Crypto is peak Silicon Valley

The Allen Farrington piece on Sequoia’s investment in FTX and hyping of SBF is hilarious.

Moral of the story:

Next time somebody says they don’t read books, don’t make up a mumbo jumbo explanation why that makes the person a next-level genius. Take it instead as confirmation that the person is a fool.

“Wouldn’t someone with IQ points to spare realize that dismissing books — all books — as essentially worthless might rile a writer? Was he playing with me? Is this fun? Is this humor? I’m satisfied with my meta-analysis until I realize that one can always increment the level of strategic play in this sort of game. It’s like poker. Level one is just thinking about how to strengthen your own hand. Level two is thinking about what your opponent’s hand is. Level three is thinking about what your opponent thinks your hand is. And so on. And, since SBF is obviously a genius, I should simply assume that, compared with me, SBF will always be playing at level N+1. Which makes my analysis of the intent behind SBF’s “books are for losers” idea spiral into infinity and crash, like a computer program stuck in a loop.


The Blocksize Wars

Most Bitcoin books are bad. Many fall in the category of overzealous Bitcoin Maximalist tracts, reading more like religious scripture than factually enlightening non-fiction.

The “Blocksize Wars” is of a different breed. The title admittedly sounds boring. And the subtitle – “the battle for control over Bitcoin’s protocol rules” – even more so.

That is precisely why you should read it. Jonathan Bier chronicles what on the face of it looked like a quite narrow technical disagreement within the Bitcoin community, but which revealed a deep underlying philosophical schism, with two competing visions for what Bitcoin should be. This was Bitcoin’s equivalent of Christianity’s split between Catholicism and Protestantism or the Shia-Sunni divide within Islam.

The two diverging factions that went to war between 2015 – 2017 became known as the small blockers and the big blockers. The former being textualists who wanted to stick to Bitcoin’s pseudonymous founder Satoshi Nakamoto’s original idea of how the cryptocurrency should work, whereas the latter faction preferred a more constructionist approach allowing greater scope for amending and adapting the Bitcoin protocol like a living constitution to new circumstances as time goes by.

The primary point of contention was Bitcoin’s blocksize limit, i.e. the amount of data available in each Bitcoin block. Whereas the big blockers deemed it necessary to progressively increase the blocksize limit in order to facilitate faster and cheaper transactions on the Bitcoin blockchain, the small blockers wanted to keep the original 1MB blocksize limit, (which was actually not included in the code at the time of Bitcoin’s initial release in January 2009 but was introduced by Satoshi a year and a half after in the summer of 2010).

As Bier recounts at stake was not only the technical matter of the blocksize limit, but the fundamental question of how Bitcoin’s protocol rules could be modified, and by whom. Does power over Bitcoin lie with miners or with the ultimate end users? And what time preference should Bitcoin be dictated by? Should Bitcoin be like a tech startup and prioritise gaining market share in the short term: or was it a long-term project, a new global money, that should think decades ahead when making decisions? Should its aim be to offer a fast and cheap payments network to compete with the likes of Visa and Mastercard? Or should Bitcoin’s rather aim to be a form of digital gold, that is used more as a store of value than for small daily transactions?

The plot has arguably gained renewed relevance in light of Tesla founder Elon Musk’s emergence in the cryptosphere as a late-coming big blocker.

The reason why Musk has turned his attention to Dogecoin is because his side of the argument lost. The small blockers won the war.

Why? Did Musk miss something?

At least the arguments Musk have recently been making about Bitcoin scalability sounds like a re-enactment of the [losing] arguments the big blockers made during the Blocksize war.

I will not provide a full account of the war. For that, read the book. But for the briefest of summaries: The opening shots were fired in August 2015 when ur-Bitcoiners Mike Hearn and Gavin Andresen threw their weight behind a new, incompatible version of Bitcoin, known as Bitcoin XT, that would increase the blocksize limit to 8MB and progressively double it every two years until 2036.

According to the big blockers such an increase was necessary for Bitcoin to be able to process more transactions cheaper and faster, which in their world view was a prerequisite for Bitcoin to offer a viable use case and gain mass adoption.

The scheduled implementation of this proposal was five months later in January 2016, and required a vote from the Bitcoin miners, with 75 percent support set as the threshold for activation.

What made the proposal instantly controversial was that it incompatible with the existing Bitcoin network, and thereby would require anyone running a Bitcoin node – (the decentralised network of computers that validate transactions and store the entire blockchain) – to upgrade their software.

If the upgrade had gone ahead it would have constituted what is referred to as a hard fork, i.e. a point where the blockchain can bifurcate and potentially split into two separate coins. To cut a long story short, Bitcoin XT and its successor proposals failed, but a hard fork splitting Bitcoin in two was eventually what happened with the birth of Bitcoin Cash on August 1st 2017. (And then in November 2018 Bitcoin SV split off from that chain again).

So why did the small blockers win the war? And what did it mean?

Interestingly they did win despite being the presumptive underdogs. Gavin Andresen was the closest thing to Satoshi Nakamoto’s heir apparent, and did not hide his pretensions to the throne. Almost all the big crypto corporations, Coinbase notably, supported the big blockers.

But as in Afghanistan an apparent underdog may very well conquer a materially superior enemy if it has strategic patience and more nimble tactics. Having a better understanding of the battlefield also helps.

The main philosophical differences between the small blockers and the big blockers can be summarised more or less as in the below table.

Small Blockers:Large Blockers:
Long termShort term
System resilienceUser experience
Theoretical / ScientificPragmatic
Cryptography nerdsBusiness-minded
Ultra decentralisationMild Decentralisation

To over-simplify: the nerds beat the suits.

For uninitiated but crypto-curious readers The Blocksize Wars might be as good a primer as any. You have to jump down the rabbit hole from somewhere. Bier provides a very well detailed account of all the battles of the war, with all the technical intricacies at stake, which are interesting in and of themselves, particularly for more initiated readers. Yet he manages to convey the essence of the opposing world views in the overarching philosophical conflict in terms that are perfectly clear even to the lay reader.

The fact that Bitcoin is a decentralised network with an unknown founder makes it stand out remarkably from other emerging technologies in recent times, that have mostly fallen under the control of centralised oligopolies, the tech giants of Silicon Valley and their autocratic founders coming first to mind. As venture capitalist Marc Andreessen said in a recent interview the immaculate conception of Bitcoin from the depths of the Internet and the fact that its creator remains shrouded in mystery “is one of the most amazing things I have seen my entire life.”

What Bier’s book drives home very clearly is how the decentralised nature of Bitcoin limits the power of any one actor. For example Gavin Andresen thought he could use his authority as Satoshi’s heir to force through his vision for Bitcoin. But his hubris was quickly humbled. Likewise the “Fake Satoshi”, Craig Wright. As well as the Bitcoin miners.

At the outset of the Blocksize war the balance of power was assumed to lie with the miners. But what the war revealed was that while the miners play a vital role in running and securing the Bitcoin network, they are far from all-powerful and cannot force through change without the support of nodes and end users.

The most feared known unknown for Bitcoin is a so-called 51% attack, whereby a constellation of malevolent miners gains control of more than 51% of the network and can manipulate the Blockchain in order to potentially double-spend coins.

However, after reading Bier’s book you do start to question how real the risk of a 51% attack really is for Bitcoin, (Bitcoin SV appears to have suffered one recently). It is questionable how much rogue miners would be able to gain from committing a hostile attack without ipso facto negating the theoretical gains from the attack.

Without consensus the attackers may not be able to get very far. Even if the attackers should succeed in sustaining a malignant chain with a bigger number of blocks in it than the main chain for some time, it is questionable if they will be able to force acceptance of this chain on the rest of the community. The Blocksize war proved that the majority chain will not necessarily be considered the “legitimate” chain, solely on the basis of being the majority chain. In all likelihood the price of “Bitcoin” on the illegitimate chain would plummet, thus undermining the profits of the attackers and dis-incentivising miners from working on the chain. Even a successful 51% attack could thus easily prove to be a Pyrrhic victory at most, (as demonstrated in the somewhat similar case of Justin Sun’s failed attack on STEEM, which Vitalik Buterin has written interestingly in his post on Legitimacy).

It has become a cliche that bitcoiners are “in it for the tech”, not the money. The fact of the matter however is that the money talks. Technology follows the money. The two are inseparable. Technology will gravitate toward the most valuable blockchain. Value in turn depend on trust and legitimacy. If Bitcoin does not have trust and legitimacy it will not have value either. The reason why Bitcoin does have trust and legitimacy is because it is consensus-based. It is the monetary democracy. Attackers can in theory succeed in taking over the network, but not without dooming it and themselves. The likelihood that there exist an entity that possesses both a) the technological sophistication and resources to master a 51% attack, and b) the monetary ignorance to actually carry out such a self-defeating attack, must therefore be considered to be quite small, though it cannot be ruled out completely.

What was the most transformative age: the 1880s or today?

I have long held the belief that the 1880s were probably the most innovative and transformative decade in human history. We are still reaping the [diminishing] returns of the innovations of the Second industrial revolution – electricity and the internal combustion engine foremost among them – without which the digital revolution would not have been possible.

Silicon Valley tech evangelists have a tendency to exaggerate the progress of the modern era and underestimate the dynamism of the late 19th century West.

Microsoft-founder Bill Gates has published a note on the latest book of his favourite author, Vaclav Smil, and interestingly he seems to endorse Smil’s unmodern view that the 1880s might indeed be the most consequential decade in human history:

“The 1880s were miraculous; they gave us such disparate contributions as antiperspirants, inexpensive lights, reliable elevators, and the theory of electromagnetism— although most people lost in their ephemeral tweets and in Facebook gossip are not even remotely aware of the true scope of this quotidian debt.”

Vaclav Smil

Gates has previously been at odds with younger tech moguls who seem to believe that Internet connectivity will solve all the world’s problems:

“I certainly love the IT thing. But when we want to improve lives, you’ve got to deal with more basic things like child survival, child nutrition.”

Bill Gates

If the 1880s were indeed an era of faster progress than the 21st century, what conclusions might be drawn?

The [Bizarre] Second Coming of Jordan Peterson

The resurrection of Jordan Peterson is an almost less credible story than the resurrection of Christ. Peterson first rose to fame as a Prophet of Pronoun Orthodoxy in 2016, coming out of relative academic obscurity to become an overnight viral sensation. With the publication of his life-hack manual 12 Rules For Life Peterson became a leading light for the proverbial incels and angry white males out of sync with an increasingly woke world, who took solace in his gospel of self-reliance, tradition, Western values and Christian ethics.

At root Peterson took the King James Bible, repackaged it with a blend of Freudian/Jungian psycho-analysis, and spiced it up with a mix of Harry Potter and Disney classics to make the core message more marketable to a younger audience in our Godless postmodern times.

But then came the fall, which was just as abrupt. Short version: His marathon book tour 160-city must evidently have taken a huge emotional and physical toll on Peterson, finding himself in the frontline of the Great Culture War at the same time as his wife was diagnosed with terminal cancer, (which she survived). A more detailed version of how Peterson became addicted to anti-anxiety drugs (benzodiazepines) and ended up being put into an induced coma in a Russian clinic can be found in this interview with Decca Aitkenhead, (subsequently severly criticised by Douglas Murray here), and is recounted by Peterson himself in the introduction of his latest volume.

Peterson has now returned from his Russian exile and published the sequel to 12 Rules, titled Beyond Order – 12 More Rules for Life. As always when a mythical character wanders into the wilderness and eventually returns, it is usually as a changed person. Be it Moses, Gandalf, Anakin Skywalker, the Buddha or Batman. We will probably never know exactly what Balrogs Peterson confronted in Moscow. But if he left as Jordan Peterson the White, he has come back as Jordan Peterson the Grey.

Perhaps unsuprisingly for an author re-emerging from an induced coma, the latest volume feels somewhat sloppy and half-baked compared to the first 12 Rules. The language is less succinct and more repetitive. The book also contains a surprising number of [minor] grammatical errors. As both of the books are based on a list of 42 rules Peterson wrote in a Quora answer (apparently later deleted by Quora), it is hard to escape the impression that Peterson and his publisher first cherry-picked the tastiest twelve rules for the first book, and now we are left with the second rung. Undoubtedly, the publishers will manage to squeeze out a volume III and IV from the remaining rules in the original blog post. This kind of recycling is probably inevitable, as it makes excellent commercial sense. But the intellectual returns are diminishing. Few authors have more than one good book in them.

Nevertheless, the book is well worth reading. While not new, Peterson’s refrain of not succumbing to cynicism, resentment, victim mentality and apathy remains relevant. His style of weaving together biblical and mythical narratives and reframing them in a a contemporary context can be appreciated even by readers who are not necessarily hardcore Peterson fanboys, although the language can sometime tend toward the grandiose.

Peterson’s biggest contribution to civilised society is by all accounts the number of lost souls he has stopped from continuing down the path to the dark side. He should certainly be compulsory reading for all would-be school shooters, ISIS converts and Greta Thunberg-style environmental-fatalists who would rather see the world burn so long as it comes short of their various wicked visions of a pure Utopia.

My favourite rule was probably number VII: Work as hard as you possibly can on at least one thing and see what happens. Unfortunately, it does not seem that so many people are doing that in Western societies where mediocrity increasingly seems to be the new ideal – and the contempt Jordan Peterson is held in by large chunks of Academia, the mainstream media and the liberal commentariat is probably reflective of that fact.

The Great Acceleration?

Over the past year a Portuguese named Bruno has brought creativity, inspiration and flair to an arena where we had become accustomed to see slow, staid and sleepily conventional performances. No, I am not speaking of Bruno Fernandes’ impact at Old Trafford, but Bruno Maçães’ impact on the European public sphere.

I have to admit that when I picked up Maçães’ book “History has begun”, it was with the suspicion that he was something of a charlatan. A European Tom Friedman spouting banalities like “The World is Flat” and other prophetic pronouncements perfected for the slick format of a TED talk or Davos panel.

How wrong I was. Maçães is no (in Talebian terms) Intellectual Yet Idiot at all. Rather the antidote. “History has begun” is one of the most interesting, refreshing and reflective geopolitcs books I have read in a long time – especially interesting on the increasingly blurred lines between fact and fiction as well as the increasingly diverging paths of the American and European continents – and has convinced me I will have to read his prequels “The Dawn of Eurasia” and “Belt and Road” as well. Even if you disagree with Maçães’ upbeat case for a bright American future, the book is thought-provoking and definitely worth reading.

In the course of the Covid-19 pandemic Maçães has become one of the main Twitter accounts I turn to for hot takes on the turn of global events. He has been a pertinent observer of the vaccine wars and (in spite of past allegiances as Portugal’s Secretary of State for European Affairs) a vocal critic of the EU’s bungled vaccination roll-out.

In a recent piece Maçães argues that the pandemic is finally ushering in the Great Acceleration that technology optimists have been waiting for since the collapse of the Dotcom bubble.

Maçães starts off in agreement with the Cowen/Gordon premise that we find ourselves in a Great Stagnation, from which only a major societal shock can shake us off and unleash the next leap in economic growth.

The question is if Covid is the requisite shock to kickstart the future? This is where I believe Maçães overplays his hand.

There is no doubt that the pandemic has led to an unprecedented burst in digitisation, that would otherwise have taken many more years to pan out. But the growth and (un)employment implications of this accelerated shift from physical to digital remain far less clear. Yes, the future has become more evenly distributed, but it has not necessarily become faster.

Maçães argues that “we have realised that time is actually scarce” – though it is unclear if the EU has reached the same conclusion. It is true that vaccines have been developed quite fast – thanks in part to government programmes such as the Trump administration’s Operation Warp Speed. And in the UK the government’s Vaccine Taskforce led by venture capitalist Kate Bingham (who was much mocked upon being given the post) has showed public/private partnership at its best and most effective – an exceedingly rare phenomenon in modern times.

The pandemic league of nations table looks very different today from one year ago. Back then the US and the UK were derided for being to slow to react to the spread of the virus, whereas the European countries promptly locked down their societies. But while the US and the UK failed in the early phase of the pandemic, they did so for the right reasons – putting a higher premium on the preservation of liberty than continental European or Chinese politicians tend to.

Now the tables have turned. The same higher risk-willingness that made the US and the UK slower to react to the pandemic, is enabling them to escape from the pandemic faster, whereas the risk-averse EU has been left miles behind in the vaccination race.

So Maçães’ claim that “[w]e tend to be more open to risk and disruption when they are present all around us, and the success of the new vaccines is making everyone more positive on technological development and its obvious achievements,” must probably be qualified. Yes, that might be true for the Anglo-Saxon countries, it seems less true for the EU bloc.

To me the pandemic illustrates the logic of a new world order where a post-Brexit Britain forms closer ties with the US and the other Five Eyes countries in a dynamic and entrepreneurial Anglosphere, whereas the EU likely will turn itself into an increasingly insular Neo-Napoleonic empire whose delusions of grandeur will be challenged by the hard realities of economic decline. Certainly, the election of the anti-British Joe Biden was a shot across the bow for a tighter “special relationship” between the US and the UK, but the logic of this concept will outlive Biden.

Maçães cites Peter Thiel, the Silicon Valley investor who (like several others for different reasons) has labelled 2020 as the new year 0:

“I keep thinking the other side of it is that one should think of Covid and the crisis of this year as this giant watershed moment, where this is the first year of the 21st century. This is the year in which the new economy is actually replacing the old economy.”

There is truth to this. But it needs to be qualified. While the pandemic has undisputably accelerated digitalisation, few if any truly novel technologies have emerged in its wake. One much-touted hypothesis at the outset of the pandemic was that the closing down of societies would unleash a creative explosion. That may still bear out, but so far this prediction has been as wide off the mark as the prophesy of a covidian baby boom. Maçães mentions the usual examples of progress in AI and autonomous vehicles, but have these developments truly been accelerated as a direct result of the pandemic? Or just progressed at their usual pace regardless of it? I would bet the latter.

In fact, the economic consequences of the pandemic that have solidified at this stage are all rather bleak. At the national level the balance of power between China and the Western countries has shifted by leaps and bounds in China’s favour; At the corporate level the oligopolistic market dominance of the tech giants (the FAANG’s of the world) has reached unprecedented levels, at the expense of small- and medium-sized businesses; and at the citizen level the gap between the haves (who have enjoyed a comfortable countryside pandemic) and the have-nots has become ever-wider.

Maçães also touches on Bitcoin, which started its parabolic rise in the wake of the massive fiscal and monetary stimulus measures governments instituted to combat the economic fallout of the pandemic. While I certainly agree with Maçães that the cryptosphere holds great promise – I would go so far as to say the last hope for another economic revolution – it is worthy to point out that the founding premise of Bitcoin was not particularly optimistic. On the contrary, the inception of Bitcoin provided an escape valve for those who had lost hope in the system that collapsed under the financial crisis of 2008/09 – a monetary equivalent to the misfits who gave up and left a dystopian future in the old world for a Utopian future in America. And yes, indeed the price of Bitcoin has reached stratospheric levels, but that is not reflective of investor belief in a bright future. It is reflective of a world with a dearth of productive investment opportunities and where the real yields on bonds are ridiculously low and the (negative) real yields on cash even worse.

The ghost of a long-dead thinker whom Maçães quotes has come back to haunt us: Carl Schmitt, the crown jurist of the Third Reich, who has been made relevant again by the politics of pandemic. In the Schmittian playbook a pandemic provides ideal conditions – a state of exception – for wannabe Dictators to make their move. Be it more explicitly as a Putin or an Orban, who do not even care to hide their motives, or more subtly by democratic governments who dress up their emergency power grabs with assurances that they are for the public benefit and are only temporary in nature.

Perhaps it is not a great acceleration of technology we have in store, but a great acceleration of authoritarianism. Or, as certainly seems to be the case in China, a great Orwellian cocktail of tyranny and technology. Maçães tries to take a more upbeat spin on the Schmittian threat, by saying that: “The way to prepare for the emergency is to develop our powers of reaction well in advance”. That sounds fine in theory. But even in supposedly well-organised and advanced countries like my native Norway, the government has made a complete mockery of preparedness planning, despite being specifically warned of heightened risk of a pandemic in advance. Now I do not believe that Erna Solberg will turn Norway into a Dictatorship, but that is more due to the fact that politicians like her tend to respect democratic norms, rather than waterproof institutional safeguards against executive overreach.

Despite falling well short of Dictatorship in any meaningful sense of the word the emergency powers that “liberal” governments in many western countries have freely (ab)used, will be very hard to reverse and recover from. As Lord Sumption has made the probably most eloquent and principled argument for, “we cannot switch in and out of totalitarianism at will. Because a free society is a question of attitude, it is dead once the attitude changes”.

My hunch is that Maçães tries to be more positive than he actually is. His case for optimism seems somewhat forced, (more like Bruno Fernandes on one of his few uninspired days) and slightly at odds with the scepticism of his Twitter feed.

Even if we can finally see light in the end of the Covidian tunnel, the political situation, in the EU especially, can still get far worse from here. There is no way back to the status quo ante. Exception is the new normal. With populations suffering from Covid fatigue the last mile of the pandemic will be the longest. On the technology front we will wait for the promised acceleration to show up in the productivity statistics, which there is hitherto little sign of.


Amazon’s relentless expansion is upending the rules of business. Will the company take over the world? Or is Jeff Bezos over-extending?

The Amazon Spheres in Seattle; (photo from Wikipedia)

Brian Dumaine
Simon & Schuster, 2020

The Soviet experiment of a centrally planned economy ended in dismal failure. But was the project inevitably doomed to fail or could the Gosplan have succeeded with better information technology? Leonid Kantorovich, one of the Soviet Union’s economic masterminds & recipient of the 1975 Nobel Memorial Prize in Economic Sciences, seemed to believe that the undertaking was not hopeless. In his prize lecture Kantorovich said that: “The difficulties of modelling & data creation can be overcome like similar difficulties were overcome in the natural & technical sciences… A significant progress is now being made in the development of computer hard- and software & their mastering.” Basically, if only the central planner had better data, the economy could be optimised.

Obviously, the difficulties were not overcome in the lifetimes of Kantorovich or the Soviet Union. But in the Capitalist west there has now appeared an institution that looks set to succeed where Gos­plan failed. That institution is Amazon – “The Everything Store”. Yes, there are notable differences. For one Amazon is a private corporation driven by – at least in theory – the profit motive. But there are also conceptual similarities between the way Amazon is planning for the long run & attempting to maximise value for its customers by taking complete control over the entire value chain & the way the Soviet Union attempted to optimise resource allocation by central command under the framework of the now ridiculed 5-year plan. Though Amazon’s apparatchiks have access to way better data than Gosplan ever had.

The One Store to Rule Them All

Jeff Bezos started Amazon as a pure online bookseller, but his ambitions went much wider already from Day One – every day is Day One at Amazon. Originally, he wanted to name the site, which might have been a fitting description for Bezos’ personality, although an awful name for a bookstore. Indeed, Amazon’s ambitions know no limits. That’s what separates Amazon from most private corporations, which typically tend to be specialised in one or at most a few domains. Specialisation through the division of labour has been a basic tenet of Capitalism for centuries & in the past non­-specialised firms have tended to fail against more specialised competitors. Managements making big bets on vertical &/or horizontal expansion are always accused by sceptical share­holders of losing sight of the business’ core competencies – or of hubris. Shares of highly diversified conglomerates typically trade at a discount to more razor-focused rivals. Yet, nothing has deterred Bezos from launching an ever-widening array of products & services or from insourcing every step of the value chain.

That’s why drawing an analogy to Gosplan may be relevant. Can Amazon really provide everything from books & diapers, TV series & web hosting to home delivery & health insurance more efficiently than specialised providers could do separately? Economic theory says adamantly no. Reality seems to suggest yes. If so, economic “science” would be turned on its head.

One of the defining features of modern “Surveillance Capitalism” is that the big technology giants like Amazon have a tremendous information advantage over smaller rivals, who may be more nimble but to little avail up against scale. Therefore, it cannot be conclusively ruled out that Kantorovich was right after all: that the problem was not necessarily central planning per se, but simply a data problem – which Amazon as opposed to Gosplan has solved.

The Orwellian information-gathering capabilities that Amazon has developed are frighteningly impressive. Not only does Amazon gather troves of data from the e-tailer’s more than 300 million customers worldwide – of which more than 150 million are Amazon Prime subscribers. It also & perhaps more sinisterly has privileged access to the data of the more than 2 million third-party sellers that rely on Amazon’s Marketplace platform to sell their goods, (with the constant risk of Amazon launching their own label rival if they spot that sales are going well).

In addition, there is Amazon Web Services. The company’s cash cow, which has grown serendipitously to become the number one provider of cloud computing services. AWS hosts data from more than a million businesses. Even if AWS isn’t spying on the data of their customers, they easily see which businesses are growing fast and which are not. Yet, the Amazon technology most resembling Airstrip One’s Telescreens – which Kantorovich could only have dreamed of – is Amazon’s Virtual Assistant Alexa. Alexa has been installed in more than 100 million devices, eavesdropping on everything & everybody within hearing distance. It is telling that of Amazon’s gargantuan 29bUSD R&D budget as much as one tenth is believed to be directed to voice recognition technology alone. 10.000 Amazon employees work solely on voice recognition. In spite of obvious privacy concerns Amazon obviously believes that the future of shopping will happen by voice rather than click.

Bezos’ Flywheel

In “Bezonomics” Fortune journalist Brian Dumaine does a good job of chronicling how Amazon has become one of the most valuable companies in the world (depending on the stock market’s daily mood), & how the company is revolutionizing modern business with profound effects on society. Dumaine argues that the success of Amazon boils down to three things: customer obsession, extreme innovation & long-term thinking.

For anyone interested in getting a general understanding of how Amazon works, Dumaine’s book is a worthwhile read. As opposed to many business books he sticks mostly to concretes & does not theorize too much – except for Jim Collins’ concept of a “flywheel”, but that is only because Bezos got hooked on that idea himself after a session with Collins.

I don’t think Dumaine brings any really original new insights into Bezos’ character, but it gives a good, if superficial, summary of his MO. Bezos has said publicly that he needs his

8 hours of sleep and likes to potter around, reading & not doing much else until 10 in the morning. Dumaine does not at all get into Bezos’ recent transformation from looking like a typical 90’s nerd to his current iron man physique & Bond Villain appearance. Many readers will already know that Bezos is famously hard-charging. One of his stock replies to employees who have not lived up to expectation is: “Are you lazy or just incompetent?” Or his quirky 2-Pizza rule; which dictates that no team should be bigger than getting by on two pizzas.

Bezos is also allergic to PowerPoint presentations, which he has banned at meetings, preferring instead the narrative structure of text rather than slick bullet point slides. Every meeting of Amazon’s S-team (S for senior executive) is centred around a 6—page narrative memo describing the problem at hand. The first 20 minutes of the meeting is spent on reading through the document, to make sure nobody shows up just pretending to have read it in advance. Similarly, every new project or initiative at Amazon starts with writing an internal press release, “working backwards” from the imagined launch date & serving as the project’s guiding document until the actual launch.

Prime Addiction

Why has Amazon started producing TV series? It is all about seducing customers into the Amazon ecosystem & getting them addicted. Prime members spend on average 1.300USD per year vs 700 for non-Prime customers. Looking at it that way it immediately makes more sense why Amazon for instance would spend 72mUSD on producing the series “The Man in the High Castle”. Considering that the show attracted 1,15m new Prime subscribers, that works out to a recruitment cost of 63USD per subscriber. Way less than the annual Prime subscri­ption fee of 99USD at the time – since increased to 119USD.

The business model of Prime is not a breakage model, unlike say a gym, that would be quite happy if their membersdidn’t show up that often. In contrast, Amazon wants Prime subscribers to use the service as much as possible. Because over time that will result in more sales – although there is currently increased speculation Amazon will hike the subscription for Prime again. That is why Prime is constantly adding more content & features. As Bezos has said: “Every time we win a Golden Globe Award, we sell more shoes”.

Logistics, Logistics, Logistics

Amazon spends astronomical amounts on shipping. 37,9bUSD in 2019, equivalent to 13,5 percent of revenue, up almost 40 percent from the year before – thanks to a soaring Prime membership & the introduction of guaranteed one-day delivery. The “Last Mile” on deliveries is a particular challenge, often accounting for as much as half of shipping costs.

Solving the logistical puzzle is one of Amazon’s top priorities. The company has a wide range of initiatives to streamline its logistics operation. The common denominator is that Bozos is keen to move the entire, or as much as possible of, the logistics chain in-house. Amazon is amassing its own fleet of cargo aircraft, to avoid reliance on the likes of FedEx, UPS & DHL. It also has a joint venture with Toyota to build its own autonomous delivery van, the e-Palette. In a 2013 interview Bezos said that delivery drones would be in use by 2019. That has not happened yet. But one should not be surprised to see Amazon drones buzzing around in big cities in the not too distant future.

As in any war the supply lines are of vital importance. That is the unseen side of Amazon for the customer. Highly efficient. Not always beautiful. In recent years Amazon has come under strong criticism for the working conditions in the company’s warehouses, or fulfillment centers as they are labelled. Some of the harshest criticism has come in The New York Times’ investigative exposé & the book “Hired: Six Months Undercover in Low-Wage Britain” by (Trotskyist) journalist James Bloodworth. After unflattering reports of Amazon employees having to endure inhumane working conditions & relying on Food Stamps, the Democratic Socialist Vermont Senator Bernie Sanders went on the attack with a “Stop BEZOS Act” in the autumn of 2018. Sensing the political zeitgeist moving against him Bozos pre­emptively implemented an across-the-board 15USD minimum wage for all of Amazon’s 350.000 hourly workers. This was not only a clever PR move, but also a shrewd tactic that would put less deep-pocketed competitors at a disadvantage.

Amazon is different from the other FAANG companies in that it has hundreds of thousands of low-skilled, low-wage workers. Dumaine is adamant that many of them will fall victim to technological unemployment. Bezos may have hiked the minimum wage for his serfs but there is no doubt that he would prefer to make them obsolete altogether.

Workers in Amazon’s fulfillment centers will probably be first to go – which are already heavily robotised. McKinsey, the management consultancy (not known for being universally right in their predictions) believes autonomous deliveries will slash shipping costs by 40 percent – which would amount to ~15 billion per year for Amazon.

If Amazon’s autonomous delivery van becomes a success – which is probably still some way into the future – that will translate to significant job losses. The 3,5 million truck drivers in America are obviously exposed – although for the moment America is facing a shortage of, not an over-supply of truck drivers. The job group probably more immediately at risk is cashiers, of which there are 3,6 million in the United States. Many of those jobs are being rendered obsolete as Amazon’s phenomenal growth continues & as shopping in general transitions from physical stores to online, while the remaining physical stores go to a cashier-less user experience – as in Amazon’s own Go stores.

Wal-Mart vs Amazon

Probably the only competitor with the wherewithal to take on Amazon head to head is Wal-Mart & the old retailer has no intentions of giving up without a fight. It is worth to remember that even though Amazon’s market value is more than four times that of Wal-Mart, the latter’s revenue is still almost double Amazon’s. Currently the Amazon/Wal-Mart rivalry seems to be mimicking the US political divide between “Globalists” on the urban coasts & “Nationalists” in the rural heartlands.

Venture Capitalist Peter Thiel has made the distinction between the Economy of Bits & The Economy of Atoms. That division is however becoming increasingly blurred. As Tencent-founder Tony Ma has put it: “There will be no purely Internet-only companies because the Internet will have spread to cover all social infra­structure; nor will there be purely traditional industries be­cause they will have grafted onto the Internet.” The key will be to offer the best hybrid experience. One obvious geographic advantage Wal-Mart holds over Amazon in that regard is that the Arkansas based chain’s 4.700 US stores are located within 10 miles of 90 percent of the US population. Amazon partly made up for that by acquiring the up­market grocery chain Whole Foods in 2017, whose 400 US stores are mostly concentrated in urban coastal areas.

Evev the biggest geniuses can fall to hubris. They only fall from higher up.

Will Amazon Fail?

Today, CEOs in almost all industries are worried that Jeff Bezos will wake up one morning & say: “Your margin is my opportu­nity”. No industry seems to be safely out of reach from Amazon’s all-invasive tentacles. Amazon’s advertising business is growing fast & challenging the oligopoly of Google & Facebook, thanks to superior conversion rates. Together with JP Morgan, the bank, & Warren Buffet’s conglomerate, Berkshire Hathaway,  Amazon has launched a health-insurance scheme for the three companies’ combined 1,5 million employees, that is widely anticipated to be a stepping stone for taking on America’s dysfunctional health insurance market. Banking is also a natural expansion path for Amazon. After all it is already providing loans to third-party sellers on its platform. Though there are regulatory hurdles to overcome. Dumaine believes Amazon could become the slick user interface front of a digital banking product, with a legacy bank (JP Morgan perhaps) running the nuts and bolts under the hood, mitigating the need for Amazon to become a regulated banking institution. Amazon’s own computer chips may repeat the success of AWS.

The un-ending reach of Amazon’s tentacles inevitably begs the question: Isn’t Amazon over-extending? It sure looks like a classic example of imperial overreach? Or is Amazon now so omniscient that it’s Al-powered flywheel will simply continue to accelerate while the competition is left ever further behind? For the moment that looks to be the case. Bezos has himself frankly admitted that Amazon will probably fail, at some point in the future. It is hard to see that happening in this decade. For the foreseeable future the only force that could conceivably stop Amazon is Washington. The case for antitrust action against the tech giants is building. Bezos faces his maiden Congressional hearing later this month & even Elon Musk (no doubt partly driven by personal rivalry) joining calls for Amazon to be broken up.

So how would Bezos respond if Washington or the EU decide to break up Amazon? Sensing that Western political institutions are failing in their mission to deliver value to citizens, perhaps Bezos will go on the counter-attack and have a go at reforming one of the oldest business models there is: the state. Amazon Republic? Why not? Would you rather be a citizen of your current country or of Amazon?

How Fast is the Future?

Peter Diamandis & Steven Kotler cherry-pick evidence to paint a Panglossian picture of accelerating innovation, but fail to conceal the gloomy shadows of Secular Stagnation.

I have been reading Peter Diamandis & Steven Kotler’s new book, “The Future is Faster Than You Think”. If you are already familiar with the authors’ previous works, it will come as little surprise that the latest volume in their “Exponential Mindset Trilogy” doubles down on the same arguments made in “Abundance” (2012) & “BOLD” (2015). Basically, that a convergence of accelerating technologies such as Artificial Intelligence (AI) & Augmented Reality (AR) will lead us to a Singular Utopia — much sooner than you would expect.

The book is certainly worth reading end contains numerous enlightening insights about emergent exponential technologies. But, to get that out of the way first, the book’s biggest weakness is that it does not seriously engage with the counterarguments of the Secular Stagnationists; that the future is not so fast.

After all it has been close to a decade since the publication of “Abundance” & for most of the middle-class in most Western countries that has been a decade of stagnation in wages & wealth. For many the authors’ arguments that flying cars are right around the corner & that we will soon be enjoying an abundance of low-cost housing, healthcare & education may thus ring a bit hollow, to put it mildly. For example, what exactly does it mean that “exponential technology is dematerializing, demonetizing, & democratizing nearly every aspect of real estate”? Three funky words starting with “de-“; that will probably go down well in a TED speech. But try telling that to a Silicon Valley employee struggling to pay the rent on his ludicrously expensive San Francisco hut.

The authors do at least acknowledge Peter Thiel’s complaint that: “We wanted flying cars, instead we got 140 characters”. But they interpret Thiel too literally, without taking him seriously. Their retort that flying cars are here already is too clever by half. It is true that Uber plans to launch their aerial ridesharing scheme in 2023 – Uber Elevate – with a long­-term goal of achieving lower marginal costs per passenger mile for flying cars than for traditional cars. However, the Covid-19 pandemic has thrown renewed doubt at the feasibility of both those targets.

The book would have been more credible if Diamandis & Kotler had offered a more comprehensive macro rebuttal of the Secular Stagnation story, instead of cherry-picking individual companies & sectors with outsize productivity gains. It weakens the book that the authors are hesitant to confront the decelerating productivity growth in the American (& other Western) economies that has been extensively documented by Robert Gordon & others – most notably in his masterly “The Rise & Fall of American Growth”. The only thing this evasiveness serves is to stoke suspicion that the crowd around Singularity University is turning into a techno-utopian cult.

The human factor is a bit missing from Diamandis & Kotler’s narrative. Throughout the book one often gets the impression that people, far from having any inherent value or free will of their own, are reduced to a pathetically mortal pieces of meat, whose intelligence has been transcended by their Alexa home enter­tainment system & who can be rocketed around in Hyperloops at 760mph serving some higher Kurzweilian purpose. & if the authors get their way society will soon reach Longevity Escape Velocity – i.e. that for every year you live you will add more than one year of life expectancy. If this is what the future holds, most sane people will probably wish to die before they will have the chance to spend eternity in AI purgatory.

Despite the claims of an “exponential mindset” the authors occasionally fall prey to rather linear, & dare one say shallow thinking. Such as their very linear view of the “time saved” by googling the answer to a question instead of having to look it up in a lexicon or applying your own cognitive faculties. Even Eric Schmidt has recognized the risk that Google – & the Internet more broadly – making us stupid, by producing a tendency toward shallow thinking, at the expense of (for schoolchildren esp­ecially) developing the ability to think (& read) deeply about things. Diamandis & Kotler on the other hand, have no such qualms.

There is no question that a lot of interesting stuff is happening in Silicon Valley. But will Avatars ever match the impact of the invention of electricity or Blockchain that of running water? Gordon has demonstrated very thoroughly how hard it is to match the truly life-altering significance of the General Purpose Technologies & subsidiary inventions of the Second Industrial Revolution: the internal combustion engine, automobiles, aircraft, the telephone, radio, “modern” sewage systems, the washing machine & assembly lines. These inventions powered a century of miraculous growth from ~1870 to ~1970. Their impact was so transformative that the feat can hardly be repeated. Diamandis & Kotler wax lyrical about the notion of a Kurzweilian “Law of Accelerating Returns”. But the law of diminishing returns will not easily be turned upside down. Yes it may be true that an iPhone would have cost 110 mUSD in 1980, but how much better is really the iPhone 11 than the iPhone 10? & will the 12 be leaps & bounds better than the 11?

Even if one remains sceptical about Diamandis & Kotler’s grand thesis of accelerating change, their analyses of several industries are spot on. In the retail industry for instance, the changes are obvious to see & have been accelerated by the coronavirus pandemic. The transition from analog to digital has been sped up. Amazon is the big winner. Shopping malls will die. It will be the end of cashiers as automated checkout becomes the new norm. The transition from physical to online retail has profound consequences for the advertising industry as well, as evidenced by the fact that Google & Facebook have gobbled up a combined quarter of ALL global ad revenue – leaving Old Media as the big loser.

The Covid-19 Pandemic has been a Luther moment for the “Higher Education” racket. As lectures have moved from campus to cyber­space it seems to have finally dawned on students that they are indebting themselves for life only to pay exorbitant tuition fees for knowledge that is essentially available for free on the Internet. The authors are right that this relic from the past is no longer fit for purpose (if it ever was – note the disparaging judgments of Oxbridge from the likes of Adam Smith or Edward Gibbon as long as 250 years ago). Peter Thiel has rightly compared modern university diplomas to the indulgence letters of the medieval Catholic Church. But students’ obedient faith in orthodoxy has held up surprisingly long. With Covid – judging for example from reports suggesting that foreign students will not bother with elite educations at prestigious US or UK universities if classes will anyway be held online – the moment when students (& employers) see that the Professor is not wearing clothes may at long last have arrived.

AR, VR & Avatars are all exciting fields, but will they truly transform the lives of common people like the dishwasher did? Or perhaps more likely & more sinisterly; will these technologies provide avenues for resigned people to retreat from reality? A second chance to create in virtual worlds the life they could not have in the real world? At the very least this should bode well for the gaming industry.

Blockchain & Cryptocurrencies are perhaps the emerging tech­nologies with the biggest potential to radically change the way the economy is ordered – by challenging the incumbency-biased hegemony of central banks & fiat currencies. In theory at least. Not that I believe it will happen in practice. The “Fintech” revolution held early promise but has by now been quite effectively co-opted by the legacy banking system, rendering the chances for radical change minimal.

Legacy banks have today become probably almost as big a break on entrepreneurial activity as government regulation. If blockchain, cryptocurrencies, Digital Autonomous Organi­sations (DAOs) & seasteading perhaps could be combined in a way that would enable people to conduct (legitimate) business across borders without being reliant on legacy financial institutions then it could unlock a new dimension. But for the moment the whole cryptosphere, although it has practical utility, for all intents & purposes remains a casino.

Speaking of money, Diamandis & Kotler claims that entrepreneurs today enjoy easier access to capital than ever before. While that may be true for some tech startups, it is not the everyday reality for most small businesses. Legacy banks have largely abandoned their traditional role of providing finance to new business creation, in favour of loans to big corporates & mortgages to the salaried classes. With the exception of a few much-publicized success stories, the concept of crowdfunding was dead on arrival. At any rate, cheap capital is no magic potion for entrepreneurship. If that had been the case, the Kamikaze monetary experiments of the Federal Reserve & other central banks should have unleashed a Wirtschaftswunder like the world had never seen before. It has not happened. That is because the stagnation we see in Western economies today is due to deeper problems on the supply side, which cannot be solved by funny monetary policies. Or to take a case in point, look at SoftBank’s 100bUSD Vision Fund, which was created with the aim of throwing billions of dollars at Unicorns to accelerate the future, & the best they could find was a Ponzi office sub-letting scheme? Building the future is hard & requires more vision than an abundance of Petrodollars from hallucinating desert princes.

The authors do pay lip service to concerns for rising technological unemployment – concerns that suddenly have become much more acute in the wake of the coronavirus pandemic, as many of the job losses triggered by Covid-19 are unlikely to be reversed. For example, the cashiers that have been rendered obsolete as shopping has migrated online. What are they going to do next? Diamandis & Kotler cite a McKinsey report (congratulations) claiming that the Internet has created 2,6 new jobs for every job it has destroyed. That claim may have been supported by the low pre-pandemic unemployment levels. But, as David Graeber has documented, there has been an awful lot of bullshit jobs out there. What the pandemic has brutally revealed is that society manage to cope pretty well without many of those jobs, (a consequence that can be both encouraging & disheartening, depending on your perspective).

Another trend that the authors are very keen on that is also being challenged by Covid is urbanisation. Are ever bigger cities with ever-taller towers with ever-more people crowded together in tiny closets still the answer to the future? It does not look very appealing to me.

As a matter of formality Diamandis & Kotler go through the list of threats to their thesis – from water woes to climate change in addition to the risk of technological unemployment. But they remain optimistic on all fronts. Politics do not seem to play much of a role in their future – except that: “Governments around the world, encouraged by Estonia’s example, are going digital”. That sounds great, but where is the evidence that digitalization has increased public sector productivity – other than in governments’ tax-collecting arms & citizen surveillance capabilities? When it comes to immigration Diamandis & Kotler still cling to, the rosy-eyed view that: “Migration is an innovation accelerant”, which to a European reader sounds dangerously naive. As if their example of Jews emigrating from Hitler’s Germany holds any relevance whatsoever for the migration flows of today.

All in all, the book is absolutely worth reading, as it is representative of how Silicon Valley’s most Pangloss­ian minds envision the best of all possible futures. But while Diamandis & Kotler have their AR goggles on & are ready to hyperloop into the future, the rest of humankind will be joining them not so fast.

Bagehots monster

Walter Bagehot var symbolet på Victoriatidens maskuline edruelighet, men plantet frøet for modernismens mest uedruelige pengepolitiske eksperiment.


Bagehot: The Life and Times of the Greatest Victorian
James Grant
W. W. Norton, 2019

Hvis du har intellektuelle pretensjoner nok til å plukke med en flyplasskopi av The Economist og skli den halvveis ned i lommen på seteryggen foran mens du seriefråtser på Netflix, da er du antagelig familiær med navnet Bagehot. Hvis du til og med faktisk leser blekken vil du kanskje også kjenne Bagehot som den liberale økonomiske ukeavisens mangeårige redaktør og ofte-sitert apostel for at sentralbanken i krisetider skal agere som markedets «lender of last resort». Men stort nærmere kjennskap til Bagehot enn som så, har neppe mange funnet det bryderiet verdt å stifte.

James Grants bok om denne halvt forglemte førstemann blant Victorianere er således adekvat, men neppe nødvendig. Strengt tatt har de fleste praktiske menn bedre ting å ta seg til enn å lese om samtidssynsingen til en lenge-død økonom. Nettopp derfor er dette en bok som fortjener en plass i bokhyllen til konservative pedanter som gjerne setter av hele arbeidsdagen til å fordype seg i teoretiske paradokser.

Bagehot – som for å ta det første først uttales som et rim på «gadget» – briljerte med paradokser. Det var hans litterære vannmerke. Paradokset som opptok mye av hans liv og virke, og som vi fremdeles ikke har løst i dag, er hvordan et samfunn innretter et pengepolitisk system som sikrer økonomisk vekst samtidig som det verner mot kriser.

Under finanskrisen i 2007 – 08 begynte Bagehots obskure navn begynte å dukke opp igjen i overskriftene og i talene til Federal Reserve-formann Ben Bernanke og andre sentralbanksjefer – i Bernankes memoarer er Bagehot sitert flere ganger enn noen nålevende økonom.

Da åreforkalkningen i finansmarkedet ble akutt gav Bagehot intellektuell ryggdekning for nødlån og redningspakker til bankvesenet, med sin maksime at sentralbanken i en krise skal låne ut til alle banker i nød, mot god sikkerhet og til høy rente. Sentralbankene fulgte det første punktet med stor iver, men glemte de to siste. Istedet gav de lån til insolvente så vel som solvente banker, med pant i skrap så vel som i gull, og ikke til straffende høye renter men knapt noen rente i det hele tatt.

Den radikale pengepolitikken, som alle de toneangivende sentralbankene førte, bidrog etter alt å dømme til å forhindre at verdensøkonomien falt ned i en ny depresjon. Samtidig har politikken hatt dypt problematiske sidevirkninger, i form av moralsk hasard i bankvesenet med privatisering av profitt men sosialisering av tap, og verdistigning i verdipapirmarkedet som har løpt i fra lønnsveksten og således bidratt til økt økonomisk ulikhet i samfunnet.

Dette er bakgrunnen for at James Grant har valgt å grave Bagehot opp fra arkivet og vise hans ideer frem for et bredere publikum. Hva angår Grant, vil finansielt bevandrede lesere kjenne ham som en av rentemarkedets skarpeste observatører, som tversoverkledt utgiver av Grant’s Interest Rate Observer og oftebrukt kommentator i finansielle media, hvor han går igjen som en av de krasseste kritikerne av aktivistisk og overstadig løssluppen pengepolitikk. Sløyfen levner ingen tvil om Hayekianske sympatier.

Det er slettes ingen hagiografi Grant har skrevet. Tvert imot setter han sitt subjekt på tiltalebenken for å, i det minste indirekte, ha åpnet slusene for moderne pengepolitikk og all umoralen den har ført med seg. Som Dr. Frankenstein har Bagehot, mot sin vilje, vært med å skape et monster. Spørsmålet som piner Grant er hvor strengt man skal dømme en person for utfall lenge etter hans død, i en helt annen tid, som vedkommende ville vært sterkt imot, men unektelig har hatt en viss innflytelse i å fremdrive.

Det er ikke uten ironi at Bagehot, som var selve symbolet på Victoriansk sedelighet – som advarte mot at «the sins of the big cities» som gikk på bekostning av befolkningens intellektuelle beskjeftigelser, og som satt like stringente moralske krav til lånekontrakten som ekteskapspakten – også er blitt symbolet på vår tids ukristelige pengepolitikk.

Grant gir Bagehot likevel delvis frifinnelse i skyldspørsmålet. Der Bagehot levde og skrev i en kontekst av gullstandarden, balanserte budsjetter og personlig ansvar for bankaksjonærer og bankdirektører for solvensen til bankene de ledet – en verden av institusjonalisert disiplin, i Grants ord – har vi falt langt fra Victoriatidens finansielle jomfruelighet, til en verden med papirvalutaer, flytende kurser, enorme budsjettunderskudd og statlig intervensjon for å beskytte både godtroende investorer og sparere mot konsekvensene av bankers vanstyre og egne dårlige beslutninger. En verden hvor normen snarere er institusjonalisert udisiplin».

Bokens undertittel, «The Greatest Victorian», kan virke en smule pussig. Om man spilte leken «Name 10 famous Victorians», ville Bagehots navn neppe kommet med på alle deltagernes lister. Ei heller fikk han plass i Jacob Rees-Moggs nylige og universalt slaktede: «The Victorians:  12 Titans Who Forged Britain».

Hvordan rettferdiggjøres så en slik ubeskjeden undertittel? Bagehot var hverken den mektigste eller mest berømte, men i G. M. Youngs ord (som Grant låner undertittelen fra) var han selve legemliggjøringen av Victoriatidens maskuline edruelighet. I over et dusin år satt han som uoffisielt kabinettmedlem i alle regjeringer, konservative så vel som liberale. Spesielt var han en betrodd rådgiver for det liberale partiets Grand Old Man og fire ganger statsminister, William Ewart Gladstone.

John Maynard Keynes skrev I 1915 en anmeldelse av Bagehots monetære magnum opus, Lombard Street, og hans øvrige verker. Den store økonomens dom var at Bagehots oeuvre mer tok for seg finansiell psykologi enn finansiell teori, og at mye av hans skriverier var agitasjon for å banke vett inn i skallen på direktørene i Bank of England og bankirene i City of London. Bagehot dvelte ved kontroverser og fakta som var utgått på dato, mente Keynes. Flere har delt Keynes’ oppfatning at Bagehot tilførte lite ny teori, som har holdt sin verdi i ettertiden. Derimot hersker det ingen tvil om at Bagehot var en av de mest innflytelsesrike stemmene i sin samtid, og aller mest i spørsmål om finans og pengepolitikk. Og selv om han heller ikke var den første som sa at sentralbanken må være lender of last resort i krisetider, så var det Bagehot som kanoniserte doktrinen.

Grunnpillarene i Bagehots økonomiske filosofi var den klassiske gullstandarden og konservativ bankvirksomhet. Han ble født inn i juniorgrenen av et regionalt bankdynasti, Stuckey’s Bank i Langport, Somerset, hvor han gjorde karriere etter endte studier ved University College London, (familiens unitariske tro utelukket Bagehot fra Oxford og Cambridge). Bagehot beholdt stillingen som vise-formann i banken under hele sitt redaktørskap av The Economist – som han overtok fra sin svigerfar og magasinets grunnlegger James Wilson i 1860, og satt i helt til han døde altfor ung i 1877.

Hvordan kunne så Bagehots formaninger om ekspansiv pengepolitikk i krisetider forenes med hans trosbekjennelse til gullstandarden? På overflaten er dette en selvmotsigende posisjon, som må forstås i lys av den dominerende kimen til pengepolitisk konflikt i Bagehots tid. Nemlig Sir Robert Peels Bank Charter Act av 1844. For Bagehot påtok denne loven større betydning enn til og med opphevingen av de proteksjonistiske kornlovene i 1846, som hadde vært selve beveggrunnen for stiftelsen av The Economist i 1843.

Banklovens overordnede mål var å gradvis monopolisere kontroll over pengeutstedelse i Bank of Englands hvelv. Private banker som Stuckey’s fikk fortsatt lov til å utstede penger – slik de historisk hadde hatt. Men ved sammenslåinger mistet gamle banker denne retten, og ingen nyetablerte banker fikk lenger lov til å trykke egne sedler. Gullstandarden hadde blitt gjeninnført etter Napoleonskrigene til førkrigsparitet i 1821, tross prisinflasjonen i de halve århundret siden pundets gullkonvertibilitet ble opphevet. Denne politikken var høyst deflasjonær, hvilket Bank of England raskt innså og korrigerte for med å senke renten fra fem til fire prosent i juni 1822, den første renteendringen siden 1719. Banken fulgte opp med å skru utlånskranene på fullt. Det bidrog til en spekulativ bonanza og at store mengder gull forlot London i lån til utenlandske stater og tvilsomme investeringer i latinamerikanske gruvegeskjefter. Da panikken i 1825 oppstod var det bare på hengende håret at den gamle damen i Threadneedle Street ikke måtte oppheve gullstandarden igjen. En tidel av landets banker gikk ned i dragsuget.

Peel-regjeringens banklov tok sikte på å stagge disse boom-bust-spiralene som plaget økonomien i det 19. århundre, ved å gi sentralbanken mer kontroll over pengemengden. Prinsipielt gikk debatten, som forblir uavgjort den dag i dag, mellom de som ville ha et regelbasert system mot de som mente at sentralbanken burde kunne styre med diskresjon. Bagehot tilhørte den siste gjengen. På papiret var 1844-loven en seier for regelrytterne. Men ikke like mye i praksis. Det gikk bare tre år fra loven trådte i kraft, til den ble suspendert under den finansielle panikken i 1847, og igjen i 1857. Likeså trosset Bank of England loven og tråkket til med ekstraordinær pengetrykking for å berolige markedet da den distingverte forretningsbanken Overend Gurney gikk overende i 1866. Etter panikken i 1857 skrev Bagehot: «It may be an evil to have discretion; but the events of the last few months prove…the evils of a rigid rule which admits no discretion».

Gjengangeren i de finansielle panikkene i 1825, 1839, 1847, 1857, og 1866, var kraftig kredittvekst. Konvensjonell økonomisk visdom tilsa at det tuet pundets verdi i gull, som var satt til £3 17 shilling og 10 ½ pence, (20 shilling per pund, 12 pence per shilling), og ansett som et kategorisk finansielt imperativ. Bagehot mente dette var gammeldags tenkning. I hans øyne var det bare gull og sølv som er ekte penger. Alt annet, bankinnskudd og sedler, er kredittinstrumenter. Han var ikke like redd som puristene for at penge- og kredittmengden skulle løpe fra reservene av gull, som sedler og innskudd kunne veksles inn i. «The enormous importance attached to the convertibility of bank note, as distinguished from the stability of banks, is a relic of past times», skrev Bagehot. Denne moraliserende høy-victorianeren var en paradoksalt moderne mann.

For Bagehot hadde sentralbanken to mandater: 1) holde kongedømmets bankreserver, (slik at bankene slapp denne byrden selv), og 2) gi lån når andre banker ikke lenger gav lån.

Bagehot kunne således innkassere en slags intellektuell seier da Bank of England omsider vedkjente det som sin samfunnsplikt å støtte bankvesenet etter panikken i 1866 – Peels banklov til tross, og i motsetning til Bagehots meningsmotstandere, inkludert Benjamin Disraeli (som Bagehot hadde absolutt null til overs for) og banklovens arkitekt Lord Overstone, som advarte om moralsk hasard hvis sentralbanken grep inn for å hindre at råtne banker gikk over ende. Bedre da å rense systemet. Bagehots intellektuelle nemesis og mangeårig Bank of England-direktør og guvernør fra 1851 – 53, oppsummerte doktrinen som følger: «A good banker had no need of a central bank, and a bad banker had no claim on a central bank».

Bank of England var, og er, en særbritisk institusjon, hvis formålsparagraf var like vagt og tvetydig som den uskrevne britiske grunnloven – (som Bagehot også skrev et av sine viktigste verker om). Bagehot poengterte at bankens praksis var blitt til i løpet av 175 års tradisjon og presedens, og ikke var noe den ene finansministeren eller den andre plutselig kunne komme og endre over natten med lover og regler som sa ditt eller datt.

Med andre ord, Bank of England var ikke en institusjon som bare kunne utsettes for radikal reform etter en regjerings eget forgodtbefinnende. Bagehot kom derfor til følgende paradoksale konklusjon, at på den ene siden ville et system hvor hver bank holdt sine egne (gull- og kontant-) reserver, for å kunne ri gjennom stormen, vært det beste systemet. Men på den andre siden er systemet hvor sentralbanken holder reservene for hele bankvesenet, det eksisterende systemet og for dypt inngrodd til å forandres.

Englands solvens var blitt avhengig av at sentralbanken, fastslo Bagehot. I det har finanskrisen gitt ham rett. Og 100 år etter han ble avskrevet av Keynes, har Bagehots monetære ideer vist seg minst like relevante som Keynes’ mer fiskalt orienterte resepter, da det var den ekspansive pengepolitikken langt mer enn den ekspansive finanspolitikken som arresterte kollapsen i verdensøkonomien for ti år siden. Men de utilsiktede konsekvensene av at sentralbankene fulgte hans mantra og stilte «gullkortet» til rådighet for bankvesenet under krisen i 2008 og ikke har levnet noen tvil om at de vil komme til unnsetning også ved neste bankkrise, gir Bagehots ettermæle en mer blandet smak.

Det er dog ingen vei tilbake til Edens hage før det finansielle syndefallet fra den klassiske gullstandarden. For et slikt sted eksisterte aldri, ei heller i Bagehots tid.

I sitt andre hovedverk, The English Constitution, konkluderte Bagehot at den britiske suksessoppskriften lå i den uskrevne grunnlovens todeling i «the efficient», regjeringen som leder massene, og «the dignified», monarkiet som inspirerer massene. I en oppdatert utgave i dag kunne han lagt til en tredje: «the magical», sentralbanken som tryller penger til massene ut av tynn luft.

Will there be life after Google?

The Google system of the world is an evil empire that stifles entrepreneurial activity and is doomed to fail, before a decentralised Internet will rise from the ashes, argues George Gilder in his latest book. 

life after google

On the face of it the main argument George Gilder is making in his latest book is preposterously bold: “The Google era is coming to an end because Google tries to cheat the constraints of economic scarcity and security by making its goods and services free. Google’s Free World is a way of brazenly defying the centrality of time in economics and reaching beyond the wallets of its customers directly to seize their time.”

Considering that Google generated revenues of 136,8 billion dollars and profits of 30,7 bUSD in 2018 and has a market capitalisation not far shy of a trillion (870 bUSD as of April 22), its decline and fall does not seem imminent, but a rather far-fetched prospect.

Google’s system of the world

Google is not only one of the most valuable (on some days the most valuable) companies in the world, but more than any other of the tech giants Google represents a system of the world, (borrowed from Neal Stephenson’s Baroque Cycle trilogy). A system of the world necessarily combines science and commerce, religion and philosophy, economics and epistemology.

Google’s theory of knowledge, its religion, is Big Data. Whereas good Christians may go to heaven “good googlers” are on a determinist path to a place called Singularity, where technology has transcended biology and artificial intelligence surpassed human intelligence.

Reaching Singularity rests on two conditions:

  • All data in the world can be compiled in a single “mind”.
  • Algorithms sufficiently comprehensive to analyse the data can be written.

As Gilder points out the Google theory of knowledge and mind are not mere abstract exercises. They are central to Google’s business model, which has progressed from “Search” to “Satisfy”. Google can already show considerable evidence that with enough data and processors the search engine can know better what will satisfy your longings than yourself. Notwithstanding that it in many cases makes us stupider: Just last weekend I was in Vienna and Google could tell me a restaurant I fancied was closed for lunch. We walked by to double-check and lo and behold open the restaurant was.

The fatal conceit of Google-Marxism 

Gilder – an unreconstructed Reaganite free-marketeer – sees Google’s idea of a universal omniscient logic machine as deterministic and ultimately dictatorial. He accuses Google of repeating Karl Marx’s erroneous belief that we have reached the final stage of history. An immanentized escathon, in the words of William Buckley. Ironically both the technology Utopians and Dystopians share the belief/delusion of the coming all -powerful AI. Gilder thinks they are exaggerating the attainments of their own era, and sees the gospel espoused by the Google guys, Ray Kurzweil (since 2014 employed by Google) and the likes of Life 3.0 author Max Tegmark and Yuval Noah Hariri as hubristic Google-Marxism. Gilder accuses the AI champions of being blind to the realities of consciousness and of having forgotten Gödel’s lesson that all logical systems, such as AI, is incomplete and in need of an “oracle” (such as human consciousness outside the machine). He does not share Kurzweil’s position that when a machine is fully intelligent it will be recognised as conscious.

Indeed, there are eerie similarities between the Google theory of progress and the Soviet economic theories of central planning. The Soviet economist Leonid Kantorovich, who won the Sveriges Riksbank’s economics prize in 1975, the year between Friedrich Hayek and Milton Friedman, never shed the belief that advances in information technology would give Gosplan (close to perfect) knowledge and make central planning more efficient than market choices.

One foundational feature of the Google system is the Zero Price. Informed by Internet pioneer Stewart Brand’s slogan that “Information wants to be free”, Google has made (almost) all of its content and information free, in a digital version of the medieval Commons – i.e. public resources available to all. Private data are the mortal enemy of the Google system of the world.

In Gilder’s view the Zero price is the fatal flaw that dooms Google, just as Hayek predicted that the lack of price signals would doom the Soviet economy. Jeremy Rifkin heralds a Zero Marginal Cost Society, where prices for near every product and service will reach (close to) zero as every device and entity become connected in an Internet of Things and exponential network effects will unleash a Utopia of leisure and abundance – (a vision for the future that needless to say is much in vogue at the Googleplex).

Gilder does not buy into that prophesy. He sees “free” not only as a lie – as Apple CEO Tim Cook acerbically pointed out: “If the service is ‘free’ you are not the customer but the product” – but as a return to the barter system, a system so inefficient that it was left behind in the Stone Age: “Above all, you pay in time. Time is what money measures and represents – what remains scarce when all else becomes abundant in the “Zero Marginal Cost” economy. Money signals the real scarcities of the world concealed in the false infinities of free.” Furthermore, “free” entails a slippery avoidance of liabilities to real customers and no concern for security.

Disconcertingly for Google there are many signs that internet users have had enough of attention-grabbing ads and lack of data privacy.

  • Adoption of ad-blockers are skyrocketing to the degree that even Google itself has felt forced to launch their own “ad-blocker” – and it is the most attractive demographics for advertisers that are leading the trend. In the US 25 percent of internet users were blocking ads in 2016.
  • Internet users are simply developing “banner blindness”, becoming more or less immune to the bombardment of ads.
  • In the product-search category Google is rapidly losing ground to Amazon. Internet users still prefer Google for informational searches, such as “What is the capital of Kazakhstan?”, “Was Jesus a Muslim?” or “When will the world end?”. But by 2017 Amazon had captured 52 percent of the product-search market; intentional searches for products to buy, vs 26 percent for Google and other search engines. 

Nobody really wants the value-subtractive ads that are the underpinning of the Google system. Gilder, who is 78, thinks this will doom Google within his lifetime, although he qualifies his prediction by saying that search will likely remain a valuable business.

Crashing into Hölzle’s Wall

If you meet any technology investor today his first question will likely be if your business is “scalable”? Meaning if you are able to grow revenues with less than proportional, or ideally no increases in marginal cost – the key to ever-fatter profit margins. That is what the likes of Google and Facebook have achieved, and what investors hope the likes of Amazon, Uber, Spotify, AirBnB et al. will achieve.

The question is if the margin story can continue for Google? An inherent challenge in Google’s business model is that “free” inevitably leads to over-consumption. “Free” has enabled Google to capture (effectively) the entire market, but will the company eventually collapse under the weight of the unlimited demand for its free services? As Gilder writes: “The nearly infinite demand implicit in ‘free’ runs into the finitude of bandwidth, optical innovation, and finance – a finitude that reflects the inexorable scarcity of time. This finitude produces not zero marginal costs but spikes of nearly infinite marginal costs – Hölzle’s wall. The latter a reference to Google employee number 8, Urs Hölzle’s lament that Google’s cloud infrastructure was “rapidly approaching a wall”. 

The exponential growth in demand for Google’s services (see chart below) – which roughly doubles every year – has forced Google to build out the largest cloud infrastructure on the planet over the past 15 years, with three underwater cables across the Pacific and more on the way. The 12.899km third cable from California to Hong Kong (that was scheduled to be completed last year but is delayed) will carry data at a rate of 144 terabits per second – up 29-fold from Google’s first 5tbps cable from California to Japan in 2010.

Screenshot 2019-04-22 14.10.56
Source: Urs Hölzle keynote OFC Plenary, 2017

This is putting huge Capex pressure on Google, with the need to continue building massive data centres and undersea cables. As Hölzle pointed out in his 2017 keynote apart from the change from copper to fibre, cable building has not changed much over the past 150 years and the system’s reliance on a small amount of cables leaves it vulnerable to tail risks. Still, Google is to a significant degree essentially free-riding on the backs of carriers such as AT&T, Verizon and T-Mobile, whose infrastructure investments Google is totally reliant on. The cost is ultimately passed on to the end user: On average (US) smartphone users pay 23 dollars per month for ads, trackers, scripts and other spam that strikes them with malware, slows load times and depletes battery life. Strikingly, on popular publishers’ sites as much as 79 percent of the mobile data are adds.

What will replace the Google World Order?

The latter parts of Gilder’s book are somewhat unstructured and anecdotal but contain insightful observations. Obviously, it would be a futile exercise to foretell exactly how the Google system will meet its end. But Gilder argues interestingly that the overarching threat to Google will come from the Cryptosphere. That the un-secure and centralised Google Empire will be replaced by a decentralised and secure Crypto order. That is admittedly far away – 70 percent of all Internet links are handled through Google or Facebook. But alternatives are emerging, such as Blockstack, whose mission is to “foster an open and decentralised Internet that establishes and protects privacy, security and freedom for all internet users.” Tim Berners-Lee, who fears the Internet is being broken by the centralisation of user data in the giant silos of Google, Facebook, Amazon and Microsoft – is one Blockstack admirer.

Gilder also goes through the emergence of Bitcoin and Ethereum and discusses their potential and limitations as currency systems. He sees the upper limit of 21 million total bitcoin units as one of the main challenges that would likely be highly deflationary over time. The high price volatility of Bitcoin could likely be addressed by more issuance and circulation of Bitcoin-redeemable liabilities – something which SEC’s clampdown on ICOs and crypto in general may put up obstacles for. Nevertheless, despite all the challenges it is clear that it is in the Cryptosphere the most interesting economic and political ideas are to be found today.

In the “Googlesphere” on the contrary, true entrepreneurial activity is being stifled by the narrow focus on developing largely parasitic apps and profitless Unicorns inside the Google/Android, Facebook or Apple iOS ecosystems — (a charge I would stand guilty of myself). Gilder also laments investors excessive belief in Marc Andreessen’s mantra that “Software will eat the world”, which has the unfortunate effect of crowding out innovative hardware investment. Though there are pockets of light, such as Luminar Technologies, which manufactures advanced Lidar censors for autonomous vehicles. What makes Luminar founder Austin Russell stand out from the crowd is that he does not believe in the consensus that autonomy is chiefly a software problem, but a hardware one, and that no amount of big data, artificial intelligence and software can make up for bad data from hopelessly outdated hardware. In contrast for example, two of the three finalists in the startup pitch at the Web Summit in Lisbon before Christmas were self-driving startups focused on getting more out of existing hardware with better software, one of them even claiming that a $12 camera will suffice for self-driving – Luminar would beg to differ.

Most business books today are boring. Life after Google is definitely not boring. And even if Gilder will be proved wrong in his hypotheses about the fall of the Google system of the world and the rise of the Blockchain economy, his analyses are insightful as well as idiosyncratic. That makes the book worth reading for everybody seeking to understand the new and uncharted economic landscape we find ourselves in.

Reid Hoffman’s not fully convincing book on “Blitzscaling”

Businesses can achieve global scale faster than ever in the Networked Age, argues LinkedIn-founder Reid Hoffman in his new book, but must grow fast or die slow in a brutal market where the winner takes all.

Blitzkrieg luftwaffe-1

Blitzscaling — The lightning-fast path to building massively valuable companies. Reid Hoffman, Chris Yeh, 336 pages, Penguin Random House, 2018

Reid Hoffman may be the closest Silicon Valley has to a philosopher king. Stanford- and Oxford-educated Settlers from Catan enthusiast. Original Communist, who has dedicated his formidable brain capacity to “playing monopoly” on the Internet. Member of the “PayPal Mafia”, the eccentric group of nerds — including Elon Musk and Peter Thiel — who founded the pioneering payment service before moving on to building some of the most powerful businesses in the Internet age. In Hoffman’s case, the professional network LinkedIn. Since Linkedin was acquired by Microsoft for $26,2 billion in 2016, Hoffman has served as a board member of the software giant along with his numerous other investing and philanthropic endeavours.

Precisely because of his somewhat paradoxical background, Hoffman brings illuminating perspectives on the 21st century Internet economy, in his new book — Blitzscaling: The lightning-fast path to building massively valuable companies — and explains why he believes the ability to act fast is the key to competitive advantage in the modern economy.

The title, Blitzscaling, derives from Blitzkrieg. The German concept of attacking warfare perfected by Heinz Guderian during the invasion of France in 1940. French forces were completely outmanoeuvred and overwhelmed by the surprise element of the Germans’ lightning-fast and densely concentrated combined tank and air attacks. Hoffman is fully aware of the nomenclature’s burdened history but has chosen analytical precision over political correctness — also considering that the German word (which in fact was popularised by the British tabloids and never officially used by the Wehrmacht. Guderian himself referred to the doctrine as Bewegungskrieg in his book Achtung — Panzer!) or its shortened form Blitz has become a common metaphor in sports and elsewhere. As Hoffman makes clear, Blitzscaling accurately captures the strategic essence of how technology companies such as Amazon, Google, Facebook, Apple, Uber and AirBnB have rapidly subjected huge markets to their rule.

Dawn of the Networked Age

At the end of 1996, the world’s five most valuable companies were General Electric, Royal Dutch Shell, The Coca-Cola Company, Nippon Telegraph & Telephone and ExxonMobil. The common denominator is that they all were traditional industrial or consumer goods companies. Fast forward to the end of 2017, and the the Top 5 list looks very different: Apple, Google, Microsoft, Amazon and Facebook. All technology companies, of which Google and Facebook were not even born in 1996, while Amazon was a two-year-old toddler.

What happened? The Networked Age happened — Hoffman’s preferred term for the era he dates from the stock market listing of Netscape, the pioneering web browser provider, in 1995. Today, over two billion people are connected to the internet through smartphones that have become an extended limb of the human body. At the same time, more and more industries and businesses are being run on software and delivered as online services, as Netscape founder Marc Andreessen wrote in a well-known essay in 2011, “Software is eating the world”. Binge watching on Netflix has replaced the drive to the video rental shop. Amazon has delivered mass death for physical bookstores. IBM produced its last PC in 2005, and today is essentially a software and services provider. Even industries that produce physical products (the economy of atoms), like cars or refrigerators, are becoming ever more integrated with software (the economy of bits). Such as when a Tesla’s acceleration is upgraded by an automatic software update while the car sits untouched in the garage overnight.

Goodbye Galapagos

Hoffman’s central thesis is that in this hyperconnected world it is possible to build global monopolies faster than ever in history. This has fundamentally changed the market economy. While the world economy previously consisted of geographically fragmented “Galapagos Islands”, where many businesses such as newspapers and bookstores were relatively sheltered from external competition, the networked age has tied these islands together in a hyper-competitive global market.

The Networked Ages opens up enormous opportunities for entrepreneurs with wet dreams of monopoly. The flip side is a merciless market where “thewinner takes all”. Hoffman illustrates with an analogy from the movie Glengarry Glen Ross, where Alec Baldwin’s character, Blake, tells a sales team: “As you all know, first prize is a Cadillac Eldorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you’re fired. Get thepicture?” Or in the social network category: First prize to Facebook, second to MySpace, and third prize to Friendster, who hardly anyone remember.

Why did Facebook win? Mark Zuckerberg was not the market’s first mover — Both Friendster and MySpace got off the ground before Facebook. But Facebook was the first scaler. Being the first to achieve critical mass is decisive in a market with network effects. If all your friends choose Facebook, it is pointless to sign up with another social network that no one uses. This creates a positive feedback loop, eventually ending in an equilibrium where Facebook more or less monopolises the market while all the other players go the way of Friendster. De facto the consumer does not really have much of a free choice whether he wants to use Facebook or a competing social network. Like a political prisoner in a remote Siberian labour camp a Facebook user in theory is quite free to go anywhere, but in practice has nowhere else to go. The degree of customer lock -in Mark Zuckerberg has cunningly engineered would be admired by the designers of the Gulag.

The Magic of Network Effects

Hoffman prefers the layman’s definition of network effects: A product or service is subject to positive network effects when increased usage by one user increases the value of the product or service for other users. Network effects occur in several forms: Increasing numbers of passengers or guests attracts more drivers and landlords to marketplaces such as Uber and AirBnB, and vice versa, (two-sided network effects); The dominance of operating systems such as Windows, iOS or Android, encourage third-party application developers to adapt their apps to these platforms, (indirect network effects); Microsoft Word’s dominance meant that its document file format became the industry standard and swept all non-compatible competitors off the pitch, (network effects driven by compatibility and industry standards). Similarly, that Internet Explorer came pre-installed on all Windows PCs was the “pincer movement” that broke Netscape.

A feature in markets with network effects is increasing returns to scale, which often results in a monopolistic/oligopolistic equilibrium where one single or a few dominant players eat all of an industry’s profits — as demonstrated today by for instance Facebook. Facebook enjoys a gross margin of a whopping 82 percent. Yet, as Hoffman reminds, many failed to see the potential value of Facebook in the company’s early days, when Zuckerberg turned down repeated takeover offers. Perhaps the doubters were not without reason; as late as 2012 Facebook struggled with the transition from desktop to mobile.

Move Fast and Break Things

Facebook’s problem with finding the right product/market fit was nevertheless a luxury problem. Thanks to the record-breaking user growth, Facebook accumulated enormous amounts of data on billions of people — a digital gold mine. It was just a question of time to figure out the profit-maximising business model. MySpace or Friendster didn’t have this privilege. Without users, no business model. With users, one can find a business model later.

In this market landscape, speed is as vital as it was for Guderian’s Panzerkorpsin World War II. The only difference is that while Guderian had to capture land, business have to capture data. To achieve scale quickly, businesses must be willing to sacrifice efficiency for speed. Companies must grow fast or die slow. Summarised in Mark Zuckerberg’s previous motto: Move fast and breakthings. The classic approach to business strategy, carefully gathering information and making decisions with a fairly high confidence level, is dead. Blitzscaling forces businesses to make much faster decisions in the face of much higher levels of uncertainty, and they must commit to making big investments being half-blinded in the dark.

In a market where the winner takes all (or most), it becomes more important to cement market share before focusing on profitability. For Jeff Bezos in Amazon, profit has been secondary to growth for a quarter of a century — expressed by his bon mot that: “your margin is my opportunity”. Uber has subsidised both drivers and passengers when they have launched in new markets, in order to take the pole position before their competitors. Naturally, it would not have been possible without investors who have been willing to pump in nine billion dollars to fund Uber’s growth — an investment they can be far from sure to recoup. The growth imperative in the networked age also explains the popularity of Freemium business models, which companies from Spotify to Dropbox employ, luring new customers with a free version in the hope that they will upgrade to a paying premium subscription later on.

Can Software Digest the World?

It is a small paradox that technological developments are taking place so quickly, at the same time as productivity growth in the economy overall is stagnating. This must probably be seen in light of the fact that only a very small number of companies achieve lightning-fast growth and monopoly profit, while many others are lagging behind. Information technology also appear to be a contributing factor to the rising market concentration seen in many industries, raising the productivity gap between market leading and average firms.

As Peter Thiel, among others, have highlighted there is a dichotomy between the economy of bits and the economy of atoms, with rapid technological development in the former and far slower in the latter.

Thiel’s bifurcation can be illustrated by Tesla, a company at the intersection of new technology and old industry. Due to physical bottlenecks in the value chain, Tesla has not managed to increase car production in line with rising demand — hampering the company’s growth and exposing its fragile finances. One big reason why fast-growing online businesses like Dropbox have been able to navigate around such infrastructure limitations is Amazon’s cloud services offering, Amazon Web Services (AWS) — which almost by accident thus has become Amazon’s primary cash cow. However, so far nobody, not even Elon Musk, has found a way to manufacture Teslas in the cloud. Unfortunately, it must still be done in the physical world. This is the Achilles heel of Hoffman’s thesis: Companies can grow exponentially in the internet age, as long as they confine their business to the realm of bits. Confronted with the sticky realities of the world of atoms, things tend to slow down. Perhaps software is eating the world, but there are still some chunky pieces of the physical economy left that may prove tricky to chew and digest.


Previously published on Medium