tax revenue that would be generated by Amazon moving into the area that Amazon would be able to keep. Arlington, Virginia agreed to give some of the extra money raised in payroll taxes and hotel room taxes generated by Amazon back to the company and promised to spend almost $200 million on infrastructure improvements. This is credited against the almost $3 billion in extra revenue that Amazon expects to generate for them over the next twenty years. Amazon has a lot to promise a region, but an influx of potentially hundreds of thousands of developed world workers should be even more valuable. And while discounts on state taxes or help with some infrastructure funding will be important variables, it will be more important to negotiate with agencies at the state level who will have the authority to authorize specialists to continue practicing their previous jobs with minimal retraining periods.

Starting any new development is not going to be easy and for a project that aims to provide a place where fleeing Hong Kong residents can find their freedom, there is a need for a big start. It will be interesting to see if any of the Hong Kong billionaires manage to get the bulk of their wealth out of Hong Kong before they, too, are subject to Chinese capital controls. In terms of evaluating projects for relocating Hong Kong people, the presence of people with those types of resources will be a key factor for ensuring success. Having people on board who are credibly committed to investing hundreds of millions to billions of dollars to get a project off the ground will be key for convincing both people in Hong Kong that it could make sense to move and to convince the authorities in the new destination that it makes sense to give them the type of support that they were willing to give to Amazon’s HQ2.

When talking about where people from Hong Kong might make new lives if China makes remaining in Hong Kong untenable for a large fraction of the population, it is important to remember that those who choose to and are able to flee will end up where they can make the best lives for themselves. Cities across the world are poised to benefit from an influx of smart, hardworking people who value their freedom enough to take drastic measures to ensure that they do not fall under China's thumb. Communities built specifically for them will be just one of their potential options, but the governments, organizations and individuals who take that option seriously are poised to benefit massively from China's mistakes... if they can get it right.

Some 2020 Predictions

It’s 2020, and there were a lot of things that I wanted to write in 2019 that I never finished. Luckily, I can write one post and cover many of them under the guise of writing predictions for the next decade.

Rise of the Splinternet

A significant trend of the last decade has been users engaging not with the general internet, but in walled gardens like Facebook, Pinterest and other applications. The number of blogs linking to each other has fallen off, the number of users on curated apps have grown much more. The declining relevance of a global internet is happening on a geographic level and as more discussion moves out of public spaces.

Geographic Splinters

The rise of China’s internet ecosystem inside their great firewall is another example of a space on the internet that has been walled off from the rest of the world. And inside China’s walled garden there are walled gardens within walled gardens. Alibaba and Tencent have relatively separate ecosystems. Despite both investing prolifically in China the companies that have taken money from both are few and far between. China’s ecosystem makes discovery difficult relative to other ecosystems, new companies cannot easily buy Facebook or Google ads to reach customers, which may be why super-apps like WeChat and Meituan-Dianping work well in the Chinese ecosystem while outside of China every wannabe super-app is still only really able to make money at the thing they are best at. Competition is hard, and while competition in China is fierce, the winners are not always related to who can serve their customers best. As one Chinese VC put it, “We like aggressive founders, ones who can get their competition thrown in jail.” However, in more open ecosystems where winners are determined by consumers, it is tough to be the best across multiple services.

This is not to say that winning Chinese companies did not also furiously focus on their customers by quickly copying what is otherwise working for other companies. It’s just that they do all this while also facing less competition from other sources as many of their competitors are absent for political reasons.

In the face of general unrest, China has been stepping up their internet censorship. While foreigners can use a sim card as a VPN and large corporations have their ways around the system, China is throwing some domestic VPN providers in jail and the ability to access internet from the rest of the world in China is getting more difficult by the year. China’s creation of an internet walled garden, and the tech ecosystem that has sprung up inside their garden, has inspired other countries. Iran and Russia have followed suit enthusiastically. India has been taking a playbook from China and shutting down the internet in politically volatile areas like Kashmir.

India has also seemingly used the threat of shutdowns against companies like Bytedance to force them to have a sizeable presence in the country, either because they need to have someone they can talk to in person about the problems of their platform or perhaps with the goal of transferring knowledge and skills to their local workers. India’s tech sector has produced a few big winners by selling companies to outsiders, but the number of homegrown tech startups that have found business models that can generate positive cashflows rather than act as strategic assets for companies looking to enter India have been few and far between. With so many tech companies still having to compete with Facebook, Google and the like there is a temptation for politicians to skew the playing field in favor of local companies. When India passed a law preventing e-commerce companies from selling products from companies in which they owned an equity interest they skewed the playing field to support local SMBs. There will likely be pressure to do more for the domestic tech scene.

Vietnam has also started down the path to mimicking China. They passed new cyber security rules in 2018 that require internet giants keep data generated by users within Vietnam inside Vietnam’s borders. Depending on how it is applied and how foreign companies react, they will either be excluded from doing business in Vietnam or will have to open a sizeable presence in the country.

The developing world is not the only group of countries getting in on this game. When Europe passed General Data Protection Regulation, companies were faced with the choice of annoying all their visitors with popup notifications about cookies and implementing other regulations, or not being allowed to operate in Europe at all. So far most of the companies have cooperated with the EU, and a new category of compliance jobs was created. But the EU also seems close to implementing policies or implementing so many regulatory fines that create costs that make it too expensive for tech companies to operate in Europe. At some level of cost companies will choose to opt out. The resulting splintering might Balkanize the developed world internet in a world where the developing world is already splitting up.

Personal Content Going Offline

The 2010’s brought about another odd scenario. Content is relatively valuable. It helps create the brand of a person or company. It can help with search engine optimization as others link to useful pieces. But today, people are actively deleting content they have created. It is now considered best practice in some circles to automatically delete twitter comments, old reddit comments and to privatize Facebook posts (or even simply delete Facebook). And when they create new content online, it is more often in places where the masses cannot see it.

The first widespread acknowledgement that comments created career risk arose when Justine Sacco got fired for making a joke on Twitter that spread far beyond the followers she meant to target. Today, every high-profile political appointment or really any person who enters the limelight will have their past views scrutinized by their adversaries or by content creators hoping to generate some rage clicks. There was a particularly notable case of Leif Olson, a lawyer appointed to a role in the Trump administration whose public joking about anti-Semites were purposefully taken out of context by Bloomberg Law reporter Ben Penn to make a story. This was notable because Penn was actively operating in bad faith, passing on screenshots that looked incriminating to the department where he was going to work when the full context made it very clear he was laughing at anti-Semites rather than being one. Benjamin Penn celebrated Leif’s temporary resignation and then went silent after Penn received blowback for effectively fabricating a scandal. Bloomberg Law later issued a correction. But Leif was only open to this attack because he had content on a Facebook page open to the public.

Given that jokes will be taken out of context, views that were acceptable during their time will be compared to today’s zeitgeist and found wanting, and the increasingly common practice for this information to be sent to employers with the implicit threat that if they do not act the employer will also be attacked, having personal content accessible on the internet is riskier than ever. In the face of this, many people have decided that engaging publicly just isn’t worth it. Some people have opted for pseudonyms. There are entire ecosystems of finance, energy and government professionals commenting anonymously on current events. Mitt Romney chose the nom de plume Pierre Delecto simply to follow relevant Twitter conversations without excessive scrutiny around where he was getting his news. That we know what his username was indicates that this method has significant risks, although in this case the only part of the story that resonated was about the name he chose. Pseudonyms are particularly popular on Reddit, an internet portal that is only behind Google and Youtube in traffic but where monetization is much more difficult because of the nature of its users.

Other websites have rejected anonymous commenters. People who have something to say are often only speaking because they disagree. And between spam and trolls it becomes logistically difficult to police commenters. The main benefactors of a relatively curated comment section are the readers who are looking to see how the author’s points might be challenged or expanded upon. The usefulness of the comments is usually inversely proportion to the size of the community commenting. A very small subreddit will have experts happily engaging with neophytes, while a place with a large commentator base will often put discussions around tribal dynamics first and foremost. The economics blog Marginalrevolution.com has managed to keep a relatively high signal to noise ratio in their comments despite a significant readership (at least one of the authors really doesn’t like the comments, but that’s part of the point of having comments), and that may be due to how they hide the fact that there are comments on the main page. The more comment sections close, the more important forums such as Twitter or Facebook feeds become.

In school we were warned about misbehavior going on our permanent record. It’s not clear one even existed (And if it did, my elementary school never figured out I was the one who stuck the wires in the electrical socket in the library), but the internet has become a permanent record that people care about. If jokes from five years ago weren’t making it hard for people to direct movies, host the Oscars or work at a random company that does social media screening, then people wouldn’t care. But there are real life implications to having casual conversations on your personal record, so people are opting out. They are exiting the public internet. People have private slack channels, Whatsapp groups, FB messenger chats, iMessage groups, WeChat groups (where the internet isn’t watching but the CCP is), email threads, Twitter DMs, newsletters, Discords, etc. There is no clear winner of the second conversation space, but its growing popularity is also a retreat from the open discourse that was once more significant on the internet.

Text, Video & Audio – Separate Conversations

It’s pretty easy to be sent a link to an article, read it, find a few more related pieces and some online debates around them and come to an initial understanding about an event in a reasonable time frame. But that isn’t how the next generation is engaging with certain ideas. A lot of debate and discussion is occurring on Youtube. In order to understand a situation, you would have to sit through thirty minute videos (play them at 2x) and multiple responses. It’s exhausting, and that might be the point. If you want to look at the most accessible version of this drama, check out Philip DeFranko’s Youtube channel. Video discussions and print discussions on subjects are happening in parallel and do not necessarily intersect. And this is part of the point, young people avoid interacting with older people by choice and video is their way to do this. It’s the tech enabled version of a loud bar that scares away older patrons.

One area that is more age neutral is podcasts. Right now, podcasts are another way for people to talk about things and it doesn’t seem like people get attacked in a way where they would if they tweeted or were quoted in an article saying the same things they say on podcasts. You can say things about people you could never say on Twitter or in blog format. This makes for a golden age of podcasting that might not last as long as we would like. The inevitable pressure to find ways to share content and increase engagement is going to mean more ways to spread clips from shows – and perhaps more importantly, people are going to get used to consuming bite-sized audio clips. When the ease of sharing a clip goes down, so does the ease of sharing an out of context clip, or an in context clip that was a truth that is offensive to the wrong people. Once people know they are going to be attacked for what they say, we may lose much of the free-flowing conversation that occurs and be left with people who excel at PR speak.

A Couple Cold Wars Heating Up

The Ideological Cold War

It’s no secret that politics are becoming more polarized around the world. The far right and far left are become more influential in many countries around the world. In the US, congressional voting patterns have born this out and many centrist candidates end up not seeing re-election as they know they would not survive a challenge from primary voters. The start of political violence has broken out between violent antifa communists and actual fascist far-righties in various cities. Threats of violent protests, or actual violent protests, have been used to shutdown speakers. But these events have so far remained on the fringes of society.

People are being personally attacked, figuratively more often than literally, for their politics in ways they were not previously. Joaquin Castro courted controversy when he tweeted a list of 44 local Trump donors and the local businesses they ran (six of whom had previously given him or his brother donations). But to see the future of where the decade might lead us, we look to China… This is not usually as good an idea as many people in tech would like you to think, but in this case, what is going on in Hong Kong is particularly relevant. What is still mildly controversial in the US is standard practice in the current Hong Kong protests. In a move called the yellow economy, protesters are using apps that lets them know which businesses are in favor of the protests so they can support them and ignore the so-called blue businesses that are owned by people who support the CCP and current establishment in Hong Kong.

It isn’t much of a stretch to imagine parallel red and blue economies emerging as the decade moves on and presidential election years are likely to accelerate these bifurcations. Each year, companies are asked to make public statements on divisive political ideas, and currently the default color for consumer companies is blue. Right now, with notable exceptions such as Nike, most companies are more focused on avoiding controversy (and overreacting to Twitter mobs) and hoping that red and blue consumers will both want to buy from them.

But going forward, as partisan antipathy increases, it is easy to imagine campaigns by either side to increase their boycotts of companies that lean too far in the wrong direction. It is easy to imagine apps that track different types of coded spending, letting people know how many dollars they must donate to the democrats to cancel out the financial support they gave to the GOP. This number could be displayed right next to the amount they need to spend on carbon credits to cancel out the impact of their air travel. We could even imagine leaderboards where people compete for ideologically pure consumption habits.

The above story isn’t likely to come true as described, but some version of it is unfortunately too likely. Also possible is increased usage of secret blacklists by companies, whether to track people who made too many righty statements or to track new employees whose lefty activism makes them significant litigation liabilities. This might be a space where censorship-proof decentralized tools prove useful, though not in a way that is necessarily helpful for society.

The way we might avoid this future is if centrist coalitions become more viable politically. But if the trend towards extremism continues, the above scenarios become more likely.

The China Cold War

One of the few places people have given Trump credit has been in his shift towards treating of China as more of a potential adversary. Whether Trump stays or goes, the adversarial shift towards China is going to be one of the most enduring parts of his presidential legacy. It’s unclear if this would have happened as quickly under a president who answered more directly to the US business community, many of whom are still making or hoping to make money in China. But enough companies have been burned by seeing technology transfers to China create their future competitors as they are kept out of China’s market that even the US business community is increasingly skeptical of China.

Politically, the reasons for opposing China are almost overdetermined. The voices who claimed that access to world markets would democratize China have been proven decisively wrong over the past decade as Xi centralized and increased state power. Add in China’s treatment of Uyghurs in concentration camps, Falun Gong organ harvesting, the breaking of the one country two systems pledge with regards to Hong Kong, China’s military expansion to try to claim the South China Sea, and efforts to influence and effectively colonize less developed countries via the Belt and Road Initiative and behind the scenes bribery and there is every reason to start pushing back on China’s agenda.

One notable advantage of China’s soft power in this developing cold war is their near total capture of America’s film and television industry. People in Hollywood are worried about ever offending a totalitarian regime, lest they end up on a blacklist that prevents them from working on movies that are hoped to be released in China. It is notable that none of the new action movies have the villain played by a Chinese government official, despite many real-life scenarios that could inspire these types of stories. Absent large mistakes made by China in Hong Kong or large groups of filmmakers who give up on ever getting their films into China, it is hard to see how China will lose its grip on the industry.

The US has started preventing technological acquisitions from Chinese investors with stricter applications of CFIUS. Silicon Valley hasn’t fully caught up yet to these developments, there are a few people who facilitated the transfer of technology to China who are still hailed as inspiring venture capitalists and not as enablers of a totalitarian police state.

There will be a continuing fight between governments who want cheap telecom technology and are willing to expose their infrastructure to the Chinese and those who want to stick to systems that implicitly allow surveillance by the US and its allies.

Grad schools still see China as a source of students with extremely high test scores to fill up their programs. But as shown by the recent case of the grad student arrested from Beth Israel Deaconess Medical Center in Boston, they are now being tracked a bit more carefully to prevent transfers of technological secrets back to China. Still, many of these students are patient enough to wait out their time, and with the US making staying in the country difficult it is an easy choice for many of them to take this knowledge back to China where they will find higher status opportunities than their alternative options in the US. The Trump administration is already looking more closely at students applying to study robotics, aviation and high-tech manufacturing. If the cold war with China heats up, it is only a matter of time until more research funding is explicitly tied to the student researchers being mostly US citizens, or perhaps just directly excluding Chinese graduate students. That this hasn’t happened may be due to the reliance of low tier colleges on foreign Chinese students paying full price. If all 363,000 foreign Chinese students are paying around $40,000 a year, that is almost $15 billion dollars going to colleges that the establishment has no easy way of replacing.

The Bureau of Industry and Security announced in 2018 that they were considering implementing controls over technologies like AI and autonomous vehicles the way they control weapons technology. Their prospective list includes, biotech, position, navigation and timing technology, microprocessor technology, advanced computing technology, data analytics technology, quantum information and sensing technology, logistics technology, 3D printing, robotics, brain-computer interface, hypersonics, advanced materials and advanced surveillance technologies.

In 2019 they added five technologies to the Commerce Control List.

Discrete microwave transistors (a major component of wideband semiconductors), continuity of operation software, post-quantum cryptography, underwater transducers designed to operate as hydrophones, and air-launch platforms.

To start out 2020, they put restrictions around exporting AI for analyzing satellite images.

We should expect more of the technologies mentioned above to become controlled technologies. (Incidentally, Dan Wang is one of the better people to follow if you are interested in the China/US technology trade war and regulation space). The choice to implement controls on something as broad as machine learning technology would send a shockwave through the industry. The satellite rules are an interesting test case. Many of the people working on technologies on the prospective list in US companies are Chinese nationals, educated at US universities. If the licensing program around deemed exports does not make it easy for them to get licenses it will result in many of these experts going back to China to build tools over there. To the extent that there are competitive ecosystems, forcing people out of the US ecosystem and back to China might not be a long-term win for the United States. On the other hand, employees at companies like Google might be less quick to criticize working on tools that help the United States Defense Department if the ones loyal to the Chinese government are no longer working there and able to sign employee petitions.

The Subscriber Economy

Businesses have always realized that financing purchases for consumers allows them to extract more from their customers. That has become institutionalized in subscription only business models as things that used to be sold once with upfront fees are now primarily funded via subscriptions. What started with software is now applied to exercise bikes, tractors and even baby monitors (Nanit). How far this can be taken, where else we will see it and its general impact on society are all open questions. A lot of early stage investors say they do not want to fund any new hardware company that doesn’t have a subscription element, so this trend is not going away. The cars that people supposedly own are becoming increasingly more difficult for unauthorized third parties to fix. In the 1980s, Margaret Thatcher made a point to increase home ownership significantly in the UK to create more capitalists. Today, homes in major metropolitan areas are more out of reach than ever and if new business plans work then even appliances won’t keep working unless their real owners are paid a fee. In the long run, a society with lower levels of ownership risks fueling a wholesale rejection of capitalism.

Another reaction might be a return to dumb devices. There is a hole in the market for well-functioning dumb hardware that people can own, repair and do with as they please. While I appreciate the convenience of many smart devices, I find myself rooting for dumb devices even as many forces are arrayed against them.

Can’t Buy Me Status (Everybody Tells Me So)

The explicit rise of the status economy has been one of the major events of the past decade. Eugene Wei chronicled many of the emerging dynamics in his Status-as-a-Service essay. Suffice to say, what many people thought was a joke with Klout (obviously not a joke in retrospect, and it got acquired for $200 million) has become an obviously important factor in our modern economy. People are creating careers out of being popular and pushing products, from the Kardashians and other influencers whose fans follow their recommendations with purchases to founders who are popular on Twitter and thus able to raise at much higher valuations from VCs, the internet has created a space where people can turn their status into money.

No, no, no, noooo

For much of history, people have also turned their money into status. In the olden days, people married into nobility or outright bought a title. In the modern age, people endow prizes or institutions to be named after them. Slightly less wealthy people serve on the boards of these high status and highly resourced institutions and contribute to their finances. It is typical for someone who made money in their life, even if it was in a way that society finds distasteful, to launder their reputation by getting their name onto a new or existing respected institution. The Ford Foundation, Carnegie Mellon, etc. One hundred and fifty years ago, Leland Stanford benefited from Chinese migrants willing to work for less than whites to build his railroads. Today, Asian students need to have much better than the average scores compared to others who make it into the school he started (Stanford wasn’t the school directly under litigation, but they filed an amicus brief supporting the rights of institutions like their own to continue to discriminate against Asian Americans). Bill Gates was perceived as the enemy of most nerds in the 1990’s due to his aggressive business practices, but thanks to the effective philanthropic work of the Gates Foundation, he is almost every nerd’s hero in the 2020’s.

One of the more notorious recent cases of status laundering was Jeffrey Epstein, who helped raise money for MIT’s media lab and people might have therefore assumed he must not have done such horrible things if respected institutions were still interacting with him. (I believe it’s obligatory to mention at this point that he obviously didn’t kill himself.)

The universities have remained central in the establishment status system, and despite their many types of dysfunction it has been hard to replace them. Many professional certifications also require going through the university system, and it is hard to find talented young people by other means. What makes the process difficult is there needs to be a reciprocal transfer of status between the institution and the people who have passed through the institution. Harvard could primarily teach juggling, but as long as people thought it was the same institution that has their impressive alumni, the ambitious students who want to be associated with that group would continue lining up. All Harvard or any other top college needs to do to keep the system going is continue to accept people who are likely to be impressive. They just need to make sure the parts of the class that are legacy or meritocratic are large enough to outweigh the drag on their brand that occurs if they focus on students with other characteristics. By legacy I do not just mean the children of successful alumni, but also other children of politicians, stars, industry leaders or other powerbrokers. Meritocratic can mean test scores, grades, competitions and research projects but also other accomplishments like a flourishing acting career. Movie star alumni are good branding even if they have scandals later. Kevin Spacey is still pretty good for Juilliard’s branding while Enron’s Jeffrey Skilling is not great for HBS.

So where does this leave people who want to replace these institutions? They have to realize that reputation gets built in a feedback loop between the institution and its members. First the institution gives credibility to the member, but then some of those members give much more credibility back to the institution. Paul Graham did this well with YC. First, his business accomplishments and his essays earned him a significant amount of status and people took those going through the YC program more seriously. When some of the YC companies worked out, they added more status to the program than they got from it. Money is only the first step. If the money isn’t put to work attracting people who might pay an order of magnitude more status back to the institution then attempts to build new high status institutions will be very hard.

A lot of people that want replace educational institutions aren’t thinking clearly enough about the status angle. There isn’t a good flywheel to attract high school students away from colleges without offering them a substantial amount of money. It is likely that top tier colleges will continue to dominate the high-status landscape in the 2020’s. There will also be more institutions of higher learned that shoot themselves in the foot like Evergreen, mismanage their money like Sanders’ Burlington College, and others that are too dependent on a flow of subsidized loans or Chinese students paying full tuition like many low tier colleges.

As an aside, the basic way to fix the student loan crisis is as follows – revert the bankruptcy law that made it impossible to declare bankruptcy on student loans. Bankruptcy is not a great thing, so people who paid off their loans won’t be angry, and people who really need to escape their debt will now have a way. Then add in some measures to make schools accountable for the bankruptcies they are causing and call it a day. Hopefully this will be the political compromise that the debt forgiveness/free college types can agree on with the hard money conservatives.

The Rise of the Neurotic

This is not so much a new trend as it is something that has been happening since the 1950’s. In 2000, Jean Twenge published The Age of Anxiety? Birth Cohort Change in Anxiety and Neuroticism, 1952-1993. She found that the average child psychiatric patient in 1957 had similar anxiety scores to normal children samples collected between 1970 and 1988. This looks to be a trend that is either accelerating and/or we are seeing the normalization of behaviors prompted by extreme levels of anxiety.

But the past decade already saw an acceleration of sorts. Microaggressions, a new category of social offenses, became a significant subject this decade. Yale fired some otherwise exemplary faculty-in-residence, Professor Nicholas Christakis, after his wife Erika Christakis, an expert on child psychology, sent out an email with offensive statements such as

As a former preschool teacher, for example, it is hard for me to give credence to a claim that there is something objectionably “appropriative” about a blonde-haired child’s wanting to be Mulan for a day.

And…

Even if we could agree on how to avoid offense – and I’ll note that no one around campus seems overly concerned about the offense taken by religiously conservative folks to skin-revealing costumes – I wonder, and I am not trying to be provocative: Is there no room anymore for a child or young person to be a little bit obnoxious… a little bit inappropriate or provocative or, yes, offensive? American universities were once a safe space not only for maturation but also for a certain regressive, or even transgressive, experience; increasingly, it seems, they have become places of censure and prohibition.

Yale’s kowtowing to its students was widely seen as a mistake at the time, but these types of reactions are becoming more normalized. To see where the future might lead, we might look to DSA meetings and the Yale quad where some people claim that clapping hurts them so everyone should use jazz hands instead. As for the people who find jazz hands creepy? Some people apparently get left behind by history.

Hormesis is the idea that a little bit of stress makes people stronger (Hormesis is frequently incorrectly attributed to noted popularizer Taleb in the name of antifragility, but these are separate concepts). As a society, we are removing early stress from children’s early years. When they finally face people who even simply disagree with them and the values they have been taught, they don’t know how to react outside of ad hominem attacks, frequently believing that if they identify their opponent as part of another tribe they have won the argument, and complaining to the authorities.

There are other factors that might be making our society sicker. The maximalization of empathy, the type that puts a person in the mindset of another that is suffering, is not necessarily a healthy thought pattern. The need for compassion for other humans is obvious, it’s less obvious that letting people imagine themselves suffering leads to rationality or a healthy psychological mindset.

A Google n-gram showing the rise of the concept of empathy, which has increased along with our age of anxiety:

Large families and close-knit groups are also on the decline, replaced by potentially better matched but amorphous relationships that people can easily exit. The prevalence of ghosting, the idea of just never talking to someone again, makes exiting bad relationships easier but also makes other existing relationship more fragile. On the one hand, it is easier than ever to find a new partner online. On the other hand, it is easier than ever for people’s partners to find a new partner online. And instead of seeing and interacting with friends every day, people count on likes and notifications from social media to reassure themselves that their relationship status is intact.

On top of all of this this, going back to the adults at Yale who were kicked out of their jobs by anxious students, people are shown that broadcasting their problems in a certain way gives them power over others. It would be a wonder if society wasn’t getting more openly neurotic.

The Rise of Gaming

Gaming is a huge industry. For how big it is, it has stayed on the relative periphery of our culture. That is partially because an interest in gaming is still coded as an activity that is more low status male. But with the ubiquity of smartphones, everyone is gaming now, and it is obvious that PC, console and mobile games are huge multi-billion-dollar industries.

Gaming Regulation

The big scare of past decades was about whether simulated violence leads to real violence. To the extent that violent people played violent video games, it was obvious that the worriers were mixing up correlation and causation and activists like Jack Thompson were making such bad arguments that he became an internet meme before the concept of memes became primarily associated with pictures with text that get widely shared on the internet. It wasn’t that games calmed down, and we might see a new wave of puritanical censoriousness trying to clean up games in the coming decade. Even a relatively tame game, such as Dota Underlords, derived from a Warcraft 3 custom map called Pokemon Tower Defense can have themes that some parents would want to protect their kids from. A line that stands out in my mind when using the insane arsonist character, is when he sometimes says “Nothing is more rewarding than the feeling you get when the body stops moving” after you win a round.

But there are other avenues for those looking to regulate gaming. Some people are worried about gaming addiction. Korea already implemented a Cinderella law, doesn’t let kids under the age of 16 play between midnight and six o’clock in the morning. But that wasn’t enough for some mental health professionals in Korea, who saw games as a cause of problems among young men, and they lobbied the World Health Organization to add an internet gaming disorder to its International Classification of Diseases. The WHO announced in 2019 that it will include the disorder in the its 2022 ICD.

To the extent that better games are effectively creating Nozick's hypothetical experience machines that allow people to opt out of society, it will be interesting to see if yet another war will be waged against people doing what they want to do to themselves. If that war is waged, it is likely to be as effective as other types of prohibition.

In an area where activists might have more success, consumer activists are worried about how certain games monetize their users by encouraging gambling. The primary gambling mechanism is loot-boxes. These are in-game chests that contain random items, some of which sell for a premium on the secondary market. Customers, some of them young children using their parents’ credit cards, buy loot-boxes until they get the item they really wanted. This generates far more revenue than if the company had simply charged a direct price for the item. Loot-box regulations have been passed in a variety of countries, and given the tendency of legislatures to both protect children and push back on gambling business models this is a trend we should expect to continue. It is likely that a freemium model of gaming, in which gamers get the basic game for free but have to subscribe to earn achievements and cosmetics, will become more of the default method for monetizing games when loot boxes are banned.

Where there is a secondary market and an active esports scene, it is also popular to bet these digital goods on the outcome of esports games. A lot of the gambling happens in the gray market, as companies are hoping that by betting with skins instead of money they will be allowed to skirt existing laws or at least enforcement of laws. Gaming companies, who might be liable due to the skins only being marketable on their website, have started pushing back against these sites themselves.

Esports - the Sport of the Future?

There are two ways to look at esports:

1. An activity that will grow to be as large and as valuable as the NBA, NFL or at least the NHL.

2. A distribution mechanic, branding exercise or loss leader for games that can be played repetitively. Less employees are needed to create and slightly modify an hour long game than is needed to create content for new 40 hour+ AAA games.

Right now, the people who benefit the most from esports are the gaming companies. The question is if sponsors can grow beyond the endemic sponsors like energy drinks, computer hardware and streaming services into more mainstream advertisers to cover the production costs, team salaries and prize pools needed to sustain an esports ecosystem.

Different gaming companies are taking different approaches. Blizzard seems to be trying to build a gaming league that looks similar to the NBA, NFL or NHL while Valve is focused more on major tournaments that promote their game. Riot is somewhat between Blizzard and Valve, where they have a league but aren’t as tied to the traditional model that Blizzard is trying to capture. Of these companies, Blizzard, with its very high franchise fees, might be the only company directly profiting from their foray into esports. Riot and Valve seem to be investing significant amounts of money into their competitive scenes as a way to engage their player bases and sell them more in-game digital goods.

Streamers

Streamers are a combination of influencer, reality TV and the Harlem Globetrotters. The most popular streamers at the end of this decade play first person shooters, and grew their popularity playing battle royale style games (Fortnite). Battle royale games have one person facing off against 99 random players, and they are generally not organized by skill. In these conditions, a player in the top percentile can pull off moves that make their opponents look sillier than the Washington Generals.

As they amassed viewers that rival that of a modern TV show, streamers have been recruited by platforms, either those trying to break Twitch’s dominant hold on the space or Twitch itself. Microsoft’s Mixer made waves when it recruited top talents like Ninja and Shroud, but it is unclear if viewer loyalty is enough to create a Howard Stern to satellite radio moment from Microsoft’s significant investment. With the competition to attract talent, it’s unclear if the companies in the streaming space are profitable, and the current business models might not see profits for some time. But right now, the major players now have very deep pockets and are willing to use them.

1. Amazon is willing to subsidize streamers on their Twitch platform by letting Amazon Prime customers subscribe free (Giving the streamer income in return for emoticons) to one streamer each month. They also pay major streamers and esports events directly to remain on their platform. Users are pretty locked into the streaming live chat experience, and smaller creators really like the subscriber dynamic that has given them a relatively steady income. Twitch has also locked in mindshare with their custom emoticons/memes – if you don’t go on Twitch much but recognize Kappa (also an unrelated European clothing brand), Pogchamp, 4Head, BibleThump or Monkas you are seeing Twitch memes in the wild.

2. Microsoft has been spending money to recruit major streamers to their platform. But so far these streamers see their viewership drop by more than an order of magnitude, so other than the cash payouts things are not really working out for the recruited streamers.

3. Youtube is still dominant in hosting content but not in gaming live-stream viewers. This is despite their live-streaming being technically decent. They are still missing the live chat experience that draws viewers to Twitch but exclusive streaming contracts stick to streaming and acknowledge that every relevant influencer needs Youtube to host their permanent content.

4. Facebook has done exclusive deals with esports orgs like ESL, but viewers were not happy with the laggy stream or the chat experience. They have a greater shot at being more relevant in the next wave, as Oculus is well positioned to be the default hardware if VR becomes a dominant way for people to experience streaming events.

Behind these major players are the far more numerous minor players. Some of the minor players rise to prominence via their esport achievements – people want to watch the best. While top streamers have to decide how to monetize their popularity, competitive esports players often have to decide between being a career streamer or being competitive. When top players stream in casual matches, their competitors often stream snipe them to get information not available to normal opponents. There are a variety of ways for them to handle this, but the bigger trade-off occurs when their streaming schedule intersects with the demands of rigorous training. In team games, teammates who don’t have streaming to fall back on might also resent the competitive player who is spending time investing in what is essentially an in-case-we-lose insurance policy. Some players have managed this balance, but a greater majority have opted into the steady income of being a full-time streamer.

In the next decade, a lot of people who dropped out of college or put their careers on hold to play games will find themselves falling behind in game to younger players with faster reflexes. They will have to see if the demand for their content and other skills can sustain a long-term career. The biggest hurdle is moving outside of their primary game, where the bulk of their fans come from. The game streamers who have viewership across multiple games have derisked a significant aspect of their future income, while single game players are at risk of dropping off the map when the game the specialize in falls in popularity. It is likely that we will see new jobs emerge in these spaces as this is an emerging media space that is attracting just as many eyeballs as some of the most popular shows.

Are You Ready for a Remix?

One sad prediction, for those who might have hoped gaming would show us a path to the future beyond the endless sequels and prequels ending up on Hollywood and on our televisions today, is that we are going to see even more repeated content in the gaming space. Making games is expensive, and anything that can be done to derisk games is going to be done. This isn’t new. Farmville, the first major success on social, was really just a remix of Harvest Moon. League of Legends is a version of Dota, modified to increase the twitch gaming and remove aspects that overly complicate the game.

For games that are new, one common pattern to expect to continue is that second movers can win big if they release faster cartoony free-to-play version of a newly popular games. League of Legends beat out Heroes of Newerth in this manner in the genre created by Dota and Fortnite beat out Public Battlegrounds (PubG) in the battle royale genre. EA fast followed with Apex Legends, which seemed to do relatively well even if it never became as large as Fortnite.

A source of game ideas that is still probably underappreciated are the custom map games from the days of Warcraft 3 and Starcraft. Riot’s Teamfight Tactics (as well as Dota’s Underlords) emerged after the studio Drodo released a game called Autochess, modeled after Pokemon Tower Defense, a custom game on the Warcraft 3 map. Just as Craigslist was a map for hundreds of startups, the custom games on WC3 and SC can be a map for game developers looking to do something that gamers previously liked.

There may be some truly new experiences with VR coming this decade, but so far everything has been basic first person shooters with controls that are a little more annoying and which can make people who play for long hours of time kind of dizzy (Gaming addiction might be solved by forcing games to use VR, similar to how alcoholics are given disulfiram to make them sick if they drink). However, the new Oculus is selling well and Valve is making Half-Life: Alyx in VR. So it might very well be the decade of VR, though that is what people thought most other decades.

Societal Long Tails and Societal Bifurcation

In 2006, Chris Anderson wrote The Long Tail, a book about how the internet solved distribution for consumers. And their actual demands for less common products that fit their needs means that there will be millions of markets for dozens of products rather than dozens of markets of millions of products.

For too long we’ve been suffering the tyranny of lowest-common-denominator fare, subjected to brain-dead summer blockbusters and manufactured pop. Why? Economics. Many of our assumptions about popular taste are actually artifacts of poor supply-and-demand matching—a market response to inefficient distribution.

He was certainly right about the fractionalization of pop-culture. The last big cultural event was Game of Thrones. This massive hit had 13.6 million viewers watching its finale. This is great for a premium cable network like HBO, even if the creators had no idea how to write a story when they weren’t using GRRM’s cliff notes and badly mauled the show’s brand in their rush to finish their work. However, this number is less than half of the 30 million viewers pulled in by an average showing of Seinfeld in the 90’s.

At the same time, it’s never been a better time to be a niche media consumer. Anime, vampire shows, documentaries, procedurals, fake healthcare advice and other genres are being cranked out in record numbers thanks to the streaming wars. Disney, Netflix, Amazon and the established media are racing to create content that will encourage consumers to sign up to their subscription services.

And this long tail doesn’t just apply to media. It expands to other parts of culture. Going on Reddit, people have very different experiences based on what they want to see. One person can get leftist propaganda, makeup advice, relationship advice and track the MtG professional scene while another person might see things aimed at Trump fans, League of Legends, Rocket League and subreddits dedicated to their favorite TV shows. Going on Twitter people curate similarly unique content. There are even blocklists available to be shared. Everyone is becoming exposed to only what they want to be exposed to.

This trend will only accelerate as platforms themselves are acting as if they must pick sides. Reddit admins are trying to find excuses to shutdown subreddits with abnormal political perspectives, while Twitter finds reasons to kick off their platform anyone who can’t or won’t properly pronounce the latest shibboleth or who suggests to journalists losing their jobs that they learn to code. Gab, formed in opposition to Twitter with the intent of being a free speech platform, revealed that their main issue with Twitter censorship was that they were not censoring the right people.

Notably, Twitter has not shutdown Trump, despite calls for them to do so. It will be interesting to see if campaign finance laws address a future where certain politicians are allowed on internet platforms that give them valuable reach if their opponents are not allowed to use those same platforms to promote their candidacy. This is already happening on a small scale with local candidates who have violated certain rules, but when it happens in a major election the internet platforms will face significant political blowback the first time the people they oppose get power.

Are you are only really cancelled if you let them cancel you?

One aspect of social bifurcation is the rise of cancel culture. Extremists on the left try to shutdown righties, and righty partisans try to give them a taste of their own medicine, with noticeable less success. One thing that has been underrated this past decade is that most people were only cancelled after they let themselves be cancelled. Trump is the politician who blew this open, he didn’t let any allegation, true or false, bring him down. The people most at risk from cancel culture are the individuals and institutions who have enthusiastically wielded the tools of cancel culture.

In the next decade, we should expect to see more very public fights. Lawyers tell their clients to save their statements for the court room, but the court of public opinion is stronger than before and it is vital to come out swinging against false allegations that other people see as credible. Making a lukewarm apology and then disappearing from public life is the equivalent of ceding the field to your enemies.

For those looking for a non-Trump model for how this plays out, Carlos Ghosn’s very public pushback on the allegations made against him by Japan’s prosecutors and Nissan will serve as a template for others who have been unjustly accused.

Some Other Tech Trends

There have been a few other tech trends that are either ending or accelerating into 2020, it’s been a long essay so I’ll try to keep it short.

SaaSy

New SaaS companies have been enabled by the rise of cloud computing, and the transition of old school businesses into SaaS businesses has been a boon to tech companies as markets have rewarded SaaS companies with higher multiples. These companies are more capital efficient, but eventually markets will realize that SaaS businesses don’t always grow as much as they hope and the multiples will contract.

Amazon’s competition with SaaS businesses will also start to impact the market and there is a chance that other major players come in and try to compete significantly on price across multiple open source projects. More projects will modify their licenses to prevent this type of competition.

Remote Workers

As real estate prices in major metro areas remain ridiculous, this is a trend that will only accelerate. Remote companies were less popular because not that many people had seen functional remote companies. Now that there are more examples of success, and with more example the funding for additional remote companies will be easier.

Money Losing Business Plans

What is going to get harder are businesses that lose money until they somehow win the market. Many of them are growing without product market fit, and they are disguising it by giving their customers $1 for $0.95 and selling VCs on the growth. With Softbank pulling back from funding these types of companies (both because they are choosing not to and because their ability to raise future massive funds is in question) and public markets punishing companies like Uber, it will be harder to execute this strategy. What will be interesting to see is what happens to the companies who were running a playbook to attract Softbank or Softbank-like money. There may be a lot of blood in the water the first couple years of this decade.

Bootstrapped companies

There should be even more bootstrapped companies in the 2020’s. The companies that don’t raise at increasingly large valuations won’t get as much press – both because they won’t seek out press and because there will be less public news like funding rounds to talk about – but since a highly functional SaaS company can be cashflow positive from a very early timeframe, it is feasible that a few very successful companies will be able to fund their growth internally, independent of the funding ecosystem.

The Crypto

A decade is a long time. And while the demand for grey market money is only going to increase, governments are probably going to catch on to the fact that crypto players are enabling all sorts of things that they would prefer not to be enabled. The price isn’t likely to crash until it looks like the various off-ramps from crypto into the legal economy start closing, and that won’t happen until there is a major geopolitical event.

There are a lot of other projects in the works, many of them will be interesting tools or networks where having a trusted institution (ie, a company) coordinating things and reducing transaction costs might improve the experience significantly. The largest demand for blockchain will come from government officials who don’t know that databases can be auditable without it and the people who are using blockchain as a selling point to modernize an old-school industry.

The Old Economy Tech Funding Arbitrage

Thanks to Andreessen, everyone knows that software is eating the world. One strategy for tech people has been to go after an old economy space and raise at tech valuations. They can slowly build out an old economy company, perhaps a bit more efficiently thanks to fewer legacy systems, and keep raising at tech multiples to revenue. Then they go public and valuations rationalize to match the actual fundamentals of their business. The founders win, the early investors win, a few late stage investors might not win, and the public markets definitely don’t win. Although WeWork didn’t go public, it was otherwise shaping up to be one of the platonic ideals of this motif.

This is a pattern that played out a lot in the 2010’s and should continue to play out in the 2020’s. This strategy will only work because there will also be tech enabled companies that will take over sizable portions of these industries and it will remain difficult for many of the players to tell the difference between real tech disruption and VC funded customer subsidies at scale.

Mobility and Cities

The rate at which people move has been consistently falling, and cities are being more poorly managed than ever. This comes down to the long run results of the idea that housing is an asset that should appreciate significantly and politicians who are beholden to their current constituents, not their futures ones. So politicians in many major metropolitan areas came up with a compromise of building restrictions combined with rent controls or rent subsidies.

This worked well for current residents until it became apparent that their children would not be able to live in the city they grew up in, and other people who want to work in their city need to spend hours commuting which drives up labor costs significantly.

On top of this failure, there are failures to both take care of and police the behavior of the homeless, many of whom are mentally ill. With no options for affordable housing due to lack of supply, no options for incarceration for many who commit crimes of various magnitudes due to both a lack of desire and a lack of ability to incarcerate them at an affordable cost, and no ability to get them committed, and in the case of San Francisco no desire to move the homeless out of the city’s main business districts, many people are starting to think about how they can do cities better.

In the US, there is more interest than in a generation in developing new cities. They are likely to be developed in states that can make a credible commitment to make it easy for people building for the long term. States like California and Illinois don’t merely have significantly more corruption to navigate, but their precarious long-term pension situations should give pause to anyone thinking of building something in their state wary that their assets will eventually be looted to pay for promises made by local governments.

With the United States broadly allergic to concepts like a congestion tax, traffic in major metropolitan areas is only going to get worse. Places like San Francisco think they can fix things by replacing car lanes with bus lanes without making it safe for commuters to want to try public transportation. It is telling how the only major transportation solutions that have worked in SF have been company shuttle buses, and these solutions have been opposed by many locals. Alternative transportation systems are being attempted to get people into and around cities, but these solutions will function much better in cities designed for their use than they do in currently existing cities.

Conclusion

There are more topics I want to address... from attention spans, to healthcare to the future of various rent seeking economic models more generally. But I am coming up on 10,000 words so I should probably put them in separate posts.

As usual, none of these ideas belong to me. They are free to spread however they spread. But it is 2020… So if you, my dear reader, happen to know someone that I also know, you should attribute any questionable view espoused in this essay to them unless they agree to immediately publicly denounced me and apologize for ever interacting with me.

We must let the public witch-hunts continue as they lead us to a more empathetic society.

AI-Driven Job Disruption in a Constrained Economy

In an overly simplified version of economic growth, productivity improvements are developed that allow for more tasks to be done better with fewer inputs. Some of these inputs that get replaced are people, who need to find a job doing something else. Many of these workers never find a job that paid as highly as their original work, but society has always adjusted. Today, through applications of deep learning and other algorithms, computers are looking like they be proficient at many more tasks. To some people the question of what people will do when an AI takes their job is an alarming question. But other than the typical issues of displaced older workers and some increased difficulty in moving to higher productivity areas due to high housing costs, there wouldn't be much to worry about if the sectors with increasing demand weren’t protected from new entrants.

There is a significant amount of people who are worried that computers and robots are going to take most of the jobs, and that there will be nothing for normal people to do. Some go so far to believe that putting them on a universal basic income plan is the only rational thing to do.

There are a few reasons given for why humans might not find a job:

1. A combination of AI and robots will be doing what humans used to do.

2. There are not enough activities that these workers are willing to do which might promote the welfare of customers who can afford to pay.

3. The workers who lose one job will be zero-marginal productivity workers at other jobs.

Most UBI proponents accept some combination of all three of these explanations. Most of them have some grain of truth, but there are strong counter arguments to each.

1. Robots are expensive and generally constrained to industrial and repeatable tasks. We are far from removing humans from the loop. It is still difficult to get video conferencing and printers to work consistently without IT assistance.

2. Many who make over $200k run their household at a deficit, which suggests that $60k GDP per capita economies are nowhere near conquering economic scarcity. (Given the existence of status games that require money, it might be that economic scarcity will never be truly conquerable)

3. Robots are expensive, and precision robots that can multitask are even more so. A moderately skilled person who can be guided by a computer will be the most viable choice in many situations for decades to come.

Amusingly, Bill Gates is among one of the AI worriers. Perhaps he is thinking back to his role in bringing spreadsheet software to market in the 80’s and 90’s. The proliferation of this software really did destroy jobs, the number of bookkeepers, accounting and auditing clerks in the US economy fell drastically. However, they were replaced quite quickly by more accountants, auditors, management analysts and financial managers. Making one part of the economy more efficient creates new possibilities that were cost prohibitive before new technology drove down costs.

It is tempting to say that AI worriers have it all wrong. That automated trucks will lead to more much more jobs for people supervising truck convoys and working at places that become economically feasible once the movement of goods becomes much cheaper. And maybe drastically cheaper transportation will create even more specialized retail experiences. It is more fun point out to the biggest worriers that they have witnessed the rise of a category of jobs under their very noses, that of the influencer and their various enablers.

But the Pollyannish approach downplays some realities. Productivity improvements leave some people behind. The historical Luddites didn’t find better jobs. And when society has gotten richer, the type of new services demanded changed. Richer societies aren’t buying that many more clothes, personal consumption expenditures on clothing were near 10% of US GDP in 1929, today they are closer to 2%. In place of sectors that have gotten more productive, we see consumers wanting to spend more on things like education, healthcare and housing.

It will not be simple to increase economic output in these areas. Each of these sectors has numerous artificial barriers to entry, especially relative to the high quality of services that advancing technology could enable in a competitive market.

The main barrier to entry in most non-housing sectors is occupational licensing. Occupational licensing has basically replaced union job protection in the private sector. In the 1950s, about 35% of the private sector workers were in unions. Today, that number is closer to 7%. Instead, an equivalent amount of the workforce has been created occupational licensing protections. These protections now cover over 30% of the workforce, up from 5% in the 1950s. And their impact will retard productivity much more than private sector unions in the US ever did. Union workers may have destroyed Detroit’s auto dominance, as the union's strict rules slowed process improvements and increased labor costs at the Big Three. But occupational licensing rules are not just making a few companies uncompetitive, they are making entire sectors less competitive.

Occupational licensing sometimes requires periods of apprenticeships to existing professionals. Often, a prerequisite to getting the license is participating in our inexplicably expensive and slow education system. For some reason, Michigan requires security guards to have three years of education and training while most other states tend to require 11 days or less. Healthcare is one of the more extreme examples. The typical physician has at least eight years of post-secondary education. The students with the best test scores will often go into practices such as dermatology and radiology, where the hazing of the residency doctors is minimal, and the post-graduation lifestyle and pay is highest. Doing well on tests doesn’t prepare these students for thinking about how soon basic machine learning models will do their jobs better than them.

When thinking about how to meet healthcare needs, the question of increasing supply is usually ignored in favor of increasing spending across the board. In the rare cases when supply is addressed, the focus is usually on increasing enrollment in medical schools and residency programs (which is good!) or allowing underutilized doctors to help people outside their market via telemedicine (also good!), but not increasing the scope of what a nurse or technician guided by today’s more advanced computers (and soon, augmented reality) is allowed to accomplish without additional oversight from doctors.

We are entering a world where computers will be able to help a random conscientious person do 80% of the job of various experts. In this type of environment, the pressure to retain occupational licensing requirements will become strongest just as the need for restrictions are disappearing. This misguided response will be the one thing that keeps society poor, as the sectors of healthcare and education will continue to take a larger share of the household budget in the same way that housing does for people who live around centers like San Francisco and NYC where the supply of housing is artificially constrained.

When I get Lunch, Part II: The Tasty-Unhealthy Scale

This is the follow-up to When I Get Lunch.

In my more formative years, the show How I Met Your Mother was an amazing sitcom.  When the show was still in the phase where it was somehow more often than not ridiculously funny, in season 3, episode 5 (I had to look that up), Barney introduced us to the Crazy-Hot scale.

The basic idea is that there are sometimes direct tradeoffs between two variables, in this case, mental stability and attractiveness in the dating market. If someone is above the line, it means that along these two dimensions, their relevant positive trait outweighs their negative trait in the category under consideration. The higher one variable is, the higher another must be to make it a viable option.

Having been happily absent from the dating market for many years, I have taken to applying this trade off when considering food. The first relevant variable is how the food tastes. Like attractiveness, the tastiness of any given food item is subjective, though with considerable consensus around different food types. The directly relevant tradeoff for how tasty any given food type is how healthy it is. There is considerable debate and disagreement about what people consider healthy. Judging by its popularity in supermarkets, many consumers still look for “fat free”, while that is a label that tells me to look elsewhere. Either way, it’s far too often the case that things which taste good are unhealthy for us, especially when we consider the quantity of unhealthy food that we are tempted to consume.

The basic chart looks as follows:

In this case, salmon sashimi is comfortably above the line while in my case, cake is comfortably below the line. While it would be nice to standardize this metric, it’s going to vary unavoidably from person to person. My taste bias is generally towards spicy food and oriental cuisine. My health concerns are generally centered around avoiding excessive carbs and sugar.

The line is not always stable. If a woman becomes pregnant, that salmon sashimi which seemed like a great way to get protein and omega-3 now looks like a high-risk food item where the small chance of trichinosis or other parasites is too much of a risk, regardless of how tasty it is. Someone who loves pizza, but who goes on a low carb diet, will start seeing pizza as laying on the opposite side of the line compared to when they were not on a diet.

The fictional Barney Stinson named his trade-off line the “Vicky Mendoza line” his fictional ex-girlfriend whose cosmetic and behavioral changes caused her to fluctuate between the zones.

The closest food analogy might be the egg yolk.

At a young age, scrambled or hardboiled eggs would be served in the morning. These eggs were not particularly tasty, but they were seen as relatively healthy. Then, doctors became more concerned with the cholesterol in egg yolk. Eventually, I discovered the wonder that is soft boiled eggs, particularly in ramen noodles (Ramen is probably somewhere in the upper right of my chart, if I don’t eat most of the noodles I can pretend it is on the upper side of the line). And scientists have started to come to the conclusion that identifying bad things in the body and tying them directly to things that are eaten, like cholesterol, might be oversimplifying our body’s very complicated mechanisms. Dietary cholesterol from eggs is generally not thought to be as bad for the general population as it was twenty years ago.

With Thanksgiving coming up, it is worth thinking about why America’s feast meal traditionally involves some of America’s most mediocre food. My relatives are generally great cooks, but Thanksgiving is a category where almost every single dish is either on the line or below the egg-yolk line. It’s inaccurate to say that rituals don’t evolve over time, but they do evolve more slowly than the rest of culture. While some families have modernized their various parts of their Thanksgiving food, it is still a window into what food was like a generation ago.

Turkey – The main dish consists of a meat that is seemingly only popular now and during Christmas, its defining factor is its ability to put you to sleep. The only real turkey enthusiast seems to be Michael Dukakis.

Mashed Potatoes – Basic starches that are sometimes made edible with enough salt, butter and gravy.

Mashed Sweet Potatoes – There is some potential here, if not for the marshmallows that drive this dish firmly to the left of the egg-yolk line.

Stuffing – Made properly, these are better tasting carbs, made even better with gravy.

Gravy – The only thing that makes it worthwhile to think about eating the above dishes.

Cranberry Sauce – This tangy collection of sugar is adored by many people in the thrall of nostalgia.

In fact, outside of pie enthusiasts, most of the appeal of the Thanksgiving meal appears to come from nostalgia. Before condemning me as un-American, look into your heart, you know this is true. Or better yet, look at popular restaurants across America. There are very few chain restaurants whose thesis is that they should serve Thanksgiving food year-round. And those that do, like Pluto’s, survive mostly due to the popularity of their salads and simple meat options. It takes a lot of self-brainwashing to convince yourself that salads are anywhere other than the lower left side of the tasty-unhealthy chart – except for the ones at risk of being on the wrong side of the line in the lower-right due to a heavy reliance on tortilla chips, fried meat or an unhealthy dressing.

A two by two matrix often oversimplifies things. Maybe the most important trade-off isn’t between hotness and craziness, but between social status and wealth. The nice thing about the tasty-unhealthy framework is the axes can contain most of the complicating variables. The hungrier you get, the better certain foods taste. Or maybe almost all food is seen as unhealthy at meal time if you have decided that intermittent fasting is important. Someone who discovers they suffer from Celiac disease should relocate everything that has gluten to the far right of the chart. Maybe you don’t usually eat cake but make exceptions for friend’s weddings – you can incorporate the desire to be properly sociable into the tasty side of the scale. Or just throw it out during cheat days or cheat events.

The important thing is having a framework that is generalizable enough to handle new information and new constraints properly. The best approach would be if we were capable of brainwash ourselves into only liking healthy food and constrain our diet to the upper left side of the quadrant, but that is easier said than done. It may be most useful in avoiding borderline foods when we know it’s not good enough for its health levels. So when someone asks you why you don’t like pizza, you can tell them “Yes, I like pizza. But I don’t like it enough considering how unhealthy it is for me.” You can even draw it out, using slightly better handwriting than my own. But this is advice on how to think of the trade-offs between enjoyable and healthy food, not on how to lose friends and bore people.


Ignoring the Lives Technological Progress Doesn't Save

Everyone knows the story of thalidomide and the deformed babies that were born as a result of approval in European countries. There were delays in approving the drug in the United States. The director at the FDA in charge of the approval was worried about nerve damage that wasn't proven to be a real problem, but she became a hero for keeping this drug off the US market once the birth defects were linked with the drug. Fewer people know about the deaths caused by the FDA's delay of approving beta-blockers for preventing the risk of a second heart attack. Despite trials showing its effectiveness in the mid 1970's and approval in Europe, it wasn't until 1981 until timolol was approved for use in preventing a second heart attack. In the press release, the FDA announced that it could save 17,000 lives a year. So by their numbers around 100,000 people died as the FDA dragged their feet. 

Now, medicine is complicated. There are many examples of delays of useful treatments, there are many more ineffective treatments that were properly blocked and there are some treatments that should never have been approved. Recently, a study found that guidelines suggesting the use of beta-blockers in non-cardiac surgery are resulting in significant excess strokes and deaths. The problem is that the deaths caused by actions are taken far more seriously that the deaths caused by inaction and delays. Our moral calculus does not seem to recognize that obvious missed opportunities to save a life are almost as bad as other causes of death, even in obvious cases like the example above where many people who had already had a heart attack died of a second one because the FDA had yet to approve beta-blockers as a treatment.

That brings us to self-driving cars. Every year in the past decade over 30,000 people in the United States have died in car crashes on public roads. To the extent that many of these accidents are caused by driver error, replacing more fallible human drivers with an electronic system has the potential to prevent many of these deaths. Recently a pedestrian was killed in Arizona and the company suspended tests in all cities. To the extent that Uber is suspending testing to fix an obvious bug that caused this mishap this is what we should expect. But the extent to which Uber or any other company has to suspend operations after an accident only for political optics then we should recognize that the knee-jerk political response is pushing back the time when humans will not only be free to devote many hours of commuting time to other activities, but tens of thousands of lives each year are lost because human drivers still dominate the roads. And that's just counting the deaths that occur within the United States.

We must not expect new technology to start out an order of magnitude better than the old technology. When human lives are on the line we must have higher standards, but those standards should not be unrealistically higher that the status quo. If they are even equally as safe as current human driven systems, then ensuring a legal and regulatory framework under which self driving cars can operate will allow for real time improvement and iteration. When we get to a point that self-driving cars are ubiquitous it will save tens of thousands of lives and give billions of hours of free time back to commuters.

Be careful about demanding too much perfection too soon. Demanding perfection now causes delays, and our moral calculus is too ready to ignore the tens of thousands of lives lost every year that effective automated driving is delayed.

When I Get Lunch: Part 1

I think a lot about food. I haven't yet put my food related thoughts down on paper and sometimes the only way to progress in understanding is to lay everything out on paper. This technically isn't on paper either, unless someone decides to print out this page, but it's close enough. I'll start by covering a book that has helped me develop a large part of my framework for how I think about picking out and eating at restaurants. One more caveat before I start. This is not a competent book review. Competent book reviews engage with a book within five years of having actually read the book. This is more of a reflection on a book that I did at one point read and whose concepts have continued to shape my thinking about food over the years.

That book is Tyler Cowen's An Economist Gets Lunch: New Rules for Everyday Foodies. It's one of the few books that I've bought a couple times, as I always end up giving it to a friend or acquaintance (I prefer not to engage in the myth that I'm letting someone borrow a book, that's just a set up for minor friction and disappointment if they forget, damage or lose it). It is a combination of an overview of the economic and social forces that made good food in the United States almost disappear and a framework and advice for finding the best tasting food in general. 

The economic history portion is interesting, it delves into the dynamics behind how prohibition killed off the best restaurants & provides an interesting hypothesis as to how the child-centric culture in the era of Baby Boomers oriented our food culture towards fatty, sweet foods and away from more interesting flavorful options.

The history is fun, but more relevant is Tyler's advice for finding good food (Those in the DC area have the option to skip much of the work of applying his framework and access his recommendations directly). He uses a combination of economic and cultural understanding to determine when he is paying for good food and when he might be paying more for the other goods or services bundled with food. Some tips in his own words can be found here.

I will paraphrase the six points from that article:

1. Order what sounds the least appetizing, it is on the menu for a reason. Avoid what sounds safe if it is not the restaurant's specialty, that's just there to mollify people who prefer the familiar.

2. Be suspicious of restaurants that are social scenes, especially if it is not a new restaurant that has an extra incentive to create a reputation for its food quality.

3. Low rent places in suburban strip malls will have more interesting varieties of food. Places with higher overhead will be less able to take risks, and when they do provide good food it will generally have a matching high price. Food trucks share relevant qualities with suburban strip malls. 

4. Ask other people for advice, particularly people between the age of 35 and 55 who become excited by the topic of giving advice on where to eat. Searching online for the best particular dish will give better outcomes than searching for general cuisine.

5. Cheap labor leads to good food at low prices, expensive labor & superfluous employees means that the customer is going to be paying for the experience. 

6. Food cuisines that Americans are comfortable with will often be biased towards American taste-buds. A Pakistani restaurant will generally be more authentic than your average Indian restaurant. Americans feel more comfortable wandering into an Indian restaurant and the restaurateurs have learned that Boomer-type customers are happier with dishes that are blander and slightly sweeter than is traditional. Thai food is another category that is often targeted at Americans, while Vietnamese food has yet to catch on and is less likely to be overly fried and sweet in an attempt to lure Americans who do not have a preference for interesting food.

Besides these tips the book also explains many of the forces driving where good food is made. It is the demand for high quality food that creates a good supply. The only Chinese restaurant in a very white town might be have a highly capable chef, but if his customers prefer bland, sweet food he will learn to give them what they want. Place this same chef in the middle of a metropolitan Chinatown and it could be well worth a visit to his restaurant. Therefore, if you talk to the chef and express interest in non-Americanized fair, you might be able to convince him to make you a good meal at the mediocre place. And when we hear the common rule of thumb to make sure that people of the same ethnicity as the food are eating in a restaurant we are trying to avoid a dynamic where food is made both more bland and sweeter in an attempt to attract a Boomer-ish type of clientele. 

Consumer demand driving restaurant behavior is also the reason why areas with significant tourist traffic will have more questionable restaurants, as the main skill required of restaurants in those areas is to convincing people to drop by just once. This is why it is easier to accidentally find a good restaurant in San Francisco's Sunset and Richmond district than in its more tourist filled Chinatown.

Most of Tyler's advice on food and the parts of his framework that I have internalized, probably including insights which I might not directly remember as coming from said framework, have served me well. But most rules do not work all of the time and his suggestions are suggestions and not laws for a reason. I remember right after reading the particular piece of advice about trying things on the menu that sound disgusting I tried pig blood curd congee in a restaurant attached to a 99 Ranch (essentially a suburban strip mall with a large flow of Asian customers). I was rather disappointed. Although now that I think of it, even that dish was generally pretty good once I took out the pig blood curd. But every so often things that sound disgusting actually are.

One area that was touched on but incomplete is how to find good food using online sources. He recommended avoiding generalizations and using specific searches even if that isn't what we are interested in. His approach does work, searching for "pig blood" in San Francisco on Yelp actually highlights a few restaurants I know to be quite decent. But when we look at the Yelp or Google for reviews and scores the process of interpreting them is not very direct. Most of the US review systems ask users to give only one all encompassing score, so many other factors outside of the food quality are being measured.

For people who are trying to find the good food at reasonable values using these services, there are some basic heuristics outside of looking at the number of stars that will help interpret the results.

Sometimes an almost cheap ethnic restaurant gets dinged for its relative price, not the quality of its feed. If the biggest problem is that it is slightly more expensive than its category suggests it should be, remember your opportunity cost. The $16 ramen, where half the customers are raving about it and the other half are complaining about it for costing too much for ramen, will still be much cheaper than other dinner options. (If this seems particularly high, it should be noted that I live in the San Francisco Bay Area).

By that same token, the places with glowing reviews from people who are amazed at large portion sizes should be treated with a grain of salt.

When a restaurant has a bad score due to people complaining about service and the goal is to find good food, not to impress someone with a flawless evening out, then that restaurant deserves significantly more consideration. 

Relatively expensive places, those which fall under the $$$ and $$$$ categories, often have ratings that are biased upwards. Many of the people reviewing them did not have to pay for the restaurant, and even those who did often forget that the baseline experience for these restaurants should be good food and great service. They do not adjust their baseline expectations higher. Many of these places actually have great food worth trying out, but don't trust the average score. Some of the most mediocre meals out have occured because I was being hosted by someone who fully relied on the heuristic of "If I spend enough money and go to a place that is popular I won't get a bad result."

Ratings are also biased upwards when the owner replies to every or almost every review, positive or negative. Real negative reviews are scared away by the prospect of having a real person react to public criticism. Be wary of these places, not only are they skewing what might otherwise be a useful indicator, they may be more concerned with perception than reality.

And just to make sure that the absolute basics are covered, learning about the specialty of the place is important. There are many places with large menus where it is a mistake to pick anything but a couple items. Also in the obvious column is looking at the most recent reviews for signs of deterioration in food ratings or ownership changes. And if you know the cuisine well then the pictures might be the most helpful content.

There are other concepts beyond analyzing reviews that are quite helpful.

Many times the health inspection score will be easily available when looking up options online. For those who like to travel, remember that a mediocre health inspection score in the United States would be a great health inspection score in a developing country. Unless you know of people getting sick at the restaurant don't be as put off by a mediocre health inspection score as your instincts tell you to be.

While traveling, it is useful to understand which countries do another's cuisine well and which ones don't. Getting Kebab is Germany is a no-brainer, but in Korea it may be mediocre. Thai food in Vietnam is much better than sushi or Korean. (My perception of bad Korean might be due to trauma, one restaurant put ketchup in a bottle that was supposed to contain chili paste for the bibimbap.) US style Mexican food doesn't seem to travel well past the states that are touching Mexico's border. In Japan, some cuisines can be reproduced even better than in their home country, at other places there will inexplicably be mayonnaise on everything. But the general rules still apply, a local population with high standards which will eat at whatever restaurant makes the highest quality version of the food they want is needed for quality food. The more metropolitan an area, there more likely there will be a significant population of people with standards for the cuisine you want. So it's more likely you will be able to find a good meal of most cuisines in major metropolitan areas. But if you took a multi-hour bus or train ride to get your location then sticking with the local cuisine will be your best bet.

Another important concept is time arbitrage, doing things when others aren't. The basic time arbitrage related to eating out is going out for lunch rather than dinner. If you are able to visit a good place during lunch hours the time arbitrage allows for obtaining good food at much cheaper prices. Some Korean places have such a significant price difference that even though they slightly increase the portion size it feels like a ripoff to visit them for dinner. The exception to this rule of thumb would be the places that are designed to make most of their revenue from lunch, like the nicer sitdown lunch places in a downtown area which might not even be open for dinner.

Time arbitrage extends beyond just getting lunch, some places impose higher costs on customers by making them wait in lines. These lines act as advertisements to the restaurant, and if people are willing to wait for a restaurant that isn't a social scene of one sort or another then that is generally a good sign (Remember that urban brunch places are all social scenes). If you have the flexibility, going out for early or late dinner on a weekday, as long as you are also avoiding traffic, would be the best way to experience these restaurants.

By this same token, the place that is open 24 hours or until 4am when other places close earlier will often be serving worse food at a higher price. I have found this to be very true with most Korean places within San Francisco. But there are also definite exceptions to this rule, there are a few 24 hour burrito places in San Diego that you should visit regardless of the time.

The only place where it seems that Tyler's take was wrong, at least as I remember it, was on sushi. In Tyler's estimation, the only way to be certain of getting a better meal was to spend more money, as this would be more directly correlated with high quality fresh fish and perhaps the skill of the chef. Part of the reason this is wrong is that some expensive places have built up brand names as the place to go for business dinners and these have dropped in quality significantly. And sometimes there are restaurants which are far less expensive than the ultra-expensive places who are ordering similar quality fish from the same wholesalers. Figuring out which sushi places are ordering from these wholesalers and which ones are ordering from the same places providing the selection at your local Japanese supermarket can help a discerning eater determine where to find really good sushi at reasonable prices (Note: The prices may still be unreasonable compared to other cuisines).

The restaurant scene is an inefficient marketplace. If you want good food there are plenty of ways to get better food at a better price than what most others are getting. But if what you want is close to a completely normal social dining experience then the inefficiencies get smaller. You will be choosing to also pay for the atmosphere, the service, the view, etc. The best you can do is use these techniques to make sure the food is also good. When it comes to finding good food at reasonable costs, it helps to be a little weird.

That's it for Part 1. Eventually there will be a Part 2, where I will introduce a framework focusing on addressing the tradeoffs that often occur between matters of taste and matters of health.

Schemes, Illustrated

A lot of people are calling bitcoin and other blockchain tokens* Ponzi schemes or pyramid schemes. This is inaccurate, what is happening in the token economy is a new structure with significantly different incentives for participants.

*For the sake of simplicity, I will use the term token and coin interchangeably. This is far from the most blatant generalization that I will make in this piece. 

Ponzi Scheme

One centralized entity attracts investors by pretending returns are higher than they are. The first few investors might get more than their money back as proof that the fund is healthy, but those funds were not made by the firm, they are funds stolen from later investors.

In the end, only the perpetrator of the Ponzi scheme comes out ahead.

Incentives for participants to recruit others: Social upside from sharing how to make money. Little direct incentive.

In recent times: Madoff’s investment scandal was a classic Ponzi scheme. People believed he had a way to make consistent returns in up or down markets, but he really used new investor money to pay out fake returns to old investors.

This wasn’t just a one map shop, there were firms called fund of funds with an incentive to introduce their clients to Madoff’s Ponzi scheme as they would make a percentage of their client’s returns. But these funds did not think there was a Ponzi scheme, though many believed that Madoff was making his money illegally.

Total size: At the Madoff’s fund peak investors believed they had $65 billion invested in Madoff’s fund, but the total amount investors put in was closer to $20 billion dollars.

Legitimate form: None?

Ongoing Ponzi Schemes: There is also a famous Russian Ponzi scheme, MMM, which after having collapsed in Russia it has inexplicably become popular in developing economies. It is primarily a Ponzi scheme in which money is put into the system and is paid out only when newcomers put in more, but the scheme has set up some incentives to recruit other people that cause some to label it a pyramid scheme.

What to look for: There may be many small ongoing frauds of this nature. Investors should always do due diligence when a scenario seems too good to be true. Understanding the strategy and making sure the fund has a respectable auditor can help avoid some of these schemes. More generally, funds trading very illiquid asset classes in which they are the main participants might act as accidental Ponzi schemes. If investments from one source are driving up the market value of the fund, and fees are being paid out on this increased value, then the scenario may act exactly like a Ponzi scheme.

Pyramid Scheme

In a pyramid scheme, the person at the top benefits from everyone below him in the scheme. The people below the top person are incentivized to recruit other people below them to increase their payout.

Incentives for participants to recruit others: Incentives are siloed, someone recruited by the top guy doesn’t care if a person he did not recruit is successful, he shares no gains in the scheme’s success except to the extent that he is directly introducing new people into the scheme.

In recent times: Bill Ackman’s fight against Herbalife has been one of the most publicized looks into whether or not a company is a pyramid scheme. His presentation can be found here. As of January 7, it still has a market capitalization of $6.1 billion.

Legitimate form: Multilevel marketing companies, in which companies recruit consumers to both sell products and recruit other people to sell products have varying levels of legitimacy. To the extent participants make most of their money by selling goods that generate significant consumer surplus the company can be said to be a legitimate MLM company. Some people suspect that Bill Ackman’s mistake in going after Herbalife was in not understanding the benefits from communities enabled by Herbalife’s MLM system. Despite some questionable practices and relatively high prices the MLM system is creating significant consumer surpluses.

Total Size: The top ten multilevel marketing companies, from Amway to Tupperware, had a combined 2017 revenue of a bit over $40 billion dollars.

What to look for: The more money that is sourced from recruiting additional people and selling to those recruits, the more likely it is to be pyramid scheme.

Token Scheme:

The blockchain tokens that we have seen recently have a significantly different dynamic from Ponzi and pyramid schemes. In a Ponzi scheme, it’s only the guy pulling off the fraud that really benefits from attracting more people. In a pyramid scheme, each silo is separate, and people below someone in a pyramid scheme do not typically get any advantage from that person becoming more successful.

Incentives for participants to recruit others: In a token scheme, everyone is paddling in the same boat. Early adopters take ownership of space on the ledger, represented by tokens, and lobby everyone to buy more. Wealthy latecomers, rather than being stuck at the bottom of the pyramid, can choose to take on a more significant stake if they invest the capital. And when that capital is invested and drives up the price, the existing holders all win. Each of the newcomer’s tokens has the exact same status as the tokens of the early adopters, and everyone is expected to work together to push up the value of the systems that they have bought into. 

When individuals start to think that the value of the network is going to fall and internal collective actions cannot prevent it they are incentivized to be the first to jump ship without letting the others know they have decided to defect until after they have exited.

The incentive structure enabled by token schemes are very powerful. They can be used to incentivize people to all contribute towards a central project, like the people building on Ethereum and other projects where many talented people are trying to develop useful decentralized system. Token scheme incentives are also the driving force behind many obvious scams.

This type of environment created by token schemes forms cult-like behavior. The early believers are told to “HODL” (buy and hold) and not sell any of their tokens into the market, helping drive up the price as new entrants are only able to purchase token that are being flipped. The general community reaction to critiques of any of the token schemes is to accuse the critic of spreading FUD (Fear, uncertainty and doubt), like the way a priest might accuse a scientist of heresy. And a market that has gone up over 1000x has only strengthened these dynamics.

The analogy to stocks: Many observers view blockchain assets as analogous to stocks. The might interpret a coin’s market capitalization, the amount of coins outstanding multiplied by the most recently traded price, and view it through the lens of a company’s valuation. In the case of the healthiest blockchain projects, there are companies and individual engineers putting in lots of work to develop and update the codebase or build products on top of the existing infrastructure. The token itself retains its fundamental value so long as the projects that will eventual create value remain on top of the token’s blockchain ecosystem.

While a decentralized blockchain generally does not convey ownership of real assets the way that owning Exxon’s stock conveys partial ownership of oil producing assets around the world, there is a closer analogy to technology companies. Technology companies derive most of their value from their intangible assets and not their real assets. Investors in technology companies worry that they will lose their best employees who are creating value within the company or that employees who leave might create or enable competitors, so they incentivize the employees with stock options and hope their employees believe that their compensation combined with helping the company achieve its mission is enough to keep working. In the case of blockchain, the main thing keeping technologists working on a token that is not directly tied to a company is their personal token holdings in place of options, and the goal of achieving their project's vision in place of their company's impact.

But unlike stock, tokens do not have the same type of end game. A company like Whatsapp can be acquired for $19 billion, there is no equivalent liquidity event that can reward token holders. Liquidity events only occur when new money enters the system and token holders chooses to leave instead of letting new money push the price up to even higher levels. While they do not have an endgame, tokens have a much quicker mid-game, as many blockchain programmers are able to cash out in the seven to eight figures thanks to the extreme price appreciation of the major tokens. Start ups have historically been wary of letting employees cash out life changing amounts too early in the development process, as the employees may be more tempted to work on their own projects when they have sufficient capital to choose to work on anything they want. But even if some contributors drop out to due to options from their wealth creation, this scale of wealth creation attracts new workers looking for similar upside. Some companies have started vesting tokens to employees over time in way similar to how companies grant employees stock options. The longer-term stability of these projects is only threatened once token price appreciation slows down significantly, and that’s a situation that tech companies without traction also face. The bigger risk for the ecosystem is that if obviously bad tokens are rising with the good tokens, then the good tokens can later fall when the price of bad tokens crash.

Thinking about token market capitalization can be misleading, and not just because acquisitions aren’t as feasible in token-space. Blockchain tokens can be almost permanently lost in ways that stock is not lost. The lost tokens are still counted towards the market capitalization even when their permanent absence from the market is one of the factors driving the price of tokens higher. Despite being potentially misleading, there does not seem to be a better readily available metric or name. There are significant differences when talking about a company’s market capitalization and it should not be confused with a coin’s market capitalization. That Ripple’s company is valued at a couple billion dollars when its coin holdings are supposedly worth well over $50 billion is illustrative of that difference.

The analogy to currency: Many people think the main use case for blockchain is decentralized currency, or a decentralized store of value. In the case of traditional fiat currencies, the demand for money is likely to stay within an order of magnitude of the expected range as each currency is tied to the economic activity of a geographic region. The local state collects their taxes in their own currency, ensuring demand. Over the long term the question is if the supply of money will get out of control as it did at times in the Roman Empire and the Weimar Republic or more recently in Zimbabwe and Venezuela.

For blockchains like Bitcoin, the targeted supply at a given date can be forecasted with relative accuracy. The bitcoin outstanding will increase by about 4% in 2018. The total amount will never be more than 21,000,000. It is the demand that is the unknown factor. Morgan Stanley estimated that hedge funds put around $2 billion into the token economy in 2017. The amount from institutions and people not tracked by Morgan Stanley was likely much larger. 2018 may be even larger, but it is an open question if the money flow can continue to increase through 2019 and 2020. If the miners sell every bitcoin they mine in 2018 and everyone else holds bitcoin, there needs to be around $10 billion in new investment at current prices to keep prices stable. For reference, a calculation done at the start of 2017 would have found that $700 million dollars would be needed to keep bitcoin at approximately the same price. Continuously growing demand is dependent primarily on continued high prices and benign neglect by governmental agencies who may be concerned at the law breaking behavior enabled by various blockchain networks. The networks currently using the protocols could be as stable as Google, but many could just as easily be Friendster or Myspace.

For fiat currencies, the demand is certain and future supply drives price uncertainty. For blockchain, the supply of a specific blockchain is known, the demand is unknown. There may be uncertainty on the supply side. Alternative blockchains and forks effectively add blockchain assets to the ecosystem. Bitcoin has forked quite a few times, and to the extent that investors deploy money to forks, such as Bitcoin Cash or Bitcoin Gold, the supply of blockchain assets can also be said to be increasing. However, this interpretation is not how the market reacted to forks. The price of Bitcoin on announced forks generally stayed level or increased, as if the forks merely increased demand and did nothing for supply. Many people even started equating forks with dividends. This dynamic of assuming the increased supply from forks and additional blockchains being accretive in value to existing blockchains does not seem sustainable.

Current use cases: Avoiding capital controls, black market exchanges, cybercrime enablement, grey market money storage

Additional use cases: Corporate gift cards for products under development, Security-ish tokens, automated contracts, online gambling, cryptokitties

Size: Currently over $800 billion across the publicly tracked tokens. (It would be very interesting to find estimates for total capital committed)

What to look for: First, there are the obvious scam signs. A whitepaper might include significant plagiarized work, promotional material making false or illegal claims and people who attached to the project being attached to other types of scams are all giant red flags.

Sometimes things aren’t quite scams, just unlikely to be good investments going forward. The most obvious example is the companies who change their name to something blockchain related hoping to attract fast money. More subtle case involve scenarios where the token itself is incidental to the process seen as valuable (as seems to be the case with Ripple), or companies selling a blockchain token it retains full control over to do a task that a distributed database would do the job better. In the case of Doge coin, a token designed as a joke, the market capitalization hit $1 billion despite it being abandoned by its creator.

Just as legitimate MLM companies adopt aspects of a pyramid scheme to make something useful, there are some token schemes that have the potential to create real consumer surplus. Some of these projects might even be designed to facilitate legal activity in ways that are more efficient than what trusted institutions are currently doing. And some of those projects might even have a legitimate reason that their tokens should appreciate in value outside of a speculative mania.

When it comes to understanding the dynamics behind blockchain tokens, even the blatantly useless or fraudulent ones, it is important to realize that they cannot be fully understood by analyzing Ponzi or pyramid scheme dynamics. They are token schemes that have their own unique and much more powerful dynamic.


Some Brief Thoughts on Net Neutrality

Net neutrality is not something people who prefer a free market economy would support apriori. It goes against the idea that businesses should be able to compete how they see fit. If a business wanted to lay fiber and give away cheap internet on the condition that their social network, streaming service or Amazon referral links are used, then in theory that should be okay. But we don’t have a competitive open market with many different players. The internet service providers have relationships with municipality governments that help them deploy fiber to their residents. Sometimes the municipality keeps the ISP’s competitors out due to relationships between local officials and ISP lobbyists, other times it is due to bureaucratic indifference or incompetence. It takes a concentrated effort to avoid the accumulation of cumbersome rules and regulations that cause the high costs and slow deployment times that will keep ISPs out of an area that already has a competing provider. Either way, ISPs often achieve monopoly power over their local markets. A 2013 report from the US Department of Commerce shows very oligopolistic competition at best for providers at speeds over 25 Mpbs, and almost no competition above 100 Mbps.

Given time and an incentive to increase their revenue quarter after quarter, companies will attempt to extract additional rents from their position as the gatekeeper consumers and online businesses. Net neutrality rules force ISPs to act as dumb pipes to the internet will prevent these local monopolies from using their government-backed power to pick winners and losers on the rest of the internet.  In our status quo of regional internet service provider monopolies and oligopolies, some form of net neutrality is a desirable compromise.

The 2015 Title II Order by the FCC which was an implementation of net neutrality in the United States is seen by many as a regulatory overreach. It wasn’t because their general framework was that far off, but it was quite a stretch to independently label ISPs as public utilities under authority used to regulate telephone monopolies in the 1930s. This type of significant rule change without congressional input is worrisome for those who want the responsibility of lawmaking to fall upon an elected legislative body. We shouldn’t look to the FCC to implement these rules on their own, the rules should be spelled out by a congress that is concerned with protecting interstate commerce from companies who are empowered by barriers to entry put up by local governments.

One thing that might get lost in this process is the implementation of internet service providers with unique business models. It would be best if room for experimentation was left open in areas where there is already significant competition between multiple providers at high speeds. Then we might see if consumers will be willing to forgo their dumb pipe options in return for a lower cost service. This is the last thing that major tech incumbents want. This approach might allow emerging tech companies buy their way into customer scale, or it might force to major tech companies to spend more to entrench their positions. Either way, the ISPs might be able to figure out ways to make a little more profit while their customers find additional consumer surplus. The key is that the ISP is trying out these innovative business plans in scenarios where the consumer has other reasonable options.

Home Invasion Incentives

Criminals are generally pretty stupid. Especially the type who go after property theft directly. They face a high chance of getting caught and spending years in jail, and their take is generally pretty small. Invading Mariah Carey's house only netted them assets valued at $50,000. These assets were in handbags and accessories so they will be lucky to get anywhere close to half of that value on the black market. If they had found the jewelry they might have made quite a bit more, but most of the assets held by the wealthy can not be easily appropriated.

There is a reason movie stars are being targeted instead of financiers and entrepreneurs. The exact reason depends on how stupid these criminals actually are. The stupidest reason is that movie stars are widely known to be rich. A slightly better reason may be that movie stars are more likely to have assets in tangible goods such as expensive jewelry in their homes. And perhaps the criminals prefer to only invade empty homes, so society's collective stalking of celebrities allows the criminals to identify periods when no one is home.

As mentioned above, targeting celebrities for tangible assets can make some sense. Old money, entrepreneurs and financiers have most of their assets in stock, registered bonds, property titles and the like which cannot be easily transferred without the consent of owner and the implicit consent of the rest of society. Because even if a transfer is forced, these transactions can be reversed and would be easy to track. Some of the more eccentric wealthy might have precious metal or cash lying around, but it's difficult to know ahead of time which people are eccentric in that manner. If there is any valuable art which might be snatched, the criminal needs to consider that the art is valuable precisely because it is unique and again it cannot be transferred for anywhere close to full value. It will always be known as a stolen piece, art stolen as far back as the Holocaust is still being recovered today. Other valuable assets like fine wine might appear to be a liquid asset*, but they too can be tracked. For the celebrities that some criminals are targeting, there is no way the thieves are ever getting access to the financial assets they bought or their residuals and royalties, but the celebrities are at least known as someone who keeps around expensive handbags and jewelry.

Fortunately for criminals, there are now many people holding immense amounts of wealth that is liquid and hard for governments to track. Currently, that is the main active use for blockchain technology. Some sophisticated criminals are already taking advantage of this, with the rise of ransomware. Ransomware is a computer virus that encrypts a user's data and does not grant access to it until a certain amount of cryptocurrency is sent to the attackers. Researchers have tracked most of this activity back to a Russian cryptocurrency exchange.

While crypto assets requires some expertise to properly dispose of, it provides exactly what local criminals looking for high risk/high reward opportunities should want. If someone owns millions of dollars in crypto those assets can usually be transferred relatively anonymously. This is a higher risk proposition, in which the criminal needs to kidnap and threaten the holder of crypto assets directly. But it is striking that crypto has created for local criminals what was before only a pipe-dream, effective access to significant amounts of their victim's wealth. It might be compared to initiating a wire transfer, but a wire transfer has significantly more complications with regards to who is contacted to initiate it and how to evade safeguards in the financial system. The promise of bitcoin is that the process is simpler, faster and easier to manage.

Criminals are stupid, but they learn eventually. Home invasion robberies are rare, but incentives matter. At least some people have decided to burglarize the homes of celebrities who already have security measures to protect themselves from stalkers for much less upside.

This is just a long winded way of telling my friends who talk a lot about their ownership of crypto assets online to be sure to periodically remind everyone that they keep most of it in cold storage locked up in their bank's safe-deposit box or other safe place away from their homes and family. Because incentives matter, even for stupid criminals.



*Sorry

Unintended Consequences of Regulations: Contracting Companies

recent New York Times article tells the tale of two janitors. One at Eastman Kodak in the early 80's had their education paid for and later worked her way up to CTO, later going on to be a senior executive at other companies. The other is at Apple today and doesn't even directly work for Apple. She has minimal benefits and no obvious path for career advancement. That's in large part because she works for a company that contracts out her labor and not for Apple directly*.

The narrative the Times advanced is that companies chose to focus on their core competency and have outsourced other work. Most modern tech companies have decided to focus on their most productive employees and are letting contractors deal with the supposedly interchangeable employees working on low skill problems.

What many people don't see is that this is not an economic relationship that has sprung out of thin air. A lot of it can be interpreted as a company's logical response to the regulatory environment. There are at least three different areas that incentivize companies to keep low skilled workers at arms-length, only hiring them through secondary employers. There are laws around unionization, legal risks from the Equal Employment Opportunity Commission and the Affordable Care Act has made the choice even more clear from a cost perspective.

At first glance, it's obvious why laws about unions would cause companies to choose to contract their labor. For companies that are innovating quickly, becoming unionized raises the spectre of what happened to Detroit auto companies. The long term accumulation of rules and resistance to automation that would cost jobs helped cause the Big Three to fall far behind their more nimble competition from Japan. As Steve Babson puts it in "Working Detroit: The Making of a Union Town"

"The absence of union factory rules gave Japanese management the flexibility to change workloads and reassign jobs without opposition but it also left workers with little protection against speed-up of favoritism."

Today's tech companies need to move fast and keep up with a quickly changing technology landscape, so their instinct is to avoid unionization. How do they do this? First, they spoil their workers more than any union ever did. Companies provide meals, social events, gym memberships and some tech companies even do laundry for employees. This is a multi-purpose policy, not only do these perks discourage talk of unionization, they are also meant to encourage employees to spend more time at work and make them less likely to leave the company even when they are being paid significantly under their market price.

But keeping the higher skilled employees is only part of the equation. The second is keeping employees that are likely to unionize outside of the company. Low skilled workers are most likely to form unions. Unions might possibly strike and upset the sympathetic high skilled employees. The laws empowering the National Labor Relations Board grants union employees specific protection. But those protections stop when they target employers other than their own. From the NLRB FAQ:

"A union cannot strike or picket an employer to force it to stop doing business with another employer who is the primary target of a labor dispute."

After looking at this rule, it should be obvious why companies would want to avoid giving employment status to a class of workers that are unionized or might decide to form a union in the future. By hiring these workers through another employer, they are shielding themselves from the more inconvenient aspects of labor law.

Next we have the Equal Employment Opportunity Commission. The EEOC does not only look for employers who are discriminating in hiring based on age, race, sex, etc. They will also punish treatment of employees based on these factors. If a corporation wants to treat some employees as first class employees with more benefits and another group as second class, they would have significant legal risk when the second group consists of employees that are more likely to belong to a protected class. (And the Times piece does mention how there are legal requirements that employees are offered the same health insurance and 401(k) benefits.) The EEOC will be collecting pay data by sex, ethnicity and race. Under this scenario, it will look a lot better for everyone involved to continue contracting out the low paid jobs.

On top of all of this we have the Affordable Care Act's impact on full-time employment. The ACA puts the burden of providing healthcare fully on full-time employers while leaving part time employers and contract workers almost completely off the hook. The question of who should be responsible for healthcare payments is a political question, but it should be applied equally to all types of employment relationships. Two part-time employees working 20 hours a week should cost an employer the same as a single full-time employee working 40 hours a week. That's not the case today, the 40-hour workweek employee is more expensive. And rather than be the bad guys who are hiring part time workers to avoid paying for health insurance, it is easier for corporations to pay another company to hire and manage workers in this manner.

When designing and implementing policy, it's hard to account for the long-term impact. In this case, the incentives created by multiple regulatory bodies have combined to raise the risk and cost of full-time low-skill employees. They are highly incentivized to hire another company to shield them from a direct relationship. Laws that were originally intended to protect people and keep society integrated might be serving to bifurcate it even further.

 

*On top of the low wage she pays inordinately high rent to live in the area. A significant part of the struggle of low wage workers in the Bay Area comes from the lack of affordable housing. Most people should realize by now that this is an artificial hardship imposed on the poor by voters who think they are preserving the character of their neighborhood, preventing sprawl or protecting the environment. In reality, the main concern of voters is boosting the value of their house after they have locked in the amount of taxes they have to pay thanks to California’s Proposition 13.