My latest essay is about better approaches to studying the intangible economy. It is like four book reviews in one.
It is a long essay. Make time to read it.
Category Archives: business economics
How I think about Bitcoin
With crypto-assets, I am carrying wealth more generally into the future. The person who most wants that payoff structure for the wealth carry will end up owning the crypto-asset.
Read the whole thing, with which I do not agree one bit. Tyler knows more than I do about the topic, but for what it’s worth, here is my view.
I think of Bitcoin as functioning like a chain letter, of the sort where you say “Send ten dollars to the person at the top of this list scratch that person off the list, put yourself on the bottom of the list, and then send this letter to six of your friends.” If the chain letter keeps going until you are at the top of the list, you might get thousands of dollars.
A chain letter is a redistribution scheme that creates a few big winners and a lot of little losers. I see Bitcoin playing out the same way. As long as the Bitcoin chain letter keeps reaching new people, its value will rise. Once Bitcoin runs out of new suckers, er, investors, it will crash. Then we will find out who were the winners and losers. The few who sell before the crash will have made fortunes at the expense of those who paid up for it and held on for too long.
If you participate in a chain letter, the odds are very low that you will make it to the top of the list. Similarly, with Bitcoin, the odds are very low that you will sell your Bitcoin before it goes down in value. The majority of Bitcoin investors will buy high and sell low.
I Told You So
But Apple decided now — it’s hard to think it’s not conscious — to [] up my old phone, which was OK the day before the upgrade to iOS 11, and now it’s a disaster. And I think this is mean, or careless, and wasteful, certainly not sustainability-friendly, and it makes me angry. iOS devices are now having enough processing power to be more like computers: no real need to replace them every year or even for a few years, if you don’t want the newest, fastest, shining thing. (Even my iPhone 6 is not slower on iOS 11 than on iOS 10 — it just doesn’t work as a mobile phone anymore…)
Note that not this is an extreme experience. But I remember getting a lot of pushback when I suggested that this might happen. And speaking of opinions for which I have received pushback,
Auto insurers are starting to offer discounts for drivers who enable the autonomous options on their vehicles. The latest is Britain’s largest motor insurer, Direct Line. According to Reuters it is now offering a 5 percent discount for turning on those features in a Tesla.
There is probably a bet to be made about when self-driving cars reach a particular milestone.
Computers win the race
the human now adds absolutely nothing to man-machine chess-playing teams.
I am pretty sure I predicted this. I certainly would have if anyone asked. Whenever you get to the point where a computer is close to human capability at something, you should bet on the computer becoming much better at it within a few years. Humans only get better slowly, and computers get better rapidly.
Imagine that you were running at pretty close to top speed, and there is some other creature that is currently chasing you. If that creature is gaining on you rapidly, then you aren’t going to stay ahead of that creature, are you? And after the creature catches up with you, if it keeps going you are not going to be able to keep up, are you?
By the way, that is why I take a bullish view of self-driving cars. Maybe we will make the physical and regulatory environment for self-driving cars as unfriendly as possible. Otherwise, I think they will take over. People will come to see driving as a waste of time. They will come to see having a car that is idle most of the day as a wasteful expense.
Heterodox economics: my latest
1. David Wright invited me to a podcast, which is here. I got off to a slow start, so I recommend skipping ahead to about minute 6, maybe even to minute 8, where Wright brings up the book Capitalism without Capital.
2. After being stimulated by Wright’s questions, I wrote an essay on the social construction of value. Titled The Value of Nothing, it begins
If he were alive today, Oscar Wilde would say that a cynic is a man who knows the price of Bitcoin. You cannot drink a Bitcoin. You cannot plant crops on Bitcoin. Its intrinsic value is nothing.
Read the whole thing. I think of it as a deep essay about the fact that value is not intrinsic.
Equity without capital, twenty years later
I received a review copy of Capitalism without Capital: The Rise of the Intangible Economy, by Jonathan Haskel and Stian Westlake, which has a 2018 copyright date.
1. My first reaction is to be a bit miffed that my name is not in the index. Nick Schulz and I wrote a book on the intangible economy, and the first edition appeared in 2009. Going back even further, in 1998 I wrote an essay called Equity without Capital. That essay is still interesting to read, and it anticipated some of the central issues in their book. But probably fewer than 200 people saw it when I wrote it.
2. Hal Varian and Carl Shapiro aren’t in the index, either. That is a less forgivable omission. Information Rules sold well.
3. I hurried through the book, and I was inclined to give it a mixed review. But when I re-read it, I only re-read the sections that I liked the first time. I decided that those sections are really good. Now I am inclined to give the book a strong recommendation.
4. The organization of the book is excellent. The good news is that you usually can skip to the end of the chapter and read its conclusion to get the main point. The bad news is, well, why not just condense the book into an extended essay? And if you left out the sections of the book that did not do much for me, the extended essay would work even better.
Gosh, I am really being hard on them, for some reason. It really is a first-rate book. I’m not sure why I keep wanting to talk about what I don’t like about it. But, here I go again:
5. They make a big deal about recent literature that arrives at measures of intangible capital. However, as they point out, such measures are fraught.
Their analysis says that intangible capital has four s’s: sunk costs (investments in assets that cannot be re-sold); scale (network effects and path dependency can bring very high returns); synergies (combinations of ideas are worth more than the ideas are worth separately); and spillovers (ideas are easily copied or imitated).
This implies, as they recognize, that intangible capital can be worth much more than what it costs to obtain, because of scale and synergies. But it can be worth much less than what it costs to obtain, because of sunk costs in non-marketable assets. In bankruptcy, you can sell off the office furniture and the fleet of trucks (tangible assets), but not the business process that proved unsustainable or the failed attempt to establish a brand (sunk costs).
But the measures of intangible capital use acquisition cost as the measure of investment in intangible capital. That may be a reasonable way to value tangible capital. But to me, their four s’s imply that intangible capital’s value cannot be reliably represented by its acquisition cost.
To get technical, Tobin’s q is the ratio of the market value of capital to its replacement cost. Think of it as the ratio of the stock price of a firm to the acquisition cost of its assets. For tangible capital, q should be close to 1. But for firms with a lot of intangible capital, like The Four, it is much, much greater than 1. Tyler Cowen’s recent column, Investors are celebrating the tech revolution, says that the current high values of q are a positive signal about future economic growth.
Of course, for many dotcom stocks in the 1990s, q shot way up before dropping to zero, which is what my essay was predicting. But by the way, one of the stocks I was skeptical about back then was Amazon, and if you held onto that, the losses on the rest of your 90’s doctcom portfolio might not trouble you.
Looking at this balance between superstar value and failure, the authors propose that, well, on average, the value of intangible capital for the whole economy ought to be somewhere close to what it costs. I thought they were just hand-waving at that point.
They understand well enough that intangible capital is not exactly like tangible capital in the neoclassical model. But I do not think that they are ready as I am to take the next step and jettison the neoclassical framework.
The Servant Aggregators
Several years ago, I asked,
In an economy where some folks are very rich and many folks are unemployed, why are there not more personal servants?
Recently, someone pointed me to Umair Haque’s column from two years ago.
I’m going to call it a Servitude Bubble. For the simple reason that it is largely based on creating armies of servants. You can call them whatever buzzwords you like — “tech-enabled always-on super-hustling freelance personal brand capitalists”. But the truth is simpler. The stuff of the Servitude Bubble makes a small number of people something like neofeudal masters, lords with a corncucopia of on-demand just-in-time luxury services at their fingertips. But only by making a very large number of people glorified neo-servants…butlers, maids, chauffeurs, waiters, etcetera.
Dog walkers, Uber drivers, etc. My question was answered.
But it’s not just a few rich people with access to these services.
Spotify >> Facebook
I think that Spotify is much more satisfying than Facebook. Here is why:
1. The revenue model. Spotify has a free version that includes ads and a subscription version without ads. I have always hated the advertising model on the Internet. I much prefer the subscription model, but the subscription should give you access to a ton of stuff, not just one newspaper’s content or one record label’s music. Spotify gives me almost everything I would ever search for in music, and I am happy to pay the monthly fee to support that, to get rid of ads, and to be allowed to download music so I can use it on road trips.
2. Better sorting. On Spotify, I use playlists, so that I know what I am getting. If Spotify were like Facebook, it would send me Israeli dance music when I’m in the mood for 60’s rock music.
3. Better filtering. If I’m interested in a friend’s travel photos, but she puts up ten posts about why she hates Trump for every post on travel, I get stuck wading through all the Trump posts. Spotify doesn’t make me worry about having to filter out lots of crud.
4. Better recommendations. Spotify’s recommendation methods include: “discover weekly,” a set of songs that have some similarity to what I listen to, and these are often good; playlists that are similar to mine, and some of these are excellent; playlists of other users, including one friend of mine who has some ones that I really, really like.
Facebook took of in part because it satisfied a desire for people to engage with their real identities, which allows you to do things that you cannot do on the anonymous Internet. But that is not such an advantage when you have smart phones to establish identity. Does anyone think that we’ll be using the “log in with Facebook” feature when we have smart phones with facial recognition?
I think that Facebook should try to become the Spotify of social media and provide users with capabilities that they would be willing to pay a subscription fee to have. If not Facebook, then I hope other companies try it.
Andre Staltz on the new tech business environment
I promised a post on this piece. Here goes. He writes,
GOOG’s goal is to gather as much rich data as possible, and build AI. Their mission is to have an AI provide timely and personalized information to us, not specifically to have websites provide information. Any GOOG concerted efforts are aligned to the AI mission.
Try a search for mortgage calculator. Once you scroll past the ads, what you get is. . .a mortgage calculator! It used to be that all you got were links to web sites. The new approach is very convenient if you want to figure out a monthly payment, but not so nice for all those web sites that put up mortgage calculators to try to attract visitors.
This suggests that Google has reached the cannibalization phase of the O’Reilly cycle. Staltz seems to think that it has. But if Google eats all of the revenue without sending you to anyone’s web site, then I presume people will stop putting up web sites. And in that case Google is going to have less new data to mine to produce answers to queries.
He speculates,
There would be no more economical incentive for smaller businesses to have independent websites, and a gradual migration towards Facebook Pages would make more sense.
Later,
There is a tendency at GOOG-FB-AMZN to bypass the Web which is motivated by user experience and efficient communication, not by an agenda to avoid browsers. In the knowledge internet and the commerce internet, being efficient to provide what users want is the goal. In the social internet, the goal is to provide an efficient channel for communication between people. … Already today, most people on the internet communicate with other people via a mobile app, not via a browser.
Some random thoughts:
1. For me, it’s starting to sink in that this is not 1997 any more. Smart phones are more closed and proprietary than was the Web. At this point, artificial intelligence and machine learning seem to be mainframe-like, favoring established giants, rather than PC-like or Web-like, favoring upstarts.
2. Google, Amazon, and Facebook may already have entered the cannibalization phase.
3. Content creators have always whined that they deserve more income. But the idea that “content is king” was baloney sandwich from the get-go. I can remember almost twenty years ago hearing Ted Leonsis (AOL) say that “convenience is king.” And now Staltz is telling us that the Web is just not convenient enough to cut it these days. Facebook is going to help us connect over mobile devices. Google is going to give us information directly. Amazon is going to enable us to order stuff without using a personal computer.
4. My counter to Staltz’s dystopian forecast is to suggest that effervescence is king. Effervescence in tech means that lots of talented people are working on stuff. Personal computers were effervescent in the 1980s. The Web was effervescent in the 1990s and early 2000s. The smart phone became effervescent when Apple encouraged app development. Cannibalization and walled-garden strategies kill off effervescence, and when you kill off effervescence, that leaves talented, driven people with a need to find an outlet. At some point, they will succeed, and then today’s giants will be cut down to size.
Handle predicts a shakedown
That is, the capitalists will try to purchase respectability and pay off potential critics that could create real trouble for their businesses by buying ‘indulgences’ in the form of funding donations for certain prominent anti-capitalists, conspicuously and prominently towing the party line in public on the most important ideological commitments, and hiring the right number of the right people for cushy sinecures. If they show they are reliable allies instead of potential threats or rivals, and put enough money where their mouths are, and use their platforms, technological savvy, and expertise to help progressives win elections (e.g. Eric Schmidt wearing his “Staff” badge at Clinton campaign HQ), then in exchange, they will be left alone, and maybe even get some special treatment, favorable coverage, and promotion instead of demonization.
This strikes me as a very plausible scenario. Universities have pacified radicals in this way.
In the mid-1980’s, Freddie Mac made a number of bad loans on multifamily properties in poor neighborhoods. Some of them were cash-out refinances (someone from another company later confided in me that no other multifamily lender did cash-out refis), where the property owners took the money to spend on themselves, did zero maintenance on the properties, and then defaulted on the loans.
The agitation group ACORN saw this as an opportunity to go after Freddie. They organized demonstrations on the theme that Freddie was ruining the dwelling places of poor people. That was indeed one of the unintended consequences of the misguided lending practices, but what ACORN was really after was a big grant from Freddie that amounted to hush many paid to ACORN.
The thing about this shakedown tactic is that it is like paying ransom in a kidnapping. It relieves your problem, but it increases the chances that there will be other victims. In the case of a shakedown by activists, giving them hush money relieves our problem but it hands the group more resources to go and shake down the next corporate victim.