An essay about what it really means to be committed to growing domestic industry & enriching the middle class.

A Summary of This Essay’s Key Points:

• The most intolerant wins: global supply chains force production to comply with the most intolerant buyers

• Europe therefore dictates the shape of regulatory compliance for global auto markets

• This should be an incredible boon to European industry!

• Instead, it’s bankrupting domestic industry, accelerating the continent’s deindustrialization,  & funding the rise of an adversarial regional hegemon

• Electrification’s core physics problems are downstream of energy storage

• Battery improvements haven’t moved as fast as Moore’s law: slower rates of tech improvement mean a longer time horizon to market dominance & fewer opportunities for outsize investment returns

• China nurtured multiple firms focused on battery development in the mid-1990s, with the goal of dominating the subcomponent market for electric devices

• Longer time horizons necessitate profit taking while building these businesses, as no pool of capital would fund 30-year cashflow negative journeys under these conditions

• In contrast to China’s multi-decade nurturing of domestic industry, Europe and California wield regulatory cudgels to beat domestic industry into electrification

• With 15 years to transition fully away from gas vehicles, large European automakers now invest billions into the only market developing suitable batteries at scale: China

• In exchange for battery access, they transfer any remaining IP to the new generation of Chinese firms now building domestic Electric Vehicles atop a fully domestic supply chain 

• Meanwhile, new startup European EV manufacturers face all the usual European barriers to doing business and struggle to get to market at a competitive price point

• After building out all the component manufacturers and reorienting global supply chains to their own firms, China’s Electric Vehicle companies now have large structural advantages over the competition

• “Chinese EV makers have opened up vast and unassailable lead in the global market”, says the Wall St. Journal

• “[Chinese Electric Bike brand] recorded the highest UK registrations for two months in a row.”

• Western academics tell themselves this is all to our benefit — higher equity prices & cheaper products make us all richer in aggregate!

• But moving industrial production elsewhere reduces the number of viable paths to personal prosperity and increases socioeconomic bifurcation

• The youth radicalize while voters oscillate between ever-more-polarized political extremes, searching for someone or something that can “make things feel better!”

  • Gen Z now thinks you aren’t “financially successful” unless you make $600k — 3x more than Millennials!

• Sadly, no matter which flavor of radicalism your nation’s plebeians choose to vote for, it’s guaranteed to make your industrial base less competitive vs. China

• At the end of the day, Europe has squandered a generational advantage on its home turf, playing under home rules and biased referees, and used all its bureaucratic red tape to fund the development of Chinese industry in favor of its own

• America doesn’t have to have the same fate — and even if we do nothing, we’ll be more okay than Europe

• But if we are going to play this game, playing it half-heartedly with a smattering of tariffs is the worst move of all!

• This essay does not present an exhaustive list of all the things necessary to win the game — indeed, it explicitly calls out that no such list is possible

• What it does do is say: winning is in the space of possible outcomes, so you should know what your competition is doing and choose your next moves accordingly

Summarizing 12k words in a few bullets is tricky, so give me a chance to make my case — 

Globalism Keeps Kosher: The Dictatorship of the Strictest Standard

Let’s talk explosions. Controlled ones.

In global supply chains, a single uncompromising regulator dictates standards for all. Nassim Taleb published “The Most Intolerant Wins: The Dictatorship of the Small Minority ” a decade ago, noting that complex supply chains opt to make every grocery store item Kosher instead of bifurcating into “Kosher” and “Non-Kosher” aisles.

Lemonade is just sugar & water. But the complexities of trying to accommodate the 0.3% of America who keep kosher would mean pointless duplication for producers & distributors. So most products on the shelves of big retailers will be kosher. Check for yourself next time — there’ll be a little “U” in a circle on your items that stands for Orthodox Union.

Vehicles are a bit more complicated than lemonade. Metal, composites, forging, assembly, global supply chains, dealer networks. They cost a lot more to make per unit.

Which means if one part of the global market — particularly a wealthy part of it like Europe — enacts stricter regulations on internal combustion engines, the whole production chain will shift to accommodate them.

If you want to buy a bike in America, your choices will be determined by European regulations.

KTM Case Study: Trouble in Europe

With over 4,000 internal employees and a global dealership network, KTM is Europe’s largest motorcycle manufacturer. Revenues are over €2.5 billion.

You might think they’d be doing okay…

But unfortunately their primary product is a two-wheeled internal combustion machine.

And so KTM is put in the awkward business position of trying to shape the market by launching new products into a regulatory environment that then makes those new products illegal.

For example, their Street legal 790 Duke was a big success when it released in 2018. It was made illegal for sale in Europe in January 2020:

[New rules] required updates to on-board diagnostics (OBD stage II), including misfire detection and oxygen sensor monitoring. There was just one problem for KTM. With new regulations set to take effect in January 2020, it hadn’t yet developed a Euro 5-compliant 790 Duke. 

You do not need 15 years of in-industry experience to intuit that <18 months from launch to banning is not ideal for the lifetime of an industrial product with a complex supply chain.

Some readers may now be thinking: “It’s fine, they can just invent a cleaner way to burn fuel.”

But of course, they just gamed the rules by making the engine bigger:

The displacement bump achieved two objectives. Larger mills generate more power at lower engine speeds. Thus, producing less emissions without sacrificing output.

This essay isn’t about the emissions. I assume many of my readers are broadly supportive of efforts to make transportation cleaner.

It’s about industrial development.

In the context of actually trying to build and run a business in this environment, the reality of complying with European regulatory frameworks is that:

• Your products must get more expensive for consumers

• Your product lifecycles have to shorten

• Your actual solutions aren’t necessarily going to be cleaner

• Your fixed costs will rise as you attempt to comply

None of these things increase the profits you’ll be able to make. Without profits, your ability to invest in future improvements shrinks to zero.

How do you mitigate any of this as an industrial manufacturer?

You need to race towards bigger economies of scale! 

You need to 10x your revenues and 100x your employee count, so the reduced-profit-per-unit is minimized and your lobbying efforts can have more impact shaping the regulations. 

Of course, you don’t need a business degree to know that increased fixed costs crush small manufacturers. Mega manufacturers can mitigate the cost impacts and strong-arm regulators. Banks or bikes, the solution to regulations that raise the fixed cost of doing business is always going to be the same: size is the prize.

Anyway, here’s the punchline:

Mission Success.

We did it team!

Has KTM been mismanaged? Certainly. Perhaps legendarily so. But you have to understand the underlying incentives pushing them to try and capture as much market share as possible and get to the next tier of industrial scale.

Was giving their business a set of operating incentives that pushed them towards sustainable economic growth and increased employment a concern for their own government?

Clearly it wasn’t a priority. But was it even a consideration?

How much time did regulators in Brussels spend thinking about the 4,000 jobs in Mattighofen, Austria and the effect of €2.5 billion in revenue flowing through a company headquartered there?

Electric Dreams: Small Beginnings, Happy Endings

Electric powered vehicles have been a reality for decades. 

My dad brought me home a toy RC car 30 years ago. It ripped.

But not every Tech revolution runs at the same speed.

“We wanted flying cars, instead we got 140 characters,” is a great quote. Moore’s Law doubled computing power every 18 months while battery energy density was only doubling every 12 years. That’s an 8x gap. It’s a lot easier to make money investing in something that gets twice as good every 2 years — incumbents aren’t as much of a threat and you can ride a technology wave to scale.

High cost, low energy density batteries are why my toy electric car could rip around at incredible scale-accurate speeds but scaled up versions were still decades from mass consumer markets.

Observe the depressing flatness of the dark blue line for 25 years: 

This chart presents an obvious question: why did things spike recently? Is it just a faulty data set?

But no, you can find similar data elsewhere:

These things are somewhat overdetermined. Many different factors that contribute to technological improvements.

The short version[-1] is that the tech crossed the “good enough” threshold to start attractive a whole bunch more human & financial capital, in pursuit of electrifying vehicles:

Why am I talking about batteries?

Because the technological improvement curve moves slow enough you can track it. It takes longer than any one political administration. It requires a level of sustained capital investment that only makes sense if you’re able to take profits along the way. And then once you hit “mass market EV-suitable” products, the available capital flows 5x and everything goes to the moon.

You can’t snap your fingers in the year 1995 and say: “make me an Electric scooter that can carry an adult human male 25 miles at 20 miles an hour and that can retail for $400-$500 profitably.” No amount of upfront investment can deliver that product before all the available human and financial capital is depleted.

But 1995 is when LG started investing billions into its Nanjing facility. And it had to ride the consumer laptop boom to be able to deliver the micro-mobility boom of the mid-2010s. And now true next generation mass market affordable EVs are coming.[0]

The Electric Platform: Winning Under Uncertainty

There’s something I want to callout before we look back at Europe. The Chinese industry news site I linked in the footnote detailing the buildout of LG’s $8bn Nanjing battery facility explicitly called out the total value output of all the regional businesses enabled by LG ($18b) at the very top of the article. This is a perspective you’ll find in academic journals elsewhere, but it’s not one that comes naturally to modern Western readers. I wrote about how Google essentially created the entire Open Internet ecosystem, but most people who cover Google don’t include the revenues of all the businesses made possible by Google’s Internet ecosystem in the very same sentence as Google’s own revenues!

“What are you saying, Conrad? We should value Google stock based on revenues it can’t conceivably capture?”

“No, I’m not saying you should do that. But a wise government official might want to know the second and third order effects of having a key part of an industry’s ‘supply chain’ operating healthily within their borders,  as well as have an accurate count of how many people and taxes are downstream of a few central nodes in their network.”

Thriving industrial development is not JUST about the big players in a space. There are clear network effects in manufacturing when sufficiently large players move into or out of a region. The single pretty giga factory is nice, but the broader array of suppliers it requires is even nicer. 

It’s about building a Platform. A Platform economy.

The Happy Ending for Electrification isn’t just “mass market consumer EVs.”

It isn’t just “novel high density battery technology gets developed.”

It isn’t just “30,000 jobs created by one firm.”

The Happy Ending is the whole package and what it unlocks in the next stage of the game. The Platform. The ability to have a thriving ecosystem of Industry, with hundreds of small players alongside international megacaps, that can combine and recombine foundational technologies into market ready products no matter what wave of innovation comes next.

You can’t predict the future. You can’t predict the next wave.

But an Industrial Platform positions your regional economy to be able to ride it anyway, employing hundreds of thousands of people productively along the way.

Now hopeful that I’ve made my point about how an integrated regional manufacturing hub requires multiple firms operating at different levels in the value-added stack, an attractive regulatory environment, favorable tax incentives for Capital, strong wages for Labor, and so on, I close some browser tabs and move on. The last tab is the /about page for the aforementioned foreign-language Chinese industry newspaper. I click it, curious. The first paragraph cheerfully explains:

We aim to help promote the industrial upgrading of Chinese auto supply chain.

I chuckle. I wonder which newspapers would put a sentence like this at the top of their /about page in the West. I suspect I have not even come close to making my point. I’ll grant you that of course it’s all propaganda — but ask: did it occur to European leaders to invest any of their own propaganda points in “promoting the industrial upgrading of Europe’s auto supply chain”? 

Why not?

European Self Sabotage: Big Beginnings, Sad Endings

Where China’s Industrial Platform focused on foundational technologies and supporting a dynamic ecosystem, Europe has chosen a…somewhat different approach.

California led the way, but Europe is looking to one-up them.

The KTM Case Study above is a tiny slice of life. I could write 10k words on that section alone. Someone should write a book on it. There should be a whole section in your nearest bookstore dedicated to Industrial Decline and the inevitable corporate response of increased centralization and oligopolistic market stagnation to regulations that lower profits — and the way this slow motion train-wreck can always be cast as mismanagement for any single company who fails in such a hostile environment.

Alas, your nearest bookstore probably doesn’t exist anymore either.

The total banning of gasoline powered cars by 2035 is an aggressive attempt to shift the industry to a less-carbon future. And while you should be familiar with what it truly means to become “Data Driven”, the reality of the real world is that most organizations — including governments — operate hierarchically and focus their attention in a top-down manner on the things that are easiest for them to measure and understand.

Patrick McKenzie told tech workers in 2012 that their while their personal paycheck is the largest regular flow determining their net worth, it’s actually the smallest possible unit of money that their employer interacts with on a regular basis. 

So when European bureaucrats want to accelerate the transition to electric powered transportation, the smallest possible unit of their society that they can interact with is called “BMW” (Enterprise Value: $100b).

So they take Mr. BMW and they sit him down and they tell him that if he sells any non-electric cars they are going to shoot him. He protests. He asks for some time to comply (15 years). “Who the f-ck makes batteries and how do we get three million of them a year?”, Mr. BMW asks his senior executives (the smallest unit within his organization that he can interact with).

Do you see his problem? In light of everything I’ve written above? Where is the domestic industry he can pull from? Why did LG spend $8 billion building out more battery production capacity in China than it built out in its home ground of Korea? Why didn’t it pick Germany? Mr. BMW has 15 years to figure out a problem that’s taken, conservatively, a hundred billion dollars of capex and a million people’s careers to solve.

And all those careers and all that capex was profit-taking along the way. Not a LOT of profit. But enough to keep reinvesting surplus US dollars into additional capex in China.

Just picture the pricing negotiation Mr. BMW is going to have to go through to source high quality electric components at the scale of 3 million vehicles per year — and that’s at current annual production volumes! I’d hope they expect to grow between now and 2035. He’s gonna need 5 million batteries, at least!

So what does he do? Business, of course. He re-ups on his joint venture with the State Owned Huachen Automotive Group Holdings Co. Ltd. (the only allowed distributor of his vehicles in China), building the largest R&D center outside Germany and doubling production capacity at factories in Shenyang to 650,000 cars a year.

With his dues now paid in the form of direct Capital and Intellectual Property infusions, Mr. BMW is then permitted to form a new joint venture with Mr. Mercedes to roll out 7,000 charging stations over just 2 years. 

Europe’s approach to Electrification was — and continues to be — top-down punitive mandates imposed on their largest manufacturers.

Motorcycles must comply or die.

BMW needs to electrify or die.

But while passing all these mandates, no thought is spared for what it would take to build a replacement Platform Economy that can support and grow domestic industry.

European regulations are the kosher of Industry. Everyone complies with Euro standards to reduce duplication. They are the most intolerant!

And yet. They don’t care who gets richer or who ends up with the jobs, so long as the cars are cleaner. And so…

Guess who those naughty European automakers now have to buy carbon credits from?

You wouldn’t believe it if you read it in fiction.

Protectionism Without Production: Salt In The Wound

Europe uses high standards and strict rules as a source of competitive advantage – a form of vanilla protectionism that favors domestic industry. EU Single Market rules then raise the effective cost of imports by making outside goods comply with EU-wide specs and tariffs, while promoting free trade within. The positive currency impact of the Euro on German exports is massive.

However, unlike classic mercantilism or China’s current approach, Europe’s protectionism isn’t fond of nurturing new businesses to compete in the global market. 

It’s all stick, no carrot: mandates, not manufacturing.

I assume this is downstream of needing to shape domestic policy in response to democratic pressures. Voters everywhere in the West hate cronyism and explicit pro-Capital incentives. So Mr. BMW gets the stick and new entrepreneurs move to America. Or perhaps it’s just culture.

In light of KTM’s plight, consider the Stark Varg — a true European Union wonder! A Swedish founder who moves across the EU to Spain to start a domestic industrial manufacturing company building fully electric high-performance dirt bikes.

KTM is stuck with a quarter million bikes it can’t sell due to emissions regulations (the stick).

But perhaps Stark has a different relationship with the government, as a producer of the future?

Cue its founder talking on a podcast last month:

…some ridiculous things like government licenses and stuff like that that you're depending on. The bureaucracy…it's interesting, you know? Sometimes it feels like the the government is trying to stop you from making tax revenue. You're doing your best to you know make more money for them and they're doing the best to to stop you from that.

So that’ll be a “no,” then?

Large companies can often absorb these sorts of compliance costs, but they really can be the nail in the coffin for smaller firms and would-be startups. When your business margins are thin and the path to profitability narrow, every minor speed bump is existential.

The outcome of Europe’s Stick-only approach to industrial policy is yet more pressure towards achieving economies of scale as fast as possible — or towards shifting revenues, profits, and labor to state-protected foreign firms.

Losing To Sur Ron: A Cleaner, Poorer, Future

Stark isn’t the only company trying to eat KTM’s lunch with a fully electric dirt bike.

Take a look at this offering instead:

Compare it to the Stark Varg above. You don’t need to know anything about bikes. What do you notice?

It looks more like a traditional mountain bike. It looks lighter. It looks a bit cheaper.

The Sur Ron is the natural evolution of Chinese engineering & technology. It’s an outgrowth of micro-mobility electric scooters — very directly, it turns out [see Note 0].

In contrast, the Stark Varg is an attempt to start at the finish line with something that looks and performs exactly like a traditional dirt bike.

The Sur Ron isn’t as good as the Stark. But it costs half the price and goes 60mph.

And so:

They sold more of these in the UK than any other manufacturer in the category — gas or electric.

Of course they did! Consumers love a product that gives 70% of the value at 50% of the price!

The first Sur Ron bikes launched in 2018, and once they found Product Market Fit they were quickly followed by two copycat brands: E-Ride Pro and Talaria. 

Neither of these two bikes above are Sur Rons, but you’d be forgiven for getting confused because they look exactly the fucking same.

And if you’d like to launch your own copycat brand, the factories that make these bikes will make it super easy for you!

You need only reach out to one of the factories — mostly located in Chongqing, China — and they’ll be happy to tweak the design slightly for you and ship you 500 units. Your ecommerce dreams are just one click away!

The key component of Chinese industrialism in this industry is not the “brand”, who just slaps their label on a slightly-tweaked design and manages Go-To-Market.

The key component is the factory that churns out the end product — a factory that has no qualms about “IP” and that views “producing as many products as possible, as efficiently as possible” as its raison d'etre.

Personally, I think the Stark Varg is pretty cool, although as an American citizen I’m rooting for America’s own domestic attempt:

But both this and the Stark will cost you $11k.

When foreign rivals can either meet or route around elevated regulatory burdens and still outproduce you, at 1/3rd of the price, are you really winning?

The Dragon’s Forge: China’s Full-Court Press

There’s a funny meme on twitter about Chinese propaganda aimed at demonizing America accidentally making America look insanely cool. I don’t want to accidentally do the essay version of that here.

But I do want to pull these threads together. If it makes China look good, so be it. They deserve kudos for playing the game better than anyone else. I can write about how Alexander Hamilton codified the rules of the game 250 years ago ‘til I’m blue in the face — actually executing and adapting to the meta matters far more.

In the battery sector, China founded multiple manufacturers (BYD, CATL, EVE Energy, CALB and more) in the 10 year window between 1995 and 2005, supported by state subsidies and intense local competition. Instead of one big Electric Vehicle maker, China went upstream and built the largest companies in every industry that provides key Electric Vehicle components to manufacturers downstream.

Then, also, incidentally, it built a number of Electric Vehicle manufacturers.

Figuring out how to build a high quality consumer EV is a hard task. But every major European, American, Japanese, and Korean automaker has already done their deal with the dragon. Their IP is only “protected” in the sense that Chinese automakers agree not to sell direct clones of their cars under the same brand name.

But they don’t need to do that anymore!

They have their own brands now, innovating on their own, releasing actually good products at low prices thanks to….everything I’ve been talking about here.

Using state capacity to direct Capital and Labor into foundational industry and then clear regulatory and tax burdens for the new firms is the first move in the multi-decade play. Cultivating a fleet of national EV makers and letting them battle domestically for market share instead of choosing a winner by diktat is the next.

The redundancy in manufacturers at this stage is a feature, not a bug: a dynamic industrial base with multiple players keeps the market agile and forces firms to push for more innovation. You’re not picking winners and losers like a failed Soviet imitation of Capitalism.

You are literally doing Capitalism: accumulating as much Capital as possible.

Then economies of scale start kicking in. Huge demand from the now-wealthier domestic economy comes online — with many of the individuals driving this demand either directly employed in the production chains that make the whole thing possible, or else downstream of it in services labor. A captive market of increasingly wealthy consumers is an insane asset for any nation. Ensuring your own people are involved in the production chain of global value added manufacturing is a cheat code for getting there.

Of course, there are also currency controls in place. Of course, there are import tariffs. Of course, the actual equity ownership of these firms is shared with the state. Of course the laws themselves are somewhat vague and corruption happens arbitrarily. Of course, attempting to exit China with Capital from these activities is strongly discouraged.

This is the full court press! China learned from the best.

The American System. Victorian England. West Germany.

China built what Europe forgot or, I suspect more depressingly, didn’t value enough to Protect: big factories, abundant skilled labor, many small firms, intense competition, ownership of the whole supply chain – the ingredients for relentless productivity gains and a population whose Wealth doesn’t have to be static.

I could be describing Birmingham or West Germany or the Midwest in prior eras. Sadly, I’m describing a totalitarian communist state running the West’s own playbook to perfection.

Coincidentally, doing all this right creates significant downstream white collar services-sector employment as described in Birmingham above, circa 1775. All that production requires secretaries and bankers and lawyers in droves. If you’d like to guess what the effect of removing the underlying industry is on services sector wages and employment, take a walk round Birmingham next time you’re in England.

And everything in this essay is just a small slice of the industrial pie. Everywhere you look the playbook is the same. Solar cells? Europe and America mandate them! Who makes them?

Drones? The Call of Duty videogame franchise has been portraying drones as the kings of future war since 2014. You don’t have to be a jingoistic patriot to think there might be some national benefits to being able to produce 10 million drones a year.

Of course you know already where this is going:

Smartphones? A microcosm of the Western model. Apple is currently the most valuable public company in the world, worth over $3.5 trillion — half a trillion more than the next biggest company. Apple directly employs 80,000 US workers. They understand enough of the political economy game being played that they have a whole web page explaining how many American jobs their Platform has created: 2 million!

But step back and think about the whole supply chain. How many people are directly involved in the iPhone manufacturing supply chain? 1.5 million. Why is the whole supply chain based in Asia?

This breathless 2007 WSJ profile of Foxconn’s founder is enlightening.

On his right wrist he wears a beaded bracelet he got from a temple dedicated to Genghis Khan, the 13th-century Mongolian conqueror whom he calls a personal hero.

"I always tell employees: The group's benefit is more important than your personal benefit," Mr. Gou says.

You have to read between the lines, but all the pieces are there — from company towns, to vertically integrated manufacturing, to artificially lowered tax rates, to a network of other firms providing subcomponents and raw materials, to infrastructure investments that lower the cost of transporting finished products to market.

You can’t possible compete against all this as a single private corporation! 

Honestly, you’d be an idiot not to take advantage of it. In fact, it might even violate your fiduciary duty — and that would be a literal crime. Better to just take the money. No one will accuse you of mismanagement and you’ll probably get rich along the way. Don’t hate the player when you voted for the rules.

Contra “This Is Good For Us Actually” and “It’s Just Cost of Labor”

The Germany Shock demonstrates that you can still build industrial supply chains even in very high cost of labor regions, though they’ve fumbled the bag in more ways than one over the last decade.

But abstracting the whole top-to-bottom apparatus of corporate & government strategy designed to capture and retain economic surplus to a single variable — “cost of labor!” — is what the kids today call “cope”.

Apple just said they hope to move 50% of their iPhone assembly to fully automated assembly lines. That article says they’d previously scrapped those plans because the upfront investment costs would’ve been too high (how much cash do they have again? what do you think the CCP position would be towards Apple reducing employment at Foxconn? you think they don’t make that clear to Foxconn?). 

For reasons that will be very obvious to readers of this essay, Apple has no plans to move automated assembly to America.

No. If automation is going to happen, it’ll be at the direction of a domestic firm. I know, I know, if you didn’t understand the CCP’s approach to industrialism it would sound conspiratorial — but here we are:

Automation happens in smartphone manufacturing when — and only when — the CCP decides it will be to the benefit of the CCP.

The Western cope — the soothing lie we tell ourselves — is that this whole setup is also to our own benefit. All the high-paying jobs designing, marketing, and selling these products remain here in America. Manufacturing supply chains are grubby, low-prestige, and low-pay. If China wants to spend its own human and financial capital to send us cheaper goods, we should thank them for it.

The irony is that for the sort of person who understands those arguments, they are true! People who can get a job designing an iPhone probably are better off in this system. Their equity appreciates (AAPL to the moon!), their labor is paid handsomely, and the goods they buy are cheaper.

But you share a polity with more than just those people! 

The Lockean response to this is that all the other people are Tabula Rasas and they should learn to design iPhones too in order to have a path to greater personal wealth. But of course, not only are the philosophical and scientific underpinnings of the blank slate stuff too weak to build upon, the actual market for labor functions reasonably well. If the number of people able to design iPhones and Semiconductors increased by 3 orders of magnitude, the corresponding wages for that labor would decrease. The reason “Tech jobs” pay so well is precisely because of two beautiful facts: (i) how few people are needed to build Tech companies relative to the value they create, and (ii) how few people are actually capable of doing the work.

In contrast, building great companies in the real world inevitably requires involving more real people in the physical labor of the thing. Industrialism says to labor: “here is one of the most valuable parts of the economy, measured by enterprise value and systemic value creation — your labor is mandatory for its continued success, no college degree needed.”

This has predictable impacts on the balance of power between Capital and Labor.

It’s no wonder the communists understood these relationships between Capital, Labor, Markets, and Political Philosophy: they blew up their domestic economy so badly trying to subordinate everything to Labor that millions of people starved to death, after which Party Leadership decided — “it doesn't matter if a cat is black or white, as long as it catches mice.”

And now they catch all the mice.

Voters have preferences — mostly self-interested ones. You may think their preferences are wrong. But they want improving standards of living for themselves and their kids. If you can’t provide them through Capitalist mechanisms, they’re going to go looking for other options. And those options will almost certainly make things much, much worse for the remaining productive parts of your economy!

So you can stop them voting or you can make things better for them.

There’s no other option that results in a stable transition of power over the long run. Prosperity is mandatory.

As just one example, the majority of Western complaints about Housing are not actually about housing at all! Sure, your favorite city probably could have better policies. But the underlying issue is the path to personal wealth in a service-based economy demands you move to a handful of cities. If people could live elsewhere and still have similar economic opportunity, housing wouldn’t be such an issue. My barber cuts hair the same way no matter where he works — but he told me he moved to my town because the pay is better.

I see what I pay him and I agree that he made a smart choice.

An economy where the only options for non-elites to build personal and familial Wealth involve selling low-value-add services to elites will see the market power — the negotiating leverage and price setting abilities — of those non-elites vanish into the ether of various rents.

But an industrial Platform economy that builds valuable goods and sells them into a global market doesn’t have to set itself up next to New York City or San Francisco. The conditions necessary for success do not require a pre-existing hub of elites next door to spend money on you.

Your goods go on a container ship or a truck or a train and get shipped to the customer.

Which means you can build your industrial hub outside of the corridors of Political power and Capital pools. Somewhere land is cheaper and jobs are lacking. The global trade networks built over the last 400 years are an insane blessing for non-elite labor: they lower the fixed costs of getting your product to market, increasing the pricing power your labor has relative to other manufacturing inputs.

Say thank you to the Brits — you don’t need to live anywhere near your customer now!

But if you’re just a service providers….that’s not true. You have to live next to your clients.

If everyone else does too, your landlord gets much of the benefit from your labor.

And then the people doing that labor vote for something easy to understand that might make their lives better. 

You probably won’t like what they pick.

The “cheap” answer to why it’s worth trying to maintain a domestic industrial base is that the wheel of time could turn and History Could Restart anytime — and if we have to get involved in a shooting war with a peer adversary, it would be nice if we could make our own munitions.

I think that answer is okay.

It’s not wrong, and more people appreciate it now than they did 5 years ago when we didn’t have a land war in Europe. But it’s not compelling!

People want to better their lives. They want things to improve! Telling them they should put up with even less because you might need them to fight and die for you in a war someday down the road is a bad pitch! It’s an even worse pitch after a century of running domestic campaigns to reduce nationalist fervor in the West.

The better answer, but the much harder one to understand and explain and convince anyone of, is that sometimes — not always, and certainly not if you don’t commit to it — but sometimes you can actually end up with more in the future by paying for it upfront.

Industrialism can in fact have a positive Return on Investment.

The Logic of Capital: Why Innovation Capital Makes America Great (But Hates Investing In Hardware)

Having just spent 3,000+ words talking up China’s strategy to produce Wealth for its population across the whole socioeconomic spectrum, I feel like I have to take a quick break to explain what makes America so great — and why it’s heavily at odds with the American System Chinese model.

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Full summary of The American System available via email, courtesy of Zephaniah Chang

American innovation is responsible for enormous amounts of the technological progress whose actualization then occurs in Chinese factories[see Note 0].

But the way America prefers to fund the actual corporate entities that grow up to become mega cap tech companies is through private funding. Those funds in turn source capital from an array of external Limited Partners. To the extent there are any government-related funds in the system, they are not directed by actual government representatives.

Sure, Silicon Valley’s backstory does involve a rather more direct government link, with Fairchild Semiconductor’s primary original customer and source of funds being the Department of Defense.

And yes, it does turn out that linking government, academia, and corporate interests in a single location with (at the time) a low cost of living is an incredible way to kickstart a regional ecosystem.

But today, there are two primary channels for private funding to spur innovation in America.

The first — responsible for the storied “144 characters” — is by having a small group of investment professionals manage a large pool of capital. They then get paid a ton of money if they can grow the pool of capital.

The second is by having megacap companies run an economic surplus repeatedly and then invest that surplus in things that might make their products better. My essay on Monetization and Monopolies explores how we end up with less innovation when these companies lose their profits.

If you’re a Marxist you can use the phrase “the logic of capital”, or if you’re an economist you can refer to the law of rent. But no matter your preferred ideology, the mathematics of both of these innovation channels is the same: Capital must flow to the places it grows the fastest.

Firms who choose any other strategy will, in the long run, underperform versus peers and see their funding dry up.

Remember above in the section on Electrification when I noted that Semiconductor performance was doubling 8x faster than Battery performance?

The inevitable result of a core technology growth rate gap that big is many more opportunities to invest in things downstream of semiconductor performance than batteries. 

You get 144 characters instead of flying cars because for ~40 consecutive years the majority of capital invested in new high-growth business formation was allocated into things built on top of semiconductors, based on the gap between expected future growth rates and the cost of capital.

If you want the flying cars too — which in this case is a metaphor for Electric Vehicles — you have to be willing to sink an enormous pile of capital upfront into a lower-growth industry. And then double-down on it repeatedly until it achieves sufficient scale to pay you back. 

With the recent explosive success of its tech scene in global markets, China shows that you can actually have both high Tech high IRR startups and a thriving domestic industrial base — but note that while each individual firm may be critical to the industrial platform’s functioning, not every equity owner has the same return. You might have the idea, capital, knowledge, and team necessary to build the next generation EV company — but you still need the industrial platform around you to make it work.

I want to seriously ask readers with some mild financial literacy to imagine raising hundreds of millions of dollars of other people’s Capital in 1995 and then telling your own investors that your plan is to take all their money and spend it aggressively on machinery and labor to build a brand new battery manufacturing company to compete with entrenched giants. The margins are slim. The upfront costs are enormous. Profits are expected in 2-3 decades, if ever. In order for this ever to be a good investment, someone else will need to invent something called a “smartphone” in 15 years time. Oh, and by the way, your buddy is going to do the exact same thing on a city block next door to you. 

Also, the local government doesn’t really like you and some of your workers will try to unionize and you’ll be taxed before making profits.

OR: you could take a tiny fraction of that same pool of Capital and use it to found Amazon ($2 trillion market cap), eBay ($32b market cap), or Netscape (acquired for $4b within 3 years).

You’d have to be insane.

Selling goods and services over the internet at near-zero marginal cost to an ever-increasing pool of online users is an incredibly good business model. So good, in fact, that we’re still coming up with new permutations of it 30 years later. We left the terrible business models of “actually using labor and machines to assemble finished product” to the misfortunate capital allocators who lack access to this goldmine:

The American system is the best on Earth at sourcing free Capital from anywhere in the world and then allocating it to the highest-potential RoI activities permissible within our borders. 

Sometimes even to impermissible ones.

But the existence of that system necessarily raises the hurdle rate on all other investments.

Over the long run, repeatedly choosing a 5% rate of return when you could’ve instead chosen a 20% rate of return will actually make you poorer than when you started. You will lose the ability to raise funds. People will choose to work with others. Your comparable metric is not “CPI inflation” — it’s “expected cost of capital,” which is determined by the performance of your peers. 

Don’t fall behind.

You can imagine how good all the lines on the charts look when your system is the best at turning $1 into $10! This common sense analysis is at the root of the economics that explains why it’s good for America to make this trade repeatedly for decades. But it’s a system destined to break when its gains separate from its citizens. Optimizing for equity outcomes benefits equity holders. This drives the bifurcation between old and young, rich and middle, successful and not successful.

The appropriate class-based response to this obvious bifurcation for someone like myself is either (i) explain to the not-successful that it sucks to suck, they should’ve tried harder in school, should’ve had a firmer handshake, should’ve eaten less avocado toast, etc., or (ii) signal my pity clearly and vocally for the tragic-but-unsolvable plight of the unsuccessful and advocate for a legion of policies on their behalf that fund jobs for my peers and our kids disbursing funds ostensibly to help…but whose inevitable outcome is to reduce industrial competitiveness wherever we go, eventually shrinking the number of available jobs for the people we pity.

Unsurprisingly, I find both of these copy-paste-tier responses to be inadequate.

“Okay Conrad, but this American system funded Tesla and that’s clearly the company that led the EV industry into the next era. U-S-A!!”

Sure. So ask the question: how was Tesla funded?

And the answer is simply that Tesla would’ve died in the 2007-2009 crisis without ever shipping a car if not for a single insane man throwing all his personal cash into the company:

Elon Musk has become an incredibly polarizing figure since this happened. I don’t care to discuss his insanity in other venues in this essay. But I think his actions with personal capital during this period truly defy the “logic of capital” — he demonstrated absolutely no risk function and outspent institutional investors by an order of magnitude with his personal capital. This was irrational. Insane. This stuff is so far outside the norm that it should recontextualize all subsequent behavior.

Founding a company usually requires some amount of insanity given the expected odds of success — and that’s when you’re using other people’s money to bankroll things! But plowing all of your personal funds into an industrial manufacturing firm pursuing a novel product using new manufacturing techniques in a high cost of labor market was ruled economic suicide by every rational investor.

It’s to America’s benefit that Tesla exists. 

But the systems that fund innovation here would not have saved it.

As for the second method of allocating capital — Tech megacaps — Apple has over $150b in cash & investments. Google has $130b. Microsoft has $90b. $370b between them. But all that capital is still held to the same standards, the same law of rent, as everyone else’s capital. If it’s going to be spent on anything at all, its risk-adjusted rate of return has to be higher than whatever else it could possible be doing.

$370b dollars stuffed in mattresses T-bills says: this is a much safer way of shepherding capital than anything else we could be doing with it!

And they’re right!

Because as I’m trying to show, building a successful growing industrial engine that employs or supports meaningful shares of regional economies is a bigger problem than any one individual firm can solve.

Why on earth would any rational actor light their capital on fire investing in factories when there’s generational wealth lying on the table for them to take, so long as they play along with the incentives set up for them? Why would anyone invest in multi-decade low-margin foundational hardware manufacturing when the returns will likely be captured downstream by other equity holders?

The logic of capital says you’ll lose your job, your fund, and your reputation if you do any of that. Invest in hardware? Have you seen the margins? Have you seen the returns? Have you seen the TAM? Have you seen the limited ability to capture repeat revenues from customers? Don’t be insane. The American system has one goal: maximize capital returns.

Ask yourself: which statement sounds crazier? The S&P500 goes to $10k? Or $1k? In your heart, you too believe in American equities.

Tariffs Can’t Save You From All This

In 2020 I was focused on a different part of the industrial puzzle: The Currency Problem.

And my point 5 years ago was that you might be able to light a few sparks by playing with just one piece of this playbook, but to a certain degree global manufacturing success IS a zero-sum game. In any given year, there are only so many dollars available to be spent on finished goods. If you just run this playbook half-heartedly, you’re still going to get rinsed by China and the end products your consumers buy will be more expensive.

The tariffs are literally just punching yourself in the face. Economically-speaking.

On my 4-hour podcast with Lorenzo, he says at one point that some of my writing almost provided a defense of some of Trump’s tariff-driven economic policy. I deflected a bit at the time because you have to be careful not to accidentally endorse polarized figures when you’re trying to make nuanced points, but he was somewhat right to note that none of my work presents a rejection of the Pro-Tariff Pro-Reindustrializing economic position.

To the extent that that “making your whole society wealthier” is a worthy goal to strive for, integrating as large a share of your population as possible into the production of value-added goods is a really, really good strategy for any democratic society. And doing so doesn’t require a crazy never-before-seen playbook.

But Lorenzo was also right to note my skepticism towards the 2016 administration.

If you’re going to play this game, you have to play to win. That was the conclusion of my piece on Germany. You can’t just play half-heartedly. You’re going to get smoked AND your consumers will be made poorer.

The standard economist line is right, generally speaking. Opening Pandora’s box on this shit is a bad idea. You’re probably not dedicated enough. You’re probably going to change priorities in 4-8 years — you’ll likely change administrations! You’ll barely move the needle on reallocating productive jobs to your own nation, and you’ll only end up raising costs for the end buyer. Maybe you should just give up. Maybe it’s fine to let someone else capture the whole value-add chain. If you’re reading this, your kids will probably get into a good enough college that they can have a tertiary services job anyway — and everyone who doesn’t make it can just be supported with taxes on the wealthy and increased government debt. 

Embrace the European solution!

Or maybe that last paragraph made you mad and you think people who talk to their readers directly using “you” in essays are hacks (sorry).

I think winning is good. Yes, I do like positive-sum games and think everyone should strive to play them wherever possible. But I don’t think there’s anything morally wrong with winning a game someone else has to lose. If we’re going to play those games — and whether we wanted to or not, the rules of the jungle have at least forced others to play them against us — I prefer to win.

I’m not trying to advocate any one specific policy here — just a frank articulation about the actual game being played and whether we are serious about playing or not. Do you care about making your people wealthier? How much? My analysis is that Europe is so unserious about playing that it borders on a violation of the fiduciary duty between government and people.

America is better positioned. We don’t have to play.

But we could.

The tagline on my essays is “Building great things.” I joked earlier about a serious newspaper whose top stated mission is to improve the overall supply chain of a given domestic industry being unthinkable to Western audiences. But I had 50+ wonderful comments on my essay on the origins of heightened criminality in Western cities and not one reader connected the dots from there to everything else I write about.

You think we can build a dynamic regional industry of interconnected firms & suppliers, each of whom moves a warehouse full of valuable inventory on any given day, without shockingly low levels of crime as the background?

One of my running bits is that The Irishman is a bad movie but a great documentary. 

Watch it to understand, in small part, American deindustrialization. You cannot run industry when high crime and low social trust is in the water. Local crime raises the cost of doing business. If you make 90% Gross Margins slinging bits over the internet, the ultimate impact of regional crime on your profits is perhaps limited to the increased cost of housing in safe parts of town driving up employee wages and difficulties getting people to come in to the office. You can deal with that.

But if your margins are 8%? You’re toast.

Tariffs aren’t going to solve any of this for you. Not in isolation. They can definitely cause some industrial investment to reallocate. They can even manage to do so in ways that are net positive due to the network effects of manufacturing and the increased productivity of low-skill labor on the margins. This is made even more true by the interaction of socioeconomic bifurcation, wage growth, and prices.

However, tariffs are just one part of a national strategy committed to domestic wealth building. If concerns other than enriching the domestic population ever take priority — and you can see how reasonable it would be for a nation like ours to occasionally have other priorities! — they’re going to undermine the work tariffs are trying to do.

So that’s my pitch. You don’t have to concede the whole game. Technological progress, innovation diffusion curves, differing rates of return on invested capital, unequal total addressable market sizes across industries, and the stickiness of trade routes are all factors that say: you can actually play this game and win!

But the meta has evolved over the last 50 years.

“Industrial policy” is a fool’s label, just as much as “company strategy” is. What’s the best “company strategy” for any given company? Whatever wins. The metas evolve. You can’t study this stuff after the fact — anything that worked long enough ago to make it into a study is unlikely to work now! People write the “tell all” books only when their tactics are no longer relevant.

What’s the best “industrial policy”?

Do all the things that matter and none of the things that don’t.

Good luck.

Notes & Related Musings Cut From The Main Essay

[-1] The longer version of the story of battery improvements over the last 30 years:

• Battery improvements driven by consumer electronics and early EV manufacturers made micro-mobility (scooters) totally viable in the early to mid 2010s

• Tesla famously made its first battery packs by stacking cost efficient consumer laptop batteries together

• The same batteries can be found in Ninebot scooters today

• End-product sales growth offset the cost of industrial capacity buildouts and justify continued investment, further lowering per-unit costs

• E.g. South Korean conglomerate LG has invested $8 billion building out 10 different corporate entities employing 30,000 people in Nanjing’s technological development zone and driving $18 billion of “total output value” across the supply chain in 2023

• A flywheel of sales, profit, and Capital reinvestment funds technological improvements though direct corporate R&D, indirect academic research partnerships, and tertiary incentives

• Regarding tertiary incentives, a massive entity nearby offering direct research opportunities and an attractive quality of life will tend to push more students into undergraduate programs studying the hard sciences, even if only a small fraction actually end up working at that explicit entity

• We get positive feedback from centralizing industrial capacity across multiple firms, capital inflows, employment opportunities, R&D, etc. etc….and all of that goes into making end products that are dramatically more attractive to consumers.

• Which means more sales, more profits, more investments, more capex buildout, more R&D funded, more more more!

[0] A One Firm Narrative About The Death of Industrialism, Job Loss in New Hampshire, and Higher Stock Prices 

(if I was a better writer, this story would be the introductory narrative for this essay instead of a footnote)

The recent story of electric scooters is actually its own incredible microcosm of this whole thing.

Segway Inc. invested in early innovation around electric-powered micro-mobility. Their devices never found product market fit and — in keeping with the theme of this essay — they were not well supported by a rich ecosystem of domestic industrial manufacturing and component suppliers.

Mismanagement and failed product adoption left the company in a bad spot. It sold in 2010 to a British millionaire. Less than a year later, the new owner died and the company was stranded in a worse spot. American investment firm Summit Strategic Investments bought it for just $9m in 2013. Summit talked to local New Hampshire newspapers about planning to “expand its worldwide network”, but a year later filed a formal complaint with the United States International Trade Commission alleging multiple Chinese firms had been infringing on Segway patents.

The cynic in me suspects this was always the investment case.

18 months after filing suit, Beijing-based Ninebot agreed to acquire Segway for $75m. Not a bad turn around for Summit! $9m to $75m in 2.5 years!

A few years later, all remaining US-based employees are laid off and the New Hampshire plant is closed.

In 2019, Segway-slash-Ninebot makes a major investment in e-bike manufacturer Sur Ron.

And we come full circle back to this essay, with Segway tech improving the bikes that dominate the UK market in 2023.

Your patents? Infringed & irrelevant. Your jobs? Moved to somewhere that values them. Ahhh, but your consumer products? Affordable & high performance! And your equities? 8x’d!

Yeah, sure, an American investment firm turned $9m into $75m by suing over some IP before the American jobs were axed. But the combined Segway-Ninebot company just did $2b of revenue in 2024.

Don’t get me wrong: Segway never had any hope of competing here. Its best hope really was as a collection of unactionable Intellectual Property. That things ended up this way is likely for the best for the company given the background economic environment. I’m sure the people employed in their American facility found something more productive to do. And even if not, my local Five Guys here in New Hampshire pays over $20/hour. That’s over $40k/year!

But note that the way this plays out across every industry is that Americans get higher equity prices and cheaper goods, in exchange for increasing the bar necessary to build Wealth. Is it any wonder college tuition is so crazy and the rent in a handful of major cities is so nuts? Five Guys or Big Tech, those are your bifurcated choices. Below the API or Above it.

The instinctual democratic response to this bifurcation of outcomes for citizens is for one political party to offer to “crack down” on those “evil rent seekers” who’ve successfully passed the higher par and seen their personal fortunes accelerate, while the other party condemns those left behind for not working hard enough, not scoring high enough on the SAT, not having the right connections, and for having the temerity to expect handouts!

If you’re curious how the doom-spiral of ping-ponging between these two extremes plays out, please, consult Great Britain:

And after all the arguing is done, look around and ask: are we winning?

[99] On the Role of Democracy In Accelerating Or Retarding Industrial Growth

One of the core issues with pursuing some of the strategies outlined in this essay in the West is that the whole plan can be compromised by losing an election that happens every 2/4/6 years — and your geopolitical adversaries know that! 

This is part of what makes our system resilient to autocratic overreach and improves democratic support for the state. It is a good thing. But it is also undeniably a weakness against an adversary who can put a plan into motion in 1995 and keep executing on it for 30 years straight.

That doesn’t make it wrong! Every system has strengths and weaknesses. But don’t let love of our own system lead to delusions about its weaknesses.

It’s easy to mistake my respect for China’s achievements as wanting to emulate their system here. Nothing could be further from the truth. I’m an Anglo American individualist who loves his culture and the philosophy and values it’s created. I think small agile units working in loose tactical harmony but with tight strategic alignment create more aesthetically beautiful victories than combining all forces into a single crushingly powerful monolith.

But the current moment has an eerie feeling about it. American global hegemony is a thing of the past. Our secretary of state acknowledged it plainly this year:

So it’s not normal for the world to simply have a unipolar power.  That was not – that was an anomaly.  It was a product of the end of the Cold War, but eventually you were going to reach back to a point where you had a multipolar world, multi-great powers in different parts of the planet.  We face that now with China and to some extent Russia.

This is the opinion of the White House and therefore its intelligence agencies. It’s been part of my writing since 2018. Anyone who can mentally model dynamic systems changing over time has been able to see the writing on the wall here for a while now.

The thought of missiles and a shooting war naturally draws all the attention in the room. But the economic side of things goes under-discussed — except in the context of escalating tariffs and pointless twitter arguments about whether or not they work.

What’s eerie about this moment, in 2025, is that the West is responding to domestic pressures by increasing the level of autocracy it practices and experiencing weakening democratic support for the state. The very things our system mitigates compared to China’s. 

Of course partisans for one party or another in any of these nations might object to my framing — “we didn’t do any autocracy! Everything we did was necessary!”

Litigating that level of the Culture War in writing is beyond me. I trust readers who’ve stuck with me to the bottom of this footnote can follow my logic that, regardless of the incumbent party in question, from the advent of covid through to the present, the West has opted to exercise an increasing amount of centralized power over its citizens.

If you think these things were good in some cases, know that I will happily grant you any of them instead of arguing about it.

Nonetheless, we’re still dealing with the economic fallout of the corona-crisis, 5 years on.

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In my own mental models, almost everything that matters is downstream of underlying economic causes. And I suspect that the potential (American) or inevitable (European) loss of economic optimism primes the people to be more hostile towards their elite institutions — including political ones.

“If this shit isn’t working, we’ll kick it until it does.”

And that hostility breeds a natural reactionary response from said elite institutions.

“You don’t even know what’s good for you. Do what I say.”

The opinion of many smart philosophical liberals who actually know how markets work is that Western values were responsible for unleashing the powers of modern capitalism and ushering in a period of tremendous growth. I think that’s a really neat story. I’ll probably tell my son something like it as he grows up.

But the shadow of that story is that it gets the causality wrong. The independent wealth of the North West European middle class was what enabled their philosophies to evolve into a coherent and functioning state.

As with all things, the truth of the matter requires integrating both the idea and its shadow. 

The culture helped create the wealth. 

The wealth accelerated the adoption of positive cultural technology (e.g. contracts, courts, joint stock corporations). 

That cultural technology made the people more amenable to a liberal state based on similar frameworks. 

The broad involvement of the middle class in economic production then supplied a large pool of independent & self-interested manpower to vote for, staff, and direct that state for the purposes of mutual self-betterment.

What this realization then implies is that changes to the underlying economy of the demos — the way they work, their relative wealth vs. the elite, the Course of Honors to elite status, etc. — can change the sorts of cultural technology that a democratic nation built on top of them is able to use.

Regardless of what I would like to happen — “while retaining all of our Western cultural values, we seamlessly & instantaneously transition to a world where much of global industrial production happens in vertically-integrated industrial hubs in the West, involving and benefiting large portions of the local population even where much of the actual assembly work is automated, such that productivity growth and wage growth recouple somewhat for individuals in the 25th-75th percentiles of earnings and counterproductive value-destructive policies stop being championed by both leftist & rightist demagogues, ultimately reducing the economic leverage that a totalitarian communist regime has over global affairs” — the question of how things actually resolve, and whether or not it’s possible to move the needle in a positive direction, remains.

I don’t think my vision above is particularly likely to come to pass. It would be nice, but so would many other things. Getting from here to there would require hitting so many reset buttons with such vigor that the system would likely crack before reforming. That’s okay. The alternatives on offer in reality are not “utopia” and “hell” — merely different levels of imperfection. I don’t write this essay to advocate for some vision of utopia. I write it because there are people currently attempting to throw a wrench at the system with the hope of changing it, directionally, to look more like the utopia I describe.

And, for many reasons outlined here and in the footnotes of other essays, very few smart people have engaged seriously with what this might look like over the last half-century in the West. We have forbidden it explicitly and implicitly, because its likely end-state is nationalistic competition. Nationalist competition in the West has a somewhat recent and very tragic backstory that we make sure to tell our children both at home and at school. 

Regrettably, this has not stopped China from playing.

As with my notes on foreign currency exchange rates, the people who most value stability are those currently at the top of any given hierarchy. It shouldn’t be surprising that China aspired to climb the international GDP/Capita ranking table.

What I think would be most tragic of all, and this is where the European and British cases are instructive, would be to ultimately forsake the philosophies and values of the West without actually improving the underlying productivity and Wealth of the our people.

If we forsake some of what makes our culture special, but do so in service of things that don’t simultaneously increase domestic productivity and involve a greater share of the domestic population in those new gains…the inevitable ruin that follows will be well deserved.

On the one hand, I’ve buried this in a footnote instead of its own essay because it feels omnidirectionally blasphemous to say in the current environment. To endorse any sort of state capacity industrial policy is to invite the scorn of every “proper-thinking, well-socialized” economist in the nation. To critique the strategy of "throw some blanket tariffs on the barbeque to see what cooks” is to invite the enmity of those hoping to curry favor with the current administration.

On the other hand, I think engaging earnestly with this topic provides a coherent definition of “good statesmanship.” This is also its own petty blasphemy. But I would happily opt into a world where leaders are judged purely on the impact of their leadership on the household Wealth of their citizens at the time their administration began. Certainly it appears that the CCP is more sensitive to this measure than Brussels. Extremes are of course bad, but perhaps this essay might cause a few readers to wonder if we ought to move a little further towards the “Wealth-maximization-focus” end of the spectrum.

I hope to convince at least a few readers that abandoning Principle AND Prosperity is the worst trade of all. I honestly believe a strong case can be made for pursuing each of the other 3 quadrants (slotting today’s nations into each quadrant is left as a fun exercise for the reader). You can keep your Principles, but abandon Prosperity, and still end up with reasonable domestic outcomes. You could keep Prosperity but abandon Principle, and hey, at least you can wipe the tears away with all your money.

But to throw both away? Tragedy.

In the meantime…the logic of capital owns the souls of all individual Americans. We can each only do the best we can, given the system and incentives around us, to:

Thankfully, I don’t have “write Substack essays for a niche contrarian audience that simultaneously attempt to convince anti-tariff-market-purists that Tariffs are good, while also attempting to convince pro-tarriff-industrial-realists that Tariffs are laughably insufficient” as part of my own personal plan to Get Rich or Die Tryin’. This is quite genuinely just my own “special interest”, as the kids say. If you read this far, please subscribe or write a comment or tweet at me or send me an email, even just to let me know what parts you took issue with. My end of the writer-reader bargain is that I promise not to publish unless I have something interesting & meaningful to say. If I’m upholding it, you may not agree with all of my perspectives, but ideally you come away from each essay with a newer or richer framework to think about what it means to build great things.

• Globalism Keeps Kosher
• KTM Case Study
• Electric Dreams
• European Self Sabotage
• Protectionism Without Production
• Losing To Sur Ron
• The Dragon’s Forge
• Contra "This Is Good For Us"
• The Logic of Capital
• Tariffs Can't Save You
• Notes & Musings
• Job Loss In New Hampshire
• Democracy's Role In Retarding Industrialism

Hold on! Stow the pitchforks! Hear me out.

Nothing lasts forever. All technologies have their moment in the spotlight — then the wheel of progress turns and a new challenger arises, one better adapted to the environment.

Progress is a cruel master. Just because a given company managed to fundamentally advance the frontier of technology doesn’t mean they’ll have a strong defense against the next challenger. The lesson of technology is the exact opposite: each society-transforming success story in Tech creates the conditions for its own replacement by funding the development of the next wave of progress…and then letting someone else execute on it, totally disrupting their monopoly.

But in the meantime, for a brief moment, we all benefit from their market dominance.

The amount of money you can make in today’s global technology market by capturing market share is absurd. It enables industries and sub-industries like Venture Capital, Journalism, and Law to thrive in its shadow. It also stirs the envy & ire of those unable to join in, inspiring a turn towards political solutions.

The goal of this essay is to show three things. Not necessarily to prove them, as that would take a book-length exploration of the technology frontier’s evolution over the ages. Just to show them in action and perhaps point some readers to reconsider both the historical record and the potential futures on offer to us. I expect these points to be counter-intuitive & unappetizing to anyone who broadly shares my background or general outlook (e.g. markets actually ~work, economics is reasonable, building things is good, progress is mandatory).

First: not only are technology monopolies “not so bad”, and not only ought company founders seek to build them, but they are in fact actively good, create massive positive externalities for the public, and are a primary source of innovation for society. When they fail, things actually deteriorate.

Second: the natural lifecycle of a technology monopoly is short — they burn bright, but briefly, which is why it’s so important that they take profits when they can. The legal monopolies we happily grant to less innovative industries with better regulatory capture (Pharma, Publishing) are far longer than tech’s natural lifecycle.

Third: the “rents” collected by technology monopolies serve two purposes. They fund the development of “toys” that later enable climbing to the next branch in our civilizational tech tree. And those rents then serve as a natural bounty payable to anyone who can commercialize those toys and help us make the leap to that next tier. No redistributive bounty could ever hope to match this natural bounty, as the former is hard-capped by productivity under today’s tech paradigm, while the latter is only capped by what’s possible in a future, more productive state.

That’s the rough pitch. “Tech Monopolies: They profit by creating positive externalities for society. They don’t last that long. And their rents are both reasonable and self-defeating.”

Progress itself depends on the natural movements of this cycle being allowed to run unchecked, despite the unease many feel when looking at these companies in isolation. I recognize that it can be hard to lose to one of these monopolies in the market. I understand the temptation to seek alternate solutions. But doing so is worse for consumers, worse for other founders, and worse for society as a whole.

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These positions may be obvious to some longtime readers, but I think most readers will immediately reach for the same objections I once did! Even if you’re committed to the dismemberment of technology monopolies for other reasons, let me try to make my case…

A Case Study In Cascading Market Failure From Monopoly Positioning: Apple iTunes

I’ve previously mentioned how MySpace saw its revenue drop from $900m to $100m over 3 years, but in hindsight the market-altering growth of Facebook feels like a sure-thing to most people now, and consumer sentiment towards both properties is mixed at best. Debates about social media are further muddied by other factors, making them a poor case study for my thesis. So I’m leaving social media aside for a moment.

Instead, I want to talk about music.

An important caveat: I’m not an audiophile. Some of the songs on my iPhone today were recorded manually 20 years ago using one of these:

But. I do have a library of digital music I’ve collected over the years that includes a long-tail of content that you can’t find on Spotify. My attachment to that library means I still use Apple iTunes on my Windows PC to get mp3s onto my iPhone, where I then use the first party “Music” app to listen to them — the same flow you perhaps remember using back in the day before becoming one of Spotify’s 520M users.

Except one small thing has changed about this user flow: it’s now a piece of shit.

Until 2023, your only viable Windows desktop app was a buggy piece of software — a degraded version of what you used back in 2008. Few things in life are as frustrating as using legacy software maintained by a skeleton crew, whose every infrequent update makes the thing worse, laggier, and removes features.

But believe it or not, this desktop app is not the most frustrating part of the user experience of “try to listen to my personal mp3 files on my iPhone.”

No, the worst part is the first party Apple Music mobile app itself.

If you’re one of Apple’s (less impressive) 93M Music streaming service subscribers, you may not fully understand the irritation of opening your Music app on your phone to listen to some songs you bought & paid for, then having the screen hijacked by a first-party popup ad begging you to subscribe to their Spotify knockoff (complete with dark pattern button placement), except you’ve only got half a bar of service so the screen fails to load any content at all for a minute, blocking you from taking any action while it slowly loads the growth-hack.

But why is it like this? 

Why is the mobile app experience worse in 2024 than in 2014? 

Why is the desktop app experience worse in 2024 than in 2004?

The answer to this story may be obvious if you work in or around tech: software has development & maintenance costs! And staffing a team of developers, designers, and product managers on any piece of software is an expensive task: the cost of each developer is set by the market and is downstream of the most productive thing they could be building at that time. 

Back in the 2004-2014 era, Apple was the undisputed king of content. Their iconic iPod ads dominated advertising.

The music industry was ravaged by piracy until Steve Jobs threw it a lifeline: consumers will pay for content if you make the experience seamless & price things fairly.

The iPod, iTunes store, and the later iPhone were the product of this vision, and they were monster successes. Economic juggernauts.

But something happened around 2012-2014ish.

First: smartphone penetration hit ~50% of the US.

Second: 4G came with it, bringing 12.5Mbps+ download speeds to half the country.

Third: a dark green European company took advantage of both, inflected its growth, and caused the first ever decline in Apple Music revenues!

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In 2013, Apple owned 63% of the digital music market, perhaps more.

You can say many things about that. Maybe you or a business you liked was hurt by Apple’s domination. Or maybe you & your friends loved your iPods and uninstalled P2P sharing apps in favor of supporting your favorite artists by buying their music on iTunes.

What’s indisputable is that working on the software that propelled Apple to billions of Music revenue by the end of 2013 was hugely valuable for those engineers! The list of more productive things a team of devs, designers, and product people could’ve been building instead of Apple’s iTunes empire for that decade-long stretch could be counted on one hand. Maybe on three fingers.

But around 2014, everything changes. Apple sees revenue drop sharply as these new streaming technologies — made possible by Apple’s own hardware penetration & new 4G download speeds — eat its Music market share.

Their monopoly starts to crumble right as it looked strongest. This is how fast things can vanish in tech. Apple yolos $3 billion buying Beats, who had both a hardware arm and a music streaming service, the latter of which they immediately folded into a first party Apple offering. Fun fact: this was Apple’s largest acquisition to-date, by ~$2.8 billion. Panic moves money.

The result? 10 years later they aren’t even in the top 3 players by market share:

So ask yourself: at what point did staffing a large & hyper-competent product team on iTunes — for both its current maintenance and its future development — stop being the most productive thing for Apple to do?

You pick, there’s many good answers. I think by this point in the chart of Spotify’s user growth from earlier, it was already too late:

There’s a classic and tragic Innovator’s Dilemma to this whole saga.

When Apple first entered the market, there was no strategic conflict between their new user purchase model and existing legacy options. Music bought at a record store on CD and then imported into an iTunes library on a Dell PC running Windows Vista helped create a literal data moat for Apple.

Any friction in that user’s experience using Apple’s software to engage with their music would inhibit iTunes adoption and, in the endgame, reduce Apple’s revenue potential via future sales (after all the record stores get cleaned out).

Aside: you’ll note the inability to resolve a similar tension between digital & physical goods purchases massively inhibited eBook adoption.

This is wonderful from a [User-Employee-Corporation Alignment] perspective — the users using the product are happy, the business building the product profits from that happiness, and the employees working on it daily get to feel good about themselves. The “up” part of an S-curve is a super fun place to be!

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But now, in 2024?

Any user not actively subscribing to Apple Music is likely using a competitive streaming service. Competitive streaming services can never have their music integrate into Apple’s first party software — the digital content sits in a walled-garden cloud server that Apple’s software can’t touch. And the revenue potential of a single song purchase pales in comparison to an endless monthly subscription.

Leasification is the ultimate endgame of almost all consumer software products.

Aside #2: note that the closed walled-garden architecture — “an App” — that prevents Apple from touching the content was explicitly created, promoted, and distributed by Apple to combat the Microsoft Open Internet strategy. They did this to themselves!

It’s not just that they’re losing market share: it’s that losing market share to a novel technology running a novel business model totally screws the RoI of investing further in Apple’s legacy product.

The new business model — Streaming — is better adapted to the environment that Apple themselves created. The only viable play in the game is to try and catch up by investing billions of dollars of capital and the human resources of your most expensive staff to try and recover.

For students of history: this rarely succeeds.

So what do you do with the legacy product while you’re trying to save the ship??

Monetization: Lots Of Fun On The Up, A Dirty Word On The Down

I linked it as “mandatory reading” in my Macroeconomics for Tech Employees essay, but whatever you think of the man, the lecture notes from Peter Thiel’s 2012 lecture on Value Systems really must be understood if you’re interested in the economics of building companies.

The key framing that’s so valuable is separating Value Creation from Value Capture.

Back to Music: when Streaming starts to eat the iTunes Empire’s lunch, the future is already written. Refer to Cassette sales or CD sales to be able to predict the future of iTunes Store music revenues:

When you have a product with an existing install base and a large-but-shrinking top-line, the playbook is pretty simple: stop investing, start extracting.

Switch to Value Capture, because the Value Creation well has run dry.

In the fun growth phase, any friction put in front of the user trying to use Apple’s iTunes software went against the company’s growth strategy. But look now:

The Digital Download format is so dead that its only hope for a comeback is 20 years from now, when Gen Z gets inspired by their own nostalgia and repopularizes the iPod nano, like millennials and later Gen X are now doing for the CD:

In the tragic decline phase, every piece of friction put in front of the user trying to use iTunes can serve a helpful purpose: extract more value from the user or redirect them to a product with higher RoI.

Instead of a balanced producer-consumer relationship, or even one in favor of the consumer, the decline phase is most aptly characterized by an adversarial relationship between consumer and producer.

Not just in the theory & strategy of it either. Sadly, employees working on a declining product are more likely to resent consumers for having “the wrong” preferences. Of course that resentment is towards the aggregate market…and yet. Their only direct touchpoint with the market is with consumers of their own product. They can’t help but look down on their own users!

And from the consumer perspective, well. Here I am, 20 years later, trying to listen to songs I’ve purchased & downloaded from Apple, blocked from doing so by a half-loaded popup trying to sell me an Apple Music subscription for $10.99/month. My Consumer:Brand relationship becomes tarnished the more exposure I have to their products — and yet I am tied to their products far more than the average Spotify-using consumer!

Nonetheless: Apple has to monetize me more in order to stay competitive. Can you blame them? I haven’t purchased a song from iTunes in a few months now, while you likely either paid Spotify $6 a month or listened to some ads for them. Software devs aren’t free.

All Media Is Alike: Eyeballs Are Zero-Sum

From a business model perspective, part of what makes Streaming successful is that it turns what was previously a one-time economic exchange into a repeated one.

It turns a purchase into a lease.

And since the total time spent listening to music per month is largely static for any given consumer, it increases the overall monetization of the user base vs. the prior one-time purchase model.

1,500 words into an essay about how the Internet died and all I’ve done is rehash the tragic death of iTunes and the ascent of Streaming business models.

But this is important because it’s one small slice of the same overall pie.

If you understand why changes in technological trends led to market pressures and incentives that forced Apple to stop investing in their core iTunes product, increase attempts to monetize existing users, and adopt growth hacks & dark patterns at odds with their prior ethos, then you’ll understand what I’m about to describe with Google as a riff on that same pattern.

This pattern is made even more painful by the zero-sum fixed market dynamics of the Media industry.

In any given year, the number of eyeballs & ears available to consume Media each month is ~static. The amount of time those eyes & ears have to spend consuming your media is also ~fixed. Thus, someone else’s success selling into this audience necessarily means your own failure.

And then on the business side of the equation — and this is the bit people often miss — the advertising dollars looking to be deployed across the entire advertising industry are roughly fixed as a percentage of aggregate corporate revenues. Every possible channel for advertising is competing for a fixed advertising budget!

If your RoI is positive but not quite as high as other channels’, your allocation will go down.

So if any part of your business model depends on individuals consuming your media OR on advertising sending you money to run ads…you are trapped in an existential zero-sum competition for eyeballs.

Good luck!

Incidentally, I described my own perspective on how best to fight existential zero-sum competitions in one of my favorite essays about Moloch. Spoiler: you’ve got to be willing to push the button.

Say A Genuine Thank You To Google: 2000-2016

My pitch is that The Internet You Loved was a product of monopoly.

For a decade and a half, we had something magical.

Now I know monopoly is a dirty word with many dirty connotations. We fear their power and cheer their busting.

Fear not, I come to bury Google, not to praise it.

The Old Internet was a free and open hub of websites linking to each other, built from an incredibly rich long-tail of content niches, forums, blogs, and media sites.

This long tail was surfaced to new potential consumers via Google search. You just searched Google using a generic hyper-object-focused version of your native language (“Google-fu”), which would return the most popular niche/forum/blog/media empire that used those words a lot.

This actually worked!

Those websites would then monetize your eyeballs by showing you ads, which they could sign up to display in a self-serve way via Google’s AdWords platform.

The viability of this ad-supported website-hosting business model then led to further supporting growth in the industry focused on making the process of getting a website up and running as frictionless as possible.

Today, in 2024, if you’re picturing someone sitting down at a desktop computer or a macbook, actually navigating to Google’s homepage, then typing in a generically-phrased search term in order to discover websites full of other users like themselves with an interest in a given niche…do I even need to mock this set up?

But back in 2005, the person doing this was young, at the vanguard of new technology, previously unreachable via legacy advertising models, and living in an era of previously unknown economic prosperity.

That is to say: they were the prime demographic to sell ads against.

Particularly this new form of simple, non-spam, non-harassing, tasteful online ads pioneered by Google:

Google did to online advertising what Apple did to purchasing online music: they made it tasteful, respectable, slick, easy, transparent, unobtrusive, minimalist, classy, etc.

The sort of aesthetic that aspiring technology-embracing, intellectually-oriented, upwardly-mobile generations prize in the post-modern era!

And the sort of aesthetic that’s only possible in a monopoly.

Google totally owned the search market.

Google Search sent traffic to any niche content site on the internet, so long as it was good.

Google indexed the entire web so they could find the very best content.

Google let all those niche content sites monetize their traffic self-serve with ads.

This ecosystem was a Garden of Eden of monetizable eyeballs explicitly birthed and nurtured by Google — they completely destroyed the “legacy” web of locked down “Portals“ with superior content, superior aesthetics, a superior user experience, and a superior business model.

It was a total rout.

In a Thielian sense, Google actually Captured a relatively modest share of the value it Created!

Google spread the Wealth they created across millions of end users! Across all of society.

They sprinkled value on users, giving them beautiful clean interfaces & unobtrusive, respectful ads with clear standards. They sprinkled value on content creators, giving them enough revenue share on a self-serve ad platform that millions could make a living by writing online. They sprinkled value on advertisers, giving them easy access to prime demographics at low cost, with never-before-seen tracking capabilities and attractive RoIs.

The result was the beautiful open web you once loved. A network of millions interacting online, creating content for each other, sitting at their desks reading away.

Were there other factors at play? Of course! Was the domination of Google itself only possible thanks to increasing internet penetration? You bet. Bill Gates’ 1998 Memo to Microsoft employees noted that his original vision of “a computer on every desk and in every home” was not yet realized, the team had more work to do.

Google was founded 2 months later and rode the wave that Microsoft paid for. (aside: again notice the thread of a Tech monopoly funding the growth of its next challenger)

You can’t just wish a global monopoly into being out of thin air. Riding trends and existing demand is par for the course. Vision, execution, timing, and luck.

I’ve written about monopoly before and the stakes involved. I’ve been explicit about the potential for conflict and abuse that it creates.

What is a monopoly, at heart, but a gratuitous surplus generating engine? When outsiders can’t Capture a slice of those surpluses in the open market, they won’t hesitate to resort to other means. And when that happens every monopolist has to answer the question: am I going to retaliate? Will I defend my profits? Am I willing to repay evil for evil?

They’ve been maligned and taxed from Asia to Europe, but you can say one thing for the Google of this era: they responded to evil with good.

And in the process, they built the Internet You Loved.

Say a ‘thank you’ for what was.

Burying Google: 2014-2024 — Attention Was All It Needed

Few monopolies last forever. Technology monopolies burn bright, but they burn briefly. You don’t need aggressive antitrust enforcement to kill them — just wait a while for the march of progress and the innovator’s dilemma to rear their heads.

The smartphone penetration and bandwidth trends that broke Apple’s monopoly over digital music came for Google too.

Video. Longform audio. Instagram. TikTok. Even YouTube.

Sure, YouTube ended up under the Google umbrella. But their model is at odds with the open internet Google created, their content is richer and better tailored for newer platforms, they compete for internal corporate resources and external ad spend…it’s all a zero sum game in the end.

Thus we get that now-familiar pressure on the core Google business model. They made billions of dollars monetizing a small slice of people’s time spent sitting at an old school PC screen, typing search queries in, browsing content.

But now that whole mode of consumption has been disrupted and coopted by other forms of media. As much as Steve Jobs hated the idea, mobile is inherently consumptive and tailored for video & audio. Today you see the TikTok/Instagram meta evolve to put captions over content so even the audio piece is optional.

The walled garden nature of Apple’s mobile platform helped insulate these competing forms of attention capture from Google’s open web. People consume app-based content beyond the reach of Google’s indexing and beyond the reach of their ad networks. Doomscrolling is the Platonic ideal of Internet Portal capture from the late 90s Venture Capitalist playbook. Everything Google fought against.[0]

Every Doomscroller enjoying the latest algorithmically concocted nugget of pure entertainment is one less reader for the open internet. One less set of eyeballs for Google to sell ads against. One less dollar to share with content creators. These upstart platforms read their Internet History books: they knew from the start they needed to roll their own ad networks in conjunction with their apps.

And the zero-sum nature of advertising budgets means these things all realign themselves very rapidly. Network effects are great on the way up, but on the way down they mean 3-1=0.

The long-tail of third parties outside of Google’s umbrella now have a less viable business model.

Google itself now has a less viable business model!

Meanwhile, market expectations are not just for stasis — the market expects you to grow.

What’s your only possible remaining play? You don’t have years to wait. You’ve got 90 days.

To quote the Apple Case Study from earlier:

• When you have a product with an existing install base and a large-but-shrinking top-line, the playbook is pretty simple: stop investing, start extracting.

You know what was probably a pretty fun job that someone felt proud of? Figuring out how to tastefully display that small selection of sponsored links to the side of a search query and settling on the right shade of yellow background to convey “Sponsored” to the user, without denigrating the content but merely suggesting that it might also pique their interest.

You know what was probably a pretty lousy job, such that someone has to say to themselves, “hey, at least I got a lot of stock for this and can afford a house in California!” Burying an organic search result at the very bottom of a 15” MacBook Pro browser window[1].

And so Google starts slowly evaporating their own brand equity, cultivated during an era of monopoly economic power, in order to juice their revenue growth in the face of declining market share.

The Monetization of their product must increase in lock step the competition they face.

I realize most of my readers are incredibly sharp, high-verbal-scoring, critical readers and established search engine users and so will likely have no trouble discerning the “truth” of Google’s newer results — and perhaps even identifying the one true link to the hotel above that is in fact hidden in the screenshot of hotel results! However, consider that 9 years ago, when Google’s search results were clearly labeled with a yellow “Ad” tag, 39-66% of surveyed users were unable to correctly identify sponsored results:

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I invite you to turn off your ad blockers and recreate this study for yourself, on your mobile browser as well as your desktop browser. Don’t ask yourself: “am I able to identify all paid-for results?” Instead ask: “has it gotten easier or harder to identify paid results over the past 9 years, since the time when 39-66% of people were unable to spot them all?”

Perhaps you already know the answer.

Economic Dissonance: Monopoly, Competition, and Innovation

The thing to note here is that the Economics 101 narrative of “monopoly = bad; exploits pricing power; produces worse consumer outcomes” has to be tortured mightily to apply to the modern Tech world.

I realize this is heretical, though it seems so strikingly obvious when you look back in hindsight.

A company that’s growing due to monopoly market positioning in a new and growing market unlocked by technological changes is…radically different from the monopolies of old. Standard Oil does have a few good lessons to teach modern companies, but the analogy doesn’t stretch very far.

Question: When was the experience of using Google’s homepage search engine the best? When was the user given the largest share of the Value created by their own presence? When was the long-tail of niche content creators rewarded with the highest rates — instead of having their content ripped and displayed to the user without any clickthrough needed?

Answer: When Google was the undisputed king of Search and Advertising, with 60%-90% market share.

There’s a tremendous irony that online gripers can be found writing repeatedly over the past decade about the sad lack of a modern analog to Bell Labs (itself obviously unsustainable once its parent company was broken up in the early 1980s) — 

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— meanwhile Google was incubating the researchers who created the entire modern AI industry with a paper published in 2017 and worked on from ~2014-2017:

The basic level insight of your introductory college course is that monopolies have no incentive to innovate, while competition is the progenitor of all innovation under the sun.

The empirical reality — visible to anyone who just looks at even the very recent past, let alone the ancient history of the 20th century — is that without Producer Surplus, the capital necessary to create technological innovation is unlikely to accumulate.

That goes for human capital almost more than financial capital!

Some group of people must exist who are educated, aware, motivated, and at the bleeding edge of a field…who nonetheless have some spare hours in the workweek to spend innovating on something instead of slavishly executing a task.

It’s necessary to be slightly underemployed if you are to do something significant.

Without this Slack, the system will never be free enough to innovate.

Even the first legal framework ever adopted in New England, in 1641, recognized that the grave Puritan sin of monopoly was excusable only for new technology:

One hugely valuable source of Slack is the Producer surplus that a monopoly claims for itself. Another might be the structure of modern Academia, with tenure and $50 billion tax-free endowments. 

The idea that organizational-level existential competition might have negative impacts on innovation doesn’t always resonate on an emotional level with well-educated individuals, even as textbooks describe a state of idealized Perfect Competition as something out of every innovator’s worst nightmare. But the effects of even a mild increase in competition should resonate with every reader who’s experienced the painful increasing ad burden across the entire internet over the last 20 years.

And if you see how the dots all connect, you’ll understand why my title says The Internet Died, and not just Google and their vision of it.

Because these dynamics apply to every player on the Open Web that Google fostered.

Journalism was kneecapped by the internet and instantaneous & democratized access to news. But now, as a direct result, it’s forced to make the same trade I described in the Apple Case Study: more aggressively monetize its shrinking user base in order to try and prop up revenues — actively turning what little remains of said user base hostile through dark patterns, horrific UX, spammy pop-ups, and a descent into the worst fever dreams of mid-90s web browsing.

They are begging for your attention. Yet when they get it, they must abuse it.

Enjoy this example from June, 2024. A relative told me where was a report of excessive Cyanobacteria at a lake we planned to visit. I googled it. I clicked the top link to a news outlet. This is what I got:

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At the top, a banner add for a first-party walled garden app. A call to action to watch something on demand. Then a popup to give this website my Google authentication details. I ‘X’ out of that. Then another popup for my email. I ‘X’ out of that. Then beneath, a banner add that scrolls & floats!

The inflection from growth to decline as a result of competitive pressures forces the organization to adopt the universal playbook for those on the way down: stop investing, start extracting.

You can cry that they ought to try and Create some value instead of just Capturing what little they have — but they have no available Slack to do so! The competition is too fierce! Anyone who can’t justify their job today, based on net profit generated today, has already been laid off.

Incidentally, this is one reason that innovation in online content creation tends to come from the very young, significantly underemployed segment of the internet population. They’ve got Slack for days.

I’m not sure how all these online content businesses that used to be viable in Google’s empire are going to deal with the coming deluge of AI-created content, read by AI-agents. Who will pay to advertise against such low quality eyeballs? Who’s willing to bear the hosting costs? You can believe in the Dead Internet theory or not, today. On balance, I think a 2011 quote gets things about right: “it’s not the end of the world, but you can see it from here.”

The walled garden consumer attention apps may have ripped Google’s internet monopoly apart and destroyed the economics of the Old Web. But what’s left is currently still worth $2.3 trillion! The irony of AI forcing the final nail into the coffin of Google’s Internet is high. But it’s a real possibility.

Adjusted for inflation, Xerox was worth $10.2 billion when it started the PARC research lab in 1969. Today, it’s worth somewhat less. Thanks, in part, to the very technologies it created:

Videogames & Extraction: Less Money, More Monetization

Perhaps, like me, you’ve moonlighted as a gamer over the last 2 decades.

If so, you’ll have noticed the ever-increasing ratchet of Monetization creeping into every mainstream game that ships. Games are media too.

As with Apple’s products, they’re expensive to develop and there’s an opportunity cost to that expense. So now every game ships with a Battle Pass and a cosmetic cash shop. Many ship with explicit or soft pay-to-win mechanics. Many have entire game systems reworked to accommodate extra monetization mechanics. Most have content removed and then added back behind a paywall of some kind. Pay, pay, pay, pay, and pay some more. Have you considered paying?

It wasn’t always like this!

But now the competition for attention has ratcheted up. The industry has matured, massive funding flooded the space, opportunity costs have increased, dev cycles have lengthened, and your playerbase now has more compelling titles to choose from than ever before. You’re trapped in a competition with every other form of media for an ever-dwindling share of consumer attention. If you don’t milk that playerbase for all its worth, you won’t even break even. You won’t exist next year.

Once upon a time you could even rely on Moore’s law and display technology advancements to sell the next generation of games for you:

But no longer does this stuff sell more copies every year by default.

And, like iTunes, like Google Search, like Journalism…the result is the same. The product itself deteriorates in the face of increased monetization.

But the Value Capture must accelerate, because Value Creation is looking shaky. The current technology adoption wave has crested. Competition has increased. Developing markets are either plugged in already, walled off behind protectionist policies, or not yet rich enough to move the needle.

Put another way: as their global user growth stalls, Riot Games attempts to find the maximum possible price players are willing to pay for digital goods.

Why Are The Capitalists Only “Evil” When They’re Losing?

It’s interesting to ask: why didn’t these companies try to maximize their Value Capture during their heyday!? 

They just left money on the table, right?

Imagine explaining this consistent pattern to someone whose only mental model of corporate decision making is “ruthlessly extractive consumer surplus minimization”. Aka “capitalists are evil”.

These companies weren’t interested in exploiting Value Capture when they had maximum market power! They only became obsessed with min-maxing it once they faced competition!

Of course, from the earnest-yet-aspiring-monopolist corporate executive’s perspective, it all makes plenty of sense. The best way to grow revenues — particularly in these zero-sum attention-driven industries — is to grow! If you’re riding a trend and have a killer product…just…keep going. A reputation for trying to screw your users will slow adoption! It’s off-brand. Didn’t you hear? Markets are global now!

Putting additional friction between you and your customers is a bad strategic decision for anyone who wants to continue serving those customers (and all their friends) for the longterm. That friction exposes you to a greater risk of technology-driven disruption and the threat of a networked unraveling of your whole monopoly.

More than that: it will likely turn off your best employees from working on your product. The best product builders for any given attention-product put themselves in the customer’s shoes. They have user empathy. They feel like trash when their paycheck involves scumming an extra $67 from an enduser who gets paid less than they do. They will create dissent in the ranks & subject your organization to unpleasant internal politicking & continual “narrative alignment” if they feel you are Capturing too much value from users they identify with!

If you’re reading this and scoffing, I promise you this is real. We can share stories over a coffee sometime. Most of the best people in Tech do not actually want to get a paycheck conning users. The easiest way to be really good at your job in technology is to care a lot about the users of your innovations.

Instead of dealing with all the misery of class conflicts & resenting your boss for staffing you with finding more ways to exploit customers: Just. Focus. On. Growth. Offer a fair deal. Leave money on the table. For users, for business partners, for third parties, for content creators.

Sometimes, Monopoly is actually good for society. Sometimes it offers the slack necessary to create healthy and productive work environments, to share Wealth with customers, to fund questionably productive investments in future technologies, and to prioritize long-term positive relationships between customers, workers, and capital.

You want a focus on short-term hyper-extractive profit-maximizing strip-mining of capital assets instead? Just subject executives to increased levels of existential competition.

I’m not saying this holds true for all industries. I’m not even saying that it always holds true in Tech. 

But I am saying that you should update your mental model a bit about the unpleasant reality of what losing a competition where the cost of losing is your company’s existence, your job, your reputation, your mortgage, and your social status among your peers does to a person and their willingness to exploit other people. To their willingness to capture a larger share of the value they create, even if it makes things worse for others. To their willingness to invest in questionably productive future technologies.

What makes technology monopolies a special case is their monopoly is contingent — not on a government license or control of a scarce natural resource, but on using software, hardware, or their combination to maintain a superior market position.

Of course their market power gives them advantages over challengers — but in the tech industry those advantages come with offsetting costs. The Innovator’s Dilemma and organizational inertia mean your monopoly is always at risk if you fail to innovate yourself, if you miss the next wave, if your product quality declines, etc. etc.

Your Tech Monopoly gets to print money only so long as your customers are satisfied.

When Monopoly Fails: My Heart Is In The Coffin There With Google

Was I happier, before?

Did I love the old iTunes?

Do I miss the old Google?

Is the sorry state of journalism a shame?

Why do I even care about the decline of overmonetized underdeveloped videogames?

Am I just a corporate shill, enamoured with someone else’s profits, blind to the stifling impact of concentrated market power and inefficient monopolies?

Perhaps it’s “Yes” all round. 

But what I hope to show, at least for some readers, is that some of the things we most enjoy about modern life are a direct output of people who makes things having enough concentrated market power that they don’t need to concern themselves with maximizing Value Capture.

And that the world where subjecting the people who make things to existential competition increases their level of innovation is, at best, not always the case in Tech, and at worst, a total fairy tale. Innovation is hard as shit. Squeezing some extra Value out of an over-competed market in decline is easy as pie.

Is it any wonder every corporate executive & investor looks at this crazy new AI technology and the first thing they see is a way to strip some (human) costs out of their current business?

In Tech, you can ride a wave of adoption to a massive global monopoly. And then you’re lucky if you get a decade at the top! To see the end of the second decade requires predicting & catching, or innovating & creating, a subsequent technology wave.

In Pharma, we grant 20 year patents to whoever innovates a drug. That’s a legally protected guaranteed monopoly to encourage innovation. In media, we grant 95-150 year monopolies.

Tech doesn’t need any of that. Patents are not particularly useful for innovation unless you want to leak your strats to everyone else — and the international competitors will just copy-paste your products regardless of IP protections and then sell them into the global market. The natural monopoly of building & spreading a new form of technology is its own monopolistic reward. And that natural monopoly has a natural lifecycle today of a mere 5-15 years!

A beta reader advised me that I ought to harp one more time on how Google funded the development of modern AI…but entirely failed to capitalize on their own innovations until every individual involved had left and started a company based on their work at Google. This is not an unusual outcome in Tech. 

These things will die. Open will replace closed. Closed will replace open. The Bazaar will destabilize the Cathedral. The Cathedral will consolidate the Bazaar. Technologies will be bundled and unbundled.

From an outcome-maximizing perspective, you don’t need to bust these companies up or slow them down or tax them more or subsidize competition or do any of that crap. This isn’t an oil field. It isn’t a drug that cures obesity. It’s just innovation.

Technology Thrives on the Interplay of Moloch and Slack

Of course, I understand that the motivating rationale for supporting antitrust action against Tech is often at least partially driven by things beyond pure economic considerations.

Often reflexive anti-Tech sentiment involves some combination of:

• A personal career that’s been disrupted by Tech or a feeling that the boat has been missed

• Experience with or distaste for the higher-order effects on society of concentrated market power in the hands of a few highly-regionalized culturally-homogenous marshmallow-test-acing elites

• In democracies all over the world, this involves accusations of undue election interference one way or another

• In autocracies, it involves accusations of going against the national interest

• Feeling like you live beyond the economic reach of Tech’s influence such that the gravity well of productivity & profits doesn’t reach you, and you are instead just another source of monetization and future growth for an entity that won’t ever benefit you or your community

• Read the Industrialism section of my Full Stack of Society: Can You Make A Whole Society Wealthier? magnum opus for more — ctrl-f for “You ever wonder why the EU gets so mad at Google & friends?”

• Rarely, but occasionally, noting that domestic tech companies benefit from outsourced global manufacturing operations such that the Wealth they create for domestic citizens is limited only to the upper-decile of test-scorers, while the traditional base of domestic “labor” is viewed purely as a revenue source and has no means of interfacing with the chain of production

• Even “influencer” roles — traditionally more open to people below the top-decile of white collar work — reflect this same divide, merely allowing one influencer to adopt the same half-symbiotic half-parasitic relationship to their followers as tech does more broadly to the domestic population 

I’m open to others. These are varying degrees of reasonable and understandable. It may surprise people who’ve only been reading this essay at a surface level, but if I could wave a magic wand and cause the dissolution or disruption of at least some large Tech companies with extreme market power, I probably would.

But I find the reflexive condemnation of these businesses purely on the grounds of simplistic classical economics models and market power to be inappropriate — and especially unbecoming from people who work in the industry!

I am not advocating an eternal monopoly of Big Tech corporate overlords. The explicit point of my case studies is that the money made by technology monopolies, coupled with the natural progress of new technologies, puts a natural end date on these things.

Mine is an optimistic worldview!

If you don’t believe technological progress is possible, you should discard my views here and just try to Capture as much of the Wealth as you can from today’s tech monopolies, secure in your belief that doing so will have no higher order effects on future innovation.

I understand why this view comes naturally to bureaucrats and European lawyers.

But know that those who want to legislate a technology monopoly away are merely reducing the size of the prize for future innovation. Mentally modeling these higher order impacts may be counterintuitive for most, but I want more people involved in the business of innovation to be willing to defend it.

The naïve anti-monopolist views the existence of a tech monopoly at any point in time as a market failure. I view the existence of those businesses as a spark in the dark, necessary to fuel the fire of progress. Not only do I believe tech monopolies naturally decay — the executives at these companies believe it too! That is the animating force behind the continual attempt to expand the surface area of their platforms![2]

The ones who make it through multiple decades only do so via continual innovation. You can’t just extract value forever in the tech industry. But the most controversial part of this worldview is realizing that their continual innovation is funded, in part, by the excessive human & financial capital surplus their monopoly enables.

As painful as it is to confront, as much as we wish it weren’t true, innovation can in fact be crushed by competition. Productive output can be crushed by competition. Consumer surplus can be crushed by competition.

Everything you know and love. Can be crushed. By competition.

Even the Internet.

The Internet I loved is gone. My son will never know anything like it. But perhaps he’ll get something new and magical in its own way. And I hope he gets to see the wheel turn again, if only to learn the lesson as I learned it.

But the Internet is dead.

Long live the Internet.

Notes

[0] The locked down walled garden incumbent is undone by the free and open challenger. The free and open incumbent is undone by the locked down walled garden. The wheel turns, the cycle completes. $5 for where the next cycle is going. See you there in 20 years.

[1] Or this example from a friend that puts a scammy site above the actual venue — hey man, it’s all dollars to Google!

Scam site supporting evidence — the top BBB Complaint referencing Google is the icing on the cake.

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I of course am aware of how Google’s evolution is itself also partly a result of a battle between its own technology and those who try to manipulate that technology via SEO dark patterns. I don’t think it’s a coincidence that Google’s conflict with startup RapGenius escalated to a new level of ferocity in exactly 2013 — a timeline that lines up very well with some of the other trends discussed in this essay. For their visible misbehavior, RapGenius was martyred by Google, completely removed from Search results, destroying their only form of user acquisition.

It was a massive and one-sided escalation. The kind you only see from a ruler who feels its grip on power slipping.

[2] 

“Microsoft was inspired to develop new software because of Slack’s success, and now that they’ve got a product that’s market-viable they’re bundling it with their existing product suite, making Slack’s business model harder!”

Yes, that is exactly what competition looks like. Competition is not “chums sit around and agree to share the market with each other.” Competition is “we try to put each other out of business.”

Anything else is called a Cartel.

There’s an instinct here to defend Microsoft’s pricing practice by appealing to Consumer Surplus — which is greater in Microsoft’s domain than Slack’s. But let’s be clear: Slack built a $30b business by innovating, unbundling, and exploiting inefficiencies in Big Tech product development. They burned bright! They had market share dominance! 

And they got paid $30b for that.

Then they lost because their distribution model was not as effective as Microsoft’s, much as Spotify crushed Apple’s “legacy” music business, and much as Apple crushed the CD industry’s before it.

How it started vs. how it’s going:

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I think Salesforce is an insanely awesome $250b business with incredible technological & social lock-in on its core CRM product and natural adjacencies with many other Go-To-Market related business tools. I can only hope to be lucky enough to build something a fraction as awesome.

But Salesforce bought Slack on July 21st, 2021.

Exactly one year later, they announced the first ever increase in pricing for Slack — “to reflect all of that added value and ensure that we can keep investing in innovation”.

This is not a complex playbook. Monetization must increase to offset the declining growth expectations. Reminder that Microsoft Teams overtook Slack in 2019.

Microsoft might have been late to the game, but their ability to put a substitute product into the market at a lower marginal price is the exact deflationary pressure that technology is meant to create.

They did not owe Slack market share. They have the ability to offer customers more for less — and doing so aligns with their core business strategy. They are willing to “push the button”, as I put it, again and again and again. Until the next wave of technology comes along, and then they’ll invest in that with a 100x bet. And then they’ll keep “pushing the button”. This, it turns out, creates immense positive externalities for society.

The reflexive argument against Microsoft is simply that their pricing strategy makes it harder for other businesses to compete. This argument can be made very persuasively! But it entirely hinges on the listener conceding to a worldview that competition is intrinsically good and increasing it is always net-net good for the aggregate market.

That worldview is taught extensively in schools. You can assume most smart people will concede to it. I used to use it when arguing with others. But those who know better ought to be able to engage rationally and fairly with the ultimate claim: what creates the best outcomes in terms of the intersection of product quality and price?

IF Microsoft then throws their whole strategy out the window and starts trying to exploitatively ValueCaptureMaxx from their customers like a cartoonish Robber Baron of old, your first assumption should be that their growth has stalled and they don’t have a playbook to reinvigorate it.

Your second assumption should be that they will be creating the circumstances that enable an upstart competitor to come after their business.

Maybe they do get to Capture some excess profits in the short-term! But technology monopolies don’t last forever. The stakes are just too big, the entry costs too low. The worse they behave, the easier it will be to challenge them.

Note for regular readers: I do think there is nuanced ground for critique here, which is that the technology landscape, when left unfettered, will tend towards the creation of large centralized platforms. Which means that if you want to compete against Microsoft, you can’t JUST compete with their Teams product. You must inevitably aim to compete with the entire company. Which increases the capital burden of making a challenge in a way that rewards Microsoft shareholders more than startup challenger shareholders.

As noted earlier — TikTok and Instagram roll their own Ad networks, a highly complex product on its own merits.

Thankfully it turns out that there are massive pools of capital chasing returns in a relatively low-innovation background environment, and even under our current interest rate environment startups are able to raise massive sums of money to pursue their platform growth ambitions.

Ultimately, I still think this is a fair & reasonable equilibrium, whose net outcomes are massively positive for society as a whole. Hamstringing a business providing a better adapted product at lower cost to the market based on a hypothetical of what it might do does not help innovation — it just locks in a duopoly and lowers the value of future disruption.

[99] I have NO IDEA how Cory Doctorow managed to get credited with creating the vulgar & overly conjugated “enshittification” in 2022 when WIRED’s Robert Capps wrote a terrific piece 15 years earlier (!) exploring the inevitable “crapification” of everything and explaining that you better get used to it, because it was going to get a lot worse (spoiler: it did). 

The WIRED article is particularly amusing given the way it describes the MP3 product upending the CD market.

I read this article at the time. I thought it prescient.

I did not predict what Streaming would then do to the MP3 market.

But what I like most about this WIRED article is that it understands the bleak view.

Eternal September is coming for us all.

To some, it looks like the crapification of everything. But it’s really an improvement. And businesses need to get used to it, because the Good Enough revolution has only just begun.

[999] Burying this thought down here where it belongs. Perhaps I’ll explore it more later. But if you read my two-part Book Review of the 1517 historical analysis, Discourses on Livy, you’ll have encountered the idea that “A Chief Executive’s Only Path To Safety Is Through The Masses” — 

which is to say that the best security a centralized, individualized power has is to ally itself with the masses and secure their wants and needs.

My analysis contrasts this view to modern corporate power dynamics at the individual level.

But I think you can also squint a bit and move up a level.

In the same way that an Emperor’s best protection from conspiring elites who would stab him in the back to increase their own power is to ally himself with the people and secure their needs…

…a Monopoly’s best protection from conspiring elites who would stab it in the back to increase their own wealth is to ally itself with its broader customer base and secure their prosperity.

Under this framework, a Monopoly derelicts its duty when its switches to an adversarial, extractive relationship with its current and potential customers. In that scenario, it is no longer worthy of its own monopoly and fair game for other elites. The question then becomes: does the natural market environment allow other elites to Brutus a monopoly who has switched into an overly extractive relationship with the people?

If not, perhaps the elites who try to drag it down can actually be defended. Once they succeed, how do they act? Do they restore a positive value-sharing relationship with the people? Or are they merely satisfied with their own fat slice of pie? The answer to that will tell you much.

If yes, if the market naturally affords counter-elites an opportunity to destabilize a monopoly and capture its surplus generating customers, then elites who pursue that cause of action should also be lauded! But at the same time, those who seek political solutions against the offending monopoly should be seen not as allies, but as opponents of progress. They are reducing the size of the prize, increasing the organizational costs of doing business, and ultimately attempting to enforce cartelization, whether they realize it or not.

You cannot champion progress by fighting its enemies with the tools of anti-progress.

• Why Monopolies Are Good
• Apple iTunes Case Study
• Monetization & Adversity
• Why Media Is Zero Sum
• Google's Generosity & Goodness
• RIP Google
• Moloch, Slack, Monopoly, & Competition
• Extortion In Videogames
• Why Are Capitalists Being Nice!?
• Competitive Pain & The Nature Of Evil
• Balance: Thesis, Anti-Thesis, Synthesis
• Notes

Some people think crime is caused by poverty. Some think crime is caused by criminals. Some even think crime is caused by the climate. Don’t swallow these easy-to-digest popular narratives — society is shaped by its elite, always has been, always will be. It all comes back to the marshmallows.

A brief summary of what’s to come in this essay:

Online science analyst Crémieux wrote a provocative piece recently exploring why poverty alone is insufficient to explain variation in crime rates and showing how the Venetian upper class was massively overrepresented in violent crime until warfare reduced their numbers to near-zero. But as a firm believer in the idea that everything is downstream of economics, I want to present an alternate causal hypothesis that inverts the usual narrative: poverty doesn’t cause societal violence — how you become an elite does.

The selection process of each city’s elite members differs according to that city’s dominant economic industry. I suggest that the eventual downstream consequence of selection effects introduced by those different industries causes much of the variation we see in crime rates across space and time.

This essay doesn’t aim to provide a comprehensive and total explanation for differing rates of crime among cities — but it does attempt to provide a novel perspective based on economics, psychology, and culture. To begin, I must start with what it means to become an elite…

Elite Formation: Passing Tests, Jumping Through Hoops

You can read about why college matters more than ever despite costing ~everything your family can afford to give, and then you can read about why it “shouldn’t” cost so much from people who nonetheless attended prestigious institutions and try as hard as they can to get their kids into good schools. 

Universities today find themselves at the center of a political storm, but any attempt to retreat to “mere academics” will fail — they have become the first step along the path to “elite” status in our society, not just for a tiny handful of patrician families, but for the vast bulk of the aspiring American middle class.

After graduation, aspirants must progress through the ranks of institutional credibility in their chosen arena. Harvard Medical School. Goldman Sachs. Google. The New York Times. Wherever it is they go in D.C. and LA.

A graphical analogy:

There exists a modern day Course of Honors in all domains. While most citizens need to climb each rung on the ladder, sufficiently talented or well-connected folks can often speedrun the course. Much of the Venture Capital ecosystem exists to try and enable such speedrunning.

And it is through this course that ambitious youngsters are funneled each year, with the cream skimmed off into an ever-more-selective echelon at each stage. That Roman diagram has ~300 slots available at the bottom for Military Tribunes! The shortlist gets culled to only 20 per year on the very next rung on the ladder!

30 Under 30, Res publica Romana edition.

Our own version of this course of honors has more variety to it — after all, there’re more ways to become wealthy in our society than ancient Rome’s. For most domains, particularly those coded as suitable for the ranks of the modern Equestrians, the first step of college at age 18 means intense academic study during childhood.

Which brings us to my favorite essayist, hotelconcierge, and his wonderful thesis that in attempting to select our modern elites purely through meritocratic academic competition, we inadvertently also select heavily for the psychology profile that drives a teenager to study 8 hours a day throughout childhood: “The Desire To Pass Tests” (TDTPT).

His essay covers everything from IQ testing to Med School admissions to anorexia and the gradual descent into competition-induced-dystopia and psychological disorder.

And his key observation is that this Desire — the raw need to “please authority figures” — is heavily selected for in our modern elites.

Once you understand that additional study improves test scores and outcomes, everything else slots into place. Between two smart-enough kids, which one gets into college?? The one who pushed themselves harder to read dull textbooks despite hormones, social media, videogames, and marijuana all vying for attention.

And who pushes themselves hardest of all?

The “maladaptive perfectionist” of course — whose gut churned with anxiety and self-loathing when they received that 95% and fell far short of their expectations.

The more insane someone’s expectations about their own performance, the more they push themselves. The ones who overachieve the most are those who devise the most effective ways to manipulate their own psychology into jumping through ever more inane hoops, no matter the test that’s put in front of them.

His follow-on point is that these people are all deeply unhappy.

Thus: at scale, on the societal level, selecting for academic performance also selects for unhappiness.

And so our society’s gloriously selected elite are all shades of this young boy:

This young boy is the only one who makes it through the test without eating the marshmallow. 

The only one.

Every other child fails. 

Watch his face contort as he tries to force himself to pass the test. Watch him hold his face in his little hands and avert his eyes from the pathetic prize. 

Watch as he finally grabs his reward at 3:08, and even after passing the test, looks back and makes hard eye contact with the test administrator, waiting for her additional approval, and only finally smiling when she reassures him that he can, in fact, eat the marshmallows she has already given him and already told him are his.

You don’t have to be a psychiatrist to find the whole thing tragic.

You don’t have to be a parent to wonder if this is what success ought to look like.

And you don’t have to be an elite to know this type of child.

If you have ever made it through a single selection stage in the modern day Course of Honors, you’ve met this boy a hundred times over. Perhaps he is you. Hotelconcierge has it almost exactly right — the selection process selects for a certain psychology as strongly as it selects for anything else.

I say “almost” because I think this phenomenon actually has two-layers to it, and the gap between these layers will connect back to the messy topic in this essay’s title.

The first layer is covered fully in hotelconcierge’s essay: The Desire To Pass Tests.

The second layer is its complement: The Ability To Pass Tests.

The Limits of Desire

Hotelconcierge sidesteps the awkward discussion of differential ability between students by pointing out (correctly) that he was able to improve his own scores on various tests simply by studying, and that he enjoys this process and has a high innate Desire To Pass Tests.

Studying works.

And yet.

Whatever the backstory may be, the reality is that no two people taken from any single stage of the Course of Honors will have the exact same ability to pass the next test on the rung at that precise moment in time. One child may need to study for 6 hours to achieve an A+, while another may need to study for 18 hours.

Advancing to the next stage requires passing the test. So yes, the high Desire To Pass Tests individuals will get their neuroses ramped up, contort themselves like the boy in the video above, and get to work on practicing.

Many will advance.

But my retort to the dystopian conclusion of hotelconcierge’s essay, which ends with a grim future of relentless rat race competition over a handful of jobs under the emotionless administration of an AI fueled by zero-cost energy…

…my retort is that some of the people who ascend the Course of Honors do in fact possess extraordinary ability. Some of them only needed to study for 30 minutes. Crucially, the distribution of kids at each rung on the Course of Honors depends on the selection criteria to get there. Whether you get a 9:1 ratio in favor of Desire To Pass Tests vs. Ability To Pass Tests or the total inverse ratio depends on how you’re choosing who advances. 

If you were looking to build a healthy psyche for yourself or your children, it’s important to focus on building a balance between The Ability To Pass Tests and The Desire To Pass Tests.[1]

How do we get from here to violence?

From passing tests to navigating conflict?

It’s all contained in the final few frames of the test:

Hotelconcierge wrote about the intense unhappiness of these kids. Given his own medical background, that makes perfect sense.

But it’s not their unhappiness that catches my eye. It’s the lack of agency.

Or rather: the boy does achieve agency — a sort of meta-tier-2-agency — by overcoming his own desires in deference to the preferences of an external authority figure. He doesn’t do what he wants, he’s better than that. He does what you want, despite what he wants. He’s better than you, but he’s jealous of you. He wants to eat the marshmallow, but the thought of doing so causes him moral disgust. Sometimes he wishes he could be like you, happy, sated, laughing about it, but no part of him actually wants to be you. He is able to control himself. He is unable to act on his own desires. He is destined to succeed — because he was told to. It will never be enough.

I don’t know, read the book if you still have questions:

Selecting an academic and professional elite whose dominating emotional urge is compliance, even when it conflicts with personal interest, has massive follow-on effects for the shape of society that elite tries to create.

The external authority — the one who passes judgment, A+ or A-, internship or no internship, swipe right or swipe left, worthy or not, college admit or not — must be satisfied before the boy allows himself his meagre reward.

Do not judge that little boy for doing what he must to pass our tests.

Statistically speaking, he and those like him are responsible for every part of the world around you.

Your Responsibility: Non-Compliance & Disregard for Authority

What happens when The Boy Who Passed The Test meets The Man Who Didn’t Care?

How does the boy who aces a marshmallow test view his peers who did not?

When he grows up, how does he interact with people who don’t hesitate to eat the marshmallow?

Consider this celebrity YouTube video, which begins with Lil Wayne mocking a lawyer for his bad questions and climaxes with him telling that same lawyer, on camera, in front of a judge, “you know he can’t save you, right? in the real world?”

Lil Wayne obviously has no respect for the proceedings, and therefore the system that those proceedings represent, and calls attention to that directly with his threat of consequences “in the real world.”

The Judge does not chastise Wayne or sanction him for cutting the lawyer off.

The attorney asking him questions is audibly unsettled and starts trying to re-assert authority by forcing Wayne to comply with increasingly inane and obvious questions.

But Wayne is not interested in compliance and the whole thing escalates into comedy.

This clip was introduced to me in an essay by another psychiatrist, and his discussion of the psychology of violence across class lines remains true over a decade later:

Wayne may be the aggressor but the voice inside asks, "what did you do to provoke him?  Why didn't you stay away from him?"  This fear is so primary that the lawyer backs down from Wayne for Wayne's sake, not to avoid getting hit but so Wayne doesn't have to hit him.  Wayne is feared not because he's good at winning fights but because he's good at starting fights, and its oddly been indoctrinated in us that it is everyone else's job not to provoke fights with those you know will fight, even if you're in the right.

I want to point out how this dichotomy is very much predicated on a difference between people, not a sameness, and it's felt to be part of the hardware, not the software. There's you, who "knows better", and there's him, who "fights", and that's just the way it is.  And since you "know better" it's your responsibility to not let this get out of hand.  Pro-gun proponents can be seen as the logical consequence of this position: ok, I'll accept your societal commandment not to fight, but I want to preserve my right not to have to back down, either.  The sad, logical retort to this comes from a place of compassion, though, when I write this out explicitly, is really just a kind of kind of classism:  "it's best just to back down from them... because that's they way thems are." 

To engage in violence — even to be engaged-upon by another in violence — is perceived as failing a societal-level marshmallow test.

As with all other marshmallow tests, your ability to ace them is used as a class indicator and an IQ check.

“What, are you [stupid] or something? You should’ve known better!”

The boy who stares at the marshmallow without reaching for it, who contorts his psyche for a decade straight before he sits for a college entrance exam, can feel only two things towards those poor unfortunates who couldn’t do any better: pity and derision.

And my real point is that the aversion to violence itself — and the author of this second essay thinks it’s taught, whereas I‘m saying yes, it is, but being able to be taught this stuff in the first place simply correlates with The Desire To Pass Tests — can be incepted into any child with a high desire to comply.

Even though Lil Wayne is the celebrity face of this little clip, it’s the behavior of the Judge and the Attorney that matter: they have ascended high up their respective Course of Honors. They achieved. They jumped through hoops. They are probably masters of manipulating bureaucratic procedures to achieve their goals.

But the Judge would rather not have a physical fight in his deposition room, just as the teacher wishes to avoid one in class. The attorney views pleasing the Judge as a Test to pass, as I’m sure he once viewed pleasing a teacher as one. And from there it’s a short leap to the attorney viewing Wayne’s behavior and potential “real world” violence as his responsibility to manage.

How does any of this relate to violence in society and elites?

The clip shows a man being allowed to threaten a ranking Equestrian member of society, on camera, during a deposition, in front of a Judge, without consequence.

In the modern world an overriding Desire To Pass Tests eventually leads to an aversion to all forms of violence, including violence used in response to threats, and a belief that oneself is directly responsible not just for the violence one does to others, but also the violence they force others to do to them.

You may think it’s just a dumb clip about a celebrity bullying some dopey lawyer, and it is that, but it ultimately has deep ramifications for the rate of property crime in San Francisco.

Who is responsible for the table below?

Anecdata: A Tale of Two Marshmallows

There are two cities within San Francisco’s crime data.

When it comes to murder, rape, and aggravated assault, San Francisco is the 35th safest city in America. 35th is far from perfect — you’re 2-3x more likely to be murdered in SF than San Diego, twice as likely to be raped as you are in Sacramento, 13x more likely to be aggravatedly assaulted in SF than in Irvine. If you care about avoiding these things for your family, these ratios are not entirely irrelevant.

However. There are 165 cities in America where you can be victimized on these 3 dimensions more often than in San Francisco. Whether you view this as an endorsement of San Francisco or an indictment of America is up to you and beyond the scope of this essay. Either way, it cannot be said that San Francisco is aberrant from the national norm on violent crime!

When it comes to grand theft auto, robbery, burglary, and theft, another San Francisco emerges.

For motor vehicle theft, SF is only the 67th safest in the nation, and you’re 8x more likely to get your car stolen in SF than in New York. For robbery, we slide down to 81st, where getting violently robbed is 9x likelier in SF than Scottsdale. Alas, it gets worse. Theft — losing your property with slightly less explicit violence — sees San Francisco ranked as the 199th safety city in America. Out of 200. You’re going to get your stuff stolen 4.5x more often in San Francisco than Newark. [note for non-US readers: Newark is renowned for being generally unpleasant on the crime front]

Some have suggested that these numbers may be underreported. They probably are. But I think the divide is stark enough that you can take them at face value and still understand my point.

Here’s a list of cities I’ve considered living in or had friends ask me if I’d ever move there, ranked from highest to lowest crime rates. Look at the highlighted column:

While young, healthy, relatively fit, well compensated tech workers may perhaps look at data like this and go "eh, I'm not that likely to be murdered in SF and property crime won't really affect me", and I agree that this may be reasonable from their point of view, it’s nonetheless a specific view of safety, violence, and crime that is not universal — and one that would not find a home in many other American cities across both time & space.

But regardless of how you feel personally about property crime, the degree to which San Francisco sticks out on property crime is impressive.

While there are many factors that influence these numbers, it’s the reaction of the elite that most interests me.

In answer to the question: when is it acceptable to endorse state violence to suppress property crime?

San Francisco has answered clearly: 

Surely you’re smart enough to follow this simple instruction, right?

We told you not to eat the marshmallow.

If anything bad happens to you at this point, well, you should’ve known better.

Venice Can Be Venice Only Because Others Are Not

Tab back to Venice for a moment and Crémieux’s observation that its elites were overrepresented in assaulting other citizens.

The idea that the sort of policing a city chooses influences the level of crime in that city is hardly unique, and law & order diehards often like to pretend nothing else matters and nothing else is worth trying. That’s not what this essay is about.

What I’m trying to get at is that the preferences of a city’s elite are entirely responsible for shaping its [societal] response — and those elites will be selected via economics in different ways based on the dominant industry of each city.

The political philosophy of a city depends on the way the city provides for itself economically.

In a way, I’m giving a pretty fatalistic analysis here: you shouldn’t expect to be able to change things without also fundamentally altering the Big Tech economy.

Looking back to Crémieux’s essay, Venice can be Venice only because its nobles are violent people. The glory of a “maritime trading empire” has always been built first and foremost on conquering the seas.

A state economy built on the backs of capable seafaring merchants necessitates selecting elites for their ability to engage in self-motivated, self-directed, self-rewarding violence, covered only by the thin veneer of mutual allegiance to the Republic. A ship at sea in the 1400s has no police to call, no Pax Americana to save it. Slavers, pirates, and actively hostile conquering empires are all sailing the same seas.

The price of Venice’s beauty is gold, and the price of its gold is blood.

Truth be told, I had no idea about this side of Venetian history before going to look for a nice quote from Wikipedia, but my mental model of what it means to build a maritime trade empire told me it simply must be so. If my description above also pattern matches to my writing on the unavoidable geopolitical violence of Mercantilism, well. It should. One small hope of my writing is for more people to understand the value of "[regional] hegemony” in order to achieve “dominance of trade routes.”

Of course, Venice is not unique.

Thus could Venice’s Wealth only be achieved through the willingness of its “best” citizens to lean into violence. That they brought those same attitudes home after work is hardly surprising.

In much the same way, San Francisco can be San Francisco only because its nobles have an abnormally high Desire To Pass Tests.

“Big Tech” was coined only in 2013 — consider what that means for the changing landscape of the city’s politics and the relative ascendency of certain values. The wild west of Startup Landia has been on the downswing for a decade and the rising superstar had to have a perfect resume. Because no real resume would be good enough.

Consider what it takes to navigate the cross-functional organizational bureaucracies of mega-monopolies who sell product into every geography & every culture on earth, while also retaining domain expertise within your own branch of the company and scoring highly on 360 performance reviews. Consider the number of hoops you must be able to jump through to climb the ladder that environment when your competition for the next rung in the Course of Honors is every kid in the world who aced a marshmallow test. It’s no wonder we select for compliance and cross-functional collaboration and the ability to sublimate personal desire — the tech economy would go splat if we did it any other way.

To rephrase hotelconcierge: “Who will score well in every class and on the SAT and on the GMAT and graduate college in three years, summa cum laude? Who will gain leadership experience and acquire conference speaker accolades and sound passionate but not naïve and admit weaknesses but show how they have worked to overcome these weaknesses and sound confident in their knowledge but humbled by the talents of those they’ve worked with? Who will be able to inspire their colleagues without offending any of them, deliver negative feedback while highlighting potential growth areas in motivational ways, and successfully manage the egos of reports, teammates, and managers who all have perfect resumes and imposter syndrome?”

Who indeed.

And so, as with Venice:

A state economy built on the backs of centralized Big Tech global monopolies, funded by an agglomeration of global capital, necessitates selecting elites for their Desire To Pass Tests, above and beyond all else — which thus means also selecting for more unhappiness, more anxiety, more imposter syndrome, and the belief that violence of any sort, even victimization, is a personal failing.

[editor’s note: as a fellow acer of marshmallow tests, I of course support this system and mean only to present my analysis of it here and not to suggest something else is preferable]

A Theory Of Violence: Escalation Theory

So far in this essay I’ve talked about two kinds of people who commit violence: American criminals and Venetian nobles. One personal belief of mine is that people outside these groups have very poor theories of mind for how they operate. So I’d like to take a moment to explore how someone who is unphased by the thought of interpersonal and intersocietal violence approaches conflict and conflict resolution.

The mindset of someone with high system-level compliance — high Desire To Pass Tests — is to avoid, de-escalate, and otherwise mitigate any potential altercations, because system administrators always prefer peace to violence and their preferences become your preferences by the time you graduate middle school .

Conversely, the mindset of someone without this high Desire To Pass Tests is to map out the value of potential escalations and opt-in or out based on maximizing personal outcomes (or, more often, based an intuitive guess of potential outcomes).

Escalation Theory comes naturally to people with prior exposure to conflict. Escalation Theory is built on the understanding that all conflict, no matter how small, has the potential to escalate into existential conflict. 

That is: all conflict is violence and all violence is probabilistically terminal.

For these people, the potential Escalation acts both as a restraint in the moment and a catalyst in the moment-to-come. You’re hesitant to over-escalate, lest you trigger an exaggerated response too swiftly and get yourself hurt. But you’re prepared for the other side’s escalation, even planning it in your mind, and ready to react quickly if they do opt-in to the escalation. 

“Gradually and then suddenly.”

You are never shocked, never surprised, only waiting taut for a response or actively responding with an escalation of your own.

Before any of that can unfold, participants in the dance are presented with an escalating question: “will you challenge me?”

Navigating this escalating back and forth, asking the same question to each other in turn, passing it back and forth like a hot potato, is completely alien to someone who has only lived within systems designed by and for people with high Desire To Pass Tests.

Sgt. Rory Miller writes that the Monkey Dance as he understands it is nearly always non-lethal, and that’s true in the sense that most dances don’t end in serious injury. But the inverse is not true: a great many serious injuries did in fact begin with a Monkey Dance. [editor’s note: on balance I’m opting not to link the thousands of clips of such dances you can find on YouTube because I think it unbecoming, but if you’d like to search for some, knock yourself out]

Tragically but predictably, this results in the frequent exploitation of High Desire To Pass Tests people when confronted with the opposite psyche. If one party to a conflict chooses “Monkey Dance” every play and the other chooses “disengage”, then the endgame is inevitable.

You don’t need a PhD in game theory to understand that if it becomes known that you’ll submit in every round of the Monkey Dance, you get asked to play a lot more rounds of the Dance.

Resolving Conflict: Cardinal Sins vs. Iron Rules

For the high Desire To Pass Tests kids, the ones who aced the marshmallow tests, the non-aggression principle is a no-brainer. The system already prohibits violence by default!

Conflict resolution for these kids will therefore tend to be achieved through social negotiation and ideally reinforced by an external authority’s judgment. Consensus is key, because consensus a) validates their personal actions and b) is the only legitimate means by which the teacher external authority can be sanctioned to act with force. It’s force…at a distance.

So when they’re subjected to direct conflict, their first instinct will be to appeal to others. Like the lawyer who turns to the judge while Lil Wayne harasses him, they will usually end up frustrated by this experience, because the Judge thinks exactly what we read earlier:

"it's best just to back down from them... because that's they way thems are." 

After this mode of thinking is fully internalized, their role in any future conflict is automatically self-cast as the victim, which usually does lower their psychological pain by removing rage-inducing feelings of impotence and replacing them with serenity. However, per footnote [99], it tends to increase their chance of future victimization.

These images below are a bit of a scissor statement online: to genuine believers, they truly represent psychological transcendence over base personal desire and lack of power. To others, they represent submission and impotence. Self-mastery vs. mastery of others. Each perspective seems alien to the other.

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You either get it or you don’t.

For high Desire To Pass Tests kids, the cardinal sin is escalating conflict.

“Participating in ‘the monkey dance?’ Lol. Kind of derisive to suggest I’m an animal, no?.” - a fellow primate.

Successful de-escalation is the defining class marker here.

It signifies moving up to the next rung on the Course of Honors. It demonstrates system-priority over personal-priority. It shows Christ-like self-control. To be challenged directly with conflict and refrain from responding in kind? 

It’s as if the marshmallow talked to you and said “eat me!” and you still didn’t reach for it!

True self-mastery.

Reaching such a state of enlightenment can, perversely, feel good — each act of perfectly executed self control gives you a small rush, much like the one hotelconcierge described when talking about his own anorexia. He didn’t set out with the goal of starving himself. He just slowly started to enjoy the feeling of acing a test of willpower, the feeling that even personal suffering couldn’t make him fail the test.

Emotional self-regulation in this environment — per the two images above — is the necessary first step in non-escalation. Watching another kid stuff his face with the first marshmallow is awkward and embarrassing, something to avert your eyes from. You don’t look away because you think eating marshmallows is gross.

You look away because someone just failed a standardized test in public and you feel shame on their behalf, even though they don’t!

But ask the obvious follow up question: who does this person, the high Desire To Pass Tests kid who has attained self-mastery and the ability to de-escalate potential conflicts, judge more harshly: the boy who displays high levels of violence from the start and signals a low ability to resist the marshmallow, or the boy who is perfectly self-controlled and displays no aggression…right up until a potential conflict escalates to a certain level, at which point he opts into the escalation game with a display of shocking violence?

Which one of those two violated his expectations more?

Do you judge the boy who shows no capacity for self-restraint? Or the boy who shows the capacity but not the willingness?

Differing opinions on this question are at the heart of local, national, and even geopolitical disagreements.

Shame & Society: Fake Tales of San Francisco

What’s the difference between guilt and shame?

If you ever need a dictionary definition, use the 1828 Webster’s dictionary:

We see that guilt requires someone acting of their own free will, knowing right from wrong, and then choosing wrong anyway. The guilt exists as soon as the wrong choice was made.

The child with a high Desire To Pass Tests feels guilty for not studying “enough” — though of course no amount of studying could ever assuage that feeling. The guilt occurs because the child violated their own standards, and it occurs immediately anytime the child makes the wrong choice. It is a deep and painful and private thing.[2]

Feelings of personal guilt motivate the child to comply even harder with his own value system.

Guilt is a personal emotion that, in the most positive light, pushes the child to be the best version of himself.

On the contrary, we see that shame is a more social emotion:

Every example given of shame by Webster is about how one is perceived by others.

As a social emotion, shame motivates the child to comply with the value system of others. If the child shares the same value system, then he also feels guilt, yes. But sharing the value system is not required. A mere awareness of how others will react is sufficient to generate shame in those sensitive to social value.

In this way, plenty of children and politicians alike are able to express genuine remorse and true regret when caught in the act of a bad deed that they would gleefully do again if they thought they could get away with it. The shame they feel is true and real — but it does not require them to share society’s value system, only the ability to model it when caught.

Shame is a social emotion that, in the most positive light, allows society to increase the compliance of those who are smart enough to know better.

What does this have to do with San Francisco?

I discussed above the feelings of guilt that high Desire To Pass Tests kids feel when they‘re involved in crime — even as victims. “I should’ve known better” is the very first thought they have when they return to find their car window smashed in.

But guilt is a personal emotion. It can only ever generate additional actions in line with personal values.

Shame, on the other hand, can cause people to take actions that are not aligned with their personal values. Even actions that go directly against said personal values. And if they’re the right sort of high Desire To Pass Tests kid and they follow through with them, they’ll actually feel good about doing so — after all, what just happened?

They directly overcame a personal preference in order to satisfy an external authority and accrue a personal reward! Whether they get status, honor, respect, etc. is irrelevant, anything will deliver the high.

If you don’t get it still, you can watch Batman Begins or read my 3,000 word twitter thread explaining the moral philosophy of early 2000s Americana:

And you have to understand all this, the marshmallows and big tech and shame, in order to understand why San Francisco executed a temporary urban crackdown last month, in November 2023, generating the largest year-over-year crime reduction in recent records:

People on both the left and the right who don’t understand the way shame works tried to use this clip to score political points on Newsom. But it didn’t really work. Because he’s being honest and the thing he’s being honest about — “we would be ashamed to have our ally, the esteemed (dictator) of China, Xi Jinping, come to our beautiful city and find it unworthy of his own values, see it looking grim, and have his staff experience the urban background of constant theft and drug overdoses and low grade criminality that is our norm, because to him this would signal a lack of power instead of the transcendent self-restraint it truly represents” — is broadly felt and understood by his base.

And that base has the same values as everyone who watched & liked Batman Begins, which last time I checked was ~America.

From the broadly left, the critique of Newsom’s temporary actions is that they obviously do not solve the underlying problems that cause crime…and that he used the heavy hand of armed state forces to accomplish his goal.

Note that neither of these critiques have any relevance to the shame that motivated Newsom’s actions — they are instead reframings of guilt likely already felt by Newsom and his base. That he cannot solve a housing crisis, a drug crisis, a crime crisis, a local retail economic crisis, and a breakdown in public order is felt as a source of personal failure — and I write “he” here but really I mean “we” — and therefore a source of much guilt. But overcoming personal preference was already baked into the act! You’re telling the anorexic that they aren’t getting enough protein — if your words have any effect at all, they merely elevate the act further.

You can’t change his actions by trying to make him feel more guilty about it. And you lack the social status to compete with Xi Jinping’s ability to shame him. 

“He should care more about his base than a dictator!”

Sure, maybe in a perfect world, but “his base” codes as “parents”, and “a dictator” codes as “teacher”, and only one of them is grading the test, so really, whose method of long division are we gonna use??

And from the broadly right, the critique of Newsom’s temporary action was that he “only” cleans up the city when a foreign world leader with explicitly different values from San Francisco’s comes to town, but otherwise remains unwilling to use the implements of the state to reduce crime within the state.

That is: he prefers the city live with a certain level of crime and can only be motivated to lower it via the social shaming of people who don’t live in the city. He therefore chooses crime over not-crime.

But note that there’s not actually any attempt to understand or persuade otherwise in this critique. Newsom’s power was in stating plainly: “That’s because it’s true.” Critiquing him by reiterating what he already said does not undermine his position among his base — it strengthens it!

He wants to eat the marshmallow, but the thought of doing so causes him moral disgust…He is able to control himself. He is unable to act on his own desires. He is destined to succeed — because he was told to. He will never be happy.

The only ways to overcome shame are by rejecting the social hierarchy entirely and casting aside one’s Desire To Pass Tests or by replacing it with an even greater shame.

The former is nigh impossible for adults whose development is already locked in, although some twitter friends claim psychedelics can help [editor’s note: conrad does not endorse such claims].

And as for the latter…I’m not sure who you could get with more global social status than the leader of our biggest geopolitical rival. Nor how you could convince them to make regular visits to San Francisco.

All that said, there’s one analysis I didn’t see among all the hubbub of political point scoring.

Control & Responsibility: True Tales of San Francisco

See it turns out, San Francisco’s Police Department reports up to date Crime Data, by week, on what might be the internet’s most advanced interactive crime dashboard, including year-over-year comparisons to track performance.

Which means we can ask: what did San Francisco’s crime look like  from January 1st 2023 to October 31st 2023 — the first 10 months of the year?

In isolation, this means nothing. Are these numbers high or low? Relative to what standard? Can they even be changed? Alone, they tell us nothing.

But the obvious question is: what happened in November? The San Francisco Standard has photos showing Newsom’s efforts were underway by November 3rd, and California Family notes things began sometime in October.

Did “cleaning up” the city actually have any impact on crime?

Comparing these two screenshots is a bit awkward, so I’ve put the “Year-to-Year % Decrease or Increase” column data side by side in a bar chart below. This is the column you want to use because it helps adjust for any potential seasonality in the data (e.g. humans tend to do more killing in the summer).

In this case, a negative number means fewer crimes occurred this year compared to last year. A positive number means more crimes occurred. The blue bars are post-crackdown. The red bars are status quo pre-crackdown.

To know if Gavin’s aggressive armed-police-enforced “clean up” had any impact on local crime rates, compare the blue bars to the red bars.

Hopefully this cut of the data is simple and easy to understand. There was a small uptick in assault and a substantial increase in arson. No meaningful impact on burglary. And very significant declines in all other crimes.

Of course, it goes without saying, there are many variables at play in such overdetermined areas as aggregate crime. But these two snapshots let us ask two interesting questions: 

i) how many people were victimized from January to October of 2023 that would not have been victimized under a hypothetical “one-week-a-month Gavin Newsom reign of state tyranny”?

ii) how many people were saved from victimization in November by the aforementioned reign of tyranny?

Given that we have simple, clean data for both periods, I can do some very basic math to look at the year-over-year changes in November’s crime rates and apply those same year-over-year changes retroactively to the January-October historical period, and discover that if Gavin had rolled out the troops once a month in 2023, San Francisco could have hypothetically had an increase in assaults and arson, in exchange for about 30 fewer homicides and rapes, 250 fewer robberies, 1,000 fewer stolen cars, and 14,000 fewer thefts.

I might hypothesize the arson and assaults as directly related to both the increased use of force by the state itself, as well as protests surrounding November’s APEC conference, which included vociferous protests around China and the unfolding Israel/Palestine conflict, but again, there are many variables at play.

And doing the inverse math for November, we see that if Gavin had not been moved by shame to tyrannical action, San Francisco might have experienced: 6 additional homicides, 3 additional rapes, 25 additional robberies, 18 fewer assaults, 109 additional stolen cars, 7 fewer arsons, and 1,537 additional thefts in November.

I know it’s a bit dry to write this all out in words, but I think there’s a certain weight to me having to write “30 fewer homicides and rapes” instead of just slamming it all in a bar chart for you to read. That said, here you go:

This chart applies the year over year changes in crime above to the full 11 month period, showing the number of crimes committed under a hypothetical world where Newsom never “cleaned up” San Francisco in November compared to those committed in a world where he did so once a month for the full period.

The methodology is simple: for the red bars, take the actual historical data from January-October and then sum it with the 2022 November data grown at the actual year-over-year growth rate from January-October 2023. That gives you an 11-month period accounting for year-over-year changes that happened in 2023 as if Gavin’s crackdown never happened.

And for the blue bars do the inverse — take the actual historical 2023 November data under Newsom’s crackdown efforts, and then sum it with 2022 January-October period data assuming the crackdown year-over-year growth rate that occurred in November 2023.

Of course we should really slice this chart up into two charts, like Wikipedia does, one for violent crime:

…and one for property crime:

What I like about this analysis after-the-fact is that it suggests there is no free lunch.

For the first 11 months of the year, the price of 39 fewer homicides, 33 fewer rapes, 300 fewer robberies, and 1,000 fewer car thefts, hypothetically, would have been 231 additional assaults and 85 extra arsons.

A Season For All Things: Data

In my essay exploring the failure of YIMBYs to understand Japan’s real estate market, I mocked writers who choose to represent time series data as simple bar charts, thereby obfuscating the actual shape of the underlying trends.

In showing you a “constructed” metric above and a simple bar chart showing year over year crime changes, I fear I am already guilty of the same vice, but before I become more so, allow me to show the full & proper data set in monthly intervals over the last two years:

Of course, taking all that data and graphing it on the same axis makes it hard to see what’s going on, because the Theft data swamps the rest. I will assume you can clearly see that Theft fell far below it’s prior 2 year low after Newsom’s crackdown began in October.

Let’s reduce the upper-bound of the y-axis to reveal trends in the other crimes.

Below we see Motor Vehicle Theft, Burglary, Assault, and Robbery mirroring the Theft trend, with some of the lowest number of crimes reported for November and December in recent years:

Lastly — and thankfully these are two of the smaller numbers in the dataset — we have Homicide and Rape:

Again, the trends are the same.

Again, the October Crackdown for a conference in mid-November had a lasting impact through the end of December on crimes from Theft to Rape, Burglary to Grand Theft Auto.

For the curious, the rape figure for the December immediately after Newsom’s Crackdown was the same as during the height of Winter 2020’s lockdown covid season when the city was dead and everyone trapped at home, and a third of what it was back in December 2017.

[Note: Arson numbers were included in the composite chart above but have been removed from the Homicide & Rape chart as they overlapped substantially with the Rape numbers, and I feel that Arson and Rape are different categories of crime, with the chart made worse by showing them together. It’s included in the footnotes for completion’s sake]

I’ve said a few times in this piece that violence and crime are multivariate, and if someone wishes to challenge my analysis by noting that a San Francisco with zero inequality, perfect access to public resources, no drug problems, and infinite material abundance would have lower rates of violence and crime, I am happy to concede the point entirely — to my knowledge, such an A/B test has never occurred in a single month while keeping all else equal, but if it does, I promise to write about it.

What’s fascinating here is precisely the A/B test we just got, the psychology that motivated it, and the underlying economic factors that forced us all into this wild experiment.

In Summary: Wealth Über Alles

I strive to keep “advocacy” out of my writing, as I’ve said on multiple occasions that I find it tends to corrupt analysis and distort interpretations of reality. This piece is no different. Whether or not you find the idea of a monthly Newsom Police State appealing or horrifying is up to you. There’s a tradeoff either way. I’ve intentionally tried to use extreme language to describe it, lest any reader misread me and think there’s a free lunch on the table.

But even though this essay uses San Francisco and Venice as examples, it’s not really about those two cities. 

It’s about how the preferences of the local elite shape shape every society. 

And it’s about how the type of elite you ultimately end up with depends on the dominant mode of Wealth generation in a given region.

Putting it all together, your modern day Course of Honors selects your elites not just for ability — but also, and perhaps primarily, for the individual psychology willing and able to ace your tests. The more contortions you demand, the more compliance you select for. The more agency you demand, the more aggression towards peers you select for.

It is impossible to select any human for ability without also selecting them, in aggregate, for character.

Look again at Rome’s Course of Honors:

We don’t have these titles anymore. But there’s a map that looks like this in engineering roles. And there’s a map that looks like this in sales roles. And healthcare. And investing. And in Hollywood. And in Academia. And in industrial factories.

Each city has its own map of elite-hood, based on the dominant industries in that city. And because of the nature of economic specialization and the opportunity cost of operating in the second-best industry in town, each city will become dominated by a tiny handful of industries. 

Often a single source of productivity will drive a whole region.

Each Course of Honors rewards those with The Desire To Pass Tests…but also prioritizes different underlying skillsets. The population of that city will begin their tests with a differing baseline Ability To Pass the Test.

The intersection of those factors — whatever it takes to succeed in a given city, and therefore a given profession — ultimately determines the distribution of personality types and philosophies that come to dominate the upper echelons of each city.

That’s a lot of words to say: it takes a very different sort of person to be an L7 Software Engineer at Google compared to a senior manager of an oilfield compared to captain of a merchant ship in 1453. This is a very soft essay, intentionally lacking many of my usual charts and tables. I feel naked without them. But this isn’t the kind of essay that’s made better by numbers. It’s about faces. 

And if you scroll back quickly through this essay, you’ll see a lot of different faces looking back at you.

Societies are about people. Violence happens by people, to people.

Real people, with faces, hopes, and fears. These people:

Reminder: every one of these faces failed the test.

When I was younger, I was fond of the phrase “the state has a monopoly on violence.”

A compulsory political organization with continuous operations will be called a 'state' insofar as its administrative staff successfully upholds a claim to the monopoly of the legitimate use of physical force in the enforcement of its order.

As some of the ideas in this essay — and others not included for brevity! — have percolated in my head for a few years, I’ve come to also appreciate the inverted framing:

“All use of violence is sanctioned by the state.”

Both statements are extremes and untrue. But, like with calculus, you can understand a lot about a system by considering its extremes, even if your true goal is to balance the ethic of moral conviction with the ethic of responsibility.

Your city’s specific modern-day Course of Honors selects an elite, who shape its politics, which deploys the violent resources of the state & their own households, which shapes the level and mode of day-to-day violence that inhabitants are subjected to.

This framing is not perfect. It has gaps. It is just one way to look at the world.

Obviously it goes without saying that you can layer on top of this framework meta-level differences in national cultures and national proficiencies, and in the level of background wealth that supports differing levels of state capacity and all sorts of other things.

“Just increase GDP and add a million jobs and provide great access to those jobs, plus great education, while reducing cultural encouragement of any violent act” is a hell of a pitch. It would maybe work. I’m not sure what sort of an elite would be necessary to enact such a world, nor what the character of elite such a world would select for. A friend just visited Singapore and tells me it’s nice, though I’m not sure paying $100k for the temporary privilege of owning a car appeals to me.

Regardless, rearchitecting our society is a project for the utopians — my own project with these essays is more suited to the mundane, to analyzing the world and describing it clearly and without varnish.

And that analysis cannot help but see all the ways that every part of society is downstream of economics, not in the bland aggregated sense of numbers & GDP per capita tables that academics and activists and journalists love, but in the very specific modes of value creation that comprise what we call “business”, “industry”, and “building things.”

For those with both the mind and the hands to climb the Cursus Honorum, whatever shape it takes for you, I wish you good luck.

May your mind keep you out of trouble, and your hands keep trouble out of you.

Mens et manus.

Pre-notes note: though I’ve said multiple times in the essay that the point of it is to discuss the role that selecting a regional economic elite has on that region’s perspective towards crime, I fear some readers may still desire to discuss the object-level state of crime in San Francisco in depth. I will share any and all cuts of the weekly SF crime data that people may be interested in at this source location here — but I will concede any object-level points anyone wants, even contradictory ones, if it helps me avoid debating what “SF should” or “should not” do. The tragic takeaway from this essay ought to be that what "SF should” do is irrelevant, all that matters is what “SF can” do, and the surface area of options there is downstream of the way you become an elite in San Francisco. See above for more info.

Notes

[0] The relative complexity & illegibility of these status ladders to “the plebs” is often a hidden sign of elite status. Getting into Google in 2014 was good and your could tell your family about it. But to people in the Bay Area, getting into Y Combinator was often better. This seems like a small aside, but obfuscating your true power level is a key part of the elite game in any society that doesn’t have a rabid devotion to pure meritocratic advancement.

Which is a fancy way of saying: it’s best if the mob doesn’t know your name, where you live, and where your office HQ is. I know some handful of readers will read my previous paragraph and immediately react: real elites have better options than those places! That’s the point.

See also: Occupy Wall St setting up camp on Wall St itself after the 2008 crash instead of the place where the banks actually do business…and the eventual lack of consequences for those involved.

[1] This runs somewhat counter to modern parenting norms in elite circles, which come in many shades but always resolve to prioritizing a self-conception in your child as a “striver” as the most important factor.

Wealthy parents are terrified their kids will end up as “spoiled trust fund kids,” who just piss their inheritance away with nihilistic self-destructive consumption. Social climber parents who don’t feel they themselves have quite “made it” yet are equally terrified that their kids will be satisfied — and in that satisfaction, resign themselves to mediocrity. Both archetypes are common in America’s upper class. Both try to fill their kids with the Desire to pass tests above all else.

My counter-proposal is to instead try to integrate both the Desire and the Ability to Pass Tests. 

My sense is that success here is nearly impossible.

But perhaps it is better to fail in the attempt of something worthwhile than defer to the most common habits of others. Particularly when those habits irk me so much.

[2] When someone volunteers to you that they “feel guilty” about something, it’s therefore wise to assume that they do not in fact feel guilt. They instead feel they might be perceived to have acted badly and are asking you to validate them, to confirm (or lie) that you do not judge them, and to allow them to be from shame.

[42] As promised, the Arson data I removed from the Homicide/Rape chart, showing the uptick in November discussed in “Control & Responsibility: True Tales of San Francisco”, before dropping slightly in December but still remaining elevated above recent levels.

My hypothesis that this is related in some way to the crackdown itself is merely a hypothesis, but I continue to find the increase in Assaults & Arson to be interesting and relevant given the clear drop in other crimes.

[75] While looking for a snappy image after writing this essay, I discovered this amusing result on Google. I searched for “causes of crime” and received this featured snippet:

and what’s fascinating is that the very first part of this snippet, the first words Google shows me in answer to my query,  is “Economic conditions, including median income, poverty level, and job availability”

and yet, if you visit that FBI page, you’ll see quite clearly:

that the snippet Google surfaced begins halfway down the list, below factors such as “degree of urbanization”, “youth concentration”, and “stability of the population”.

I wrote earlier about seeing different worldviews when they collide with your own and generate friction.

I can’t help but comment here, in the footnote, about Google’s algorithm boosting “Economic conditions” above the FBI’s own top ranked bullet, while linking to the FBI as a resource. Obviously BOTH of these resources conflict with my own worldview, presented above in this essay, but seeing them both conflict here in a small but meaningful way amused me.

[99] On the subject of Eve Online — a hyper niche multiplayer online game about spaceships I once played in my youth — I want to to explain exactly how it applies to this topic and why I lean into it as a metaphor for understanding conflict.

When I played, I usually described my personal gameplay loop as “making a commodities market to fund a hobby hunting deer, except sometimes the deer have friends, and sometimes the friends have railguns.”

It sounds silly. A fun game. But it’s hard to describe the stakes involved, the very real consequences of personal loss — both in time invested and direct financial investment — that accompany any failure.

How do you navigate a situation where the cost of misjudging a situation costs hours of time and hours of minimum wage dollar equivalents?

Preparation. You pre-plan potential moves and escape routes. You observe the target as long as you can. You stalk them to learn their patterns — and you apply the knowledge gained from each prior stalking to every subsequent one, looking for matches or aberrations in behavior.

But it goes deeper than that — every single kill you’ve ever been a part of in game is saved forever on a giant online scoreboard.

Which means the first order of business upon discovering a potential target is to pull up their history.

It takes about 1 to 5 seconds to pull up, depending on how fast you can alt-tab. If you see something like this, you ought to pause and double-check your exits and give your surroundings another scan:

The “Dangerous-Snuggly” scale is rather helpful.

The “Gangs-Solo” scale suggests this target could be alone. But they might not be.

But what if you instead see something like this?

0 kills, ever. No friends, ever.

19 lost internet spaceships — for a combined value of about $5 (at the time).

An online friend recently said to me: “I think anyone who commits murder is in some sense a psychopath.” Which may or may not be true, depending on your definition. But believing that also frees you from having to introspect into the mind of a killer and see the world the way he sees it.

Thankfully, internet spaceships aren’t real and the potential for purely-digital unplanned violence is part of the game’s niche appeal. Which means I can say without reservation: a scoreboard that shows the world you have been previously victimized increases the likelihood you will be victimized in the present. In game.

This is one of those things that is so deeply unfair, so unpleasant, that it calls into question one’s faith and principles if they are weakly held.

Nonetheless. Even when I have every single advantage, even when my target lacks any weapons, even when I’ve stalked them for 3 nights in a row and have bookmarks placed in space at all their favorite locations….even then. I will pounce on them more quickly if they have a track record of losing. If they’ve ever killed someone who uses the equipment I use, I’ll hold my position for hours longer, days longer, just to make sure I’m not in danger.

Is the predator a coward?

In many ways, yes. Like Adam in the Garden of Eden, it is the knowledge of good & evil that fills the hunter with anxiety. Every unfair step he takes to move the odds of success in his favor…is a step he becomes intimately aware of, and in doing so he also becomes aware of the potential for a third-party to do the same back to him. Yes, the predator is afraid. The very act of predation hinges on creating the most unfair fight imaginable.

“Don’t you want to fight fair?!” No idiot, I want to take your stuff (in game).

The “knowledge of the moment to come” in Eve Online is unlike anything else you can get in video games. The symptoms of full-body anxiety before any conflict has occurred — hands shaking like crazy, breath caught in your chest, legs twitching a mile a minute — are so common you can mention “The Shakes” online and everyone knows what you mean.

This is the mindset and mindstate of a man about to initiate conflict upon another when he knows doing so risks his own hide.

It is not exactly fun.

But there’s nothing else like it.

Of course none of this has any bearing at all on the psychology of actual conflict in real life and I’ve not played the game for a decade at this point. I just thought some readers might find it interesting in the broader context of this essay.

I’m writing this essay the weekend after what was almost a financial apocalypse for Silicon Valley (note: publishing will be delayed because of said apocalypse). That so much drama could have been resolved within 4 days is a sign of the times. This is really two separate essays glued together, but they each draw from each other heavily. The first is an explainer of how and why we navigated our first bank run, along with some brief commentary. The second expands on a way to view banks and our banking system that made some of the decisions from Part I happen quickly.

As an active participant in this particular drama, it was fascinating to watch the absolute conviction with which the commentariat posted their takes online. Gell-Mann Amnesia is often cited, but I think many people forget the very first step in the amnesia:

You read the article and see the journalist has absolutely no understanding of either the facts or the issues.

Everyone always focuses on the amnesia part of applying this to other disciplines. Nobody ever disagrees that the state of affairs for one’s own discipline is so bleak.

As time moves on, our understanding of the SVB saga will improve. More sophisticated writers will take the time to understand what happened and then share their thoughts with the rest of us. The amount of conviction expressed on Twitter will unfortunately remain constant, but the complexity of the arguments will increase somewhat over time as the battle-lines are drawn and the professionals have time to build their arguments up.

Such is the meta-process by which we collectively come to interpret historical events. Today it happens on Twitter. A hundred years ago it happened in the papers.

Unsurprisingly this process is absolute dogwater rarely produces much sense, and if you use it to build your model of “how the world works”…good luck. But it is entertaining. And if your verbal intelligence is enough standard deviations above average, it can be very financially rewarding.

Alas, I got an engineering degree so you’re stuck reading my inside perspective on The Bank Run after the event instead of pithy takes live-posted as the bank collapsed. Please forgive the long preamble here, the goal is to dissuade uncharitable people with low patience from reading.

Part I: The Setup

I returned from paternity leave in July, 2022. Inflation was clearly higher than the experts had forecast and rates were hiking fast:

At this point our money was parked exclusively with SVB. Obviously this was not good. The first conversation we had when I got back to work was about making sure we weren’t leaving free money on the table by not taking advantage of the higher interest rate environment.

When I learned what we were getting from our existing SVB account, I was frustrated for exactly the reason twitter poster “EncinitasImposition” noted on Saturday:

“i was a little annoyed it wasn’t happening automatically.”

Me too, buddy. It turns out that even with a business account worth $Xm this stuff doesn’t happen automatically. There are reasonable explanations here, but at the time my personal Vanguard brokerage account was paying me a higher risk-free interest rate on idle funds than our business account and no amount of reasonable explaining stops that from tasting sour.

We didn’t get things formally set up with another banking partner until the end of the year. If SVB had collapsed in December — when the first known criticism of the bank was published — we would have been cutting it very, very close. I’m grateful luck was on our side here.

All this background means that we had an alternate bank available to wire funds to.

The more interesting part was deciding to participate in the bank run on Thursday morning.

My First Bank Run: Why We Moved The Money

We’d been discussing our relationship with SVB in our team’s slack channel on Wednesday (unrelated to any of the above).

On Wednesday night, one of the guys on the team sent a tweet to our channel noting that SVB’s stock was down 30% after hours and linking to their “Strategic Actions” deck:

I saw his message at midnight. Raised my eyebrows and took a quick look at the link. It was full of hard-to-read corporate language. The private equity investment looked suspect (read: because one typically does not call up the sharks and ask for help when things are going well).

I didn’t do anything else. Went to bed with no thought beyond: “that’s not good for them.”

That they were our bank, with $Xm of our money, didn’t fully register.

I woke in the morning to news that their stock was now down 60%! Literally while brushing my teeth I saw some concerns about their solvency.

“People are suggesting your bank might be insolvent” and “your bank’s stock is down 60%” were sufficient to make a decision.

I am occasionally prone to overcorrection of prior mistakes by temperament, and the thought that we could’ve missed our window because I hadn’t fully figured out what their “Strategic Actions” mid-quarter update meant before going to bed definitely occurred to me.

I sent a quick slack message at 8:28am to a team member: “we may need to move our money out today.” He replied: “Uh oh.”

After a quick pricing call with sales for a deal, we got the finance team together and agreed on a simple plan (copied & pasted below):

Action Items:

1. Set everything in motion to initiate a wire for $Ym

2. Email [alternate bank] detailing the situation

3. Email SVB

4. Send note to board on current plan of action and solicit feedback

5. Before end of day (5pm Eastern) → move money

6. Create list of auto debits from SVB

7. Create list of customers we need to notify

It was now 10am on Thursday.

I updated our CEO, explained the plan, and asked him to reach out to the board.

We heard back from two of three board members almost immediately that the plan sounded great, no need to delay.

At 10:30am we scheduled a wire out of SVB.

There was a bit of a delay approving it on our end as our CEO was in a prospect meeting and I felt that was more important. Around 11:30am we received confirmation from our alternate banking partner the wire had been received.

I pedantically note the times here because there were a few moments we could have moved faster. We didn’t, because I didn’t think it likely that SVB would collapse. I said “2% chance” in the morning as we made our plan and told my wife “maybe 10%” while making a cup of tea. In an email I sent at noon updating folks on how things stood, I wrote “…things will probably resolve themselves with SVB…”

In hindsight, these delays could have cost us dearly in a hypothetical world where wires out were frozen at lunch time.

Regardless of urgency levels, “there’s a 2% chance your bank doesn’t exist tomorrow” is in fact multiple orders of magnitude too high for anyone personally responsible for large sums of cash. People not responsible for such sums have shared many opinions online about the most prudent way to operate in scenarios like this, but the lack of skin in the game makes those opinions somewhat meaningless. At best, only my own job was in jeopardy. At worst, many others’ were at risk.

“There’s a 10% chance the coffeeshop won’t be open” is not a big deal. You should still go get that coffee. If it’s closed you can go elsewhere. If all the coffeeshops are closed, you’ll survive and the walk will still have been a pleasant break.

But “there’s a 2% chance you can’t make payroll”, or “there’s a 2% chance you lose months of company runway” are not risks worth taking. The cost of being wrong is damage to our relationship with SVB. That’s unfortunate and I hope(d) to mitigate it. But relationship damage can be repaired. Evaporated runway cannot.

By 6pm I was eating dinner and talking about the day with my wife. It occurred to me then that we might have made a mistake. I hadn’t revisited my “probability bank collapses” estimation since the morning and hadn’t seen Twitter or the news either. After moving our funds we’d worked on customer comms and searching for a replacement banking partner all day. But given the probability of bank failure seemed low, we’d left 2 months worth of spend with SVB in order to make payroll and some large vendor payments we had coming up (& without someone on the team’s quick thinking it would have been 3 months’ spend!).

Online sentiment by 6pm was much, much worse. SVB’s survival felt 50/50 to me. Moving that chunk of cash to money market funds was small consolation — if the bank exploded, it could be a year before we saw it. If we saw it.

In reality of course, the bank no longer officially existed by the time I was eating dinner and these worries were far too late.

SVB’s end of day balance was negative one billion. Negative one billion dollars means you are now government property.

Now that the whole thing’s been cleaned up by the government, it feels strange to recall the aura of dread and uncertainty that blanketed everyone in Tech from Friday through to Sunday’s announcement. Twitter was full of angry people pointing fingers, but most people actually involved in the crisis were silent. I recorded a short vlog for myself on the Saturday to look back on later —it was a somber and depressing video.

$42 billion withdrawals in a single day is impressive. But SVB had had $326 billion in client funds (split 50/50 deposits vs. off balance sheet funds) on Wednesday. Which means only 13% of funds were withdrawn before the doors closed. The rest was stuck in limbo.

Analyzing The Crisis From Within The Crisis

Our confidence that the funds we left in SVB could support payroll and vendor expenses helped us make the decision to move money out so quickly. But in an alternate world where the FDIC hadn’t announced on Sunday that they would print as much money as required take action to secure depositors…my failure to check market sentiment and re-evaluate the risk could have been an expensive lesson.

At 7pm I started work on some “Market Update” slides for the rest of the company. This was the first time I tried to figure out what had actually happened and only 9 hours after it had all kicked off. We have a massive 100 reply thread trying to figure it out in our team's slack channel.

At this point I’d read SVB’s “Strategic Update” deck and translated the first slide from Corporate Language to Conrad:

The thing that we kept coming back to: why did they have to sell their securities now. Why sell everything today?

Why do a Wednesday night announcement? “Special mid-quarter update” is not a good thing. Why now? Why couldn’t this be managed slowly and responsibly over a longer period of time? Why was their hand forced?

This was the best answer I could come up with on Thursday night:

“Not enough securities maturing to pay for outflows” is some Corporate Language of my own. In layman’s terms…they don’t have the money. And they expect people to ask for it. Soon.

In isolation, there are other potential ways to read this slide. But the surrounding quotes around this chart accused startups of burning too much cash and investors of not deploying enough capital investing in new startups. It doesn’t take ChatGPT5 to read between the lines here. SVB was expecting to be unable to meet depositor withdrawal requests.

If there’s an alternate way to read slide 16 in their “strategic” announcement deck, I’d love to hear it. I imagine SVB would have been ok in Q2, but the question the deck leaves me with is “how many quarters of negative $20b in client funds can your bank sustain?”

This was very different from the news takes I’d been able to find online. The most popular positions at the time were:

I’m sure my own late-night post-hoc “sense making” attempts are also flawed, and certainly a single slide and 2.5 paragraphs doesn’t do justice to the multi-causal shitshow that happened last week. But I share this attempt at understanding because it’s more interesting to consider the analysis we had within the crisis than the stuff we can come up with now, weeks later. I don’t claim the above explanation is authoritative — it’s just my own best attempt at understanding a bank run a few hours after participating in it.

A decision had to be made in the moment and then explained to the team. The professionals had not released their verdict by Thursday evening. 

I think there’s a bigger personal lesson here too: for any sufficiently severe crisis, a decision will be required before perfect information is acquired.

Part II: Tough Decisions Are Easiest When They Align With Your Worldview

Pulling the trigger on short notice before the social consensus has fully developed can be tough. A lot of the media hubbub around this bank run has pointed the finger at VCs for orchestrating the crisis. In contrast, I think this is exactly the sort of situation that a VC can be ultra helpful to a company. An outside voice granting license to make a brash decision can help companies who would otherwise dilly-dally their way into a bank run.

Regardless of your opinion around herd-like behavior, once a bank run is underway you only have two options: get your money out or don’t (some lucky folks also have a third: pay homage to the Fed). People who get this, get it immediately. People who don’t, lose (money).

If you’d restricted the communication of every VC with their portfolio companies for all of Thursday, you probably could have reduced SVB’s withdrawals somewhat. The bank may have been able to shuffle money around and scrape through the crisis without triggering its own dissolution by the government.

But if you had to assign probabilities there…is it 100% likely that the bank makes it? I doubt it (update: Credit Suisse just had to deal with $10b in customer withdrawals per day for a week before its fire sale— hardly a compelling alternative).

Founders may call their boards first. But then they call each other. VCs accelerate how fast news moves down the grapevine, but the news moves regardless. I found time on Thursday to call a couple friends on the phone after getting our money out of SVB. I’m sure others did the same.

The world is chaotic and uncertain. The only thing I feel confident in here is that VCs were not the first to notice SVB’s precarious position, nor the first to comment on it online, nor the first to read their Wednesday announcement as a warning sign. Did they accelerate things? Yes. Was that acceleration measured in hours, days, or weeks? Unclear. My guess is days.

Media commentators have & will continue to fixate on VCs because they’re a functional outgroup for an increasingly tech-hostile press (“wealthy cabal of elite financiers” is an easy slam dunk and always has been). They will not focus on the December 2022 Seeking Alpha blogpost suggesting SVB was insolvent or Byrne Hobart’s (expensive!) February newsletter post outlining the same. They will not focus on SVB’s poor decision-making — both its questionable macro decision-making (why buy $80B of Mortgage Backed Securities? why wait until rates wen to 4.5% to try and address the problems?) and its micro decision-making within the crisis (you can lambast the Tech scene for many things, but these people expect clear & decisive executive communication and assume its absence is evidence of incompetence — in this case, that assumption seems prudent).

In my case, I have some personal views on our magical banking system that influenced our decision making. If you’ve read enough of my writing, they won’t be surprising to you. Net net, they sum to the idea that banking collapses are a near-certainty in adverse financial situations and that navigating them responsibly requires adopting a zero-sum mindset. I try not to talk too explicitly here, because eventually you end up talking policy and I would never do that to my dear readers. But if you want the relevant snippets, these ones are close enough:

Financialism: You Don’t Need Surpluses If You Can Trade With The Future:

Note: magic isn’t real. Magic that lets you “snatch” value from the future should be read with a certain tone of voice. Note that the magical calculations described in this quote are exactly the kind that SVB got wrong.

The Germany Shock: The Largest Economy Nobody Understands:

aka tightly interconnected systems are beautiful marvelous wonderful systems of positive-sum value creation…and when they unravel they will take your job, your house, your community, and your city with them.

(this is bad)

(tech is a tightly interconnected system)

Unequal Growth: The Zero-Sum Games You Don’t See Essay:

Read: ”even in a crisis, somebody wins.”

Subtext: make sure it’s you.

Moloch Is Our God: AI, Mankind, and Moloch Walk Into A Bar — Only Two May Leave: 

Translation: ”when in an existential situation, default to choosing Strategic Dominance” 

(note: bank runs are existential)

Exploding Zombie Banks

I’ve been reading Patrick McKenzie for over a decade now and his long-form writeup of this whole event is superb. It was on HackerNews all day today. You should read it.

But if I might excerpt one part of it to make a personal point and highlight the way I see things:

In my mind, this is directly tied to my essay on existential competition Moloch, linked above:

Patrick’s quote — “Society depends on this existing. The alternative is a much poorer world.” — is a true and accurate statement.

That society depends on this banking model is a fact. That the alternative is a poorer world is a fact. 

Such facts should be treated with respect. Like a bomb.

And so Patrick continues in his summary of SVB:

“The dominant way people bank sometimes explodes.”

This is said plainly and simply and you can’t contest it and you should respect Patrick for being sophisticated enough to understand the system and honest enough to say it out load. It’s a core feature. It’s such a competitive advantage that any institution not operating this way will be consumed by one that is.

Note the follow up call out of “securitizing mortgages” (Mortgage Backed Securities) and selling them to pension funds. Note also that SVB bought $80 billion of these things (thanks to my teammate for digging this up in their 10K). And note that MBS have a particularly strong exposure to the types of phenomenon that cause banks to “sometimes explode” due to their insanely long duration and correlation with other things going splat.

Earlier in the piece, Patrick calls out that people will overly-fixate on his callout of Mortgage Backed Securities as being involved in this event.

But contra- this position, I think you are probably wise to minimize exposure to institutions dealing in or selling you these things if you are personally responsible for $Xm. Unless that institution is significantly more sophisticated than average among its peerset at navigating this specific subset of finance arcana — and I regret to say that “#16 ranked bank specializing in technology clients” is not sufficient here — assume that they did the magic calculations wrong. Assume they missed something. Assume they have an albatross round their neck of assets they barely understand and most certainly can’t move in a crisis.

Assume the bomb is ticking.

And with a vivid picture like that of a bank walking towards you, ticking bomb strapped to its chest, consider that some banks are very alive, very alert, and highly motivated to defuse the bomb. Others…are less used to taking bold independent action. Others are more like zombies, shuffling along, step by step, tick tock, tick tock. 

If this position seems unfair, I’m happy to hear arguments on it. I don’t mean to throw shade on anyone here — obviously I deem myself incapable of navigating these calculations as well. But I’ll steer clear of anyone selling me extra bps in exchange for long-duration fixed-rate asset exposure. The bonus yield in the short-term isn’t worth the added existential risk to me and I’d prefer to spend my spare brain cycles building.

You don’t need to be the smartest guy in the room to reduce your exposure to this stuff.

You do if you want to make money on it.

The zombies just go boom.

Time Is Money, Friend

In a short vlog over Christmas I tried to articulate something that’s been on my mind lately: the importance of understanding the role Time plays in any given phenomenon. It’s a mouthful, I know. Some people are quite good at it. Others not so much. But most things in life don’t come with an annotation that explains how the behavior within the system unfolds over time — and how perturbations to the static system impact that unfolding going forward.

However, if the only functioning model of reality you have is a static one, you’re going to get hurt:

Standard undergraduate Mechanical Engineering starts kids off with a 101 course dealing with Statics, because adding time to any system completely fucks with puts major strain on your ability to model it. Dynamic systems (1) come later after you’ve shored up your math skills. But modern finance is built on the time-based Wizardry described in my Financialism essay: which, translated, means it’s built on taking dynamic systems and modeling them as static ones.[2]

If you have an engineering degree and fully understand the implications of that sentence, you might begin to appreciate why “your bank might explode” has non-zero probability at any time — and why the overlap of that sentence with a 60% drop in the bank’s stock is entirely sufficient to move millions of dollars.

If you don’t quite understand the sentence, it means that a bank can appear to be “solvent” — that is, Assets = Liabilities + Equity on paper — and yet also “not have the money.” Some high-follower VCs were tweeting mid-bank run that they believed SVB’s CEO when he said the bank was solvent. This was a reasonable statement, and we all should believe SVB’s CEO (probably). 

But note this definition of “solvent” does not translate to “we have the money.” Nor even to “we will shortly have the money.” In fact it could quite plausibly translate to “we will not have the money until after you are retired and your professional career has ended.” This is the magical “role that time plays” in our banking system.

Say a bank owes you $100 today. It also expects to receive $100 in 30 years time, broken up into a series of small mortgage payments and spread out over that 30 years (plus interest). From an accounting perspective, these elements cancel each other out. If you have studied Mechanical or Electrical engineering in any capacity, I invite you to imagine a suitable analogy here for a dynamic system that receives inputs and has equivalent outputs, but no way to fully account for the timing of either.

You might laugh, but bear in mind that the analogy you come up with supports the entire Anglo-American banking system and by proxy…the entire world. And has done for hundreds of years.

There are many ways to contort logic and explain this. But, legally and ethically, the bank owes you $100. Today. Immediately. As soon as you ask for it. Also, they do not have the money. They are in the business of convincing you not to come ask for it. This is a remarkable business. In SVB’s case, they had tied a huge portion of their tech company clients’ funds up for 30 years. This is particularly interesting given what most people know about the burn-raise-burn pattern of tech company cashflow management.

“Particularly interesting” is another way to say “tick, tock, tick tock.”

If this line of thinking seems too fringe or too preposterous or too engineering-brained and you worry I’m suggesting an unreasonable critique of things, have no fear, you can hear the same thing from ex-secretary of the treasury, ex-director of the National Economic Council, ex-president of Harvard, ex-hedge fund manager, Larry Summers:

There’s no more fitting voice. 

And before you get the wrong idea and think that any of this is bad or that I’m in any way opposed to this glorious show and want to tear the whole thing down, remember that Patrick McKenzie was entirely correct when I quoted him above:

Society depends on this mismatch existing. It must exist somewhere. The alternative is a much poorer and riskier world…

The inherent splatification of the banks is a feature, not a bug.

We are all muggles. The banks are the wizards.

Ideally the wizards are good at their jobs.

Ideally they do not get the calculations wrong.

Because it turns out that most of us are content to lend our money to banks and have them engage in magic. Our continued collective belief in the fiction is necessary for it all to keep working. So long as they maintain our collective confidence in them, all is well. The “contagion” that scares the Fed & the government is a very real concern: no bank in the world could handle the sustained withdrawal volume SVB had to deal with as a percent of deposits. 

If there ever had been such a bank, it was put out of business a long time ago. Moloch sends his regards. Existential competition is a bitch.

But as a depositor — meaning as someone the bank owes money to — your natural attitude to the wizards is not unlike that of a Hollywood mob boss. When the underling who owes you money comes on bended knee and says, “sorry, I don’t have it right now, but I can get it for you tomorrow” then you’ve got a good movie. If he says “next week” then you’ve got an even better movie. 

If he says “perhaps not until the Fed cuts rates back to zero” then the movie script gets axed. No amount of “think of the bigger picture” can save that underling.

The audience would never respect the boss.

How To Resurrect A Zombie Bank: Go Brrrrr, Then Grow

If you’ve read enough of my writing, they won’t be surprising to you. Net net, they sum to the idea that banking collapses are a near-certainty in adverse financial situations

This lens from earlier is useful: it says that bank failures are usually a sign of pressure elsewhere in the system.

After all, if folks believed the bank was good for the money, they (probably) wouldn’t bother to try and pull their funds out. The lack of confidence sparks the fire.

In 2008 it turned out that a bunch of people banks had lent money to were, in fact, not good for it (dramatized in The Big Short by a stripper with five mortgages). Also, they gave these people a lot of money. My personal thesis is that this was just the latest act in a very long story of “chasing growth that wasn’t there” that you can plausibly draw all the way back to 1971, with a straight line through every crisis, each one driven in its own way by the search for productive wealth generation.

SVB’s collapse does not appear to be part of that narrative arc. The adverse financial situation that did them in appears to be a combination of locking too much of their cash up in long-duration securities, having a customer base with high short-term cash needs, and rising interest rates in response to covid-flation tanking the value of their loans and destroying their ability to meet depositor withdrawal requests.

Ultimately, there’s only one way to save a bank in the short-term: print money.

If you’re a highly skilled wizard, you can sort of print this money semi-fictitiously, whereby everyone thinks it exists but nobody tries to do anything with it, letting the bank continue operating as if it had cash in the vault and…one hopes…eventually allowing the bank’s long-term profitable actions to return enough capital that it can reorganize its finances without needing to sell assets at too steep of a loss (& thereby put it even deeper into the hole).

Our chief wizards have executed this a number of times. It can be done.

This level of skill is not taught many places because, as you might imagine, it’s ripe for abuse and tends to spark intense populist outrage. If your neighbor tried to do this for his personal account, he’d be arrested. Listen to Sam Bankman-Fried explain how new crypto tokens create value for an example of said arrest (ctrl-f for “ponzi” in that link & ask why FTX depositors were not made whole). Also most people, even journeyman wizards, lack the necessary skill to pull this off. 

In the long-term, the only way to save the banks is to generate growth. Anytime (expected) growth fails to materialize, banks will go boom. Their model assumes a steady stream of payments comes in from their book of assets. Turn off the stream, turn off the bank.

Raising interest rates means that the amount of money we expect to get just skyrocketed. Expectations skyrocketing means any bank who can’t be agile enough to keep up is hearing “tick, tock, tick tock,” and praying that Jerome Powell blinks when it comes to raising rates further.

Somebody has to create wealth. If not, a lot more banks are going to go boom.

If we can create wealth, then one way or another, directly or indirectly, through corporate loan repayments or mortgages, that wealth will find its way back to the banks:

aka “Banks are the vehicle through which Macroeconomic policy is delivered to the people.” 

Not discussed in that essay was what happens when the banks blow up while trying to deliver said policy.

Given all of the above as a backdrop, it’s hardly a surprise we moved our money out of SVB pretty quickly.

Given $42 billion was moved in a few hours, at least some parts of my worldview are shared by others.

And with that as the backdrop — with anyone responsible for managing a big pool of capital running these exact same calculations and feeling the exact same apprehension about these banks’ ability to weather the storm of 4.5% interest rates — is it any wonder our government moved so quickly to backstop the system?

Banks seem strong until they don’t. To quote a wise man: “up until they lose the game, they’re winning.”

Call it a bailout if you like. Personally I think that description is apt. The types offended by it are just trying to avoid confronting ugliness head on, but I think it best not to shy away from the necessary evils we are forced into. Shareholders got obliterated, yes. God bless the free market. But the very existence of these banks is contingent on an infinite money printer sitting secretly on their balance sheets. SVB’s team is still going to the office, their website still works, you can ACH money in and wire money out, and they are enticing depositors back with “fully FDIC insured” promises. Our 2 months of runway that I worried about costing us by not checking back in on the market before close of business? Wired out 4 days after the bank run.

Some people talk about how normal this is, how it’s a sign the FDIC is good at their job, they’ve done this before, easy as pie, etc.

But consider how magical it is. “Capital holders get wiped out but business continues as normal, the name on the company stays the same, everyone continues to get paid, literally nothing changes except some execs get terminated.” Lenin would almost be proud.

Run the calculus from the capital holder’s perspective and the only sensible place to move your money is a bank that’s already received a government-approved secret money printer on its balance sheet. Call it Too Big To Fail. Call it Systemic Risk. Call it Contagion. Call it a bailout.

Call it what you want: the evil was already injected into the system years ago. Hundreds of years ago. All we can do now is try to keep it operating.

If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security—on what is then commonly pledged and easily convertible—the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse. 

— 150 year old cornerstone of modern finance. Go read the link to learn that the advice for dealing with a crisis like this in the year 1873 was to spin up the money printer while raising interest rates. Place your bets on what the Fed decides to do at their next meeting to discuss further interest rates hikes (note: editing this thing took too long, sorry).

That depositors were the ones bailed out and middle-class bank employees get to keep their jobs doesn’t change the nature of the evil. Only the money printer could save these people.

What Happens Next?

The question on everybody’s mind is: what happens next? The most important question in all contexts.

Since I wrote the first draft of this essay, another bank has gone splat.

Will that be all? I hope so. The European Central Banks did some infinite-money guarantees of their own. Of course they did: there’s only one way to save a bank in the short-term.

That said, the primary case for “no further banking crisis” is that everyone in the market believes Jerome Powell & Janet Yellen will print infinite money to defend any bank. When pressed by some politician after SVB exploded, Yellen stressed that said infinite money would only be handed out if:

…a bank only gets that treatment if a supermajority of the FDIC board, a supermajority of the Fed board, and I in consultation with the President determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences…

the whole segment is worth a listen to. I think Yellen’s position is maximally defensible from the position of trying to limit government involvement and reduce the moral hazard. But. The statement is quite clear. Not all banks will be covered.

Do you believe your bank is safe? Does a supermajority of FDIC and Fed boards, plus Yellen and the President, believe your bank presents a systemic risk?

You need both of those statements to be “yes” — a single “no” means: move your money.

I’m not one for predictions. We’ll see how it plays out. Most potential crises do not develop. If you trust the Fed to be good at their jobs then things should be fine — they are trying to play the delicate game of limiting moral hazard & explicit bailouts with just a few well-placed strategic money-printers on balance sheets…all without causing too much of a political headache. To quote a teammate: “they’re playing hot potato with banks.” 

It’s a delicate game. But eventually the potato should cool off.

Mortgage Backed Fictions: Your Mortgage Is A State Product

The last tidbit I’ll add to this topic brings us back to Mortgage Backed Securities and this wonderful article published directly by the Federal Reserve of New York in 2010:

Most mortgages in the US are fixed rate. This is a historical and geographic abnormality. I don’t even think you CAN get a 30 year fixed rate mortgage in the UK. It is the American dream, reified by Fannie Mae and obscure capital ratio rules. It is a direct product of government agencies, and the banks that evaluate, package, and sell them are — in those brief moments — operating as an arm of the state.

It’s uncouth to say this so strongly. In polite company we put distance and metaphors in the way of these things lest we seem unamerican. But you have to internalize this in order to understand why the bankers get the bailouts…and why it is that your 30-year Fixed Rate Mortgage exists.

This abnormality means that when the Fed changes interest rates, that magical stream of payments banks collect from home “owners” doesn’t move whatsoever. 

Using a simple econometric model, we find that the low ARM share is largely consistent with long-run historical patterns in household mortgage choice—namely, that households tend to prefer fixed-rate mortgages when long-term interest rates are low relative to recent short-term rates.

So as rates come down, people move to fixed-rate mortgages. It makes sense. People aren’t dumb:

Look at the blue line: up until 2008, 20-50% of all mortgages were Adjustable Rate!

Since this chart was made, we’ve had Zero Interest Rate Policy run for a decade, plus an explosion of bonus liquidity during covid.

So if you swap the camera to a post-2008 view (top-most chart below):

The top chart says ~95% of post-covid mortgages were fixed-rate.

The bottom chart says the banks that sold those mortgages are getting 2% on them for the next 30 years.

And then this chart below says we sold about a trillion dollars worth of those things:

Every single dollar represented in the post-covid spike on this chart pays the bank negative 1-2% in opportunity cost right now. You can “mark to market” and talk about the value of unrealized gains and losses all you want, but the bank’s plan is to hold these things to maturity. And that now means 30 years of losing 2% against the risk free rate.

Banks are in the business of making money. Negative 2% against the risk-free rate is not a sustainable business. If you over-indexed on this shit…tick tock. I hope you’re on good terms with Yellen (for a printer) or Jpow (to cut rates).

Some folks, most notably the All-In Podcast hosts, have commented that Tech companies were going to get crushed by valuation contractions in a 4.5% interest rate environment, that their burn now needs to be managed responsibly because another round of fundraising may not be forthcoming, and that the hurdle rate to deliver investors the returns they need has now been jacked up. These are fair comments.

Tech companies that get it wrong will sputter along to their graves. I’ve been thinking of these companies as “zombies” for months now.

But valuation contraction for pre-IPO companies is an adjustment to paper gains. Company operations can be made more efficient on short time horizons. The hurdle rate determines access to future funding, not current operations. 

In sum: none of these factors present a material and immediate drain on the company’s business. The zombie tech companies can shuffle along for some time.

Zombie Banks are not so lucky.

As a friend noted on Twitter, this fiasco is not entirely the banks’ fault. I mentioned capital ratio requirements earlier…it turns out the government set up capital requirements and incentives to push banks into purchasing these things:

Aka: the government says a bank has to keep a ton of cash in its vault if it wants to make loans or buy securities.

Unless it buys Mortgage Backed Securities issued or guaranteed by a government agency. Then? There are no requirements.

Because of course there aren’t. This is a key pillar of state policy.

I focus on Mortgage Backed Securities because their name conjures demons in the dark and the multi-trillion-dollar scale of these long-duration government-securitized assets is so terrifying. But any bank that owns bonds paying them less-than-4.5% and also owes depositors their money back whenever they ask for it…is in a rather exciting position.

I hope this is not many banks. Probably, it isn’t. Probably, things will be fine.

I once wrote a whole essay about how people over-attribute agency to central bankers, who are mostly just reacting to external circumstances with a limited toolset. I stand by that essay. It’s true 95% of the time.

At present, I think we live in the 5%.

Enjoy the moment.

Don’t blink.

Notes

[0] My thinking here is simple: given that rate hikes pushed us to drive a similar gaping hole into SVB’s accounts…and given it was precipitated by the rates they were offering us…and given their own strategic packet says they were only getting 1.79% themselves while the Fed is printing 4%+…well. One might imagine the cash outflows SVB chalked up as “startups burning too much cash” may have been at least partially tied to startups seeking more favorable rates for their idle cash than SVB could afford to give them.

If SVB gave every depositor 4.5%…while locked into getting 1.79% themselves on long-term bonds they bought during ZIRP…they’d go out of business rather quickly, no?

[1] I am in fact visible in the audience of this video, struggling to understand. I’ll buy you a coffee in person sometime if you spot me :)

[2] Some finance nerds may object that the 1997 Nobel Prize in Economics was awarded to Myron Scholes & Robert Merton for developing the Black-Scholes model of parabolic partial differential equations that quite explicitly models the dynamic behavior of financial markets containing derivatives. While no Balance Sheet incorporates this stuff in a way that would meaningfully impact the duration mismatch problem, it’s still worth a call out.

The finance nerd within myself would also helpfully add that both Scholes & Merton were founding principals and board members of one of the most spectacular hedge fund explosions of all time. Shoutout to Long-Term Capital Management and its 1998 $3.6 billion bail out (that’s nearly $7b today!).

The engineer in me would add that this is sort of like if Bernoulli had been chief engineer on the Titanic, or if Newton had overseen the development & launch of the Challenger space shuttle. Only those disasters were not directly downstream of the theories of either Bernoulli or Euler or Newton so maybe it’s somehow worse than that. 

On a recent podcast, I noted that the world is uncertain, full of scientific studies that don’t replicate, an expert class that performs worse than prediction markets, and a complete lack of open data across all meaningful topics. If you’re a capable individual, the way to navigate this is to develop strong mental models of things that matter — and use those models to filter the horrific ratio of noise-to-signal that saturates the information landscape.

This essay is about something YIMBYs get very wrong, very often. But beneath that it’s about leaning on mental models to see through BS, integrate data with reality, and reason about causality.

TL;DR — A Summary of the Arguments & My Counter Narrative

• YIMBYs have a wonderful narrative about Japan’s housing market

  • Japan removed all the housing regulations

  • Japan builds houses like crazy

  • Tokyo’s house prices have barely increased in 25 years

• Thus: we should also remove all housing policy regulations and build houses like crazy

  • This will keep house prices down in places like San Francisco

• Sadly the data YIMBYs use to justify this is cherry-picked to hell and their conclusion does not follow from the data

  • You should ignore anyone who shows you housing data benchmarked to 1995

    • All the articles you’ve ever read about Japanese house price stability happen to be benchmarked to 1995

    • Significant housing reform went into effect in June 2002

    • It immediately increased house prices (lol)

      • This was heralded as a massively positive accomplishment by all the right people

        • Why? See below.

• My counter(intuitive) narrative: house prices exist at the intersection of capital-available-to-spend-on-housing and supply-of-houses — it’s the money that matters, not the raw number of people

  • Japan suffered national economic tragedy circa 1990 and the relative immiseration of a whole generation over the last 30 years

  • When the people have no capital-to-spend-on-housing, it’s not surprising that house prices go down year over year for 14 straight years!

  • Housing policy deregulation in 2002 caused an influx of capital and development, which revitalized a stagnant market — a good thing ! — but caused prices to increase net-net due to the extra capital entering the market from both buyers & developers

• Smart people who know this but want to advocate for their policy anyway will use condensed bar charts to avoid anyone asking the obvious question: “how come housing prices went down 51% between 1992 and 2002?”

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Left: YIMBY analysis from the Financial Times. Right: my analysis of the full data set. (click to enhance)

• Of course, deregulated housing policy may in fact be the silver bullet certain cities need — this essay is not an argument for or against YIMBYism

• It is simply a request to stop pretending the bar chart on the left above is a simple slam-dunk argument in favor of the YIMBY position, as opposed to a tragic output from an economic disaster

The YIMBY Weebs, Steelmanned

I’m not sure who the original Housing Policy Japanophile was, but many of the links I find across publications today lead back to an old piece in The Financial Times:

You’ll find the arguments and data presented in this 6 year old piece are repeated today across publications & individuals of all political stripes.

The three-point narrative is simple:

1. Tokyo built more houses in [YEAR] than [country/state] did:

2. Due to internal migration, Tokyo has experienced a larger percentage increase in population than [country/state] over [time period]

3. Despite the population change, housing prices have barely increased:

The data here is clear and it matches the economic theory: the price of housing is kept down despite population moving to the city because housing starts increased the supply of housing.

In this narrative, the primary antagonist of places with rising house prices is bad housing policy:

The solution to dramatic increases in the cost of housing in the West is simple: fix housing policy by nuking the byzantine “zoning rules” and corruption-filled permitting process that defines San Francisco’s real estate market, and you’ll get reasonable & affordable increases in the cost of housing over time.

I can’t speak to Robin Harding, but Wikipedia tells me The Financial Times is a centrist publication that supports free markets, free trade, liberal democracy, classical liberalism, and is considered a newspaper of record, so opposition to regulation of all sorts may come naturally to them. But you’ll find this exact same argument in Vox, which I’m told is left-wing, and the Wall St Journal, which is apparently also centrist (though I think many would say leans right?).

If you follow me on twitter, you may have seen me interact more recently with folks associated with the Institute for Progress, Bloomberg, and various other accounts that are re-telling the same story to their audiences.[0]

If you found the above narrative compelling then I did a good job with the steelman.

Counter(intuitive) Narrative: The Steel Man’s Rust

Contrary to the 2016 Financial Times analysis, Japan does not show a happy tale of deregulated housing policy solving a crisis.

Instead it tells a tragic tale of relative national decline.

I’m here to present a more complex but more accurate story: that it’s the supply of capital available to spend on housing — money, not people — that interacts with the supply of actual housing units to determine prices at the end of the day. Increasing the supply of housing may apply downwards pressure on prices, yes…but a national economic collapse that lasts 30 years, destroys wages, reduces residential home prices by 90% in some neighborhoods over a 10-year period, flatlines GDP, and bankrupts a generation will also apply significant downwards pressure on housing prices.

Celebrating a recession for keeping prices down is not, generally speaking, the behaviour of people who support Progress. In most contexts it’s considered ghoulish. Only someone intensely wedded to policy advocacy could be blind to the importance of these otherwise obvious contextual factors.

The grandest irony of confusing Japan’s economic collapse for a triumph of policy is that, to the extent that housing policy did have a neatly-demonstrable immediate impact on Tokyo’s housing prices in the last 30 years…it clearly increased them. And it’s a good thing that it did. And it was celebrated at the time by a who’s of who of smart people.

If that doesn’t make any sense, give me a few minutes to explain..

The Problem: Just-So Stories

There are two keys to this puzzle.

The first, which in this case came before I dug into the data, is my basic worldview that “Comparative International Economics for the Purpose of Identifying Good Policy” is a mostly fraudulent activity.

This is not an iron rule of the universe — you can do some pretty good analysis on international economic data. Sadly, most people don’t. The people doing the analysis in the first place are usually looking to identify an example that proves their preferred policy position and not to uncover some juicy nugget of truth.[1] “Correlation is not causation, except when I really like the policy.” I don’t intend to convince anyone of this somewhat spicy take in this essay, only to show how it changes the interpretation of data presented.

The second key, which is only the sort of thing you might notice if you already have a skeptical worldview of “just-so” international comparisons, is that the original Financial Times article chose 1995 as the starting point for its data.

Despite choosing that specific date, you can read every word of the piece and not find a single mention of that date. In fact the only mention of “199X” is this sentence:

Which, yes, highlights the deregulation of housing policy (hey! that’s the policy we want!)…but instead points to 2002 as the ideal starting point for our data. I’m not kidding that this is the only mention of a specific date in the whole piece. Isn’t that strange?

If you go through every other link I’ve posted above to all the various other analyses that have been done on this topic, all the other sources, many of them citing independent research and not the Financial Times, you’ll find again and again they choose 1995 as their starting point. Curious. The Wall St Journal piece is the most circumspect of the bunch, using the phrase “near the turn of the century” instead of a date at all.

Why?

Perhaps there's some massive policy change that occurred in 1995 that the Financial Times missed? Perhaps everyone else missed it too or just forgot to mention it?

Why is it always 1995?!

The Lost Decades: Japan’s Economic Woes

If you get into the habit of looking past high-level macro data and resisting the urge to draw “just-so” comparisons, you become familiar with the underlying data and the many drivers at play.

For those unfamiliar with the magnitude of this bubble — and the resulting carnage wrecked upon Japan’s economy in its aftermath, I’d like to highlight the performance of the Japanese stock market since the year 1990:

I’ve added my signature MS Paint red dotted line to highlight the beginning of the year 1995, at which point asset prices (housing) is now fair game for the YIMBYs to start tracking. I’ve also added a rare blue dotted line to mark the date of the original Financial Times article.

Of course, stocks are not houses. But the full time series data of the Japanese stock market tells a richer story than a simple bar chart of “change in house price” can. You can see the protracted collapse play out over the years.

Trying to find an accurate time-series view of average Tokyo house prices proved incredibly difficult (worldview: because it reveals a story that does not neatly support YIMBY housing policy & few others are writing about this topic), so I created it myself from data provided by The Land Institute of Japan:

Real world data is always messy, so my source here only provides Tokyo housing price data since Q1 1992, but I hope the similarity between the graphs of housing prices and stock prices is apparent.

Again, the question must be asked: in Q2 of 2016, why would you choose 1995 as your starting point?

Obviously the stock market doesn’t cause housing prices anymore than ice cream causes drowning. But there’s a shared underlying driver of these two things, and that driver is not housing policy.

Choosing the Right Tone: Tragedy & Misery

Reading tone into written English language can be a challenge for native & non-native speakers alike.

That said, as you read coverage of Japan’s economic misery post 1990, whether on Wikipedia or The New York Times, the tone is clearly one of professional sympathy and commiseration. Consider the language from the wiki here:

If you were looking for “just-so” stories of a country to compare against your own, the description above would not be encouraging.

And yet the Japanophile Housing Policy advocates believe that it is the exact time period and location described in that quote — “by 2004” — that should be emulated. If housing policy did this, you ought to want no part of it.

If.

Most of my readers are old enough to remember 2008, and therefore to have some mental model of why a massive and sustained crash in the price of the primary asset purchased by households — and one purchased predominantly with debt — is bad for regular people. But the following New York Times article from 2005 provides an eye-widening slice-of-life look into a bygone era — you really can’t miss a single word:

A government employee who becomes trapped in a prison of debt.

“a 14-year trough” is described with sympathy & horror in the year 2005 — matching the data I showed above. Read the article to learn how many bankruptcies per year were occurring as a result. Compare to the tone in the Financial Times 2016 piece.

Bitter. Spiraled downward. 14-year trough. Homeowners biggest victims. Avoid property.

Thinking the data output from this disaster is positive because of a single metric chosen at a specific point in time that happens to be central to local policy debates 5,000 miles away is the econ-journalist equivalent of not talking to your users.

A whole generation — millions of individual Japanese — lost their life savings and suffered through an economic stagnation measured in decades. As of 2020, the period referred to as Japan’s “Lost Decades” was recently extended to the last 30 years, up from the last 20.

The real nugget in that New York Times article though, beyond the tragedy of Mr. Nakashima and the irony of Mr. Bernanke, is the final sentence I highlighted:

Only recently did Japan finally find ways to revive the real estate market, by using deregulation to spur new development.

Question: in this NYT article from 2005 about the sustained collapse of housing prices, which cites economists, central bankers, and private banking executives, what does the word “revive” mean?

Does it mean that housing prices are now, finally, after 14 years……falling further? What is being “revived”?

Surely they aren’t suggesting that “using deregulation to spur new development” led to housing price increases? Right?

The Irony of Seeing Like A State

Thus the grand irony of today’s YIMBYs celebrating a 30 year old economic collapse as a sign of policy successes.

In the early 2000s, 15 years of housing price declines had left a whole generation underwater and drove millions of bankruptcies. The grim part of this tale that I cannot highlight tactfully is that Japan’s “suicides-above-expectations” during this period is measured in six figures. That’s one chart I’m opting not to reproduce here.

As the Financial Times noted, Japan’s Urban Renaissance Law was passed in 2002, not 1995.

And as a result the New York Times then wrote, and this quote could not be more perfect for my Counter(intuitive) Narrative:

If you’re not chuckling while reading this, I’ve done a bad job somewhere in this essay.

“Seeing Like A State” is to see things at 30,000ft and believe you have uncovered a simple solution to a complex problem. Contact with reality is usually painful, but the people responsible tend to have moved on by the time the pain becomes apparent, free from the consequences of their actions.

When various housing policy advocates point to Japan’s house price stagnation since 1995, they’re drawing your attention to the yellow line here and attributing it to policy changes that were made…in 2002:

In the prior section I tried to highlight that this is in fact a story of national misery with a much deeper root cause than housing policy, and that celebrating it today to score points in a policy debate 5,000 miles away is unwise & unbecoming.

But here I just want to point out the sheer silliness of this chart — and of choosing 1995 as a starting point. What a coincidence it must have been, in 2016, to pick the point on the downwards slope from 1990 to 2002 that happened to ~match then-current housing prices. My own answer to the question of “why 1995?” is that it offers: a) the appearance of an arbitrary number (ends with a 5!) and b) provides an output that seems plausible enough to pass the gut check of readers who support the policy being advocated.

Using Q2 2002 at a starting point (the time major housing policy reform went into effect!) would mean using the inflection point in the housing market — suggesting deregulation was ~causal to housing price increases and completely defeating the point of writing about Japan in the first place (FT subtitle: “Can Japan’s capital offer lessons to other world cities?” Answer: yes, but not the kind of capital you’re thinking about). And so. We cherry-pick a date that offers the strongest-reasonable data to support our preferred policy…and 6 years later people are still using it.

(Now you see the Wall St Journal’s professional savvy here if you read their version of this story: “near the turn of the century” is their wonderful load-bearing sentence, which removes the need to use any exact dates at all. While I find the subterfuge distasteful, I can’t help but uprank my opinion of their technically-correct specificity — someone there noticed the dates didn’t line up)

The New York Times piece quoted above, citing economists, real estate executives, and Ben Bernanke, notes that the sum total of first-through-nth order effects of housing policy deregulation in 2002 was a revitalization of the real estate market, which they celebrate by pointing to the first price increases in 15 years!

That is a very different story. It results in a very different graph:

You can use data to tell whatever story you like. If you’d like to challenge my own presentation here, feel free.[2] I’ve gone to some lengths to make all my sources available and to make my reasons for choosing June 2002 here apparent. But housing prices are downstream of so many factors that any “neat” narrative should be viewed skeptically.

I am not making any positive claims in this essay. I am not saying any given central banker is culpable or not. I am not saying Mr. Nakashima made good decisions. I am not blaming the people for purchasing homes to live in.

I am just asking the YIMBYs to stop using Japan as their ideal model. To stop claiming that housing policies that came into effect in 2002 are causal of a pattern that began in the mid-1990s, contemporaneous with one of the most protracted international asset collapses in recent decades.

I am asking the YIMBYs to stop using Tokyo as an analogy for San Francisco without understanding what caused the movements in these charts above — and how the average Japanese who lived through it feels about this time period.

Seeing Like A Craftsman

I am asking the YIMBYs who post charts like this:

To ask themselves: at what point in this chart did housing policy change? What was the impact of that change? What was the trend before that change occurred?

To ask: How come the period from 1980 through to 1992ish seems to have an insane increase in the price of housing? Is housing policy responsible? If not, why not?

What else has not increased at all for 25 years in Japan?

How healthy is Japan’s population growth? What does their population pyramid look like? What might that mean for the number of 27-45 year-olds looking to purchase property in urban areas today relative to Japan’s overall economic productivity?

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source

How easy is it to immigrate to Japan?

What are the job prospects for an aspiring 30 year-old Japanese homeowner today? How were they in 1980? How about 1995? How about 2005?

How have Japan’s imports and exports tracked since 1990? What percent of US imports does Japan fill? What would the impact of those changes be on the Yen? What ripple effects might that have on their economy?

Here’s a chart of the month-over-month change in Japan’s housing starts since 1980:

Looking at it, I would ask: why did new housing starts see a sustained 20% month-over-month decrease in 1991/2? What period of time saw the greatest sustained month-over-month increases in new housing starts — and why was it in the 1980s?

Why is Tokyo the most expensive city in the world to build new construction in?

And why is it perfectly natural for that quote to specify that the reason Tokyo construction is expensive is because a lot of it is happening?

How many homes does Tokyo build for every one home demolished?

Why does Tokyo’s housing cost 8x more per square foot than San Francisco’s?

Why has Tokyo’s housing become more expensive in the last few years?

What did Bloomberg mean when they cited Naoko Kuga of NLI Research Institute as saying “while the overall number of ‘power couples’ is small, their willingness to spend is strong, and their impact on the consumer market cannot be ignored,”?

What might that imply for San Francisco, where a small portion of the market become millionaires every time an important company gets acquired? (shoutout to my two friends at Figma, pls keep me in your thoughts)

I realize this is an insane data dump at the end of an essay, structured as a series of (pedantic) questions and without a clearly articulated narrative linking them all together. In fact the answers to some of them point in opposite directions. It’s bad writing on my part.

But that’s exactly my point — and appreciating this point unlocks the worldview stated at the start of this essay:

“Comparative International Economics for the Purpose of Identifying Good Policy” is a mostly fraudulent activity.

The alternative to “Seeing Like A State” is Seeing Like A Craftsman — and there is no shortcut to mastering a craft. Metis must be mastered, only episteme can be shortcut. You need to understand the answers to all the above questions and more before you can throw a bar chart up comparing Tokyo’s real estate prices to San Francisco’s and say one city should copy the other’s policy to fix all its problems.

There’s a wonderfully complex chain of factors impacting the amount of capital available to spend on housing in any local region. The Japanophile YIMBY looks at the supply of housing units and discounts the other side of the equation: the supply of capital.

Let’s discuss that equation for a minute…

Ceteris Paribus: Basic Economics

When objections to using Japan as an example of the benefits of housing policy are raised, new arguments are often thrown back as counter-objections. Basic economics teaches that most markets find an equilibrium between Supply and Demand.

Increasing the supply of housing, ceteris paribus, will put downwards pressure on prices.

Am I suggesting basic economics is wrong?!

On the one hand, yes. On the other hand, no.

The basic economics I propound is:

The price paid for housing is not at all proportioned to what the seller may have spent to improve the housing, or to what they can afford to take from the market; but to what the worker can afford to give. — Adam Smith, Book I, Chapter XI, The Wealth of Nations (paraphrased)

The supply of capital available to spend on housing — money, not people — is what the market clears against the supply of housing. Tokyo’s population may or may not have increased across any given period — but it’s their aggregate capital that matters most. If population doubles but average household wealth drops 50%, the math becomes more complex — the cost of building marginal housing units to house new families balances against a lowered ability to pay at the median.

Understanding how this plays out across a whole regional economy provides insight into why it is that regions tend to be dominated by a single industry, and also into what Naoko Kuga meant in her quote above about ‘power couples’: the most productive workers can afford to give the most, thereby ‘setting’ the marginal value of housing and the hourly value of a construction team.

“Deregulation revived the Tokyo land market,” said Toshio Nagashima, executive vice president at Mitsubishi Estate, one of Japan’s largest real estate companies. He said the changes were one reason his company committed to spend $4.5 billion by 2007…

That’s $6.5 billion in today’s dollars.

And so we see that the ceteris is not paribus. The housing policy changes made for a much better investing environment and capital flows increased. Net-net, prices went up.

Before this occurred nobody could have said whether the increase in housing supply would outweigh the increase in capital flows — indeed the NYT narrative is that a lot of other things were tried first, suggesting the experts initially believed deregulation would continue to put downwards pressure on the housing market!

In the real world the ceteris is never paribus. The idealized role of policy is to navigate the changing landscape and do what’s best for the people, balancing short and long term considerations.

What About All The Other Economies That Actually Do Support YIMBYism Through Clear Empirical Data?

I don’t know. This isn’t an essay to convince you to be YIMBY or NIMBY. It’s about why Japan is an awful example to use for “policy success on the basis of sustained housing price depression” and a plea to go find a better one.

Japan, I know a little about. Not a lot. I’m sure I’ve missed things that matter. But enough to know that the simple causal narratives are statistical misdirection at best.

My worldview is that most other nations will have their own quirks that drive housing prices much more than any given housing policy, but that housing supply does matter on the margins — particularly for centers of economic activity that attract productive workers.

I made this chart below in a Twitter back & forth to highlight the relationship between house prices and available capital (proxied as House-price/income vs. GDP/capita):

By itself this chart may not convince the already-skeptical. The R^2 suggests ~13% of the variance in housing-price-to-income-ratio is due to GDP, although removing Portugal, New Zealand, and the Netherlands boosts that to 26%. P-values on the fit are <0.05 (10^-12 order of magnitude).

And yet, once you’ve thought thoroughly about one housing market it becomes easier to reason about others. And once you start thinking about removing an outlier or two, you start wondering why those outliers deviate from the trend in the first place…

Why does removing Portugal and New Zealand improve the R^2 so dramatically? Are there any reasons they might have much higher home prices than their GDP/capita would otherwise suggest? Is it possible “national income” may be missing some of the capital interested in these housing markets? I leave this as an exercise to the reader — don’t check the cheat sheet (or the weather forecasts).

Perhaps one of these dots hides a perfect comp for San Francisco — it’s very possible. All I suggest is that every single one of them has just as much localized context behind their home prices as Japan/Tokyo does.

Why Do You Hate YIMBYs and Progress?

One of the quirks of modern writing is that criticizing one’s outgroup is subject to a complex series of socially-sanctioned checks and mostly used to wage political/cultural war on one’s enemies.

I suspect people who don’t get this far in this essay will assume that’s what this essay is, though beta reader feedback has convinced me to make my points clearer in the summary at the top, somewhat spoiling the grand reveal: when it comes to most American cities, I am of course a raging YIMBY.

In reality, my own YIMBYism rests on much firmer principles than cherry-picked data sets from an often-exoticized country 5,000 miles away purporting to show house price stability.

If I truly believe my own paraphrasing of Adam Smith about house prices being a consequence of “what the worker can afford to give” — and if I truly care about Progress, as measured by the classic yardstick of “number go up” — then it follows logically that I support house price increases to the extent that it signals the creation of underlying economic surplus. And so I would never use stagnant house prices to justify any given policy — even if house prices were a hot button issue among a left-learning urban electorate and I cared a lot about the policy in question.

When presented with data showing near-zero increases in house prices over a 25 year period, the worldview I’ve tried to articulate here will assume economic catastrophe instead of policy perfection. The city I picture looks like Detroit, not Singapore.

Naturally, the lowest effort way to get house price stability is to cap “what the worker can afford to give.”

This can be done directly via hard-caps on prices, or even on worker income itself. It can also be done indirectly by limiting or otherwise obstructing the economic progress of specific population segments and reducing the number of people willing to live in the city. One could view San Francisco’s entrenched NIMBYism through this lens with some justification. I suppose you could also engineer a recession and achieve the same outcomes.

Readers of my popular essay on the structure of Germany’s economy will notice a similar worldview of mine popping up here:

Price stability, of course, explicitly favors the existing market equilibrium. It is exactly by radically disrupting “price stability” that China was initially able to build its international Manufacturing Powerhouse.

It is a failure to maintain “price stability” that so wounded Japan’s electronics industry.

Nobody wants "price stability” until they are on top — and then they want it very badly.

Of course this doesn’t map exactly to housing, but you can see where it rhymes. The YIMBY consensus is that NIMBYism accentuates housing price inflation and that more stability could be achieved by deregulating zoning & promoting more development. The Maastricht criteria specify that new entrants to the European Union cannot promote industrial development more aggressively than existing member states, such that it would impact price stability (aka cause lower prices). Housing YIMBYs want to unleash market supply to promote stability on prices currently undergoing inflation. Maastricht wants to prevent increased supply from unduly lowering currently-stable prices.

Both view price stability good and increasing supply as lowering prices.

In both cases, I raise an eyebrow at the privileging of “stability”. In both cases, I am more interested in the actual policy impact than the intended policy impact.

When I see a chart like this:

I think “good” — Mr. Nakashima, or someone like him, was eventually able to move to the big city. To relocate somewhere more productive. To get that higher paying job he hadn’t been able to get for 15 years because his house was underwater and he owed the bank $300k.

What I love about this analysis is that constructing an alternative narrative where “deregulation keeps prices lower than they otherwise would have been due to supply increases” is nonsensical — the factors driving price increases in this market are themselves downstream of the deregulation!

“If Japan hadn’t been building housing as aggressively as it has, then the slope of that line would be even steeper!”

I used to believe this — the ultimate Motte above the Bailey of rebased-1995-housing-price-bar-chart nonsense. But the story told in this essay is that housing policy changes were responsible for reviving Japan’s flatlined housing market. How could the slope of the line have been more positive? It was negative!

Recall the state of Japan’s economy from 2002-2012 and ask what factors could possibly have driven a steeper increase in housing prices than shown in the chart above given this backdrop:

Pictured: zoomed in snapshots of Japan’s stock market (left) and average wages (right) from the 2000-2012 era, marking the first decade of Japan’s “housing market revival”.

This is not an era whose economic backdrop suggests rising asset prices are the default expectation, although the stock market looked promising until 2008. Perhaps it’s possible that, absent housing policy deregulation, Tokyo’s house prices could have gone up even more than they did. I’d love to see a thorough analysis of all factors here, though we can never go back in time and run the experiment again.

Looking at the chart above, Tokyo’s housing price increases have been remarkably consistent for a decade. If we grant that it was housing deregulation that “revived” the housing market and ultimately led to housing price increases…my question becomes: at what point in time was the slope of price increases then subsequently suppressed by the exact same policy that allowed for price increases in the first place?

If you take these hypotheticals to their extremes, I do expect you’d see behavior that converges on simple economic models of supply & demand. But the actual process of adding net new individual housing units was not, from 2002-2022, a hypothetical process. It was one fueled by developer investment and everything else that entails. No one expected the result of deregulation would be saving the housing market…eppur.

A Productive Future

I believe a functioning city should be a growing city. It should be a gravity well of talent and productivity. And the more productive people come together, the more network effects amplify their output.

Housing supply should increase to try and meet this demand. But if productive people cannot create economic surplus faster than real estate companies can create housing, that says something about the potential returns to their economic activity. If you’re curious what it says, look up the historical rate of returns of real estate and compare them to equities or other investments.

Recall that the most-productive market segment have an outsized impact on the housing market. Ideally your shining city is more productive than a REIT.

But if your most productive city is more productive than real estate developers, and if housing prices are disproportionately impacted by the most productive workers in a region, and if housing is determined overall by “what the worker can afford to give”…then to become overly fixated on housing prices as the singular goal of policy is to come into conflict with Progress itself.

Definitely Not Talking About Actual Policy In San Francisco

Of course the housing policy situation on the ground in places like San Francisco is complete insanity. That goes without saying. It’s hard to imagine the immediate impact of increasing San Francisco’s housing supply by 10% not being a drop in the price of housing there. But San Francisco should be granted the same respect I granted Tokyo in this essay — a full & proper understanding of the various factors in play.

Note this is not the same as “listen politely to your political enemies” — but it does mean asking how the supply of capital available to spend on housing has increased over the last 2 decades. It means asking uncomfortable questions about Wealth inequality and bifurcating social class in the Gold Rush city — and how the impact of increased capital on housing prices interacts with the distribution of that capital and city residents. It means asking about the future career prospects of the various people involved in blocking the YIMBY agenda — from on-the-ground voters to low level corruption to high level obstruction. It means asking why the political positions that implement policy are anathema to San Francisco’s newly-minted wealthy, who relegate themselves to donating and organizing and tweeting. And other such pointed questions.

If San Francisco had a very different set of policies, many more of my friends would currently live there. That would be a good thing from the perspective of building “productivity gravity wells.” But how it would impact the housing market over the long term, net net, is a murkier question.

A full exploration of all these questions is far too close to home and best left to the reader. I recommend a pairing of English Breakfast Tea & chocolate for said exploration. If none is on hand, I suppose whisky will do.

If just one reader comes away from this essay and encounters in the future a YIMBY pointing to the Japanese real estate market from 1995-[DATE], and recognizes that policy-based causation cannot be easily drawn from a period that overlaps with economic stagnation…I’ll chalk this essay up as a success.

But beyond that, my real hope was to show, not tell, how to navigate a hostile information landscape by building a fleshed out mental model of what’s going on under the hood — and then turn that mental model into some quick & easy heuristics that can save you time, energy, and effort. You build those functional mental models by diving into the details and trying to see how they fit together, not by starting with some high level principles and doing abstract reasoning.

When very smart people end up being very wrong about a topic, it’s usually because they skip doing the schlep work themselves and rely on abstract reasoning and outsourced opinions.[3]

If you read this far — thank you. Allow me to leave you with a parting laugh:

Notes

[0] I searched for articles covering this topic and narrative from the usual right-wing news publications…but I couldn’t find much. Let me know if you did. Here’s The Cato Institute quoting the WSJ article above and The Manhattan Institute obliquely referencing Japan’s zoning laws. One guess is that the housing-policy woes that breed YIMBYism are a feature/bug of center-left-leaning urban areas and that the average right-wing news reader can probably build a pig farm in their backyard without a permit — but that’s just my worldview talking and I’ve little data to support it. Certainly Cato & Manhattan institutes take it for granted that their audience supports housing deregulation and needs no convincing.

[1] This ought to be the default worldview of anyone being presented with a “just-so” comparison between nations. It can be explored and shown to be a justified or unjustified bias only by digging into the fundamental drivers of the data for each & every nation. (Such a blanket dismissal is a reasonable position to begin with because no two nations of international importance are ever sufficiently similar to merit a direct comparison between individual policies)

I realize to those who are used to consuming studies and data provided by reputable publications this level of skepticism, cynicism, and default-distrust likely seems crazy.

I suspect even those readers I convince on this one specific topic will not become so cynical as to adopt the worldview I’m describing here. I would not ask anyone to. Adopting blanket distrust only works if you can rebuild functioning three-dimensional models of your own — and that takes time, effort, and a willingness to stop “seeing like a state.”

The hazards of this worldview are many. Communication is tougher: your narratives aren’t neatly packaged stories anymore. You make opponents out of all the conflict theorists by default, plus the mistake theorists you’re arguing with. You are more susceptible to default-contrarian conspiracy-style narratives. If you become a flat earther because you read this essay, don’t blame me — let me know if you get past the ice wall!

And the benefit of seeing the world this way is simply that you’re more likely to notice groupthink and poor reasoning — and then go looking deeper yourself. Really, you’re just signing up for more work. Hardly worth it.

[2] Looking at my own charts here, an attentive reader might ask: why did you choose your benchmark to start in 1992? What makes that more fair than 1995? Aren’t you just doing the exact same thing you accuse the Japanophile YIMBYs of?

This is a good question.

The answer: 1992, or perhaps a year earlier or two depending where you look, marks the top of Japan’s asset bubble. The core thrust of my point is that the 1995-Present benchmark includes a 15-year-long asset slump due to the bursting of that bubble (& the general deterioration of Japan’s economy). Any pricing analysis of assets in Japan must be anchored in that reality.

So because I want to tell a story about the aftershocks of a bubble popping, I’ve started my analysis at the height of that bubble. The asset prices at that peak may be unreasonable, but their unreasonableness is obvious when looking at the charts. Selecting a point halfway down their slope — 1995 — allows for misdirection.

“Housing policy drove a 33% decrease in Japan’s house prices” is a statement that the average Financial Times reader is unlikely to swallow hole. Especially if they happen to be a cosmopolitan citizen familiar with the expense of living in Japan.

“Housing policy stopped house prices from increasing more than 5% over the last 20 years”, on the other hand, is a much more easily digested tidbit — especially for an audience already pro-housing deregulation and pro-building-things.

One counter to my own narrative is to stretch my charts further back. Extend the data to before the bubble began. To compare the slope of Tokyo’s housing price increases from 2002-2020 to some period from 1950-1970. Perhaps there’s some divergence there that could provide strong support to using Japan as a shining example of YIMBY success?

Let me know if there is and perhaps we can convince people to stop using the 1995 data.

So to this point, shoutout to the twitter account @ne0liberal for nearly doing this after I wrote this essay’s first draft:

I have no idea what’s happening in South Korea — perhaps they are the perfect example the YIMBYs need and not also a victim of the late 1990s East Asian Financial collapse? Either way, the pyramidal shape of Japan’s home prices in this chart prompts absolutely no interrogation from the poster. While their numbers don’t tie exactly to my own, the shape of them is similar. The suggestion is that, despite some increases in nominal income, home prices decreased an incredible amount and then flatlined in Japan.

The implication, for those who follow these debates, is that housing policy is responsible for this — and it’s a good thing.

If you’ve read my essay, hopefully you now understand: not only did unrestricting housing policy not do this, it was implemented a decade after one of the most significant asset collapses in recent history began and was responsible for finally starting to increase house prices in Tokyo. All these charts show in Japan is that an economy blew up, and then people moved out of the countryside and stopped having kids.

[3] I write this knowing full well that the analysis done in this essay is insufficient for any meaningful academic discussion. A proper PhD would do the full analysis described in note [2] above, controlling for the variables I merely allude to controlling for. In my allusions I am doing what I chastise others for: relying on abstract reasoning to reduce my burden of work. I trust those who think sufficiently similarly to me can follow my reasoning — and I am hopeful those who disagree will take on the burden of doing a proper PhD thesis on the topic. Send the preprint my way if you do!

My only defense here for my laziness: there are only so many hours in the day.

[99] I claim the right to call them “YIMBY Weebs” by virtue of self-identification. If you don’t need to click that link to work out what a “weeb” is, you might enjoy my essay about anime, an ancient Cathaginian god, and the limits of human self-sacrifice.

[99-2] A friend asked me after my last twitter argument on this topic: “why do you get so worked up about the YIMBY Japan stuff? It clearly bothers you more than other things people are wrong on.”

This is true and I see no reason to hide it.

There are two main factors:

• The reality of life in Japan is not utopian: the “salaryman” lifestyle is horrendous and most Westerners would run far, far away from it. The smart, ambitious, hard-working youngsters would all be materially better off if they could move to a major US city and get a job there, housing policy woes included. Additional difficulty levels are applied for women & non-Japanese.

  • A high school friend of mine ended up doing investment banking in Tokyo: an experience significantly worse than investment banking in New York.

  • While the specifics may vary on the margin, if you want to live & work in Tokyo you should assume:

    • You get paid lower wages than your comparable US employee

    • You work 10-60 hours per week more than your US counterpart

    • You live in a smaller apartment than your US counterpart

    • You spend an equivalent portion of your salary on rent as your US counterpart

      • For readers familiar with elite American wages, a fresh 2022 Investment Banking Analyst at Goldman Sachs & a Software Engineer at Google both make about $75k/year in Tokyo

      • If either of these companies offer to pay you that amount per year in San Francisco, you made a serious mistake somewhere

• Exoticizing Eastern countries for some specific policies they enact within the broader context of their national cultures has been a pastime for niche Westerners for decades. It’s mostly frowned upon in polite company for playing on the audience’s stereotypes.

  • “Copy Japan” is a fine strategy in many arenas for anyone with executive responsibilities…

  • …but public policy advocacy that’s reduced to a simple bar chart and the slogan “copy Japan” plays too close to tugging on stereotypes for my comfort — where the average reader is supposed to deduce that the Japanese have figured something clever out long ago because, well, of course they would, right?

It’s the juxtaposition of these two factors that provokes me. An underlying tragedy held up and celebrated because it delivers a surface-level metric that’s appealing to a distant audience. A lack of interrogation of data because, in the best case, of confirmation bias or, in the worst case, stereotyping of ethnic competency.

Believing Japan is special here is part of what irks me — “of course the Japanese/Koreans do it right!” If maintaining flat-to-neutral housing prices over multiple decades in a major urban environment is your primary bugbear, you might also consider Manhattan, over the time period of 1920-1960. After the Great Depression it took ~40 years for property prices to recover!

Alas, for American writers and American readers the Great Depression is too close to home. We know why housing prices were “stable” so long. The trauma is tangible, and so we must borrow someone else’s tragedy instead to score policy points.

Book Two: Expansion & Growth

Book Two begins with some excellent introspection before turning its gaze outward and looking at ways to actually grow a republic:

Men always praise ancient times and condemn the present, but not always with good reason, and they are such partisans of the past that they celebrate not only those eras they have come to know through the records historians left behind but also those that they, having grown old, remember having seen in their younger days.

This is no less true today.

When their opinion is mistaken, as it is most of the time, I am persuaded that there are several reasons leading them to make this error. The first is that we do not know the complete truth about ancient affairs, and that most frequently those matters that would bring disgrace on those times are hidden, while other matters that would bestow them with glory are recounted most fully and magnificently.

…

I do not know, therefore, whether I deserve to be considered among those who deceive themselves if, in these discourse of mine, I praise too lavishly the times of the ancient Romans and condemn our own. Certainly, if the exceptional ability that prevailed then and the vice that prevails today were not clearer than the sun, I would speak more cautiously for fear of falling into the same deception for which I criticize others.

Given that Machiavelli spends the entire book infatuated with the ancient Romans, this self-reflection shows a good deal of maturity & wisdom. A lot of people today who yearn for the glory days could stand to read it.

Anyway, on to building things! —

The Culture War Battlefield Has Barely Moved In 500 Years [Morale]

Chapter 2: What Kinds of Peoples the Romans Had to Fight and How Stubbornly These Peoples Defended Their Liberty

Despite the chapter title, the section of this chapter I want to quote highlights that many of today’s Culture War battlefields are fought over the exact same issues as the Culture War of 500 years ago.

This segment could be ripped fresh today from any number of voices on the self-described “dissident right”:

It is not the private good but the common good that makes cities great.

In considering why all the peoples of ancient times were greater lovers of liberty than those of our own day, I believe this arises from the same cause that today makes men less strong, which I believe lies in the difference between our education and that of antiquity, based upon the difference between our religion and that of antiquity.

Ancient religion beatified only men fully possessed of worldly glory, such as the leaders of armies and the rulers of republics. Our religion has more often glorified humble and contemplative men rather than active ones. Moreover, our religion has defined the supreme good as humility, abjection, and contempt of worldly things; ancient religion located it in greatness of mind, strength of body, and in all the other things apt to make men the strongest. And if our religion requires that you have inner strength, it wants you to have the capacity to endure suffering more than to undertake brave deeds.

This way of living seems to have made the world weak and to have given it over to be plundered by wicked men, who are easily able to dominate it, since in order to go to paradise, most men think more about enduring their pains than about avenging them.

Not all my readers will be familiar with the modern 2020s version of this — an anonymous twitter profile picture, veneration of the ancient world, bodybuilding aesthetics, a disdain for modernity’s focus on humility & suffering, and animosity towards centralized finance — but Machiavelli would probably fit right in. At least until they started reading the very next chapter’s title: Chapter 3: Rome Became a Great City by Destroying the Surrounding Cities and by Freely Receiving Foreigners into Its Ranks

“Umm, is that based?”

On the surface, I do find a lot of Machiavelli’s points complaining about the decline of “modern” culture in this chapter compelling. But it’s worth holding those points up against the subsequent 500 years. Whatever the reason may be, “our religion” today has clearly dominated the competition. Perhaps Machiavelli and others may be unhappy with the final results, but they’ll need to find a compelling Molochian explanation for the sustained memetic victory of what they deem an inferior religion.

I am perhaps unqualified to write on the culturo-spiritual resonance of the Christian ethos’ commitment to suffering in public, but its rapid overthrow of the Roman religion and rise to global dominance seems impressive enough that it shouldn’t be dismissed out of hand.

At this point, 500 years on, its continued success can hardly be seen as coincidental — I might suggest that a message of “enduring their pains” resonates more among a democratic polity, whereas “avenging them” is reserved for those with the rare power to enact vengeance. A Christian ethos is therefore mutually reinforcing with the democratic arm of liberalism/republicanism/democracy, whereas the ancient Roman polytheism has a symbiotic relationship with the aristocratic arm.

And as Machiavelli notes in the next few chapters, the real power is always rooted in the people.

Pursue What Is Right, Vigorously [Methods]

Chapter 6: How the Romans Proceeded in Waging War

It is necessary both in acquiring territory and in maintaining it to try not to spend, but rather to undertake everything in a way that benefits the public treasury.

Wise words, applicable in many domains. If your bank balance is decreasing, you won’t be in charge of your own fate for long.

The Roman style and method was first of all to make wars short and massive, because by fielding enormous armies, the Romans brought to a very swift conclusion all the wars that they waged…If we take not of all those wars, we shall see that all of them were expedited, some in six days, others in ten, and still others in twenty days.

This was their custom: as soon as war was declared, they marched forth against the enemy with their armies and immediately waged a decisive battle.

There are a lot of little stories in this book where the nugget of ancient Roman wisdom essentially boils down to: pursue what is right, vigorously.

War, being bad and expensive, should be resolved promptly. The best way to resolve it promptly is to bring overwhelming force on short notice against ones competition. So that’s what we do.

In contrast, I think you can justifiably point to modern examples where various factions have taken an opposite approach: drawn out conflicts over multiple decades with half-hearted faux-commitments, while wracking up multi-trillion-dollar bills and ultimately failing to achieve a strategic objective. There’s more than one example.

I wrote a few years ago about what happens in the unfortunate event Rome’s massive army is defeated:

…forcibly conscript every surviving male, peasants, even slaves, make saying the word “peace” a crime, set a legal limit of 30 days on mourning, ban women from crying publicly, create a permanent standing army and not this weak-ass citizen-militia crap, and make a permanent example out of [the enemy]…

Just do it again but harder.

Why Fundraising Is Not Sufficient To Make A Great Company [Money]

Chapter 9: Wealth Is Not, Contrary to Popular Opinion, the Sinew of Warfare

…a prince must take the measure of his forces before he undertakes an enterprise and govern himself accordingly. But he must possess enough prudence not to deceive himself about his strength; and he will always deceive himself when he measures it either by money, by location, or by the goodwill of men…

I love this chapter, and it analogizes well beyond the military sphere. If you measure your startup’s worth by its fundraising, geographic location, or “the goodwill of men”…you are measuring fuzzy proxies of actual success criteria.

All these things certainly increase your power, but they do not give it to you, and by themselves they are worth nothing and serve no good purpose without faithful troops.

People who make things happen are what matters.

Money, moreover, not only will not defend you but will cause you to be plundered all the sooner.

When valuing a company, you subtract the value of the cash on its balance sheet from the market cap.

Much criticism is (rightly) leveled at the large American corporations who inadequately plan for market downturns and return cash directly to investors through share buybacks (see Part I) or dividends. But these corporations are often behaving rationally. Keeping cash on your books makes you a takeover target by anyone who can raise enough capital or debt to cover some of the cost — your own cash balance will cover the rest.

Money is certainly necessary as a secondary consideration, but it is a need that good soldiers overcome by themselves, because it is impossible for good soldiers to lack money, just as it is impossible for wealth alone to create good soldiers.

Obviously I’m not suggesting good-but-low-earning employees arm themselves and literally plunder established-but-complacent companies. The money is all electronic anyway, there wouldn’t be anything in the vault for you to take.

But, metaphorically, this is exactly how the startup ecosystem functions. As I noted in Ouroboros Theory: name any great startup and we can all tell you the company or industry that they metaphorically murdered on their path to greatness.

Good soldiers will not lack for money.

Money often lacks for good soldiers.

Don’t Make Deals With People Who Can’t Help You [Bad Partnerships]

Chapter 11: It Is Not a Prudent Policy to Form a Relationship With a Prince Who Has More Prestige Than Power

It should be noted that alliances concluded with princes who possess neither the ability to assist you because of their distance from you, nor the power to do so on account of their poor organization, or for some other cause, offer more fame than real assistance to those who entrust themselves to them…

The examples in this chapter are damning, but in keeping with the corporate theme I am reminded here of the general shape of a failed business partnership: a small company establishes a brand for itself but finds it lacks the resources to go after massive distribution. It then forms a partnership with a large brand with global resources. The big company gets a “hip” boost from the association, but is too sclerotic to help the smaller company do much of anything.

The end result is the diminishing of the small company’s brand, no discernible impact on the big company, and, in the worst case, the theft of any of the better performing employees or assets from the smaller company.

There’s a fun video from Donut Media about how Ford tends to do this:

Speed Over Accuracy [Decision making]

Chapter 15: Weak States Are Always Ambiguous in Their Decisions and Slow Decisions Are Always Harmful

The title does most of the work here, but:

…in the midst of doubt and uncertainty, it is impossible to match words with deeds, but once a decision has been taken and what is to be done has been determined, it is easy find the right words.

In doubtful cases and where courage is required for making decisions, such ambiguity will exist when it is weak men who deliberate and make such decisions. Nor are slow and tardy decisions any less harmful than the ambiguous ones, especially those which must be decided in favour of some ally, since slowness helps no one and is harmful to oneself.

Decisions of this kind derive either from weakness of mind or weakness in your forces, or from some malignant disposition on the part of those who have to deliberate…

Again, Machiavelli accurately describes the failure mode of institutions that have diffused decision making responsibility too much.

Again, 200 years later, the lessons must be learned anew:

What’s striking to me is that, again and again, Machiavelli harps on the character of the people as paramount for a republican government (he lists weakness of mind and lack of courage above), as well as civic corruption…

…and then you can read Cromwell’s speech to his own Parliament while dissolving it:

Now perhaps you disagree with Cromwell. Perhaps you think him a tyrannical imperialistic regicide, a left-leaning-figure who overthrew a monarchy for the people but could not abide his own principles and was corrupted by power. Perhaps you think his parliament was acting reasonably and responsibly by failing to decide a single thing for a war-torn nation attempting to exit a civil war, choosing instead to deliberate amongst themselves.

I’m not interested in arguing any of those specifics, more in seeing the ways that history rhymes with itself — and trying to observe the ways that it does not.

The Roman senate was founded 1,968 years before the English Parliament, and yet here we are again, struggling with decision making speed and suggesting horses are more fit to be in the halls of government.

Caligula smiles.

Good citizens, even when they see popular sentiment turning toward a pernicious choice, never impede the deliberations, especially in matters where there is little time.

Machiavelli quite sincerely advocates moving forward quickly in a bad direction instead of delaying things in no man’s land. An institution that is able to move fast, and accustomed to doing so, can proactively course correct if a decision turns out to be a poor one. An institution that learns the habit of delaying decisions will not.

Wartime CEOs vs. Peacetime CEOs [Executive character]

Chapter 22: How Often the Opinions of Men Are Mistaken in Their Judgments About Important Matters

How false the opinions of men are on many occasions has been seen and still is seen by those who witness their decisions; often when such decisions are not made by excellent men, they are contrary to every truth.

Because excellent men in corrupt republics (especially in tranquil times) are considered enemies, both out of envy or other ambitions, the people follow either a man who is judged to be good by common self-deception or someone put forward by men who are more likely to desire special favours than the common good.

Later, in adverse times, this deception is revealed, and out of necessity the people turn to those who in tranquil times were almost forgotten.

Certain situations also arise in which men who have little experience of things are easily deceived, since in such incidents there is much that seems so true that it makes men believe their judgments in these matters are accurate.

“People are often wrong” shouldn’t be news to anyone — but the specific mechanisms described here are timeless. How to ensure that “excellent men” are valued and those with “little experience” are not deceived is a continual problem for institutions that depend on mass opinion.

Seeing who people turn to in a crisis is always revealing, whether Ulysses S. Grant or Steve Jobs.

I think this chapter also provides an interesting alternative lens through which to appreciate Ben Horowitz’s “wartime CEO vs. peacetime CEO” point — to some extent the lessons he mentions taught in management programs for “peacetime management” could be viewed as techniques to manage, mitigate, or manipulate the judgment of internal stakeholders as opposed to achieving external outcomes. In this framing, the role of a “Peacetime CEO” is simply to prevent civil war breaking out and/or the dethroning of himself or other executives — as opposed to a “Wartime CEO”, whose role is to achieve something.

Shame & Society [Making Enemies]

Chapter 23: To What Extent the Romans Avoided a Middle Course of Action in Passing Judgements on Subjects for Some Incident Requiring Such a Verdict

When one has to judge powerful cities and cities that are accustomed to living in liberty, it is necessary either to destroy them or to give them benefits; otherwise every judgement is made in vain.

Above all one must avoid a middle course of action, which is harmful, as it was to the Samnites when they trapped the Romans at the Caudine Forks and did not wish to accept the opinion of the old man who advised them that all the Romans should either be released with honour or killed, but, choosing a middle course of action, they disarmed the Romans and forced them to march under the yoke, allowing them to depart full of shame and indignation.

I wonder how this turned out for the Samnites?

This story is what happens when Ender’s rule from Part I is not followed — “win all the next ones too.”

As a result, not long afterwards they learned, at great cost to themselves, that the old man’s judgement had been useful and their own decision harmful.

And then later…

The discussion of this chapter touches on how the right decision, hard and unpleasant though it may be, can be overruled by “ignorant or cowardly” men:

…those who seemed to be wiser declared that killing the Romans would bring little honour upon the city…

This is certainly true…

Men who hold such opinions fail to see that men taken individually, and a city as a whole, sometimes sin against the state in such a way that in order to make an example to others for one’s own security, a ruler has no other remedy than to destroy them.

…but when security and magnanimity are in clear conflict, honour should not be allowed to weaken the state in a way that results in later harm to its citizens.

Honour consists in being able and knowing how to punish them, not in being able to hold them amidst a thousand dangers, because a ruler who does not punish a man who errs in such a way that he cannot err again is held to be either ignorant or cowardly.

I’m excerpting here, but to be clear: Machiavelli is not supporting harsh & permanent punishment for all crimes or opponents — simply that making enemies is really bad on an existential level, even if those enemies don’t appear to be powerful today. The “middle course of action” from this chapter’s title is the realm of men without the courage of their convictions, and while you might get away with it more often than not, enacting small punishments and indignities is an excellent way to get yourself Samnite’d.

What’s refreshing to me here is the full conception of the emotional character of social relations between groups of people. Modern analyses of these things often remain in the “rational” realm and ditch an evaluation of the emotional as unmeasurable and unscientific.

But both at the individual and Great Power level, these things do matter, and they have deep security implications. The existence of wikipedia pages like this is not a sign of great wise prior actions:

And you can read this book for a detailed exploration of similar themes:

You don’t need to be TLP to understand that shame is often a prelude to rage.

Walls Are For Losers [Offense]

Chapter 24: Fortresses Are Generally Much More Harmful Than Useful

Best chapter in the whole book.

He gives three arguments for why defensive structures of any kind do more harm than good:

(i) Defense against your own citizens:

To the wise men of our times, it will perhaps seem a matter not well considered that the Romans, in their desire to secure themselves from their neighbours, did not think of building fortresses…

Indeed. Why didn’t they?

Consider whether fortresses are constructed to defend against one’s enemy or against one’s subjects. In the first case they are not necessary, in the second they are harmful.

Not necessary against one’s enemy?? Harmful against your own citizens??

Where a principality or a republic fears its subjects and the possibility of their rebellion, such a fear must arise first of all from the hatred that its subjects harbour for it, hatred for its evil conduct. This evil conduct arises from the belief that it can hold its subjects with force, or from the lack of prudence of the one who governs them.

The logic chain here is: Bad government or excessive use of force => population hates you => threat of rebellion => fear the population => use more force than you should => repeat cycle until revolution.

If you didn’t believe yourself to be “safe” from your own citizens, you wouldn’t treat them so badly in the first place:

One of the things that makes him believe he can then rule them by force is having fortresses nearby…for in the first place, they make you more bold and violent toward your subjects, and then they fail to give you the security within, since all the forces and all the violence used to hold a people are worth nothing unless you can put a good army in the field, as the Romans did, or you disperse, destroy, disorganize, and disunite the people in such a way that they cannot unite to harm you.

The second order consequence of a fortress is treating your subjects worse than you otherwise would have, believing yourself to be secure. The moral hazard here is Machiavelli’s point.

If you read this and are just taking it all literally, then it’s a neat historical story of limited relevance. We don’t build fortresses much today: artillery and MOABs break them apart, and targeted long-range offensive options mean large armies rarely congregate in one place.

But a Fortress is a perfectly good metaphor: something that took investment to build that you believe offers some form of defensive protection.

Unless you have offensive counterattack options — that require you to leave your fortress walls — no amount of defense will protect you from a determined enemy.

(ii) Defense against conquered peoples:

In a city to which your very name is inimical, follow the Roman method: either make it your ally or destroy it.

In cities they wished to hold with force, they tore down the walls instead of building them.

The examples and counter-examples in this section are good reading, but the point stands on its own.

Having conquered a people one time, removing their defensive walls trivializes the next time (if there is a next time), while also making future rebellion less likely by reducing the psychological security conferred by defensive structures described in section (i).

(iii) Defense against invading peoples:

Fortresses are unnecessary for those peoples and kingdoms that have good armies, and for those that do not have good armies they are useless, because good armies without fortresses are sufficient, while fortresses without good armies cannot defend you.

The Spartans not only abstained from building fortresses, but also did not permit their city to have walls, because they wanted the exceptional ability of the individual man, and no other type of defence, to protect them.

Walls lead to weakness, weakness leads to being conquered — it’s a pretty contrarian take and I love it.

A prince who has good armies will sometimes find fortresses on the coasts and borders of his state useful in holding back the enemy for a few days until he has put things in order, but they are not essential.

Why waste valuable scarce resources on walls?

You have enemies?

No problem.

Either make them an ally. Or destroy them.

External Threats Unify Republics [Evaluating enemies]

Chapter 25: It Is a Mistaken Policy to Attack a Divided City in Order to Occupy It as a Result of Its Disunity

Japanese generals circa 1942 must have missed this chapter:

The cause of disunity in republics is in most cases idleness and peace; the cause of unity is fear and warfare.

This lens suggests perhaps that America’s current polarization might be a result of an extended period of uncontested hegemony. I’m not saying that’s true, but it might be nice if it were.

Of course there is a right way to do these things, if you really must:

The proper method is to seek to gain the confidence of the city that is disunited and, until the people come to the point of fighting, to act as their arbiter, maneuvering between the factions. When fighting breaks out, it is appropriate to give small favours to the weakest faction, so that they continue fighting for a longer time and wear themselves down, and so that larger forces never make them all suspect that you intend to overcome them and become their ruler.

The Consequences of Ideological Blind Spots [Speech]

Chapter 28: How Dangerous It Is for a Republic or a Prince Not to Avenge an Injury Committed Against the Public or Against a Private Individual

Here we learn that the end result of disrespecting foreign ambassadors is an invasion of the Roman Republic and a great deal of death and suffering.

This disaster came upon the Romans solely because of their failure to observe justice, for after their ambassadors had transgressed ‘against the law of nations’ and should have been punished, they were honored.

Nevertheless, it must be considered how much care every republic and every prince should take not to commit such an injury, not only against a mass of people but also against any single individual, because if a man is greatly offended either by the state or by a private person and is not avenged to his own satisfaction, he will never be appeased until in some way he has avenged himself upon the prince, even if he sees his own harm in it.

The discussion of the assassination of Philip of Macedon in this chapter seems like a clear cut case to me (and indeed, assassinations of politicians often follow this mold). As a political leader you become a magnet for blame for negative outcomes, even if you were not directly responsible for them yourself.

Machiavelli describes Attalus, one of Philip’s generals:

Having organized a formal banquet to which Pausanias and many other noble barons came, after each guest was full of food and drink, he had Pausanias seized and brought to him with no hope of escape, not only fulfilling his own lust by force but also, to bring him even greater dishonour, allowing many others to violate him in the same way.'

Not nice.

Pausanias complained more than once about this insult to Philip; after keeping him for some time in the hope of being avenged, Philip not only failed to avenge him but made Attalus governor of a province in Greece; hence Pausanias, seeing his enemy honored and unpunished, turned all his indignation not against the man who had done him the injury but against Philip who had not avenged him.

If you’re unfamiliar with the story, it concludes predictably with Pausanias brutally stabbing Philip to death at a public theatre.

I highlight this because the Wikipedia page of this account describes the same rape, but then also adds:

Which just shocks me.

One thought occurred to me while reading: it’s not really possible to push back on this “hardly seems adequate” position without Fedposting:

If you’re just a humble online writer, or an academic, this is not such a big deal. You can simply repeat along with me: “nothing could ever justify engaging in violence against political leaders outside of the justice system”, and move on.

But if you’re actually involved in governing, or worse in the Justice system itself, the consequences of ignoring these lessons can ultimately be existential for your institution. I think there’s likely a spectrum here, and while the average man probably will suffer injustice and not act upon it in any way that would have negative repercussions — as with most things, it’s the extremes of the bell curve that shape dangerous outcomes.

This example is worthy of note to anyone who governs: he must never esteem a man so lightly that, piling injury upon injury, he believes that the injured man does not think about taking revenge despite all the danger and harm that might befall him.

I actually think this story and its “hardly seems adequate” Wikipedia summary is a good example of how a subtle societal norm can shape which ideas get signal boosted and which get self-suppressed. When you stack two of these social norms together, like so:

…and combine them with the knowledge of intersectional extremism that exists at the other end…

…it would be irresponsible to publish anything other than condemnations and disavowals and/or confusion at Pausanias’ actions.

And then, if you, as a civic leader, take the invisibility of those stacked orange & red sections as evidence of their non-existence, you get a real rude awakening when you go out to see a local performance.

This is all dreary stuff in the realm of politics and history, but I suspect there are many occasions where a company’s internal politico-cultural framework leads to the stacking of certain norms around what is said and what is not said, that then later leads to organizational blind spots and company blunders, ala:

Don’t Trust, and Verify [Judgment]

Chapter 31: How Dangerous It Is To Believe Exiles

One must consider, therefore, how vain are both the word and promises of those who find themselves deprived of their homeland. Accordingly, with respect to their word, it must be assumed that any time they can return to their native land by any other means than with your assistance, they will abandon you and draw near to others, notwithstanding whatever promises they have made to you.

As for their vain promises and hopes, their desire to return home is so intense that they naturally believe many things which are false, and to them they add many things with guile, so that between the things they believe and the things they say they believe to fill you with hope, they fill you up with so much hope that if you rely upon it, you either incur expenses or undertake an enterprise in which you are ruined.

Harsh words, but if you recognize this photo, I need say no more.

On Micromanaging [Delegation]

Chapter 33: How the Romans Gave the Commanders of Their Armies Full Discretionary Powers

Among other matters worthy of consideration is an examination of the kind of authority with which the senate sent out their consuls, dictators, and other military commanders. It is evident that such authority was extremely great, and that the senate reserved nothing for itself except the authority to start new wars and to confirm peace treaties, while leaving everything else to the will and power of the consul.

Anyone who considers this approach well will see that it was very prudently employed, for if the senate had wished for a consul to proceed in war little by little according to what tasks they entrusted to him, they would have made him less diligent and slower…

Besides this, the senate would have been obliged to give advice on a matter about which it could not have known anything, since despite the fact that the senate was filled with men highly experienced in warfare, nevertheless, not being on the spot and not knowing the countless details that must be known in order to give good advice, they would have committed countless errors in giving it.

This is a policy I most willingly note because I see that the republics of the present day, such as the Venetian and Florentine republics, understand the question differently, and if their military leaders, quartermasters, and agents have to set up a single artillery piece, they want to know about it and give advice on it.

The military and political implications of democratic micromanagement are still incredibly relevant today.

But the business and economic implications are just as severe. You can read a thousand tweets a day about The Fed — or any Central Bank of your choice. You can read another thousand armchair CEOing the decisions of a handful of executives at companies that capture the public eye.

And that’s just the masses, who would be the Plebeians by analogy to Rome. Machiavelli’s point was about the Senate itself, and our own Congress has lately grown fond of dragging executives before it to answer to a parade of horrifically formed questions. Or you can open your favourite media publication’s homepage and see more of the same. Or tune in to your favorite business podcast.

…nevertheless, not being on the spot and not knowing the countless details that must be known in order to give good advice, they would have committed countless errors in giving it.

But beyond taking easy shots at the commentariat, the main lesson here for modernity is the appropriate delegation of power when operating in the fog of war, when timing is important, and when potential outcomes could be huge.

Namely: reserve nothing for yourself except what direction to point in.

Book Three: Ad-hoc Advice

There are many good chapters in Book 3, but they don’t lend themselves cleanly to a theme. The chapter on “Conspiracies” has been quoted by people in recent times, most scandalously in the takedown of Gawker Media, and while it’s the longest chapter in Machiavelli’s book I don’t think it’s the most insightful. Focusing on this chapter suggests the reader barely read any of the others — which is more reasonable than it sounds, given that the chapter is ~30 pages by itself, in a book whose other chapters never go beyond 5 pages.

This oddity is noteworthy, and I think a Straussian reading of the chapter is reasonable, and if you are trying to overthrow a government, or an adversary who can destroy you right up until you finalize them, you probably should give it a close read. But otherwise…there’s more valuable material elsewhere. I call this out here because you can make a case that the existence of the “Conspiracies” chapter changes how much of Book 3 should be read and I’m going to interpret it all literally instead of as an elaborate deception.

Make your own judgment.

When You Must, Tempt Fortune [Leadership]

Chapter 10: That a Commander Cannot Avoid a Battle When His Opponent Insists on Fighting Under Any Circumstances

A prince who has put together an army and sees that, for lack of money or friends, he cannot keep such an army together for long is completely mad if he does not tempt fortune before that army falls apart, because by waiting he will certainly lose, and by trying he may win.

Another thing to be considered carefully here is that even if one is going to lose, one must wish to acquire glory, and there is more glory in being defeated by a force than by some other difficulty that has caused you to lose.

Some of the best advice for Founders and executives in general in this chapter. The fog of war is real, the future uncertain, and sometimes things look dire af.

The scenario presented: you’ve assembled a great team but you can’t keep them together for too much longer, defeat is certain once the team dissolves, but victory looks unlikely in the present moment.

The advice given is not to self-immolate or make foolish decisions — the advice is to dare greatly and play the only line that has a chance of winning.

Beware Co-Captains [Leadership]

Chapter 15: That One Man and Not Many Should Be Placed in Command of an Army, and How More Than One Commander Is Harmful

Beating the same drum as before here, and again I just include this because I can’t help laughing at events from 500 years ago:

Livy declares: ‘It is most salutary that in the administration of great undertakings, the supreme command should be in the hands of a single man.’

This is exactly the opposite of what our republics and principalities do today, when, in order to administrate them better, they send into places more than one commissioner and more than one leader; this creates an immeasurable confusion. If the reasons for the ruin of the Italian and French armies in our times were to be sought, this would be the principal explanation.

It is truly possible to conclude that it is better to send one man of average prudence on an expedition alone than two extremely capable men with the same authority together.

Treat Your Reports Kindly [Leadership]

Chapter 17: That You Should Not Offend a Man and Then Appoint Him to an Important Governmental Post

Title seems like a “duh, no shit” thing, but witness:

Once this was learned in Rome, it earned Claudius Nero the condemnation of both the senate and the people, and he was criticized in an offensive way throughout the city, much to his dishonour and disdain…

Then they put him in charge of another army and sent him off again.

He decides to risk it all on a crazy & unnecessary gamble.

Later, when Claudius was asked why he had taken such a dangerous decision, in which without dire necessity he had almost gambled Roman liberty away, he replied that he had done it because he knew that if he succeeded, he would regain the glory that he had lost in Spain, and that if he failed and his decision had the opposite outcome, he would avenge himself upon the city and those citizens who had so ungratefully and shamelessly insulted him.

No shit.

It follows that it is impossible to organize an everlasting republic, because its downfall can come about in a thousand unforeseen ways.

Unforeseen or not, the title of this chapter — don’t disparage people and then give them power over you — seems like an obvious no-brainer. Executives who like to abuse or denigrate their employees ought to keep this one in mind.

Play To Win, Read Your Opponent [Tactics]

Chapter 18: Nothing Is More Worthy of a Commander Than to Anticipate the Decisions of the Enemy

I’m a huge fan of Sirlin’s Play to Win series of essays / free online book, who defines the ability to profit from anticipating the decisions of an opponent as the mark of a good competitive game:

Machiavelli concurs:

Epaminondas the Theban used to say that nothing was more necessary and more useful to a commander than having some knowledge of the deliberations and decisions of the enemy. Since such knowledge is difficult to obtain, the commander deserves even more praise when he does so by speculation.

The very best competitors can often incept certain ideas into their opponents. It’s a lot easier to know what your enemy is thinking if you can lead him by the nose to think exactly what you want.

No Factions in France? [Overcoming objections]

Chapter 27: How to Unify a Divided City, and Why the Opinion that It Is Necessary to Keep Cities Divided In Order to Hold Them Is Not True

Obviously this chapter jumps out at me because of the current political polarization and extremity of ‘faction’ that characterizes modern times.

But putting the tinfoil on hold for a moment, Machiavelli finds reuniting divided polities to be very simple:

The method of how to reunite a divided city may be noted: this method consists of nothing else, nor can the wound be healed in any other way, but executing the leaders of the disturbances.

Ah. Errr. Can we pause the Fedposting for a second please, sir?

For it is necessary to choose one of three methods: either execute them, as the Romans did; or remove them from the city; or force them to make peace among themselves under the obligation of causing no more harm.

okay let’s just go with the last one?

Of these three methods, the last is the most damaging, the least certain, and the most useless, because where much blood has been spilled or other similar injuries have been inflicted, it is impossible for a peace made by force to endure, with the parties meeting face to face every day; it is difficult for them to abstain from offending each other, with new occasions for complaints arising among them every day through their close association.

A thoroughly depressing analysis.

I hope & assume this is a good example of a time that Machiavelli was completely wrong.

Later in the same chapter, he continues:

If a republic governs it, there is no finer method of making your citizens wicked and causing divisions in your own city than to control a city that is divided, because each faction seeks to win favours and each creates friends through various corrupt means.

Two extremely great disadvantages arise from this: one, you never make the people your friends, for the reason that you cannot govern them well, since you must often vary the government, now with one humor, now with another and second, such concern with factions of necessity further divides your republic.

He then tells a story from contemporary 1500s Florentine affairs:

Monsieur de Lant harshly criticized this division, stating that if in France one of the king’s subjects declared he was in the king’s faction, he would be punished, because such a statement signified nothing other than that people who were the king’s enemies lived in that city, and the king wanted all the cities to be friendly to him, united, and without factions.

The opinion that division is necessary to rule arises from the weakness of those who are rulers. With the realization that they cannot hold states with force and with exceptional skill, they turn to such schemes, which are occasionally useful in quiet times, but when adversities and hard times arrive, they display their false nature.

Contra “executing the leaders of the disturbances”, this degree of unification does seem admirable and worth striving for. It’s hard to reconcile the division discussed in this chapter in a negative light with the “healthy conflict” discussed in Part I, but I think Machiavelli’s case would be that the “faction” described in this chapter is somehow different from the divisions between Consul/Senate/Plebeian.

Given how the “party lines” split at the time Caesar & Octavian turned the Roman Republic into the Roman Empire, I find this view unsatisfactory. The nuanced reality is likely that, on many occasions, internal political conflict is a sign of healthy politics and Live Players…right up until it isn’t.

It follows that it is impossible to organize an everlasting republic, because its downfall can come about in a thousand unforeseen ways.

Moses the Mass Murderer [Memes]

Chapter 30: That a Citizen in His Own Republic Who Wishes to Employ His Authority for Some Good Work Must First Extinguish Envy

Including for this one amazing sentence:

Anyone who reads the Bible intelligently will see that, in order to advance his laws and his institutions, Moses was forced to kill countless men, who were moved to oppose his plans by nothing more than envy.

Legendary take.

I think in Machiavelli’s worldview, this is actually an excellent move and he’s praising Moses here for his realpolitik, which just makes it even funnier.

Why Advisors End Up Depressed Or Cancelled [Scope]

Chapter 35: What Risks Are Run in Making Oneself the Leader by Counseling an undertaking; and How Much Greater the Risks Are When the Undertaking Is an Extraordinary One

Since men judge things by their results, all the evil that comes about is blamed upon the one who gave the advice, and if things turn out well, he is commended for it; but the reward is far from counterbalancing the blame.

Founders and advisers and execs take note.

It is therefore quite certain that those who give advice to a republic find themselves amidst these difficulties: that is, if they do not recommend without reservation the policies they believe to be useful, they fail in their duties; and if they give such advice, they place their lives and their position at risk, because all men are blind in the sense that they judge good and bad advice by the results.

After considering how to avoid either this infamy or this danger, I see no other path to follow than that of choosing moderate undertakings and never seizing upon any of them as your own, and that of speaking your mind without passion and, without passion, defending it with modesty.

A chapter filled with regret, the words obviously echo Machiavelli’s own personal career trajectory (aka exile and forced retirement and a three week stint being “…hanged from his bound wrists from the back, forcing the arms to bear the body’s weight and dislocating the shoulders…”)

What’s sad here is that his ultimate conclusion — choose moderate undertakings, do not seize upon them as your own — is aligned with a “corrupt” society, per his own definition from Part I. The “Roman way” Machiavelli prizes so much would simply be to do what is right, vigorously, and suffer the consequences.

Of course that’s easy to say from my position of not-being-made-to-suffer-three-weeks-of-consequences.

The dividing line between “Actor” and “Advisor” is thin in many ways, but infinitely large in others.

And in this chapter Machiavelli is lamenting the fact that Actors hold Advisors responsible for their advice in the exact same way that the masses or the aristocracy would hold the Actor accountable. This asymmetry is severe and will feel unreasonable to most who serve in this role, because their upside is much more limited than the Actor’s upside.

Of course the alternative is simple: take the reins of action yourself and step out of the advisor role. You’ll keep the same downsides, but get more upside. Win-win.

I call this “the Lenin play”.

The Unfortunate Persistence of Unjust Stereotypes [Memes 2]

Chapter 36: The Reasons Why the French Have Been and Are Still Considered More Than Men at the Outset of a Battle and, Later on, Less Than Women

Including this because the title took me by surprise, given that such unfair stereotypes are still repeated today in America.

Even more: Machiavelli’s specific diagnosis in this chapter is that the French have an incredible amount of “passion,” but only a limited amount of “order.”

While I would of course not condone any stereotyping whatsoever, on any occasion, I do find this hilarious given that it was written 500 years ago. Blame it on my Anglo heritage.

In an entirely unrelated event, the title of Chapter 43 is: “Men Born in One Province Display Almost the Same Nature in Every Age”, and consists of a description of the unchanging character of cultural transmission & socialization through across eras.

You Will Not Become Great When You Get The Title, You Get The Title When You Become Great [Rank]

Chapter 38: What a Commander Should Be Like to Gain the Trust of the Army

“Not by means of political faction nor through the conspiracies beloved of the nobility have I won for myself three consulships and the highest praise, but by this right hand of mine.”

These words, carefully examined, will teach anyone how a man must conduct himself if he wishes to hold the rank of commander, and anyone who is not like this will discover in the passing of time that this rank, when it is held through fortune or through ambition, will have the effect of stripping him of any reputation, not of bestowing it upon him; because it is not titles that make men illustrious, but men who make the titles illustrious.

If your speech about why people should follow you isn’t inspiring artists to paint pictures like this of you 1,600 years later, are you really in charge?

Do New Things [Staying Alive]

Chapter 49: If a Republic Is to Be Kept Free, Each Day It Requires New Measures

Last chapter in the whole book here.

Its message is a fitting one.

You cannot know what is coming in the future:

Every day in a great city, accidents necessarily arise that require a physician, and the more important such accidents are, the more necessary it is to find the wisest physician.

For a Republic to survive, it needs to be a “Live Player”, able to do new things:

Many of the individual themes in this book come down to this final point. Agility, consistency, wisdom, a bias to action, and the absence of corruption, all come together to enable a Republic to overcome whatever life throws at it.

You aren’t going to be successful forever. Entropy always wins in the end. But between now and then, you can make a glorious showing of it.

Conclusion: Becoming Elden Lord

So we’re at the end of the book now, at last, and this review has ballooned in length to nearly become its own standalone book. If you consider the length of Livy’s original Ab Urbe Condita compared to Machiavelli’s own Discourses, I think I’m roughly in line with the shortening tradition. Another 2 or 3 reviews down the rabbit hole and you might have something readable in a single sitting.

But you can say one thing about Machiavelli’s review that you can’t about mine: he filled his with original or semi-original theses about the structure of a healthy government. I mostly just made observations. My only defense here is that Machiavelli published posthumously. You’ll have to sift through a 4 hour podcast if you want to hear anything more specific from me (thanks to Lorenzo and the Swarm podcast for hosting me this week, give it a listen here!)

Still, I did have one encapsulating thought that I want to leave on, and a brief story to pair it with.

I had a little extra time in the evenings recently and started playing a newly released game called Elden Ring. It’s known for being brutally punishing to new players (that’s me). After my 32nd death to a generic NPC, I went looking on Reddit for help and tips with my underperforming character build. There I saw a comment that’s a bit of a meme in the community:

Having read the whole book twice over now, if I had to condense Discourses on Livy down to a single meta-thesis it would be:

A republic is a reflection of its people; a tyranny of its tyrant. The problems of a republic are diffused across the people, while those of a tyranny are concentrated in the tyrant.

I like this framework, as concentrated problems are also much more visible, and solutions will appear simple and obvious — whereas diffused problems will tend to escape notice and solutions are hard as hell. Most of this book wrestles with the various pitfalls of diffused problems — responsibility, decision making, & accountability.

In a system of centralized power and authority, the primary issues are succession and the character of the autocrat.

In a republic, the primary problems are decision-making and the character of the people. To the extent the other topics are also issues, it’s as a reflection on the people themselves and not the structure of the republic — else they would simply change things.

So in as far as you have issues with the outputs of any republican institution, my response having read Discourses on Livy is:

My brothers in Christ, YOU made the government

You’ll be pleased to know my Elden Ring story has a happy ending: I took some responsibility for my misallocated experience points, put my head down and grinded for a bit, and was then able to rejigger my build into something that let me slay the harder bosses.

I wish all readers similarly happy endings :)

At the end of the day, you make the build.

Imagine you’re an intellectual who lives and works in close proximity to your society’s elite. Imagine that your studies of history and politics have inspired a deep love of social liberty and republicanism:

…a form of government in which "supreme power is held by the people and their elected representatives". In republics, the country is considered a "public matter", not the private concern or property of the rulers.

And crucially, imagine that the society all around you exists within the rotten carcass of what was formerly the greatest Republic ever known. Imagine there has been a complete and total decay of moral and civic virtues among the citizenry, only surpassed by an even worse decay in the quality of your political leaders.

You must watch as states around you are invaded because their civic leadership is incompetent, and your own government initiates wars on its neighbours that result in the literal shrinking of your state’s borders and the metaphorical shrinking of its treasury. Violence, poverty, inequality, corruption, sickness, and oppression are everywhere, and the thought of restoring the once glorious Republic seems hopeless.

The future looks bleak, and the most depressing thing is: it’s all self-inflicted.

I am of course describing Italy, circa 1500.

And if you can contextualize the dates and writings of one (in)famous scholar of the times…

…to the events that surrounded him, it is a wonder any rehabilitation is necessary at all:

Our protagonist — Machiavelli — was born 35 years after the Medici family had began to grasp power. He lived through the death throes of the Republic and actively conspired to restore it. When the Medici “reconquered the republic in 1512”, per the underlined section above, they sent him into exile and ended his political career.

What a man’s friends say about him is an indication of his character. But what a man’s enemies say about him is often a stronger one. To be condemned, tortured, and rendered unemployable — dare I say properly “cancelled”? — by the monarchy that overthrew the republic…what more needs to be said?

That Machiavelli is best known for his sycophantic book gifted to an aspiring tyrant, complete with a plea to look after his own hide and please not torture him more, instead of the collection of his own pro-republicanism, pro-liberty beliefs dedicated to the friends who forced him to write it, friends who do not even merit their own wikipedia pages, is the ultimate ironic tragedy.

Fate laughs at us all.

The Book Itself: Asking Readers To Do The Work

A fair warning to readers: the book you read will be a modern translation of a work written in the 1500s, that was itself an analysis of another book finished in the year 9BC, accompanied by reflections and juxtapositions between the ancient events detailed by Livy and current affairs — where “current” means circa 1400-1500AD.

But you are now 500+ years removed from those “current” affairs, and 2,000+ years removed from the ancient ones.

Machiavelli lays out the relevant stories from ancient Rome in reasonable detail, while presenting “current” affairs analogies with just a quick reference to a name and a place. 500 years on, the political intricacies of Florentine state-building will likely be completely unfamiliar to any modern reader.

So as a reader you’re trying to construct a functioning mental model of the Roman republic as described by Livy, as then described by Machiavelli, in addition to a functioning mental model of early-Renaissance Italy, as half-described by Machiavelli, and then compare both of those models to your current model of the present and recent past.

I find this quite fun. But I would not say it is easy.

Book One: Internal Affairs

Machiavelli begins by outlining his belief that all governments follow a rhyming character arc that goes round and round in similar circles. This is the longest single quote I’ll make from the book, but I’ll let him describe it in his own words:

A Framework for Unavoidable Regime Change

Chapter 2: How many kinds of republics there are, and what kind the Roman republic was

The heirs immediately began to degenerate from their ancestors, and abandoning acts of special worth, they thought princes had nothing to do but surpass others in luxury and lasciviousness and all other forms of licentiousness. The princes then became afraid on account of the growing hatred among the people, and quickly passed from fear to harmful acts. Tyranny immediately arose.

Subsequently, this gave rise to the beginning of the collapse and the conspiracies and plots against princes, executed not by those who were either timid or weak but by those who surpassed others in generosity, greatness of soul, wealth, and nobility; such men as these could not endure the dishonorable life of such a prince.

The masses, following the authority of these powerful men, took up arms against the prince, and once he had been eliminated, obeyed them as their liberators. And since these men hated the very idea of a single leader, they constituted a government among themselves.

In the beginning, mindful of past tyranny, they governed themselves according to the laws they had instituted, subordinating their own interests to the common good, and with the greatest care they managed and maintained both their private and public affairs.

This administration later passed to their sons, who did not understand the changeability of fortune since they had never experienced evil, and unwilling to remain content with civic equality, they turned to avarice, ambition, and the unlawful seizure of women, causing a government of aristocrats to become a government of the few, without regard for civic bonds of any kind.

In a brief time what happened to the tyrant happened to them, because, disgusted by this system of government, the multitude became the instrument of anyone who designed any kind of plan to attack these rulers, and someone thus soon rose up, who, with the aid of the multitude, destroyed them.

Furthermore, since the memory of the prince and the injuries he inflicted was still fresh, after having destroyed the government of the few and unwilling to reestablish that of a prince, the people turned to democratic government, and they organized it in such a way that neither the few powerful men nor a single prince would ever have any authority whatsoever.

Since all governments receive some respect in the beginning, this democratic government was maintained for a while but not for long, at the most until the generation that had founded it passed away, for it immediately fell into a state of undisciplined liberty, where neither private citizens nor public officials were feared. As a result, with each person living according to his own wishes, a thousand injuries were inflicted every day, so that, forced by necessity or by the suggestion of some good man, in order to flee such permissiveness they returned again to the principality, and from that, step by step, they returned towards a state of undisciplined liberty in the ways and for the reasons given.

And this is the cycle through which all states that have governed themselves or that now govern themselves pass, but rarely do they return to the same forms of government, because almost no republic can be so full of life that it may pass through these mutations many times and remain standing.

It is possible to distinguish Machiavelli’s point here from Fukuyama’s argument in The End of History, and I think arguing the merits of each is a worthy cause, but I’ll pay for the round if you can still do it after drinking a single alcoholic beverage.

Conflict Is A Sign of Healthy Politics

Chapter 4: How the Division Between the Plebeians and the Roman Senate Made That Republic Free and Powerful

Those who condemn the disturbances between the nobles and the plebeians condemn those very things that were the primary cause of Roman liberty. They give more consideration to the noises and cries arising from such disturbances than to the good effects they produced; and they do not consider that in every republic there are two different tendencies, that of the people and of the upper class, and that all of the laws which are passed in favour of liberty are born from the rift between the two, as can easily be seen from what happened in Rome…

This is very much a core part of Machiavelli’s worldview, and comes up in different flavours throughout the book: the idea that it is strife and struggle and turmoil and compromise that keeps a society in balance and alive. Things which his contemporary intellectuals read as signs of trouble are read by Machiavelli as evidence that one side has not succeeded in oppressing the other, and therefore that liberty is alive.

Put another way: the interests of different layers of society will always come into conflict — the absence of visible conflict in a society is therefore a sign of sickness, not health.

It’s the silence you want to watch out for.

A Chief Executive’s Only Path To Safety Is Through The Masses

Chapter 6: Whether in Rome It Was Possible to Organize a Government that Could Do Away with the Enmities Between the People and the Senate

Sparta, as I said, was governed by a king and a senate of limited size. It was able to sustain itself for such a long time [800 years] because it had few inhabitants and access to participation had been taken away from those who came there to live, and once the laws of Lycurgus were adopted to good effect, the Spartans were able to live in unity over a long period of time.

With his laws, Lycurgus created in Sparta greater equality of property and less equality of rank, so that there was an equality of poverty there, and the plebeians were less ambitious since the high ranks of the city, extended to few citizens, were denied to them; nor did the nobles ever give the plebeians any desire to obtain these ranks by mistreating them.

This was due to the Spartan kings, who, being set up in that principality and placed in the midst of that nobility, had no better way to secure their office than to protect the plebeians from every injury. Thus the plebeians did not fear nor did they desire power, and neither possessing power nor fearing it, the competition they might have had with the nobility and the cause of such disturbances were eliminated, and they were able to live in unity for such a long period of time.

But there were two principal causes for this unity: first, the fact that Sparta had few inhabitants and could therefore by governed by few men; second, the fact that by not accepting foreigners into their republic, they did not have the opportunity either to become corrupt or to grow to such an extent that the city became an intolerable burden for the few who governed it.

Machiavelli observes that in Sparta, significant equality of property, coupled with an exclusionary hereditary aristocracy, massively reduced the ambition of the masses — and therefore the potential to enter the next stage of the civilization cycle laid out in Chapter 2. You might be poor, but so is everyone — even the aristocrats — so what are you going to through a revolution about?

He also notes that the best safeguard a king has for his own position is to ally himself with the masses and secure their wants and needs. Since the Spartan society was anti-property, anti-wealth, and anti-luxury, there was no possible form for this alliance to take other than one of mutual protection from harm. The king can’t lure the masses with handouts — “bread & circuses” — when fun is banned and everyone gets the same amount of bread.

While many of the examples in this book will be social in nature (econo-/politico-/religio-/cultural factors), this idea applies to social institutions of any kind, including corporations. The analogy is strained, but if you view a State as composed of competing factions — the Elite and the Masses — then you could also view a company as composed of similar factions — Management, Employees, and Customers. My model here is:

Management::Consuls

Employees::Senate

Customers::Plebeians

— which suggests that some segment of internal stakeholders will tend to engage in power struggles against executive leadership, and that the “best safeguard an executive has for his own position is to ally himself with the customers and secure their wants and needs.”

I realize this might seem like I’m smoking my usual blend of English Breakfast Tea and chocolate, but I actually think this framework is a very useful mental model for modeling current events and predicting their likely outcomes:

In each of the above three events, having an accurate model of customer sentiment regarding the company and the exec suffices to predict the outcome (note: SpaceX’s actual customers are not average consumers like me) — arguably more so than actual financial metrics.*

On a reasonable timescale, all sufficiently successful Executives will experience a campaign against their leadership in one vein or another. Keep Machiavelli’s advice in mind, when he says “no better way to secure their office…”

*as an uninvolved party in these three examples, and a customer of two of them, I happen to also think the outcomes in each was the correct one. Which is not contrary to my point: if you haven’t satisfied your customer base enough that they would stick their neck out for you, you are not secure.

Justice Must Be Seen To Be Done

Chapter 7: To What Degree Public Indictments Are Necessary in a Republic to Maintain Its Liberty

Note how useful and necessary it is for republics to provide through their laws a means of venting the anger the multitude feels toward and individual citizen, because when such legal means are not available, they will resort to illegal ones, and without any doubt the latter produce much worse effects than the former.

The examples in this chapter are fully fleshed out, both ancient and current. They make for compelling reading.

To his point about citizens seeking their own “means” when failed by the state…we are hot off the heels of a summer of nationwide protest in response to police murder, unrest, civil disobedience, uncivil disobedience, more police brutality, police abandonment of duty, a crime wave, a homicide wave, and, in a response Machiavelli would predict, private citizens buying an extra 8 million guns:

If the republic cannot provide justice, the masses will attempt to do so themselves.

To quote from later in the same chapter:

…this would have given rise to individuals harming individuals, the kind of injury that generates fear; fear seeks protection, for which partisans are procured; out of partisans factions are born in states, from which arises their destruction.

Real Darth Vader stuff.

Whatever your degree of support for some of these things, the Machiavellian view is that they are a predictable consequence of Judicial inadequacy.

Fix the justice system and you can fix a lot of the other unpleasantness.

False Accusations Weaponize Democracy

Chapter 8: False Accusations Are As Harmful to Republics As Public Indictments Are Useful

Thus, so full of envy that he could not restrain himself, and realizing that he could not sow discord among the senators, he turned to the plebeians, spreading various sinister rumours among them…

These words were quite persuasive with the plebeians, with the result that they began to hold meetings and to create disturbances in the city; this displeased the senate, and since they considered it a significant and dangerous situation, they created a dictator to examine the matter and to hold his impetuosity in check.

We got a dictator appointed in 2 sentences. Pretty impressive speedrun there.

False accusations are most often employed where there are fewer public indictments and wherever cities are less well organized to receive them.

The organizer of a republic must find an arrangement which allows charges to be made against any citizen in the republic without fear and without respect to the individual’s position, and after a charge has been made and thoroughly examined, he must severely punish those making false accusations, who cannot complain when they are punished, since avenues were open to hear the charges against those whom they falsely chose to accuse under the porticoes.

Wherever this element is not well organized, great disorders always follow, because false accusations irritate but do not punish the citizens, and those who are irritated think about proving their worth by hating rather than fearing the things that are said against them.

To be clear, step one is to provide speedy & effective avenues of justice for all citizens at all times.

If you mess that up, everything else is suspect.

The False Accusations described in this chapter that led to a dictator being appointed were not made in courts at all — they were spread amongst the people as part of a power struggle.

The backdrop is, as usual, that these words have consequences for the health of the nation, and that the masses can always be leveraged to provide power and support that a functioning justice system would never condone. I note to myself while reading that the examples he fleshes out from both Rome and Florence involve intra-elite competition. Perhaps you can think of similar examples from more contemporary history.

This is a continuation of his theme of the balance of power between Autocratic, Aristocratic, and Democratic power: the democratic power can be easily swayed by false accusations made in public spaces (because the plebeians are not particularly smart, wise, or capable, on account of the fact that if they were, they would ascend to the elite in any worthy meritocratic society).

Our internet discourse today is as unhealthy as ever, and people of all stripes have experienced the unpleasantness of the Democratic Eye being turned on them, transforming their private messages into a stream of abuse, slurs, doxxing, and death threats. Those things are bad in all cases — but knowing that they can be summoned against your opponents increases the expected frequency of their summoning.

False accusations are a primary way elites summon those disaggregated democratic weapons against their opposition.

That’s the moral hazard of False Accusations — not punishing them swiftly and to the satisfaction of all involved results in much worse behaviour than otherwise would have occurred, at many meta-levels of society.

Urban vs. Rural Divide: Older Than You Think

Chapter 11: On the Religion of the Romans

In truth, no maker of extraordinary laws who did not have recourse to God has ever existed in any society, because those laws would not otherwise be accepted, and because although the good things known to a prudent man are many, these things in themselves lack the self-evident qualities that can persuade others.

There’s a brief hint of self-pity in this paragraph that won’t resurface until the very end of the book. The point that good and true things are often unconvincing to others is felt most strongly by a man who has tried and failed. Given the continued relevance of Machiavelli’s thoughts in this book 500 years later, I find him somewhat vindicated here.

Without doubt, anyone wishing to establish a republic at present would find it easier among mountain people, where there is no civil society, than among men who are used to living in cities, where civil society is corrupt; a sculptor will more easily extract a beautiful statue from a rough piece of marble than he can from one badly blocked out by others.

I conclude that the religion introduced by Numa was among the principal reasons for the happiness of that city, because it produced good institutions, the good institutions created good fortune, and from good fortune arose the happy successes of their undertakings.

It’s hard to come away from this chapter thinking Machiavelli anything other than an atheist, or as near as you can get to atheist in the 1500s. He’s not talking about Christianity when he praises Numa. It’s clear that the corrupt abuses of the Church are responsible for his own disdain towards “modern” (aka 1500s) organized religion, but he has many fond words for the use of religion and spirituality in ancient times to bind people together in harsh times, and gives many examples of times that the religion was directly helpful for motivating Romans to overcome hardship.

This might be interesting on its own, but the parallels to modern discourse are the most striking part of these next few chapters.

In particular, his comment here on the divide between rural and urban peoples jumped out at me. Despite being an urban ~atheist, he can’t help but note positively the stronger moral foundations that appear in rural religious areas.

“…among men who are used to living in cities, where civil society is corrupt…”

I don’t want to litigate today’s Culture War, but the durability of this rural/urban spiritual divide across 500+ years is a point in favor of these observations being systemic and not related to any facet of modern living.

Before any of my urban readers get too offended at the implication that they are “corrupt” by default, do stick around for the following chapters on Wealthy Inequality and the true nature of “real” corruption. I suspect you may see his point…

The Heresy Chapter

Chapter 12: How Important It Is to Take Account of Religion, and How Italy, Lacking in Religion Thanks to the Roman Church, Has Been Ruined

With a title like that, is it any wonder this was only published posthumously? Galileo hadn’t even been born yet and my man is here saying:

Because of the evil examples set by this court, this land has lost all piety and religion; this brings with it countless disadvantages and countless disorders, because just as we take for granted every good thing where religion exists, so, where it is lacking, we take for granted the contrary.

That is to say: people no longer expect justice in the courts, virtue in the ruling class, wisdom in the priests, and perseverance in the masses. And the lack of expectation of these things makes for a self-fulfilling prophecy. I can’t imagine how difficult that must have made things.

Machiavelli says repeatedly throughout the book that bad examples cannot be allowed to stand. Not even once. Institutions cannot pay lip service to their ideals without corrupting the whole society around them. As another wise man once said:

“Injustice anywhere is a threat to justice everywhere.”

To satisfy Machiavelli, a society’s elite must be both spiritually worthy and technically excellent at all times.

If we return briefly to the Lifecycle Theory of Government presented in Chapter 2, this starts to make a bit of sense: your institution is always one bad generation, or one major crisis, away from (self-)immolation, and so those with a hand on the rudder must always have the ability and the character to navigate each new challenge.

Against Wealth Inequality

Chapter 17: A Corrupt People Which Becomes Free Can Remain So Only With the Greatest Difficulty

Once a city has begun to decline through the corruption of its substance, if it ever manages to rise again, this occurs through the exceptional ability of a single man who is alive at the time and not through the exceptional ability of the people as a whole who support good institutions. As soon as that man is dead the city returns to its former habits, just as in Thebes, which, through the exceptional skill of Epaminondas, was able to maintain the republican form of government and an empire while he was living, but returned to its former disorders once he was dead.

The reason is that no single man can live long enough to train a city long accustomed to bad habits. If one man with an extraordinarily long life, or one skillful ruler succeeded by another, does not set it back in order, the lack of such men brings it to ruin, unless they have, at the risk of much danger and bloodshed, brought about its rebirth.

Thus, such corruption and so little aptitude for living in freedom arise from an inequality that exists in the city, and if one wishes to bring the city back to a state of equality, it is necessary to employ extraordinary measures, which few know how or wish to employ…

With the other contextual examples provided elsewhere in this chapter, it’s clear that the “corruption” Machiavelli refers to is a spiritual corruption resulting from divergent access to goods and services — spelled out in this chapter as Wealth Inequality. “Corruption” is used interchangeably to mean conditions of wealth inequality, as well as the downstream debased state of public character that results: “so little aptitude for living in freedom.”

This is a real thorn for Machiavelli, because he views a significant underclass who has ~nothing to their name as a huge boon for any aspiring tyrant — because said tyrant can gain the loyalty of this class by promising them stuff.

He writes:

Caesar was able to blind the multitude so that they did not recognize the yoke that they themselves were placing upon their own necks.

The use of “inequality” in this chapter is worth focusing on, as it’s obviously been a hot-button topic in American politics for the last 50 years now. Machiavelli’s utilitarian pro-liberty view is that inequality is bad because it leads to an easily manipulated population, and a malleable population will conform to the will of any ambitious aristocrat with a big enough wallet.

Inequality is the fastest pipeline to tyranny.

Institutional Corruption, Political Incompetence

Chapter 18: How a Free Government Can Be Maintained in Corrupt Cities If One Already Exists, or, If One Does Not Already Exist, How to Establish It

A sad tale of institutional decline:

This institution was good at the beginning, because no one asked for these offices except those citizens who deemed themselves worthy, and to be refused was disgraceful; as a result, in order to be deemed worthy of them everyone behaved well.

This system later became extremely harmful in the corrupted city, because those with the most power rather than those who possessed the most ability asked for the magistracies, and those lacking power, no matter how able, refrained from asking for them out of fear.

The corrupted* city moved away from meritocracy…

Rome did not arrive at this disadvantageous situation all at once, but rather by degrees, just as one falls into all the other kinds of difficulties.

…slowly…

It was therefore necessary, if Rome wished to remain free amid the corruption, that just as the city had created new laws in the course of its existence, it should also have created new institutions, because different institutions and ways of life must be established for a subject who is evil rather than good…

…and so different rules and social structures should have been setup…

But since all these institutions must either be reformed all in a single stroke as soon as it is discovered they are no longer good, or little by little before everyone realizes they are bad, let me say that both of these two alternatives are almost impossible.

…alas, having not done so, reform is the only option. And reform is ~impossible. So Rome was screwed.

The wish to reform them little by little requires a prudent man to come forward who sees this problem from some distance and in its initial stages. It is very likely that an individual of this type may never emerge in a city, and even if one were to emerge, he might not be able to persuade others of what he himself has come to understand, because men used to living in one way do not wish to change…

As for changing these institutions all at once, once ordinary methods have become wicked it is necessary to turn to extraordinary methods, such as violence or arms, and to become prince of the city and able to arrange it as one wishes. But since the reorganization of a city into a body politic presupposes a good man, whereas becoming the prince of a republic through violent means presupposes an evil one, we will discover that only on the rarest occasions will a good man wish to become prince through evil means, even though his goal might be a good one.

We will also discover that equally rarely will an evil man who has become prince wish to govern well.

From all the above-mentioned forces arises the difficulty or impossibility of maintaining a republic in corrupt cities or of establishing a new one in them, and even if one had to be established or maintained there, it would be necessary to lead it more towards a monarchical than towards a popular government, so that those insolent men who cannot be improved by laws would be held in check by their king.

To try to make them become good by other means would be either a most cruel undertaking or completely impossible.

Threading it all together, in my own words:

Institutions are the vessel through which state power is channeled, but it is the people themselves who determine whether that power will be used for good or evil. No institution can withstand an unworthy population, and a corrupt* people will slowly subvert any institution that was fitting for a worthy people. Given pre-existing corruption, the only way to get a functioning republic is to fuse it with a monarchy, otherwise the power-hungry elite will trample over everyone and everything.

But doing this requires what Machiavelli euphemistically calls “extraordinary means”…and few good men are willing to temporarily adopt “extraordinary means” to reorganize the state, while a great many bad men would happily don the Cloak of Extraordinary Means for evil ends.

While the Monarchical-Republic fusion is suggested near the end as the only real way out of the pit, Machiavelli rules this as a near-impossibility, barely ahead of the absolute-impossibility of all other options. Make no mistake — he strongly prefers that the people themselves become worthy of good government. By the time you’re talking of reforming a corrupted* people, you’re already too late.

If you’re a modern day Neoreactionary, this chapter will provide some excellent points and reading to support your positions, plus it’s 500 years old which makes it more based than anything written since the Enlightenment, with the one minor downside that the man outlining the points is fundamentally opposed to them, views them as ugly & unpleasant, and explains at length how they’re a local maxima that is almost certainly doomed to failure.

*A further note on corruption: today in the West, “Corruption” is used mainly to mean [exploiting a system for personal financial gain]. When a newspaper describes someone as “a corrupt official”, they are talking about personal enrichment. The IMF helpfully explains:

While this is not strictly counter to Machiavelli’s meaning, his use of the word is much broader. For instance, when he says:

This system later became extremely harmful in the corrupted city, because those with the most power rather than those who possessed the most ability asked for the magistracies…

It is the essence and spirit of the city (& its people) that has become corrupted here. Yes, aspiring politicians are abusing a system for personal gain. But that is a symptom of corruption, not a cause. There’s a much deeper level to things: the sidelining of virtue and competence in society. Note the conclusion of that sentence observes:

…refrained from asking for political appointments out of fear.

In other words, there was no longer a political meritocracy at work, purely because the most capable citizens voluntarily opted out of civic participation in Ancient Rome.

Why does this catch my attention?

Well what better way to launder Machiavellian Corruption into a system than to rebrand corruption itself? And so I ask myself, and you, whether or not Machiavelli would agree with the rankings presented here:

Using his definition, not ours, are the governments of New Zealand and Finland more virtus and competent than those of Singapore and Germany? Does the US government do 22 points more good for its people than the Chinese government? If we charted the relevant performance of these 6 nations over the last 50 years, whose captains have done best by their own people?

I am not asking: whose officials enrich themselves while working in public service? I am not asking: in which country would you like to be born?

I am asking: whose own elite proudly serve in the halls of their own government? I am asking: whose active daily work has improved the state of their people the most?

I recognize this is a bit spicy, but that one simple sentence fragment sparked all this commentary from me — “…those lacking power, no matter how able, refrained from asking for political appointments out of fear.” — because I’ve been fortunate enough to spend time at some fabulous American institutions, from Andover to MIT, Wall Street to Silicon Valley, and the best people from each of them wouldn’t touch politics with a rusty 10-foot pole. You face personal reputation destruction, media smear campaigns, and debasement before donors. You must discard principle and sway in the breeze with the polls or the political machine or both. In exchange, you receive less power than a provincial administrator would have received working for any of the great powers of history.

And against all that, the private sector offers you: wealth, direct responsibility for outcomes that touch millions, prestige and a (mostly) protected life for your family.

Why would the competent people ever go near politics?

Of course the consequence of all this is that the political arena becomes dominated by “those with the most power, rather than those with the most ability",” which will regrettably have spillover effects on the rest of us.

Perhaps I’m too pessimistic here. Perhaps these institutions are unreflective of the country as a whole, perhaps elsewhere there are institutions where the very best, most competent, and most worthy people are proud to submit their names to the political arena. Perhaps I misread the caliber of these institutions and there are some other venues our country’s elite flows through, ones sufficiently different from my own experiences. Perhaps there is no such thing as a meritocratic elite in America and the Levellers got their wish. If that’s true, then my indictment is confined merely to the narrow slice of the population that I know well, and not reflective of broader society.

But if not…

No Bad Deed Unpunished

Chapter 24: Well-Organized Republics Establish Rewards and Punishments for Their Citizens but Never Compensate One With the Other

The merits of Horatius were very great, since with his skill he had overcome the Curiatii; his offence was atrocious, since he murdered his sister. The Romans, nevertheless, were so angered by this homicide that they put him on trial for his life despite the fact that his merits were so great and new.

He saved the republic, came home, and immediately murdered his sister. No matter how great a debt Rome owes him, they still put him on trial immediately.

No well-organized republic ever cancels the demerits of its citizens with their merits, but after having instituted rewards for a good deed and punishments for an evil one, and after rewarding a man for having acted well, if that same individual later acts badly it punishes him without any regard whatsoever for his good deeds.

…if a citizen who has rendered some distinguished service to his city also gains the confidence that he will be able to undertake without fear of punishment some bad action, he will become in a brief time so insolent that every element of civic life will disappear.

Here Machiavelli lays out a brief framework of criminal justice — i.e. implicit is the idea that not punishing evil will, at the margins, generate more of it via repeat offences, even when done by men who have achieved great & admirable things…and also that if the people believe success in one domain grants license to act badly in all others, it destroys the fabric of civic life, actively funnels bad actors into public service, and causes those who do great things to be viewed with default-skepticism.

If you ever wonder why ~all the powerful people are bad, ask if you know of anyone who received a pass for bad behaviour due to being a “high-performer” in some domain…

Executives Cannot Fear Reprisals For Performance

Chapter 31: Why Roman Commanders Were Never Excessively Punished for Errors They Committed, Nor Were They Ever Punished When Their Ignorance or Poor Decisions Resulted in Harm to the Republic

Even if a commander’s error was committed out of malice, they punished him humanely, and if it was committed out of ignorance, they not only avoided punishing him but they rewarded and honored him…because they judged it to be of such great importance for those who commanded their armies to possess a free and ready mind, unhindered by irrelevant matters in making decisions, that they did not wish to add to something already difficult and dangerous in itself new difficulties and dangers, believing that if they did so, no commander would ever be able to take skillful action.

The wisdom and maturity in this approach is fascinating.

Silicon Valley makes a somewhat decent showing of adopting this mentality, although lately the commentary endorsing failure (“fail fast, fail often!”) has taken on a slightly cynical and sarcastic tone.

The broader corporate world seems to do a much worse job on this front. Because executive pay is directly and heavily tied to stock performance, CEOs of large public companies experience perceived-negative outcomes due to factors entirely beyond their control (I hesitate to use the word “punish”). We could easily argue that executive pay is inflated, getting paid 6-figures should be enough for anyone, or that the executive should be paid less if the investors aren’t getting as good of a return. Many do argue those points, and I wouldn’t fight them.

But the Machiavellian lens is to ask: what will the consequences of adopting your rule be? The consequences of not-rewarding generals for negative outcomes that occurred due to unforeseeable events was cowardly and risk averse generals, who could be counted on to save their own hides in the present (aka battlefield) but not win glory for Rome.

Is it unreasonable to expect public company executives to behave any differently? How would you expect a rationally self-interested actor to behave, knowing that he currently holds the highest potential income earning opportunity of his life, and that that income is heavily dependent on factors entirely beyond his control? Might he not concern himself with mitigation strategies instead of winning glory for Rome building the best possible company?

Of course stock buybacks are just one tiny slice of the pie, and I’m happy to defend them from an investor point of view if anyone wants to argue the issue. The point is to view things from the General’s POV.

Let’s briefly check in on our favorite Tech stocks to see how they’re doing right now, for no particular reason whatsoever:

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Being an executive — or even an employee — at one of these companies right now is pretty miserable. Your personal net worth tanked by 20-90% and your effective annual compensation dropped by a similar amount — but you didn’t change a thing.

Personally, I would note that the 2020→2022 period was marked by anomalous asset inflation, felt particularly in Tech stocks, and that this year’s bloodbath is more of a reversion to the mean than a true indictment of business value. But if you joined any of these companies in that time window, your compensation package was benchmarked against those inflated values. Knowing that they were inflated doesn’t change the fact that you’re now getting paid cents on the dollar.

I’m sure this news is all unrelated, but it’s also worth checking in on a favorite darling of the Tech world:

I leave it to the reader to explore how the perceived-punishments for mistakes handed out to today’s political leaders change their decision making, up to and including the willingness of capable people to throw their hat in the ring.

A Little Bit O’ Dictatorship Is Good For You

Chapter 34: Dictatorial Authority Did Good, Not Harm, to the Roman Republic; and How Authority Citizens Take for Themselves, Not That Which Is Granted Them Through Free Elections, Is Harmful to Civic Life

This, in combination, the brief duration of the dictator’s appointment, his limited authority, and the fact that the Roman people was uncorrupted made it impossible for the dictator to go beyond his limitations and to harm the city, and experience shows the dictatorship was always a useful institution.

Among all the other Roman institutions, this one truly deserves to be considered and numbered among those which were the source of the greatness of such an empire, because without a similar system cities survive extraordinary circumstances only with difficulty.

The usual institutions in republics are slow to move, since no council nor any magistrate can undertake anything alone, for in many instances they need to consult one another; and since time is wasted in coming to an agreement, the remedies for republics are very dangerous when they must find one for a problem that cannot wait.

I laugh to think that the bolded final sentence I quoted here was written 500 years ago.

It might seem strange at first to read the title of this chapter and try to picture how autocratic authority can be viewed positively by a man trying to set liberty and political self-determination as his North Star. But the examples in this chapter, and the limitations described, are very clear.

Today, we think of Cincinnatus as an aberration for putting down the dictatorial powers granted him within a few weeks…but reading Machiavelli makes it clear that the admirable thing to the Romans was the speed with which he accomplished his civic duty (competence as virtue). Putting down the powers after achieving his task was always part of the deal. To be sure, he could have reasonably held onto the powers for longer, and part of his legend is his complete disinterest in wielding political power for its own sake — but my point is that this was a cultivated civic virtue among the Romans, which he most strongly exemplified, as opposed to a norm he deviated from unexpectedly.

When Machiavelli, writing half a millennium ago, about events more than 2,000 years in the past, describes the political gridlock that overcomes republican forms of government, and their inability to respond in a timely fashion to crises…do I even need to say it? Only someone not paying attention to American politics over the last hundred years would need to ask for examples. A mandatory group project in high school likely taught you all you needed to know about this failure mode.

It is not just the slowness that he criticizes though — “the remedies for republics are very dangerous when they must find one” — when the stakes are severe enough, a republic who does not have an established custom of electing temporary dictatorial authority will nonetheless be forced to establish one in the heat of the moment (or else risk existential outcomes). And as he says later in the chapter:

Although extraordinary measures may be beneficial at a certain moment, the example nonetheless causes harm, because if one establishes the habit of breaking the laws for good reasons, later on, under the same pretext, one can break them for bad reasons…In conclusion, I would say that those republics which have no recourse during the most pressing dangers either to a dictator or to some similar authority will always come to ruin during serious misfortune.

You can read a good recent example of the downsides of this republican tendency towards gridlock and excessive deliberation playing out during the early days of the coronavirus pandemic, written by Scott Alexander, here:

If your system has “putting the power down” built into it by rules and reinforced by civic values and social praise, you can short-circuit a lot of the unpleasantness described above.

The CDC comes off poorly in Scott’s essay, as it took them until October 2020 to say the virus was ‘sometimes’ airborne, and May 2021 to explicitly update its guidance that the virus was an airborne threat. That’s 10 months from the initial CDC taskforce starting work on covid for a ‘sometimes’, and 16 months for an explicit airborne update. In comparison, the WHO did not use the word ‘airborne’ until December 2021, 23 months from initial “incident management system” activation.

So if “time until correct answer is reached” is a metric you care about — and in times of existential crisis, it should be — the CDC is about twice as good as the WHO. Whoo!

Of course, the excerpt I quoted above mentioned a guy called “Zvi” — who? He’s just an uncredentialled Ivy League graduate (mathematics), internet writer/nerd, most famous for being good at a card game called Magic. He first wrote a blog about covid in March 2020. He raised the possibility of airborne transmission 1 month later, had airborne transmission as his ~primary model 2 months later, and was mocking the WHO for failing to update their guidance to include “airborne” 4 months later.

On the “time until correct” metric, that makes him 5-10x better than the CDC and 10-20x better than the WHO. I doubt even he expected it would take another 17 months for the WHO to come round.

The WHO position here was so mockable that even Nature jumped in this April, with a whole article titled: “Why the WHO took two years to say COVID is airborne”:

Zvi is not particularly special here for his insights, although he was happy to write all this stuff under his name publicly. You could have read the same stuff in many other places. Scott Alexander himself made a compelling case for aerosolized airborne transmission on March 23rd, 2020. Reading and interpreting papers is well within the scope of many Ivy League graduates’ abilities.

As Scott said above, the CDC has to optimize for more than just the truth. This is perhaps even more true for the WHO. The issue is presumably not that the people at those places can’t read papers — it’s that their bosses have multiple incentive structures. In such times a man with no power, and therefore no direct responsibility, is often more able to see the true state of things.

The competing forces that influence the institution slow it down by a factor of 10. The problem is that the incentive matrix (many individuals with competing incentives) and the responsibility matrix (whose head rolls for mistakes) are non-overlapping and non-aligned.

Occasionally no head rolls at all!

Scott wrestles with this in his Feb ‘21 essay on the poor track record of those with legible expertise, but laments that there’s no simple way to translate the truth-seeking ability of Zvi into something useful to society without diluting and corrupting his abilities. The Roman solution to this was to find a man with ability, give him temporary dictatorial power to resolve the issue, take the power away and send him back to his old job as soon as the issue resolved, and shower him with praise & prestige if he did it effectively and hastily.

It required a whole socio-cultural fabric to support it. But it was used a lot (Rome was in trouble often). It worked a lot.

A purely republican body can work through these issues with time, but in an existential crisis there is no time.

So instead, we get:

Criticism Is Easy, Leadership Is Hard

Chapter 39: The Same Circumstances Are Often Seen Among Different Peoples

[The city of Florence] was forced to wage war against those who had occupied parts of its empire. Since the occupiers were powerful, it followed that a great deal was spent on a war which bore little fruit.

Since this war was administered by a magistracy of ten citizens, the masses began to hold them in contempt, as if they had been the cause of both the war and its cost, and they began to convince themselves that if they removed the magistracy the war would end.

This decision was so disastrous that it not only failed to end the war, as the masses were persuaded it would, but once it removed the very men who had been administering the war with prudence, so much disorder followed that, besides Pisa, they lost Arezzo and other places, so that after the people had realized their mistake and saw that the cause of the disease was the fever and not the physician, they re-established the magistracy of the Ten.

This tale is worth bearing in mind for anyone who criticizes the elite (which is often me, see: prior chapter). That’s not to say that those managing a nation, a company, or any other institution are always in the right — very frequently they are not.

But it’s too easy to swing the Sword of Damocles when circumstances become painful, and a proper analysis of the situation should always untangle which factors are external and which are caused by poor leadership.

Edit: on re-reading, I think this might have been too subtle, so let me be clear: I can name a LOT of people who have criticized the Federal Reserve over the last 15 years or so. Many of them continually, across chairmen and administrations. I do personally also think the Fed — and other central banks — has made poor decisions on multiple occasions, but their current status as a centralized quasi-executive government agency with a reputation for exercising power means that people tend to turn to the Fed for solutions in any and all times of crisis. But not all problems are caused by the Fed and, more importantly, not all problems can be solved by the Fed. You can read my position here.

Democratic Tyranny

Chapter 40: The Creation of the Decemvirate in Rome and What Is Noteworthy About It; Including, Among Many Other Matters, the Consideration of How the Same Circumstances May Either Save or Destroy a Republic

The more unwieldy a chapter title is in this book, the more meat on its bones.

This tyranny arose in Rome from the same causes that give rise to most tyrannies in cities: that is, from an excessive desire on the part of the people to be free, and from an excessive desire on the part of the nobles to rule; and when they do not agree to establish a law that favors liberty but, instead, one of the parties rushes to support a single man, it is then that tyranny quickly arises.

Again it’s interesting to see how — despite being a champion of self-government and liberty — Machiavelli has no issues describing “an excessive desire” to be free. To him, the constitution of the republic must always be followed, even when pursuing good ends, such that the whole of the people will always oppose anyone who tries to route around the established rules.

When a people is led to commit the error of respecting a man because he might oppose those they despise, and when this man is shrewd, it will always happen that he will become a tyrant of that city. He will wait for the support of the people to destroy the nobility, and he will never turn to oppress the people before he has destroyed that nobility. At the point where the people realize they have been enslaved, they will have nowhere to take refuge.

This description of democratic-tyranny or populist-tyranny, depending on your linguistic preferences, may seem close to home for some.

Throughout this book, one of Machiavelli’s core theses is that the triple-tension between concentrated dictatorial power, semi-concentrated elite power, and the diffuse power of the masses is key to sustaining a healthy republic over the long-term. When any one of these factions succeeds in purging at least one of its rivals, it quickly establishes a totalizing tyranny over what remains.

I submit this analysis as a reasonable description of the various 20th century “revolutions of the proletariat” that took place in Russia (Lenin/Stalin), China (Mao), as well as the earlier events in Cromwellian England and Napoleonic France.

I’m going out on a tea & chocolate-fueled limb here, but liberal political philosophy will tend to push in this direction by default. If “The People” are not fully sovereign, they must be made so, or at least moved closer towards that outcome. Defining “The People” is of course left to the leaders of the various liberalizing political movements, but the overall trend has been shifting legible power from the elite to the masses across the world for ~500 years.*

I must confess a strong bias towards meritocracy, so anyone hoping to read a defense of Rome’s hereditary aristocracy here will be disappointed. But I think this point — balancing the tension between the elite and the masses — is not something our political philosophy has made much satisfactory progress on since Machiavelli’s time, and the base impulses of acquiring political power get in the way very quickly.

If Step One of your [Three Step Plan To Achieve Utopia] involves proscription or Dekulakization, Step Two will inevitably be a chap named Stalin sending your aunt to a Gulag because she did her job as a census worker and it turns out the numbers weren’t big enough.

The standard narrative here is that Stalin’s dictatorial power itself is responsible for this descent into Gulag-madness and mass murder.

Machiavelli’s narrative is that the dictatorial power always exists, whether you can see it or not, and is opposed and balanced by the interests of ambitious elites in society. If you remove the political class that checks Executive power…

When a people is led to commit the error of respecting a man because he might oppose those they despise-

…you get the tyrant you asked for.

Fun fact: a quick Google search taught me that the word “Democratization” was a neologism coined during the French revolution. It also turns out Robespierre was a big fan of the Roman Republic when he was younger — his own Republic only lasted 3 years before “going-monarch”, so perhaps he ought to have studied the Romans more closely.

Of course this all assumes some agreement can be reached on what achievements count as sufficiently worthy to become “elite”. Competence has many dimensions, and I’m not willing or able to lay them all out here. I make only three claims here: i) competent people exist, ii) they are underrepresented in many political arenas today, & iii) they ought not to be.

As to why it is that some part of the elite tend to play a restraining force on executive power, Machiavelli explains:

Whereas the nobles may wish to play the tyrant, the part of the nobility excluded from the tyranny is always unfriendly to the tyrant: the tyrant can never win them over completely because of their great ambition and greed, and the tyrant can never possess enough wealth or honours to satisfy them all.

He is not endorsing any of this, but describing how a state of balance may be achieved, and why the masses and the nobility in ancient Rome set about undermining the republic by trying to prosecute factional conflict against each other, allowing a centralized tyrannical power that they both endorsed — at first — to take the reins and delete their opposition.

*I am aware that, at any given historical moment, the pro-democratization side of the political divide would contest parts of this description, and some might say that wealthy/oligarchical/billionaire elite types have entrenched their own power while conceding only the trappings of power. I would agree wholeheartedly with this analysis, and would expand on it here if I had room. But by removing the publicly acceptable avenues for these people to exercise power — ways that are legible and easily contested — we left them with only two options: obfuscate their influence or give it up. You don’t need to be Machiavelli to work out which of those two is more likely.

If you wanted to remove all political power from the elite, you would need to remove wealth, fame, and any other way they might unduly influence the masses. Before you dust off your freshman-year Robespierre costume, consider Machiavelli’s lessons from this book, along with history’s lessons in the period since, about what the likely expected outcome might be.

Machiavellianism

Chapter 44: A Crowd Is Ineffective Without a Leader; and How One Should Not Make Threats First and Then Request Authority

One must not reveal one’s intentions, but instead should attempt to obtain what one wants by any means possible. For it is enough to ask somebody for his weapons without saying, ‘I want to kill you with them’, because when you have his weapons in hand, you can then satisfy your desire.

I am trying to rehabilitate Machiavelli here, but it would be remiss of me not to include this quote as it stands. He’s no fluffy bunny.

The Ender’s Game Chapter

Chapter 45: It Is a Bad Example Not to Observe a Law that Has Been Passed, Especially on the Part of Its Author; and It Is Extremely Harmful to the Ruler of a City to Open New Wounds Every Day 

Without a doubt, no one could hold to a more pernicious course, because men who begin to suspect they are about to suffer some evil protect themselves in every possible way from such dangers and become more daring and less cautious in attempting something new. Thus, it is necessary either never to injure anyone or else to inflict the injuries all at once and later on to reassure men and to give them reason to calm down and to quiet their minds.

I’ve alluded briefly in other essays to the use of economic sanctions by Pax Americana to achieve geopolitical aims. For many reasons that I will probably write about in the future, I think these do more harm than good (utilitarian bad) and more evil than not (deontologically bad). But the Machiavellian lens suffices for now: never injure anyone you do not intend to immediately extinguish.

Why Colleges Take All Your Money

Chapter 51: A Republic or a Prince Should Seem to Do Out of Generosity What Must Be Done Out of Necessity

Why the veneer of charity is applied to give gifts that are not gifts at all:

This kind of prudence was well used by the Roman senate when it decided to give public funds to the men who were fulfilling their military service, even though they were accustomed to serving at their own expense. But realizing that it could not wage war in this fashion for very long, and thus that if could neither lay siege to cities nor lead troops far from home, and judging that both of those things were necessary, the senate decided to give stipends to the soldiers in such a way that they seemed to do as a favour what necessity forced them to do.

Rome was turned upside down with joy, since this seemed to be a great benefit which they never hoped to have and which they never would have sought on their own.

And the final kicker:

The senate only increased their pleasure by the manner in which they assessed the taxes, for they imposed the heaviest taxes upon the nobility, and these were the first to be paid.

I wrote a popular essay on The Uncharity of Colleges, subtitle: “How colleges make more money than God by giving it away.” The core point is that top colleges use “charity” — need based financial aid — to reduce consumer surplus to ~zero…and get thanked by students for it.

Consumer surplus is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.

The essay includes this table:

I was hesitant to harp on this point too much at the time, but to be explicit:

If MIT had to charge all undergraduates the same tuition, they would collect the exact same revenue by charging $25,105/year — 48% of actual tuitions.

Average Federal Government student aid is $13,120-$14,950/year, split between low interest loans and direct grants.

Under my hypothetical scenario, if your family can’t afford $25,105/year, standard government aid packages will reduce your annual cost to, at most, ~$12,000.

Under my hypothetical scenario, if your family can afford $25,105/year, your maximum payment to MIT is capped at $100,000 over 4 years.

But of course, that’s not what happens.

Instead, it plays out like this:

You owe MIT $51,520. The government helps you out with that same ~$13,000 as before, but now you need to come up with $38,500. So you go to the college, tell them you need help, they put on their Godfather costume and offer to look at your case if you show them your family’s bank accounts & tax returns, and then they “charitably” reduce the remaining $38k balance to whatever is left in those bank accounts.*

*this is a slight overstatement for artistic effect. They will often only assess 75-80% of your family’s combined discretionary income+savings.

The insane difference between $12,000 per year and $38,500 per year, over a 4-year period, has a profound impact on the economic, cultural, and psychological status of middle-class college graduates.

Back to Machiavelli: by “seeming to do as a favour” — charity — the college gets credit for doing something that it has to do anyway: charge students money. Those who receive the “aid” — 58% of students — are “turned upside down with joy.” You can read the rest of my Uncharity essay to see why colleges have no choice in the matter if they want to stay 501(c)(3).

And the kicker is that this set up, which minimizes consumer surplus and maximizes how much MIT can charge, results in the highest toll being paid by the wealthiest members of society. Again, as in ancient Rome, this causes some amount of joy among the population:

The senate only increased their pleasure by the manner in which they assessed the taxes, for they imposed the heaviest taxes upon the nobility, and these were the first to be paid.

All that “pleasure” felt by assessing the most fees upon the wealthy results directly in the insane student debt burden that the middle- and upper-middle class in America is forced to maintain.

On the surface, you receive charity.

In the background, your “class enemies” must pay the heaviest cost.

And of course, the real outcome: middle & upper-middle class savings evaporated and $1.8 trillion of student debt.

Losing Faith In The Elite Is Nothing New

Chapter 53: The People, Deceived by a False Kind of Good, Often Desire Their Own Ruin, and How Great Hopes and Bold Promises Easily Move Them

The plebeians were so incensed against the senate that they would have come to the point of taking up arms and shedding blood if the senate had not used as a shield some old and esteemed citizens, their reverence for whom restrained the plebeians from pursuing their insolence any further.

Here, two things should be noted. The first is that very often the people, deceived by a false image of good, desire their own ruin, and unless someone they trust can make them capable of distinguishing the good from the bad, this will bring endless danger and damage to republics.

When fate decrees that the people will have faith in no one, as sometimes occurs after they have been deceived in the past either by events or by men, this inevitably leads to ruin.

In this regard Dante declares in his discourse that makes up On Monarchy that the people frequently cry out: ‘Long live’ their death and ‘Death’ to their life.

Again, I am struck by how Machiavelli describes the process of shaping public opinion against the best course of action, and also by how he describes the outcome of a population who has lost all faith in its elite due to repeated prior deceptions.

There’s no good quality opinion poll that would map neatly to “reverence for esteemed citizens”, but the overall institutional trust polls are not encouraging:

Small business and the military are the only institutions more than half the country has some confidence in.

If a sizable minority — not even a majority — of Americans became “so incensed against the senate” as to “take up arms and shed blood”, which esteemed citizens aligned with the senate would be able to go before the mob and calm them? What about the Supreme Court?

I can think of no one.

When fate decrees that the people will have faith in no one, as sometimes occurs after they have been deceived in the past either by events or by men, this inevitably leads to ruin.

No Love for Rent Seekers

Chapter 55: How Easily Affairs Are Conducted in a City Where the Populace Is Not Corrupted; and That Where Equality Exists, a Principality Cannot Be Created, and Where No Equality Exists, a Republic Cannot Be Created

Another tough chapter for the modern aspiring right-libertarian here. But again Machiavelli ties his notion of civic “Corruption” to the existence of “noblemen” and inequality:

To explain more clearly when this title of nobleman means, I will say that men are called noble who, in a state of idleness, live luxuriously off the revenue from their properties without paying any attention whatsoever either to the cultivation of the land or to any other exertion necessary to make a living. Such men as these are pernicious in every republic and in every province…

So it’s not just wealth that upsets Machiavelli, but the collection of rents without labor. If I imagine a spectrum of “Nobleman”, it seems to me that hero-to-some-pariah-to-others Elon Musk would be less far along that spectrum than an investor who deploys capital and collects its return. That is not to say Machiavelli would not also object to the existence of billionaires — you can read clearly that he does — merely that the invective he deploys in this chapter is aimed squarely at those who do not operate any revenue-generating apparatus themselves.

Collecting rents on capital is anathema to Machiavelli.

Later in this same section he says:

…where there exists so much corrupt material that the laws are insufficient to restrain it, it is necessary to institute there an even greater force, that is, a royal hand that with absolute and excessive power may impose a restraint on the excessive ambition and corruption of the mighty.

Aka Champion of Republicanism and Representative Government here supports the imposition of monarchical power in the event that an ascendant and extremely wealthy rent seeker class is strangling society. If this is hard to reconcile with his pro-liberty views, just imagine this face haunting Machiavelli’s dreams:

I think this is where Machiavelli could have taken a little more time to defend his points. The case he made earlier in “Democratic Tyranny” was very strong — that either the masses or the elite can rally behind a tyrant because of their hatred they feel for their political opponents, resulting ultimately in their own subjugation.

He does not do a good job here explaining why a monarch who would “impose a restraint on the excessive ambition and corruption of the mighty” would result in a different outcome, and all the same pitfalls would seem to apply. Given the examples he’s already pointed to by this point in the book — Numa, Epaminondas, Lycurgus — I suspect his position is that [Good] + [Monarch] is a real historical combination that exists at the founding of all great states and the only thing possible to reform “so much corrupt material.”

Obviously he has a reasonable axe to grind with the Medici and their leveraging finance to overthrow a republic, but this is one of the only times in the book he doesn’t spell out the potential downsides of a recommendation. I understand where he’s coming from —

“…hanged from his bound wrists from the back, forcing the arms to bear the body’s weight and dislocating the shoulders…”

— but as he said earlier: “we will discover that only on the rarest occasions will a good man wish to become prince through evil means, even though his goal might be a good one.”

How to Undermine A Mob

Chapter 57: United the People Are Courageous, but Divided They Are Weak

After their native city had been destroyed following the invasion of the Gauls, many Romans went to live in Veii against the statutes and orders of the senate. To remedy this disorderly behaviour, the senate, through public edicts, enjoined everyone to return to live in Rome within a certain time period and under certain penalties.

At first these edicts were ridiculed by those against whom they were passed. Later, when the time to obey them drew near, everyone obeyed.

Livy offers these remarks: ‘their united defiance changed to individual obedience, everyone having fears for himself.’

This provides helpful instruction for a republic (or any other institution) to deal with rebellious elements.

I note that Canada seemed to have a lot of trouble with their trucker friends until they were able to create individualized financial consequences for any identifiable participants (which, thanks to modern financial platforms and credit, was ~anyone in attendance).

Hopefully this taught some people why fighting the state is silly & counter-productive.

Silicon Valley’s Meritocracy, Contra the American Gerontocracy

Chapter 60: How the Consulate and Every Other Magistracy in Rome Were Bestowed Without Respect to Age

It is evident from the unfolding of history that after the consulate came to the plebeians, the Roman republic granted this office to its citizens without respect to age or family; indeed, respect for age never existed in Rome, but the city always sought to discover exceptional ability, whether it was to be found in the young or the old.

When a young man has such exceptional ability that he makes himself known through some illustrious deed, it would be a most damaging thing if the city were not able to avail itself of his talent…

In contrast, I present some assorted data from America today:

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One of the very best things you can say about Silicon Valley is that it empowers capable young people, gives them a great deal of responsibility, and lets merit play a large part in determining outcomes.

A lot of ink has been spilled over the imperfections of Silicon Valley and the various axes on which it fails to attain the idealized meritocratic outcome. While that’s all well and good, it’s hard to think of another area of the U.S. that is more supportive of ambitious and capable young people — and by supportive I mean: “actually handing them the reins of power and responsibility”.

This isn’t just about Founders either — many US Tech workers don’t realize what an aberration it is to be given personal control over economic, engineering, or design outcomes that impact people all over the world, with minimal oversight…in your early-mid 20s.

The opportunities are unmatched, and the rewards that come with them can be pretty sweet too. And for those on the other end of the deal, it turns out that talented ambitious young people can accomplish an incredible amount fueled only by takeout, flavoured water, and easy money.

Other industries should give it a try sometime.

So that was 12,000 words and I’m only done with Book I. We’ve covered 80% of what Machiavelli has to say regarding the internal affairs of a healthy republic. His chapter titles mostly suck, but I think my revised titles get the gist across.

I’m going to break it up there just to save my poor web browser. Editing this is breaking my PC. That said, the other two books combined are shorter than this section, so you’re way past the halfway mark if you made it here. I’ll link Part II here when it publishes - which will cover the rest of the book, more memes, and a little extra opining from me —thanks for reading, hope you enjoyed.

• Rehabilitating Machiavelli
• The Book Itself: Asking Readers To Do The Work
• Book One: Internal Affairs
• A Framework for Unavoidable Regime Change
• Conflict Is A Sign of Healthy Politics
• A Chief Executive’s Only Path To Safety Is Through The Masses
• Justice Must Be Seen To Be Done
• False Accusations Weaponize Democracy
• Urban vs. Rural Divide: Older Than You Think
• The Heresy Chapter
• Against Wealth Inequality
• Institutional Corruption, Political Incompetence
• No Bad Deed Unpunished
• Executives Cannot Fear Reprisals For Performance
• A Little Bit O’ Dictatorship Is Good For You
• Criticism Is Easy, Leadership Is Hard
• Democratic Tyranny
• Machiavellianism
• The Ender’s Game Chapter
• Why Colleges Take All Your Money
• Losing Faith In The Elite Is Nothing New
• No Love for Rent Seekers
• How to Undermine A Mob
• Silicon Valley’s Meritocracy, Contra the American Gerontocracy

Note: don’t start reading this one on your lunch break unless you can read 150+ words-a-minute. I’m torpedo-ing my shareability here by not breaking this up into bite-size sections to help the great algorithms.

This essay is the outcome of a simple observation: you cannot build a massively successful nation without building at least one massively successful company. The well-being of Great Nations is tightly linked to the well-being of their greatest companies.

The thread of this essay then follows that observation from successful Tech strategies through to Apple, China’s Big Banks, Japanese wartime industry, and Saudi Oil, then on to thinking holistically about an economy, pains of German reunification, and all the way through to the role of Interest Rates, Blitzscaling, and the Federal Reserve in today’s economy.

As we’ll see below, much of the dominance of today’s American economy is thanks to its successful Tech industry. The internet age means that the Twitter feeds, personal blogs, private lectures, and other musings of the individuals who directly create those valuable companies are all available for anyone with the curiosity to find, read, and analyze. This is probably the first time in history that such a diverse and detailed collection of personal notes from the entrepreneurial & capitalist classes has been readily available.

Love it or hate it, you ought to at least study it.

Stitching different perspectives together and reading between the lines reveals a set of effective, if sometimes unpalatable, strategies & tactics for building generational Wealth, at the corporate level, yes, but also at the national level — reframing mainstream perspectives around macroeconomics & central banking to place the company itself at the center of the analysis.

Macroeconomics for Tech Employees: A Summary

• Part I: How The Most Valuable Companies Are Built

  • Generational Tech companies are built on the back of:

    • (i) Centralizing value creation,

    • (ii) Commoditizing their complements,

    • (iii) Platformizing defensively and offensively,

    • (iv) Acquiring sufficient market power to capture created value, escape competition, & own the market,

    • (v) and building the Leverage necessary to do all the above without getting their lunch eaten by a bigger fish.

  • Not all dollars of revenue are worth the same

    • Dollars that are cheap to make are worth more

    • Dollars that you expect to grow a lot are worth more

    • Dollars that come back again and again are worth more

  • Software is eating the world because:

    • Software provides a framework to turn literally anything into a Lease (dollars come back again)

    • Software costs ~$0 to deliver to a customer (cheap to make)

    • Software can be sold instantly into a global marketplace (expect to grow a lot)

• Part II: Macroeconomic Russian Dolls

  • ~All meaningful metrics have fat tails. All of them. Mainstream coverage completely fails to appreciate the skewness of these tails.

    • The top 2 nations generate multiple times more economic production than nations 3-6 combined

    • Within all these nations, the best companies are worth multiple times more than the rest

      • Company value is a proxy for the complex intersection of future revenue, profit margins, customer retention, etc.

    • The cynical read of this is that the median individual/company/nation contributes very little to the economic Wealth & security of the whole

    • The optimistic read is that you can bootstrap a whole national economy with a single mega-corp (and cannot without one)

  • Wall St. analysts frequently compare the value of a company’s stock to the company’s periodic earnings potential — a “P/E ratio”

    • We can do something similar for companies and nations!

      • & observe that the smaller a nation is, the more valuable its biggest companies are relative to its own GDP

• Part III: Case Study Takeaway: All Great Companies Sell Into The Same Global Market

  • Every massively successful corporation is following the same playbook

    • Tech is not unique at all, simply better-by-default at everything that makes great companies great

      • To be great, you must find a way to interface with the globalized marketplace, and then follow Rules (i) → (v) described in Part I

• Part IV: Company-first Macro-economics

  • The bundle of macroeconomic policies that are chosen, in a well-functioning state, will be actively determined by the underlying type of economic activity that brings wealth into the state

  • Government spending to Stimulate the economy is analogous to Dilution at Tech companies

    • CEO & Board meet once a quarter and jointly agree to print pieces of paper and give them to new-or-existing employees to entice them to work (harder)

      • If the work they do ends up being valuable, then the pieces of paper end up being worth a lot

        • Literally borrowing from the future to pay the present

    • Tech companies pay the present in “Shares”

      • If the work fails to generate value, then all the existing Shareholders were diluted for no gain and see the relative value of their Shares fall

    • Governments pay the present in “Dollars”

      • As with Tech companies, if the value doesn’t materialize, the Dollars don’t go so far

    • Interest Rates and private banks mediate this process due to general & self-admitted government incompetence

• Part V: The Federal Reserve & Current Affairs

  • Printing your way from Zero to One is part of the magic of the modern system

  • But you do have hard limits on your growth potential

    • At the extreme end, these look like: how many lines of (good) code your team can write per day, how many calls your sales team can take per day, and how many potential customers are out there right now

  • If your lens is that the Fed is master of the national economy, then you must reconcile the modern problem of stagnating economies under expansionary policies

    • Ultimately, the more powerful you think the Fed is, the more you’ll tend to blame them for national economic woes

  • But if your lens is that the Fed is merely a weatherman, who communicates the latest known state of underlying affairs to a broad audience, then there’s nothing to untangle here

    • Don’t shoot the messenger. This viewpoint is also healthier for your personal agency — blaming other people can be fun, but it doesn’t get you out of the hole. Only building great companies can do that

• Conclusion: I Code Therefore I Am

  • Wrapping this all up, you can understand the company-first view of macroeconomics by starting with two questions. First: what is being built, where, and by who? Second: what is being sold, where, and to whom?

    • Everything is downstream of those two questions, from tax policy to interest rates and unemployment

    • And it’s nested Russian Dolls all the way down: the strategies that make a company successful are transitive to the strategies that make a whole nation successful

Why Do People Care About Macro?

What do I mean by “Macroeconomics”?

Macroeconomics is the study of whole economies…What makes the business cycle fluctuate; what makes economic growth go up and down; how are prices determined; what is the rate of inflation, and what determines it; what is productivity growth; and what are the determinants of productivity?

- says the Fed…

For example, using interest rates, taxes, and government spending to regulate an economy’s growth and stability.

- adds Wikipedia…

Macroeconomics attempts to measure how well an economy is performing, to understand what forces drive it, and to project how performance can improve.

Macroeconomics deals with the performance, structure, and behavior of the entire economy, in contrast to microeconomics, which is more focused on the choices made by individual actors in the economy (like people, households, industries, etc.).

- concludes Investopedia. Alas, if you’re looking up what Macroeconomics is then you may not know what all those bold parts are either.

If you wish to be “informed” — and be-seen-as-informed — this is the stuff you ought to brush up on. Next holiday season you’ll likely get more respect from family members if you share a nuanced opinion on the intersection of the money supply, inflation, and productivity statistics in the face of the ongoing pandemic than if you just mumble “Government [Good/Bad]”.

Of course, if you’re a smart Tech employee you probably understand that there are two kinds of learning: learning to pass the test/interview, and learning to understand. The first kind unlocks access to gated communities. The second kind helps you build stuff. Both are often necessary for a successful career — it’s on you to work out when you need to simply pass a test vs. when you need something deeper.

This essay is for the second kind of learning — and it’s targeted at people who build software (& software companies) for a living. It will probably not help you very much at the dinner table.

Part I: How To Build Something Valuable At Scale (theory, corporate)

Required Reading: Building Market Leverage & The Source Of Tech Prosperity

I’ve front-loaded the homework here. Apologies. But all good lessons have required reading — the audience has to be on the same page, or the content of the lecture will be received very differently depending on who has done the reading or not. The spicy memes come later.

In chronological order:

• The Cathedral and the Bazaar (Eric S. Raymond, 1997-2000, relevant sections highlighted below, and this to be read and also juxtaposed with the structure of today’s dominant Tech companies — and a curious reader might then ask why have Cathedrals proven so valuable?)

• Strategy Letter V (Joel Spolsky, 2002)

• Steve Yegge’s (Infamous) Platform Rant (2011)

• Notes from Peter Thiel’s Zero to One (classes 3, 4, & 9 only, 2012)

• Gwern’s Laws of Tech: Commoditize Your Complement (2019)

Cliff notes for the slackers in class:

• (i) Centralize value creation beneath your own roof,

• (ii) Commoditize your complements,

• (iii) Platform-less-products are always replaced by equivalent platformized products,

• (iv) Capture value, escape competition, own the market, & nobody ever thinks about distribution,

• (v) Division & distribution of revenue between the thousands of individuals who had a hand in making a product is entirely down to the leverage each individual has.

Economics is, of course, the study of scarcity. And scarcity is the only form of leverage there is — everything else rolls up to it.

All the above reading was about how to build a successful & enduring Technology company.

How does it relate to Macroeconomics?

Two ways:

1. If you can work in and around Technology businesses without building a mental framework for how large & complex institutions create & capture value for themselves, their employees (that’s you!), and their shareholders (hopefully also you!), then you’re going to struggle to appreciate how their methods generalize. Understand your house before trying to understand your neighbourhood.

2. The scale of these Tech businesses competes with some national economies. This is not an accident, nor is it unique to today’s Tech sector. The core principles apply equally well to national economies. Economics is economics, and what works to build a trillion-dollar company also works to build a trillion-dollar economy. The “Engineer-First” lens of national economics begins with understanding the dominant companies within each nation — the companies are the economy.

As we will see soon:

Interlude: Not All Revenue Is The Same: Why Investors Like(d) SaaS Companies

If you work in Tech, you’re probably aware of broad trends in the industry — one of which has been the explosion of SaaS businesses (Software as a Service) in the 2008-2015 era.

Why do/did investors (and founders) like SaaS models so much? You can read about it if you like, but one simple high-level reason is:

Not all dollars of revenue are worth the same.

SaaS revenue is revenue that’s coming back. Consistent revenue from each customer means your sales & marketing teams can spend (almost) all their energy going after new customers, instead of trying to win more dollars from people who already like your products.

You could — and people have — write a book about all the downstream impacts of this, from distribution (less lumpy), to product release schedules (faster), to product quality changes (more responsive, but also more resume-padding releases), to company org. structure changes (you must now care about “retention” and build teams to manage it).

The “Service-ification” (Servicification?) of Software is just one part of a much bigger trend: everything that can be Leased, will be. Recurring revenue is that good. One lens to understand why “software is eating the world” is that software wraps ~all products & services in a tailor-made Servicified package, whether those products/services are consumer-purchased songs or business-purchased design tools.

Software provides a framework to turn literally anything into a Lease.

I’m going to assume readers know all or most of this. The important part is that none of the high-level reasons why Servicification is valuable have much to do with software itself.

Dollars that come back again are worth more than dollars that don’t.

There are of course many other reasons that some dollars are more valuable than others. Most often: Growth Rate — nobody can predict the future perfectly, but some [revenue streams] grow a lot faster than others and Margin — if it costs you $0.95 to make $1.00, you’ll only have $0.05 left to reinvest or take off the table, and that’s worth a whole lot less than a dollar that only cost you $0.50 to make.

In summary:

• Not all [revenue streams] are the same

  • Dollars that come back again are worth more than dollars that don’t

  • Dollars you expect to grow a lot in the future are worth more than those you don’t

  • Dollars that don’t cost much to make are worth more than those that do

From a generalized principle view, if what you’re producing & distributing is valuable and can be made at attractive margins, Leasing will tend to serve you better than Selling. (and if it’s not valuable, you should sell it all at once and invest the money into something that is)

For Tech/Software, those 3 bullets translate to:

• Cloud software means you only ever have to Lease access to content, products, or services to your customers — forcing them to build a recurring relationship with you to get service

• You can distribute software near-instantaneously anywhere on Earth (and within 3-20mins to Mars), which means anything that achieves Product-Market-Fit can go from zero to ~5 Billion internet users…instantly

• Selling additional software copies/access only costs some extra computing-power, which means you get to keep a very large percentage of every dollar (that you can then reinvest in growth!)

How does this tie back to (international) macroeconomics?

Part II: Macroeconomic Russian Dolls (data, international)

Comparing Nations: Apples to Oranges aka The Data Part

A core thesis of this essay is that you need to understand the components of a system first in order to understand that system. When thinking about companies, that means thinking like a company — not like an employee, or a consumer, or a wannabe-regulator.

My hope is that by this point in the essay you have some inkling of what it takes to build and run a successful Software company.

If so, then the rest is simple analogy.

First, consider the GDP of the largest 21 national economies:

This chart is important to internalize, both the absolute magnitudes (that means $21.4 Trillion!) and the relative rankings (how many United Kingdoms make one USA? My ancestors shed a tear). This chart represents, sort-of, the sum total economic product of each country — measured in dollars-per-year.

For the purposes of this analogy, treat this chart as an array of 21 [revenue streams].

But even though we’ve got them all in dollars-per-year, we know now that: not. all. revenue. streams. are. the. same.

How, then, are we to tease apart what’s going on in these revenue streams? Are the dollars in each stream to be Valued the same? Of course not.

You could divide each one by the number of people living in each country, creating an abomination known as “GDP-per-capita” — my candidate for the worst, most tortured, sordid, simultaneously abused-and-abusive metric ever publicized. No, we’re not going to do that. “S&M” stands only for Sales & Marketing in this essay, so I’ll have to save a further discussion of “per-capita” metrics for a more risqué time.

No, we’re going to work like a proper engineer and dive deeper into every single country to show some specific things about the Value within their economies.

United States

Apple is the most valuable company in the America, with a market cap today of ~$2.9 trillion. That number represents the public market’s current estimation of Apple’s equity, which — as best as you’re gonna get — takes into account all the factors discussed above. Potential for recurring revenue. Growth expectations. Ability to capture high margins. And much more.

Capital markets may be efficient, they may not be, but either way the price of a publicly traded company is the best, simplest, cleanest way to Value its [revenue stream].

Note: Apple’s $2.9 trillion market cap is ~6.2x the value of the 10th ranked public company, Visa. These are not normal distributions.

$2.9 trillion also represents 13.7% of US 2019 GDP. Of course these numbers are apples & oranges — one is a snapshot value of a single company, the other is the sum total of all economic product in the whole country (a revenue stream). Dollars vs. dollars-per-year. Very different denominators, and yet linked by the simple core idea of Finance: the Value of an asset today is related to the Value of all its future cash flows.

When I compare today’s Value of Apple, in dollars, to US GDP, in dollars-per-year, I intend only to point out that this implies one thing:

Today’s value of the expected future cash flows from a single California-based company, with 154,000 employees, is equivalent to ~15% of the annual economic activity of a nation of 331 million people.

Without judgment on the righteousness of that fact, understanding its truth is helpful for contextualizing the current-and-future value of a single company relative to its own nation.

I trust most readers are familiar with the names on this list, but to summarize what the other named companies on that chart do: i) consumer tech, ii) business tech, iii) search/ads/cloud, iv) consumer retail & cloud computing, v) cars, vi) social media, vii) semiconductor design, viii) diversified investments, ix) health, x) credit cards. Tech, tech, tech, and more tech.

When it comes to America, this might be trivial, boring, and well-known. But knowing exactly what the most valuable companies in a country actually do is crucial to understanding that country’s economy — we are all downstream from these behemoths.

And, as always, we are not special:

China

China’s companies have taken a brutal public-market beating lately, but Tencent still stands as the most valuable of the lot.

At $551 billion, Tencent is worth 3.9x the 10th company on this list, Ping An Insurance. Again, nothing normal about these distributions.

$551 billion is also only ~3.9% of China’s GDP. Notably smaller than the Apple::USA ratio.

What do these companies do? i) gaming, ii) liquor, iii) e-commerce, iv) finance, v) electric car batteries, vi) finance, vii) finance, viii) consumer tech, ix) finance, x) insurance.

The inclusion of finance here — four times — is noteworthy. When you see “finance”, always ask: what is being financed?

A bank itself contains no economic production (never say this around a banker in public & do not tell my banker friends I said this): it supports others’ production, allocating and approving capital to projects as it sees fit (or, in nations like China & the USA, as it is directed to by the state).

The inclusion of four banks on this list — China’s “big four” — should signal that there’s a large amount of economic activity in China requiring significant financing. Large scale construction, small scale construction, industrial factories, high-speed rail…you get the idea.

Why do none of those companies make this list themselves? If you did the required reading, you’re hopefully thinking about Airlines vs. Google right now. Rule #4 of building successful Tech companies: capture the value you create. To quote myself from above:

(vi) Division & distribution of revenue between the thousands of individuals who had a hand in making a product is entirely down to the leverage each individual has.

Economics is, of course, the study of scarcity. And scarcity is the only form of leverage there is — everything else rolls up to it.

Capital is scarce. Labor is plentiful.

Economics sorts out the rest.

The micro shapes the macro, and is in turn shaped by the macro.

Japan

Toyota’s $257B is ~3.7x the 10th company, Nidec.

It’s also worth ~5.1% of Japan’s GDP.

What do these companies do? i) cars, ii) electronics, iii) industrial automation, iv) staffing, v) media, vi) semiconductors, vii) conglomerate, viii) finance, ix) chemicals, x) electric motors.

Industry, industry, industry, and more industry. To state the obvious: these companies make things. or help people make things. Rule #3:

Platformize defensively and offensively. Platform-less products are always replaced by equivalent platformized products

If you know how Tech works, you probably know that Microsoft offers a mega-suite of Enterprise software, end-to-end, cloud-to-client. If your business needs it, Microsoft can will provide it. Why? Because any other vendor of enterprise software is a potential entry point to your entire stack. That is the core lesson of Platforms. Steve Yegge’s required reading on Amazon’s strategy covered Bezos’ plan to turn Amazon into a full stack offering of plug-and-play components to run the whole internet. The reasons why are the same:

You must cover the whole playing field.

But these lessons apply beyond Tech. It’s not an accident that Japan’s best companies are all industry-adjacent. What would it look like to Platformize industry? If that sounds odd to you, it’s only because modern economies draw strict, strict lines between the national-government and the corporate-government:

A nation that can provide an economic platform is less likely to be displaced than one that only provides a single component/product.

It’s easy to get confused here. Are you supposed to be thinking about the national level, or the corporate level? Bureaucratic policy or corporate strategy? Which level owns the actual platform? To increase your confusion, allow me to point out: the Mitsubishi you saw on the chart above of valuable Japanese companies, ranked 8th, has 168,000 employees, $2.5 trillion in raw assets, and has never made a single car.

It’s actually the world’s 2nd largest bank holding company.

How come it has the same name as a famous car manufacturer?

Well you see, after the U.S. dropped 2 nukes on the country and accepted its unconditional surrender, the partial de-industrialization of the entire nation was a top priority. You can read a book on it or simply browse Wikipedia:

…in the end only the 11 largest companies were dissolved.

“-only-”. Remember, fat tails, always. I’m not trying to be too spicy here, but I do want to connect the dots explicitly here. The dissolution of the largest 11 enterprises in the nation into smaller companies, each with their own smaller turf, was a strategic priority of the occupation.

What does that imply about the relative value and the relative profit-making potential (aka Leverage) of the original Platformized enterprises?

Note: these companies were banned from coordinating — aka forced to compete, see Rule #4 — until the Allies needed “a stronger industrial base in Japan.” The companies were allowed to “coordinate” again in 1952, not because the Allies wanted them to earn more profits, or extort customers (themselves), or exercise undue leverage over the market. No, they were allowed to “coordinate” again simply to increase production.

What does that imply about the productive efficiency of Platforms vs. balkanized, standalone, competitive, single-product-focused companies?

Combine this note with Thiel’s required reading:

Perfect competition thus preempts the question of value; you get to compete hard, but you can never gain anything for all your struggle. Perversely, the more intense the competition, the less likely you’ll be able to capture any value at all.

If you want to critique the exploitation of a population at the hands of amoral & exploitative industrial tycoons, there’s a whole body of literature to support your points, & I can point you towards some good stuff if you like. But none of those points change the fundamental rules about building massively successful companies — and the rules for building those companies are transitive to building nations.

To be clear, Mitsubishi’s close involvement with imperialist Japan is not to be celebrated. But there’s a reason Mitsubishi was splintered into a thousand pieces and scattered to the winds, while HSBC — whose “Controversies” section on Wikipedia is 3,000 words long and mostly skips over the financing of Opium into China — remains whole.

Undoubtedly, the zaibatsu were deeply involved in the unpleasant aspects of Japanese Imperialism. But that simply provides additional public support for their dissolution. The motive is much simpler than moral righteousness. The existence of an independent economic machine, generating immense surplus Wealth for its government and its people, is always concerning for the global hegemon. I’m referencing America here, explicitly — but the implication is that this model holds true for for Facebook and Apple too.

If you’re curious about what ails the Japanese economy, about why they can’t seem to generate economic growth in recent history, this context is pretty important. I wrote in some detail about it last year. Rule #5 was very simple: never allow a bigger fish to eat your lunch.

Can we think of a bigger fish in the realm of Industry who has sprung onto the scene since 1990?

Back to Macro: what does Japan show us? — fat-tails, concentration of expected-future-[revenue streams] in a handful of large companies relative to the size of the national economy, the value of building a platform whether you’re a nation or a company, and not getting your lunch eaten.

Of course I’m not going to go through all 21 countries in this much detail…

(although I did, for my own edification, and you can look too if you scroll down to the Appendix)

I’ve gone into significant detail for these top three nations — America, China, & Japan— because the Pareto principle holds in all things.

In the same way America and China dwarf all the other nations when it comes to GDP, when you look within each country the same phenomenon plays out: the largest companies dwarf the rest.

Here’s the composite view, stacking all this data for every single country:

Eagle-eyed readers will note that some of these bars are larger than the GDP bars posted earlier.

They would be correct, although there are 2 things to remember on that front: i) the numerator is current market cap as of December ’21, while the denominator is a trailing 2-year-old GDP number, but ii) yes, some countries really are absolutely dominated by a handful of companies.

Re: i), I’ll just add that I prefer to use direct downloads from publicly sourced information, which means we’ll never get a perfect time-period tie between accurate GDP numbers and current-date-market-caps — and also that the trailing number, GDP, is relatively stable for most large economies. Lastly, I detest adjusting raw data, but you could also adjust these GDP numbers for approximate inflation data over the last 2 years to further increase the denominator.

We do what we can with the data we have — I trust you can imagine how these transformations or adjustments would nudge the bars below downwards, but not alter the story here.

Speaking of story, here’s the money shot:

I toyed with showing this as a percentage or a multiple and am still on the fence. If you try and reference this chart/data at the dinner table you’ll get a lot of confused looks. Any economists still reading are likely thinking of a hundred obvious ways this is, ahem, non-standard.

And while I agree that you should not use these multiples the same way Wall St. analysts use actual P/E multiples, collectively they tell a very, very important story.

That story:

• The sum market cap of the 10 largest public companies in the USA is equal to 0.63x GDP (63%)

  • Again, this is a relationship between the Present Value of future [revenue streams*growth*margins] and an aggregate previous-period’s [revenue stream]

• There is an amusing trend from China → France where, as the economies get smaller, the relative size of the biggest companies in each country get larger (why#1?)

• Italy & Brazil then ruin that trend thoroughly (why#2?)

• Canada → Australia look, on the surface, to be somewhat of a return to the trend of increased concentration in smaller countries

• Spain, Mexico, & Indonesia then appear to revert again…

• …before shit goes completely bonkers with the Netherlands, Saudi Arabia, Switzerland, and Taiwan all having their largest 10 public companies be significantly bigger than GDP! (why#3?)

  • all while Turkey achieves a new low score for obvious geopolitical reasons we shan’t be covering

This is all a set up of course. The answers to Why#1, Why#2, and Why#3 are all the same. The answer is the title to Part III:

Part III: All Great Companies Sell Into The Same Global Market (results, international-corporate)

Black Gold

What does this look like to you?

Answer 1: this is all that’s listed on companiesmarketcap.com

Answer 2: this is actually an entire national economy in one picture. No lie. Ignore the big bar and you’ve got: a bank, a chemicals company, an electric company, a mining company, a fertilizer company, and a food company. Plus some more banks.

Finance (which, as we already know, means construction & infrastructure), electricity, raw materials, and food. Pretty much all the basics are covered here and it’s beautiful.

Answer 3: Leverage.

This is what it looks like when you have something everyone else wants — and by everyone else, I mean everyone. Do I even need to point out Rule #1: centralize value creation?

Today’s market is incredibly globalized, even for all the non-Software pieces. Yes, your Software can get from A to B at the speed of light. But for everything else, there’s still an international network of global shipping.

Your national economy includes all the daily eggs & milk purchases people make. Monthly rent payments. Monthly electricity bills. Car loan payments. Student loan payments. All the everyday expenses.

If you’ve got a small country, those will add up to be a small amount.

If you’ve got a massive stonking country, those are gonna stack up into something huge.

But in a globalized world economy, anyone can become a serious player by selling goods into the Global market.

All you need is simple: something everyone else wants.

This is why the Tech industry is such a helpful reference. Tech goes global by default. Tech brands are household names in every developed country. Rules 1-5 from Part I make intuitive sense to anyone adjacent to the Tech industry.

Of course, Saudi Arabia has oil, not Tech, and the U.S. has shepherded them through the difficult nation-building process in order to bring that oil to market. Ask me some other time about how this is actually the greatest anti-colonialist achievement of the modern era, with the pullback from China a close second.

But all the Wealth that Saudi Arabia has comes, first & foremost, from the Oil.

The oil provides the surpluses that fund all the rest.

There are individuals in Saudi Arabia who achieve personal & familial Wealth by providing all sorts of products & services: banking, construction, infrastructure, food, electricity, vehicle imports, and so on. None of it would be possible without the Oil. This might sound obvious at first, but many people will forget it as soon as they turn their gaze towards more complex economies.

When reasoning about national economics, you can imagine the economy as a large Tech company with many sub-teams (Google, perhaps). Saudi Arabia’s electricity company may be very valuable. It may create many jobs. It may have many important stakeholders. But the Wealth of the country comes, first, from the Oil — and if the interests of the electricity company take precedence over the Oil, prosperity for the economy as a whole may be jeopardized.

Navigating these difficult waters is a herculean task — it should not surprise you to see sclerosis and special interests dominate in the long-run. Entropy always gets the last laugh.[0]

By analogy: Google’s bread & butter is online advertising (qua Search). Google has ~150,000 employees, many of whom do incredible value-add work unrelated-or-adjacent to online advertising. This is good for them and for the company. But the value of Google comes, first, from the online advertising — and the interests of other teams should be subordinated to the company’s primary Wealth-creation engine.[1]

Of course, everyone familiar with Tech will know that sometimes smaller products or teams do create far more value than the original [revenue stream]!

Managing these difficult & uncertain decisions is the primary responsibility of leadership — for both companies and nations alike. The skillsets are alike.[2]

This is the fog of war that plagues leadership at the micro level — the company itself — and the macro level — the whole economy.

Silicon Gold

What about The Netherlands? Switzerland? Taiwan?

TSMC and ASML both make semiconductors.

Which makes it amusing to see two very different nations dominated by similar companies. But also: not a coincidence. Semiconductors make computer chips — not quite as good as oil, I agree, but still very necessary for building a modern technologically-enabled industrial economy.

Which means…the whole world needs it.

“Need” is a very, very important word here. Imagine all the devices in the world that need semiconductors today. Computers, of course. But also: Medical devices. Cameras. Cars. Ovens. TVs. Phones. Speakers. I’m just looking round my house at things here.

None of these devices could exist in their current form without semiconductors.

The “need” confers leverage onto these companies. They may never directly interface with an oven manufacturer. Some other company most likely intermediates that relationship. But the oven could not exist as-is without the intermediary company, and the intermediary could not exist without TSMC/ASML.

From Gwern’s required reading:

…but what is the fair division of revenue among the countless people, technologies, manufacturers who created each of the many critically-important layers in the full tech stack?

Need. Scarcity. Leverage. TSMC’s Equity value of 1.03x 2019 GDP.

The data here is imperfect and messy, because so is the real world. But the lesson is a simple one: the valuable economies are the ones selling goods into a global market. Rule #1: centralize value creation, or, more eloquently:

Make local, sell global.

Part IV: Company-first Macro-Economics (conclusions, academic) 

Macroeconomic Lessons: Prioritization and Stimulation

I got 5,000 words in to an essay on Macroeconomics and didn’t say “Interest rates” once. I told you this wouldn’t be very useful for impressing family round the dinner table. But I do have a few pointers.

My one “trick” for macroeconomics: always, always, ALWAYS try to understand the company-specific stuff first, all the inner nested Russian dolls…and then treat every single “macroeconomic factor” as a static output that results from this system, and not as magic wands for financial wizards to wave. To the extent that there is magic at play, assume first that it’s the Wizard of Oz variety.

Chocolate chip swirl: Who Comes First?

Modern interest in rates is ~thanks to the lifelong efforts of a guy called Milton Friedman. If you want to learn the specific details, you can listen to him talk on YouTube, browse Wikipedia or Investopedia, or buy some of his books (or his critics’ books). I’ll get to them soon.

Unfortunately, there’s a lot of politics involved in these topics, which means many interested parties:

Negative macroeconomic outcomes tend to result in unpleasant consequences politicians:

• business cycle downturns lead to very unhappy citizens, mortgage foreclosures, all sorts of unpleasantries;

• economic stagnation or decrease leads to feelings of uncertainty & unease among the public, fewer products & services, wariness around investments, zero-sum games, and, again, bad times for anyone who took on debt;

• wacky price swings ruin the ability of regular folk & investors alike to make sound predictions, such as “should I buy 1 gallon of milk today or 2?” and “should I invest $5B in this semiconductor fab or no?”;

• tax hikes hurt reinvestment & upset investors and business folk who are optimistic about the future, while tax cuts disappoint citizens who want to see more punitive correction or resource reallocation;

• government spending is seen as wasteful and repugnant when done on anything the viewer voter does not personally approve of, and a moral necessity otherwise;

• and unemployment is, at best, a gross waste of human talent & potential and, at worst, the primary cause of ~every revolution ever.

The politics is thus unavoidable. Don’t worry, I won’t engage in any of it.

According to my analytics page, the majority of my readers come from democratic voting-friendly political states — which means most of you will default to reading the elements in the paragraph above from the perspective of a concerned citizen. Indeed, that’s how just all the news media and politicians will talk about them. How does so-and-so relate to you, what do [horrible-outgroup] think of abc?, etc.

Putting your Macroeconomic hat on means approaching the elements above from the perspective of what is best for the country as a whole, considering the short-term, medium-term, and long-term impacts of any proposal. There is no single individual or institution in our modern democracies who has anything close to this perspective — except, perhaps, sometimes, The Fed.[3]

“Just do what’s best” is very hard to resolve when not all interested parties will win equally. Someone is Saudi Aramco (Oil), someone else is Almarai (Saudi dairy producer) — politics must resolve the tension.

The collective bundle of Macroeconomic policies you choose, across the buckets laid out above and others, will not impact Saudi Aramco and Almarai in the same way.

Therefore the collective bundle of policies that are chosen, in a well-functioning state, will be actively determined by the underlying type of economic activity that brings wealth into the state.

“The Oil comes first”, as it were.[4]

What about when a state has multiple ways to bring wealth in? What if those are in conflict?

Yes, this means more politics. But it should also mean more rigorous analysis. It should also mean generosity. A state which brings in significant wealth by value-added-manufacturing will want to adopt a specific suite of economic policies (think of Japan’s example above). If many of the raw materials used in said manufacturing are generated within-state, there’s a significant potential for conflict.

The policies that allow raw materials producers to build Wealth are very different from the one that allows manufacturers to build Wealth.

You might imagine that Value Added Manufacturers would greatly appreciate being able to source low-cost materials domestically, instead of paying high international prices for products that are some other nation’s only source of wealth, and so view it in their own best interest to maintain a healthy domestic base of raw material production…

Alas, dollars are dollars, profits are profits, and few great businessmen ever built great businesses by making sure their suppliers earned solid margins. Consider how this plays out in modern economies — rural vs. urban, North vs. South, and East vs. West — as economic leverage leads to political leverage, and political leverage is then exercised to generate yet more economic leverage:

A key reason Platforms are valuable is they remove the need to take profits multiple times from the same transaction. A customer can enter your ecosystem at Point A or Point B, and go on to use products C, D, and E. Under one roof, the economic surplus from all this activity is retained in-house.

When the house is split beneath different rooves, no profit-oriented firm would ever allow economic surplus to “leak” out of their own borders. Altruism doesn’t make much sense when your own career could be ended by a bad quarter/year.

Rules #1 & #4 — centralize production & sell globally, acquire market power & escape competition — are not pretty when their consequences are put on public display like this. “One-third of the firms were ultimately liquidated…” Nonetheless, the geographical distribution of German firms involved in industrial production is the necessary outcome:

Economic leverage → political leverage → economic leverage. Forever.

To spell out the cynical take here, the fusion of business and politics is not some unfortunate bug in a complex system. It’s the foundational material of the system. Of every system. The economic outperformance of the West placed significant political pressure on the USSR (aka East Germany). The political dissolution of the USSR allowed East German resources to centralize (Rule#1) towards West German firms. Economic outcomes led to political changes which further improved economic outcomes.

You are free to ignore this whole game as it plays out. But you cannot ignore the consequences of others playing it, and the gains from ‘defecting’ in the Prisoner’s Dilemma of [Fusing Political and Economic in the present to increase both Political and Economic outcomes in the Future] are…unmatched.

If German readers feel I’m being too harsh here, they need only point at the history & actions of US companies like Standard Oil. Or, to highlight more recent Tech examples, ask yourself:

• Where is Friendster, today? You know they had 115 million users at one point, right? Where did MySpace go? They made $900M in revenue in 2008, which fell to $109M in 2011, 3 years later.

  • An 88% drop in revenue in under 3 years on a billion-dollar-revenue company is the stuff of nightmares. Zuckerberg sends his regards

• Satya may be the much-lauded CEO of Microsoft today, but don’t forget that the 2nd most valuable company in America built its foundations on crushing the life out competition via platformized integrations and legal action (Rules #3 & #5)

  • Over half of my readers visit my site on Chrome or Firefox browsers — you can thank the US Government for your ability to do so, Bill sure as hell wouldn’t have let you otherwise

• Google was referenced in the required reading as “creating a desert of profitability” around its core business. Perhaps you can remember the distant past of the early 2000s, when other search engines existed?

I’m making my way through the list of valuable US Tech companies to help German readers feel like I’m being fair and show how Tech strategies & national strategies are alike, and at this point I’ve come to Amazon. If it’s necessary for me to describe Amazon’s cut-throat approach to eliminating any and all competition, at all levels of the business, from server farms to Barnes & Noble (rip), then there’s no hope for us. One of Bezos’ favorite aphorisms is:

“Your margin is my opportunity.”

Fear not, my German readers. We do things just the same over here in America.[5]

Relative winners and relative losers are natural consequences of changing the Macroeconomic playing field — like reunification certainly did for Germany — which is why I pound the “Understand ALL the Players First” drum so boorishly. Every policy has a consequence, intended or not.

Modern Keynesian: Stimulation and Dilution

Another name you’ll hear a lot in macroeconomic discussions is Keynes. Again, do your own extra credit homework.

To summarize unjustly, Keynes pointed out that all macroeconomic factors are linked together in a complex network, and that the central government sits at the center of that network with a big budget. Modern updates here have noted that the technical budget of $[X00,000,000,000,000]/year is somewhat relevant, but there’s also-the-ability-to-just-print-more-money-as-needed.

Thus: declines in some macroeconomic indicators can be counteracted like so:

• Price adjustments occurring during the time lag between initial investment & product-launch-date means the initial investment may no longer generate positive returns →

  • means Loans taken out to Finance the investment may go unpaid →

    • means the business may enter bankruptcy →

      • means employees laid off and local unemployment increases →

        • means reduced wages & economic surplus for the local economy →

          • means reduced demand for products & services →

            • jeopardizes other businesses that touch the region →

• bad times ahead →

• new government in 3…2..1…

Orrrrrr….the central government could temporarily step in, spending money either directly or indirectly at multiple stages of this Failure Cascade and put a stop to the whole thing.

It’s a pretty awesome idea for anyone who wants to mitigate a short-term unpleasantry.

Tech employees should be very familiar with this idea!

If a Tech company is struggling to hire or retain employees necessary to build their business, the CEO and the Board of Directors can meet once a quarter and jointly agree to print pieces of paper and give them to new-or-existing employees to entice them to work.

If the work those employees do is valuable, then the pieces of paper will turn out to be worth a lot! You borrow from the future to pay the present. This is a unique & special power, that has to be wielded with responsibility. If it’s abused too heavily, the CEO and Board, as well as all the existing old-timers employees, will find the pieces of paper they were given in the past aren’t worth shit anymore.

This is known as “dilution”, and makes them a) very sad and more importantly b) very unmotivated to do more valuable work.

At Tech companies, these pieces of paper are called “Shares”.

At Governments, they’re called “Dollars”.

How To Print & Spend Government Money: Seriously, Have You Been To The DMV?

Of course things are never that simple. Most Governments are aware of their own ignorance & inefficiency, particularly in the post-modern post-industrial post-Bretton Woods West. Central planning is very tough and most Western governments do not select for people good at it.

But do you know which organizations do select for people pretty good at predicting future outcomes & allocating capital efficiently to ones with a chance of positive returns?

Why do banks matter for Macroeconomics and Government spending? To quote myself from a year ago:

Instead of doing all the tax-hikes/tax-cuts and Government spending yourself, a smart central government can outsource all the required analysis to banks, and then simply encourage or discourage those banks from creating more or less money “out of nothing.”

“Interest rates” therefore translate to “how much more money in the future you can get by having a pile of money today”, which ends up being the primary mechanism most modern governments use to mediate how much money banks need to “create out of nothing”.

If the Fed pays the banks a lot of money themselves (high Interest rates), the banks don’t need to go looking for businesses to loan it out to.

If the Fed lowers the money they give banks simply for keeping cash in the vault (lowers Interest rates), then banks — who care about making money more than you can possibly imagine — need to find investment opportunities instead.

In the modern system, Interest rates are the lever that unsophisticated governments can use to outsource management of the whole economy to sophisticated private parties.

A single lever to move the nation.

It’s quite beautiful.

Part V: The Federal Reserve & Current Affairs (commentary)

Why Not Use The Stimulating Cheat Code 24/7?

Why don’t they just keep rates low — or even negative! — all the time then, to boost all the investment opportunities?

Once again, we can look at Tech to understand the problem:

If it’s abused too heavily, the CEO and Board, as well as all the existing old-timers employees, will find the pieces of paper they were given in the past aren’t worth shit anymore.

This is known as “dilution”, and makes them a) very sad and more importantly b) very unmotivated to do more valuable work.

I said above that “Inflation” is either a result of insufficient supply of goods (supply-driven Inflation) or far too much demand for limited goods (demand-driven Inflation).

There is another kind of inflation: monetary debasement.

When your coins don’t contain as much silver, they aren’t worth as much, shocker, I know. Prices must therefore rise to balance this out — a process which tends to involve some unequal latency. Well-connected institutions or individuals can often then take advantage in the time lag between debasement and price adjustment (aka the Government & friends). It’s called the Cantillon Effect, if you’d like to read more.

Monetary debasement is therefore the last refuge of the desperate & scoundrels — and all scoundrels eventually become desperate.

When banks pull money out of nothing, the expectation is that it will be used productively to create more value. Even though you — a Tech employee — might get diluted to shit every time your company raises another round of financing, the actual worth of your shares will still be increasing so long as your company is becoming more and more valuable.*

But there are limits to these things — hard, physical, engineering limits. At some abstract enough level, the limits are quite literally tied to “lines of code your eng. team can write per quarter” and “number of calls your sales people can take per day”.

“Well we can always hire more engineers and sales people.”

And how will you pay them?

“Out of our profitable business earnings.”

And when those run out, because surely they are not without limit?

We can raise more money from financiers

Who will dilute all existing shareholders in the process…

It’s fine, the new employees will add more value than we lose to dilution.

Infinitely? Without limit? Awesome, where can I send you money to invest in this infinitely-large infinitely-scalable instantaneously-capital-generating business!*

*pls do not invest in opportunities like this unless you know what you’re doing

Understanding the constraints to growth is why the Tech perspective on how successful companies are built is critical to understanding Macroeconomics.

If you lose sight of the concrete actions that generate “productivity”, you can end up nodding in agreement with sophisticated arguments for diluting the value of all existing currency by 75% without stopping to ask if there actually exists enough potential productivity to overcome the debasement.

But if you understand that there are always and forever underlying real-world drivers of all productivity, then the idea that “interest rates could be lowered dramatically to encourage productive investment, but no extra production actually happens!” will be neither surprising nor interesting to you.

If you have some experience with actual videogames and real genuine cheats — and also with the sort of person who tends to be bad at games — you may have rolled your eyes at my suggestion in the subheading for this section: “Of course some people are just gonna use the Cheat Code 24/7!”

I leave it to the reader to draw their own conclusions here.

Note on the Desperate and Scoundrels:

I hope all Tech employees and software engineers understand the value of raising additional capital to expand the business, thereby increasing the value of the company by a large multiple and attracting more talent to fuel the machine. Some dilution is a perfectly reasonable price to pay for accelerating growth.

“Good” Dilution is Debasement — except your real personal wealth goes up. Finance is Magic.

In truly Desperate times, which I hope none of my readers ever have to experience, let alone be responsible for, there is no certain future ahead. It may not be possible to increase the value of the company at all. The company may not exist in the very near-term.

Monetary Debasement that occurs in truly desperate times involves existential questions. The second essay I ever wrote (Moloch is Our God: AI, Mankind, and Moloch Walk Into A Bar — Only Two May Leave), and one that I still frequently get positive comments on, is essentially a recognition of the necessary-but-tragic element involved in all existential questions.

So I’ll say simply that nobody who has never been Desperate and Uncertain should judge the decisions of those who were Desperate and Responsible too harshly. Heavy is the head and all that.

But do bear in mind that the genuine Scoundrels know all this — and know the leeway that is granted in such times. It’s not purely from incompetence that all Scoundrels become Desperate: though the incompetent ones end up there by accident, the competent ones swim there quite on purpose.

Boundary Conditions for the Modern Wizards

A major point of this essay is to reframe every macroeconomic indicator as an output, not an input. To view economics & finance professionals as financial accountants, not financial engineers. To use what you know about building successful companies and apply it to building successful economies — and to stop there, without sparing a second thought for the academic indicators.

And yet I just spent the last 2,000 words explaining why the Fed is the central architect of modern economic outcomes.

Can you square this circle?

When learning Calculus, you start by understanding an equation’s behaviour at the extremes. Extreme conditions show you where the boundaries are. For many problem sets, knowing the boundaries is sufficient.

Thus, I present two boundary conditions for reframing Interest Rates and The Fed:

• Infinite Stasis: All economic growth stops tomorrow. All expectations of future growth stop. No new businesses are started. No new homes are built. No new technology. Complete hard stop on everything, indefinitely.

Under this scenario, what is the future value of money? What is the likely return on capital?

At first, you may think: zero.

And you’d almost be right — in a world which is defined to have no investment opportunities, the amount of extra money you can earn in the future just for having a bit of Capital, today, in the present, is ~nil.

Maybe you think you could serve as a loan shark, at least? Perhaps on the very margin. But there are no new jobs coming, not now, not ever. Anyone you loan money to today is almost certain to still be broke in the future. Out of what Wealth source could they ever pay you back?

The outcome is that nobody pays you anything for your money — because you have no reason to ever loan it out. “You” here refers to everyone, from you, the reader, to heads of state. Money loaned will not return with interest in a zero-growth environment.

Interest rates thus become “zero”, to the extent that they functionally cease to exist. There is nothing our Fed could do, one way or another, to move the needle.

And yet. The value of money does not go to zero. In a zero-growth world, asset holders are Kings and Queens. The boundary condition did not define Wealth away to zero, nor economic activity to zero — it simply stopped all new activity. If you own assets, you continue to generate Wealth.

This is a very strange world to modern minds. Excess cash becomes worth nothing, but owning productive assets becomes worth ~everything. It’s hard to imagine. What is the Fair Value Sale Price of an asset in a world where the cash itself earns nothing? Where there are no investment opportunities at all?

It approximates infinity. What could you possibly do with the cash you received? Only violence or its threat could ever justify a change of control.

In a Feudal world, only the willingness to pick up the sword separates the Lord from the Peasant…there’s only one good way to build Wealth — Take it and Tax it. Veni vidi vici etc..

In this Boundary Condition world, cash will buy you anything at all — except the ability to earn more. Anything except Wealth.

Infinite Stasis leads to zero interest rates, infinite asset prices, and all economic activity becoming consumption or zero-surplus labor.

The second boundary condition:

• Infinite Progress: All conflict and political instability is evaporated. Markets and capital and labor are free to move wherever, whenever. There are no restrictions on investing in companies. New Technologies turn Sci-Fi futures into reality, on timescales measured in quarters. Twelve new Apple Inc.’s are created this year, this month. New markets are opened up and the global economy doubles in size — tomorrow. Demand for labor 100x’s, and the new technologies mean labor productivity also 10x’s. You can move to your nearest Urban Center and 10x your hourly wage, and that’s assuming you have no skills at all.

Under this scenario, what is the future value of money? What is the likely return on capital?

When contrasted to the first scenario, the answers suggest themselves.

Everyone invests everywhere. The value of money sky rockets — your Wealth could compound astronomically if you keep investing in productive businesses. The new Wealth means prices rise — ~all prices, everywhere.

Opportunity cost becomes the dominant factor in determining almost all costs.

While this boundary condition may sound — at first — like paradise on Earth, the second-order consequences of Infinite Progress will be that anyone who is not taking full advantage of the crazy new economy gets left behind. If you go live in the woods for a month you won’t recognize the world when you get back. New cities, new vehicles, new tech, new planets. Better hope your 401k was well-invested, otherwise you may need to adjust your retirement plans.

How much, then, for a dozen eggs and a gallon of milk?

How much, a month later, for the same?

How much, at that point, for a college education at Harvard?

Even if technologies have lowered the cost of milk production, the Iron Law of Rent applies to all product assets, not just land. And your cash is now a productive asset. Perhaps the milk will be free of charge, flowing from fountains in the town square — but something else, some otherwise normal part of your annual economic budget, will likely find itself bid up in price simply by virtue of the fact that everyone is now earning 10x the wages they were last month. Healthcare is a common real-world example of this phenomenon (read more here & here).

The excessive productivity leads to excessive Wealth and excessive investment opportunities, which both put excessive upwards pressure on almost all prices. Note, though, that a simple house may appreciate in value less quickly than other more productive assets in this time.

This scenario feels harder to me to model out, as it’s so far beyond anything I can imagine. Perhaps I am misjudging some of the particulars here. Nonetheless, I think it’s obvious that this world would look VERY different from the Stasis scenario — and that our hypothetical Fed would need to adopt a radically different policy in response.

Infinite Progress leads to high prices for productive and consumptive goods alike, many investment opportunities, and correspondingly higher interest rates. All asset prices rise due to the Iron Law of Rent, but the productive assets rise in price most quickly.

I don’t want this to seem too academic and disconnected.

After touching on all these various topics, let me try to tie them together with a simple question: how much money should the government of Saudi Arabia sell Saudi Aramco for? The whole company, not just 5%. Complete divestiture.

“Well you see, that’s simple, just calculate the net present value of future cash flows-”

Don’t be silly. To sell the entire company — a company which, as I’ve laid out, is responsible for the entire economic well-being of the country — would be ridiculous. The asset in question sits at the foundation-layer of the modern globalized industrial economy. There are not many more-productive areas the Saudi Government could choose to invest their sale proceeds in — and they’d end up with less Leverage over whatever they pick than they currently have with Saudi Aramco.

What competes with Oil in terms of value and leverage? You can scan the company names from Part II to find out. Tech. Industry. Pharma. The problem is not just that these are hard sectors to spin up from nothing — it’s that there are already entrenched globalized suppliers in each of them. The Saudi government would be divesting a ~centralized asset, around which it controls a global cartel that limits commodification & has built sufficient market power to capture ~all the value created, and on top of which it is able to exert enough leverage to earn the protection of the largest navy on Earth. In exchange for what? Competition with Chinese and Japanese industry? Or with Chinese and American software developers?

Ridiculous.

At the pinnacle of value-creating assets, the world really can start to look a little Feudal. All other investment opportunities will make you poorer.

What could you possibly do with the cash you received? Only violence or its threat could ever justify a change of control.

Since most readers are not members of the Saudi Government, there’s a way to reframe this question much closer to home:

How much money should your CEO sell the primary revenue-generating engine of the company you work at for? 

It’s nesting Russian dolls all the way down. The easier it is to come up with an answer, the faster you should probably start interviewing for a job at FAANG/MANGA:

The Fed As Weatherman: Don’t Shoot The Messenger

The two scenarios of Stasis & Progress are of course completely unrealistic.

But the boundary conditions tell us about the expected behaviour of the system — and about the likely directions indicators would move under growth or no-growth environments.

I poked some cynical-lighthearted-fun at the hard-working people at the Fed earlier when discussing “cheat-codes”. But if we reframe the Fed (& other Central Bankers) as downstream of real underlying economic activity — merely reacting to it and communicating that reaction to the masses market — then the picture looks quite different.

I do not mean to downplay the importance of this position either — as I write this, New England is enjoying the worst winter storm in four years. Thanks to some notice from the weathermen, we went shopping yesterday (along with half the town). Food for a few days, full tank of gas, candles, fresh water. Our physical and economic activity was directly driven by the weathermen.

But the weathermen did not summon the storm.

And so, in defense of the Fed, I simply present the exact same chart as before, only this time with the new context that they may be in the passenger seat, not the driver’s seat:

If your browser settings are similar to mine, these charts should ~line up with each other. The start date for each is the exact same.

Readers have chastised me for drawing on charts in red marker, so I’m trying not to overdo it here. I use the fuzzy hand-drawn red ink to call attention to things that might otherwise go unnoticed — we all see so many charts every year that we tend to only see what we expected to see.

But if your lens is that the Fed is master of the national economy, then you must somehow reconcile the problem of easy money and low growth: The rates have been kept at zero since the Great Financial Crisis (even negative in some nations). And yet the actual economic growth — GDP growth rate above — fell ~2% short of what we experienced for 25 years, and stayed there from the GFC through to the Corona-crisis, all while many prices have soared (assets, college, healthcare, housing).

Obviously the corona issue really tanked things in 2020, so 2021 has seen a somewhat anachronistic bounceback. Perhaps 6% growth will be the new normal and we will return to the glory days of old. I hope so. Perhaps it’s all “inflation” and downstream of pandemic-response measures. I hope not.

But if your lens is that the Fed is in the passenger seat, then there is nothing to untangle here. Economic performance has not recovered since 2008. Growth expectations are perhaps permanently lowered. Interest rates have bottomed as a result. Asset prices have skyrocketed:

“Low economic growth, low interest rates, astronomical asset prices” — of the 2 boundaries discussed earlier, I know which one this is closest to.

4% economic growth or 2% economic growth, is such a difference really so huge? Who knows.

$100 growing at 4% for 25 years — a generation — years turns into $267. $100 growing at 2% for 25 years turns into $164. A difference almost exactly equal to the principal.

Form whatever opinions you like about the political outlook and economic attitudes of Millenials and Zoomers, just make sure this is a factor in those opinions.

The unfortunate and genuinely pitiable situation of the US Federal Reserve is that they have a dual mandate:

They must attempt to keep unemployment low and prices stable. The 2 boundary scenarios I presented above were an attempt to show how these two goals are linked.

Lots of growth → prices rise ( → Fed can raise interest rates to combat prices/inflation).

Low growth → (low jobs) → prices low → Fed can lower rates to combat lack of jobs (by making investments more attractive).

But WTF is the Fed supposed to do when low growth is caused by limited investment opportunities and not a lack of capital access??

If they lower rates to combat the low growth environment, prices will go up, up, and up. But if the reason for limited growth is structural, extra jobs may not materialize! Economic stagnation under conditions of price inflation. Stag-flation (this wiki article has a surprisingly good summary of competing views on the topic).

This is the frustrating situation that The Federal Reserve finds itself in today. The factors that shape their decisions have been discussed by academics for 50 years now. They are not new. But the media that analyzes their actions, and by extension the public at large, has absolutely no understanding of the causality at play.

“Inflation high? Better raise rates or you’re being politically motivated cheat-code exploiting hackers.”

But raising rates is likely to lower incentives for investment and somewhat reduce employment, with spillover effects on economic growth. Their hands are tied.

The dual mandate has an inner tension. The Weatherman gets blamed either way.

To mirror the question above: how many shares should your CEO print & sell to new investors (for cash) & employees (for hard labour) when nobody is interested in buying your products? None? But then how will you fund the development, production, and sale of new and attractive products? Lots? But then all existing stakeholders will be diluted based on…hope. Promises with no punishment for breaking them (besides the dissolution of the company). Either way, the blame for negative outcomes will roll upwards:

If this question seems too hypothetical for you, ask why Box.com’s CEO owned a mere 5.7% of the company when it filed its S-1 in 2014………compared to Zuckerberg’s 28% stake in Facebook, Elon’s 28% stake in Tesla at IPO, or Bezos’ 48% stake in Amazon at IPO. Or, to use a more recent example, ask why a certain Michael L. Speiser personally owned 20% of Snowflake at its IPO, while his own venture firm owned another 20% (page 119 of the S-1 I linked — if you work around enterprise Tech, you should really know about this last one).

The number of shares they had to print along the way to IPO tells you how quickly the company was able to build a valuable business. So for most Tech companies, the percent of the company that your CEO owns will also be a proxy for the value of your own equity as an employee.

Economics-literate readers may already be well-aware of the delineations in this essay between “standard” and “less-common” views, but just to make it clear for all readers: all the above is well-trodden ground. There is nothing heterodox in me highlighting the problems that plague central banks, I’m just explaining things that you could otherwise learn in a textbook.

The one vaguely-heterodox macroeconomics opinion that I’ve woven in throughout this essay is that “structural” reasons for limited growth opportunities are, in many times and many geographies, often the norm. You can get there from a global pandemic, yes. You can get there from a massive reduction in a necessary economic input like Oil, yes. But you can also get there from the normal conditions of doing business in a dynamic economy.

You can get there simply because someone else ate your lunch. And you can impose them on your competitors, national or corporate. These opinions are informed by reading (The China Shock, National Bureau of Economic Research, Autor, Dorn, & Hanson) and writing (The Germany Shock & Unequal Growth, both by myself). And, at their root, these opinions are all downstream of my own experiences in and around Silicon Valley’s Tech economy.

At the national level, which can simply be the level of your nation’s largest companies, any violation of Rules #1 through #5 can leave your central banks stranded in the no-growth twilight zone.

Have some sympathy for the weatherman’s predicament, and some respect for their communications.

The Blitz

I didn’t include it in the required reading, because I think there are too many counter-examples for it to be truly required, and you really need to hit Product-Market-Fit before betting the house like this, but if you’ve been at all plugged into the Tech scene post-2012, you’ll have explicitly or implicitly encountered the PayPal mafia’s pet theory on company building:

But whether you’ve encountered these ideas before or not, it should be clear that they can and do work. Reid’s personal wealth is the only testament you need here.

Blitzscaling is insanely effective, more a Tactic than a Strategy, it can support a company establishing a chokehold on a market and cutting off competition. To carry the Russian doll analogy, it’s like starting with the smallest inner-most doll and then building the largest outer-most doll around it next, trusting yourself to build the middle dolls later.

Obviously, this comes with potential costs.

If you do not have Product-Market Fit, Blitzscaling will destroy your company, your reputation, and your business relationships (& perhaps your personal ones too). “The Blitz” was a German bombing campaign that killed 40,000 British civilians. “Blitzkrieg” was a surprise application of overwhelming force to dismantle France. Blitz-ing things does not result in frolicking lambs and fluffy bunnies.

I leave it to the reader to consider which Macroeconomic policies may best be described as a “Blitz”, what a Federal Reserve “Blitz” might look like, and what the outcomes of running a national economic “Blitz” might be when a nation no longer has Product-Market Fit. The only note I’ll add is that a Blitz must always be total — you cannot have half your org. running a Blitz. If you’d like to study some specific examples, helpful search terms might be: Deng, MITI, & TSMC.

Conclusion & Summary: I Code Therefore I Am

The point of this essay was not to rehash lessons you can learn perfectly well from credentialed economics PhDs and/or Wikipedia pages and YouTube lectures. Go forth, watch stuff, ask questions, read books, try not to watch the news.

The point was to give anyone familiar with Tech companies a suite of viable analogies to reason about the bigger Macroeconomic picture — and to relate that bigger picture back down to their everyday work. To show how central banks manage Western national economies and to impart some respect & sympathy for what they do. And to bridge the divide between those two perspectives: entrepreneurial corporate and academic central banker.

Hopefully my examples weren’t too spicy.

Viewed one way, the financiers drive the entrepreneurs. Viewed another, the entrepreneurs dictate to the financiers.

Tech company strategy provides useful analogies for this whole situation — but I don’t mean for them to be mere analogies. Massive economies are built ~entirely on the back of massive companies. You can hate the mega-corp, you can worship the mega-corp, but if you want good things for yourself you’ll need to index your own fortune to something as economically productive as a mega-corp. Known candidates include: mega-corps. The consequences of not doing so are at best the inability to afford iPhones and Oil, and at worst impoverishment and exploitation at the hands of those who did choose to plug themselves into the global marketplace.

If I have to end on a specific note for thinking about macroeconomics and the consequences of macroeconomic proposals in the future, it would be this:

Ask first what is being built, where, and by who. Ask second what is being sold, where, and to whom.

Who, whom. That should be enough to steer you in the right direction.[6]

Notes

[0] “Macroeconomic policy” is literally just resolving exactly these tensions, all day, every day, in front of people who have no understanding of the relevant factors but who will vote/riot you out of office if you don’t successfully propagandize your policy to them. Exciting!

[1] There are many reasons Google+ failed miserably, though we should all commend the effort. My suggestion here is that Google+ failed for many small reasons, but the biggest one of all: Search was not at the beating heart of the platform. The Google+ platform ran on social, not Search — infusing every part of Google with #SOCIAL in response to a perceived external threat from Facebook — which could never withstand a confrontation with Core Google. Inside the inner-company politicking, Search wins the long-game 99 times out of 100.

[2] Any divergence in skillsets today is a modern invention. When Joint Stock Companies were first formed, the skills to lead them were exactly the same as the skills to lead a successful nation — one of the largest of them all quite literally ran the subcontinent. In modern times, most societies recognize that the political will of a nation’s people should subordinate the economic will of a single company. But that just makes the point more meta: any nation whose leaders cause its economy to deteriorate, through action or inaction, will ideally be replaced ASAP by those with the skills to fix things.

This is not always the case. Sometimes political will is stronger than economic will. Sometimes an understanding of cause-effect is missing. My sympathies to anyone who finds themselves living in such a nation.

[3] Consider the length of time some members on this list served as Chairman of the Federal Reserve:

[4] This is the best argument against the over-abundance of bankers in shaping macroeconomic policy.

[5] A twitter friend told me not to bury the lede, but let’s be clear here: my essays are mostly explorations of a lede that I rarely spell out. In case it was unclear in this section: the real comparison I’m making in this section is not [90s German Industry]:[Tech], but [Standard Oil]:[Tech]

Of course, to make that comparison directly would trigger a lot of discourse that I’m entirely uninterested in, much of it political in nature. To make that comparison directly would lead to people assuming I am being critical, “anti-tech”, and so on.

I trust few enough people actually read these notes that I can pause the Straussianism, put a small part of the lede down here, and prompt some honest thought from curious readers instead of knee-jerk critiques.

[6] Thanks to a fellow appreciator of socio-politico-economic study for this helpful framing: Who, whom?

[99] Thanks also to @Quantian on Twitter for tweeting something right before Christmas that prompted me to finally sit down and write this one over the holidays. I’d been sitting on the data and thoughts for over a year now. The thought that someone else might pull these ideas together before I hit publish was an excellent motivator.

Appendix: Largest Companies In All The Other Countries

(told you I did this — not making a whole section about Korea was a real challenge, but this was long enough already. Click any of the below to enlarge)

(Discussions of equity value vs. enterprise value and the relative importance this gives to industries with low debt burdens can be had with anyone who wants to buy me a coffee 😉)

• Summary
• I: How To Build Something Valuable At Scale
• II: Macroeconomic Russian Dolls
• III: All Great Companies Sell Into The Same Global Market
• IV: Company-first Macro-Economics
• V: The Federal Reserve & Current Affairs
• Conclusion: I Code Therefore I Am
• Notes
• Appendix

This week[0], Xi Jinping’s government announced it was banning videogames — the latest salvo in a slew of attacks aimed at bringing China’s tech giants to heel and keeping the nation’s future tightly aligned with the CCP’s industrialist vision.

I have no further commentary on that national vision. I wish them good luck.

But in the dark days to come, when millions of Chinese youths will be forced to borrow ID cards from parents and grandparents, I do have some commentary about the videogames themselves.

For those who aren’t familiar with the landscape of today’s Discourse on Gaming, played out across Twitter, blogs, & old-media thinkpieces, the positions are approximately:

• “Games are a primary means of experiencing reality & playing or building them is an aspirational life goal.”

• “Games are fun!”

• “Gaming is an awesome way to escape the struggles & mundanity of regular life and indulge in infinitely varied simulations of an alternate reality.”

• “Games are fun, in moderation.”

• “Gaming is designed by sophisticated college-educated developers to exploit psychological quirks, such as random rewards, and addictive tendencies among the masses — at their worst, no different from hard drugs, at their best a colossal hedonistic waste of energy.”

• “The kids are spending too much time on games!”

• “Even in moderation, time spent gaming is time mentally obliterated beneath the weight of repeated routines, each iteration of a gameplay loop merging into the prior one in the gamer’s memory. Even doing drugs is less antisocial than gaming.”

Those positions are actually all pretty reasonable, you just have to understand the different real or imaginary subject “Gamer” that each one applies to.

But I’d like to add one more position, one not expressed very much:

Games are best played to excess in order to learn things you won’t learn in school or early in your career

Categories of Gaming

Not all games are alike.

• There are games you play by yourself, an interactive entertainment experience.

• There are games you play with friends, for fun.

• There are games you play with friends or strangers, against strangers, for personal glory.

• There are games you play with friends or strangers, against computers, for team achievement.

• And there are games you play with friends or strangers, against friends or strangers, with no explicit goal at all.

I don’t have much to say about the first two — there are some great games out there, worth playing.

The last three, however, can teach wisdom you won’t learn at school.

For Personal Glory

Competitive games played for personal glory make all the best esports. Depending on your age, this might include titles like: Quake, Starcraft, Counter Strike, DOTA, Halo, Call of Duty, Gears of War, World of Warcraft (arena), League of Legends, Hearthstone, Overwatch, PUBG, Valorant, and so on.

When you play these games with a competitive mindset, you play to win, and you play against other humans. Humans who also very much want to win.

“For Glory” games have one primary thing to teach: a repeatable process for acquiring new skills, mastering them, and deploying them in the market against other competitors effectively.

When you watch an average juggler, most people have a thought in the back of their mind that goes something like:

If I dedicated enough time to it, I could probably learn to juggle about as well as that

But when playing games “For Glory”, your absolute rate of skill acquisition itself is only one part of the problem, most relevant at the very beginning of your journey up the merciless majestic mountain.

Once you’ve mastered the basics, what matters is not just your absolute rate of skill acquisition, but also your relative rate of skill acquisition. No competitive playing field is static. Tactics evolve as players evolve, even at the very highest levels. Meta games are constantly moving. What was considered a mindblowing display of skill at the highest echelons of professional play will, over the years, become a standard part of every competitive player’s arsenal.

Only those who’ve seen that downstream journey of skills play out, from the pros to the masses, can understand how scary it is for every serious competitor. It is not enough to master the basics, you must also master the sum total of all innovation happening in the pro-scene, in real-time, as fast as everyone else is trying to master it. And then develop your own style on top of it all.

The reason to play games “For Glory” to wanton excess is not to become a professional gamer, but to learn the meta-skills of rapid skill acquisition and ruthless self-evaluation. These are incredibly useful in the complex modern world, where self-education is the only kind of education that makes a difference.

These meta-skills aren’t easy to learn, either. If they were, the doors to competitive success would open to anyone who puts the time in, though that time is a necessary prerequisite. There are common psychological barriers that tend to block your progress in the arena. Your own individual mix of culture/personality/discipline/ego will determine how they manifest. One common manifestation is intense competitive anxiety — if you’d like to read more, here’s a 370-post forum thread about the interplay of identity, ego, adrenaline, and expectations, all of which combine to produce one result: you don’t put in the reps.

Or consider how stubborn attachment to habits develops among almost all gamers — you find a sequence that works particularly well for you, you repeat it, you get good results, you repeat it, you get good results…oops. At this point your fundamental improvement loop is completely broken:

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You’re not doing something because it’s The Right Thing To Do. You’re just stuck doing it because it worked for you last time. Stop. Go to jail. Do not pass Go! Do not collect $200. You might laugh until you remember the grand tactics of World War I. It’s all fun & games until someone’s OODA loop[1] degenerates into “Decide→Act” on an endless cycle.

At the other end of the spectrum you’re likely to see reactionary competitive-apathy (ego-preservation), “tilt”, defeatism, or any one of a host of psychological stumbling blocks.

If you can become good at these sorts of games, particularly if you can experience “climbing the mountain” in more than one domain and see which lessons are transitive across time and space, you’ll have a skillset that you can take out of the virtual world and plug right into the real one.

For Team Achievement

If you’ve had your fill of glory, there are a small number of games that offer a multiplayer team-oriented goal-based gameplay experience. The most popular of these is — and has been for over 15 years — World of Warcraft (raiding).

Ben Horowitz wrote about the distinction between Peacetime and Wartime CEOs back in 2011.

As he notes in that brief read, the lessons are general leadership lessons — applying to more than just the CEO himself. “For the Achievement” gaming can teach you pretty deep lessons about what successful leadership looks like under extreme adversity.

The nature of wartime means that most conflicts are unique enough that lessons are hard to generalize. For the leader of a serious (raid) team, you might expect your gaming experience to include:

• Double-digit team attrition during bad times, single-digit attrition quarterly

  • Even your best team members will leave for external reasons and not be heard from again

• Bad times completely out of your control

  • E.g. the owners of the game release a major update reducing the strength of your best team members (expect their morale to plummet)

  • Internet connectivity issues on a ~25 player team will cause mission failure on a weekly basis

  • Bugs or freaks of programming will cause mission failure on a monthly basis

• Bad times completely because of your bad decisions

  • This bifurcates into i) (clear) bad decisions, which can be learned from and ii) (unclear) bad decisions made under conditions of extreme uncertainty (“fog of war”), which can easily offer no actionable lessons or, worse, lead to a reactionary bias in future decisions that hurts you again in the opposite direction

    • Nobody will — or can — tell you which category of decision a given bad decision was

• Bad times completely a result of individual underperformance

  • Including by team members you cannot currently afford to replace

• Bad times as a result of personality conflicts

  • Including conflicts among mutually irreplaceable team members

• Public and private disagreements with leadership decision making

  • Well-meaning-but-frustrated team members, particularly if they are talented individuals, are most at risk for developing negative attitudes towards the team, and therefore towards leadership

    • Public disagreements: you have to parse any genuine actionable feedback out from frustration-tinged disagreements, in real-time, while maintaining the respect of both the individual(s) in question and the broader team

    • Private disagreements: if you don’t have enough genuine respect from your average team member, they won’t let you know when people start whispering about “weak-links” and stirring the pot in ways that only worsen morale & performance

• Disagreements over pay (reward distribution)

  • The easiest way to solve these is to take less for yourself as a leader — which means your extra work will go unrewarded[2]

• The majority of nights to end in mission failure

I’m underselling the prolonged state of misery here. If you can make it through all that to the sweet catharsis of “Mission Accomplished” at the end…well. If indeed.

The reality of a goal-based team activity like this is that you are failing every night, until you achieve victory…at which point your goal is accomplished and you switch to a supposedly-chill holding pattern (“Peacetime”). In reality, you’ll be amazed at the sorts of conflicts which find ways to bubble up in “Peacetime” — and even begin to dread the coming mission-completion as you sense it approaching, knowing that the release of tension will lessen the glue holding your team together.

Yes, there are milestones along the way, points you can hold up and say: “Despite not yet achieving the goal, we are currently among the top [X] teams competing!” No, those don’t really matter to anyone at the end of the day and most people on your team knows that in their soul.

Outside of the very best professional or semi-professional-level teams, the “Mission Accomplished” stage for Warcraft takes anywhere from 1 to 12 months to achieve, depending on the quality of the team and the length of time the game developer allows before releasing a new raid.

On average, teams probably spend 3-4 hours a night, 2-3 nights a week, for ~6 months — between 144 and 288 hours (!) — failing to achieve a team-based goal with 19-25 fellow teammates, until eventually succeeding. And then they do it all over again. And again.

There are not many opportunities in life to learn the somewhat unpleasant lessons of leadership-under-adversity. Fewer still of those are as physically & mentally forgiving as ~200 hours sat at your desk in the evenings instead of watching Netflix. Certainly the majority of them come with tangible negative impacts on your real-world physical, mental, and/or financial health when you fail — and you will experience many failures.

In some ways, you’re getting the discount lesson here. But you’ll get more out of it than any management books you can buy.

For Self Discovery (“Playing in the Sandbox”)

This final category of gaming is a hard one to explain. Often described on wikipedia with terms like “sandbox” or “survival” or “persistent world”, the core thrust of these games is to start players at the very bottom of a savage hierarchy…and say: “Go!”

Popular titles in this genre today might include: Eve Online, Rust, Ark: Survival Evolved, and even multiplayer hosted servers of games like Valheim or Minecraft.

The specific takeaways from games like these will be wildly different depending on your own psychology — which is, in fact, the one universal lesson to be learnt: who you are, what you like, how you react to the removal of structure, how you choose relate to others when there are no expectations, and so on.

I can’t speak much more on this category, because the lessons really do not generalize very well at all, beyond a base level of appreciation for the situation of Feudal peasants.

Your experience in these games might mirror a virtual version of any of the above images

The one thing you’ll probably come out of the experience with, no matter how you choose to define yourself in-game, is the radical impossibility of maintaining total safety of yourself and your assets in a predatory world.

How you react to that is up to you, and it’s certainly traumatic the first time you experience an in-game reset back down the hierarchy at the hands of another player. It is not something you can ever experience in a school setting. Teachers, parents, and anyone who cares about your well-being will steer you far, faaaaar away from these sorts of situations.

For myself, some measure of Zen about the whole thing, coupled with preparatory planning for the inevitable total-loss, were valuable takeaways. Personal risk tolerances, how you treat assets, and how you react to acquiring Wealth can’t ever be learned in an environment where you don’t care about said risk/assets/Wealth (i.e. classroom exercises or fake trading simulators).

Sandbox games give you that environment. Nothing you earn or build would have been yours if you didn’t care enough to go out and get/create it — the games don’t push you forward, and they don’t kid you about being able to keep hold of your property forever. There’s always a bigger fish.

Which means that when a bigger fish does come along, you really don’t want to lose your stuff. How to solve that problem is up to you.

Winning Eve: The Real Endgame

It is often said that the only way to “Win at EVE” is to unsubscribe your characters.

You cannot remain at school forever. After graduation, you might still read books, essays, scholarly articles, even dabble in some thesis-generating activity of your own…but you no longer exist within an academic institution.

It is up to you to shift-your focus up from your studies and translate your education to the real world.

There are many pitfalls with “gaming to excess,” not least of which is that you might become consumed by the process…(I promise not to make any comparisons of the form Academic::Gamer as School::Game)

“For Personal Glory:” Revenge of the Ego

When gaming “For Glory”, the important practical lessons are about acquiring new skills, and the important psychological lessons are about overcoming the parts of your ego that hold you back. Sirlin’s metaphor of a “majestic mountain” whose peak you must attempt to climb in order to win is quite apt. But then: where will you look when you have summitted the peak?

The reality of mastering the parts of your ego that tend to inhibit competitive progress is that…you will progress competitively. A polite way of saying: “you will become better than others at the game.”

If you’ve done a good job, you can even drop a word there: “you will become better than others at games.”

You don’t need a PhD in Buddhist philosophy to appreciate how this will tend to feed a very-hungry ego! You probably don’t need me to point out the pressure said ego will exert to drop the final two words from that sentence: “you will become better than others."

Defining your identity by proxy of your performance within a game is unlikely to set you up for success in the real world.

For a mere student, as opposed to an aspiring “pro gamer”, your best bet here is to copy brownbear, linked above, and set yourself specific percentile-ranking brackets as a target — taking a break or stopping altogether after achieving them.

“For Team Achivement:” Inelastic Effort

And the truth is that the energy needed to achieve success in these sorts of domains is somewhat inelastic.

Going through the goal-based team struggle the first time will be a doomed challenge, failure certain unless you’re taken under the wing of an experienced veteran. The second time you might achieve victory. The third time you ought to have it in the bag. The fourth time? The fifth?

Are you having fun?

The effort to sustain victory over the long-term in team-based goal-oriented games is incredibly taxing. You might begin to sympathize with the affection Cincinnatus felt for his farm.

At the point where you’re no longer learning, the weight of expectations will still press upon you and your team will still need your leadership. It is up to each leader to learn where their breaking point is, and to do right by the team they’ve built while navigating the closing of their leadership — either by passing the mantle or closing the doors.

Your personal energy is finite, after all, and the inelasticity of the effort needed to unite, motivate, and push a ~25 person team to repeated success will leave room for little else. Sometimes small things really do take as much energy as big things.

“For Self-Discovery”: Discover Your Own Pitfalls

The downsides of excessive sandbox-play will be up to the reader to determine, based on their own experience. I would never rob anyone of self-discovery, even the painful parts.

Generational Divides Beyond Gaming: A Deeper Conclusion Than You Were Expecting

Games are best played to excess in order to learn things you won’t learn in school or early in your career

I have no doubt that millions of Chinese youths will find a way around restrictions imposed by Xi Jinping & co.

To the extent that people object to gaming in the mass media — and state-sponsored bans for minors are certainly an objection — the concern usually relates to children, how much time they waste, what lessons they learn, how much violence they mimic, how they learn to relate to each other, etc. etc.

Generational divides are some of the hardest for any society to navigate, and China’s jaw-dropping economic & technological advances over the last few decades often overshadow the very real history still remembered by its leaders today. Xi Jinping’s “Early Life” section on Wikipedia is harrowing. The Cultural Revolution was contemporaneous with the Summer of Love in the USA. Our generational divides are not in the same solar system.

In one of his more controversial essays on Why Nerds are Unpopular, Paul Graham at least identifies a thorny problem for modernity:

Teenage kids used to have a more active role in society. In pre-industrial times, they were all apprentices of one sort or another, whether in shops or on farms or even on warships. They weren't left to create their own societies. They were junior members of adult societies.

…Teenagers now are useless, except as cheap labor in industries like fast food, which evolved to exploit precisely this fact…

…In my high school French class we were supposed to read Hugo's Les Miserables. I don't think any of us knew French well enough to make our way through this enormous book. Like the rest of the class, I just skimmed the Cliff's Notes. When we were given a test on the book, I noticed that the questions sounded odd. They were full of long words that our teacher wouldn't have used. Where had these questions come from? From the Cliff's Notes, it turned out. The teacher was using them too. We were all just pretending.

There are in fact rigorous schools still out there, where the academic exercises are not quite so pretend. But even when executed properly, schooling is not reality, nor is reality much like school. Some forms of education cannot occur in the classroom. Students at all ranges of academic aptitude often recognize this early on.

For sure, the vast majority of gaming that teenagers engage in is done for the same reason teenagers do anything: because they want to. I wasn’t scouring MLG forums and arenajunkies in high school because I wanted to learn meta-skills that would help my career. I just wanted to win.

Nonetheless, hobbies and habits picked up in young-adulthood often stick around. The lessons gaming has to teach you aren’t going anywhere.

You can condemn gaming for being psychologically exploitative and look down on the kids for spending too much of their time in make-believe contests. Those are fair criticisms.

But you ought to judge still more harshly the surrounding society that removes many avenues for the kinds of personal growth that gaming creates. A society that never hands any real responsibility to its future generations, and that delays the transition as long as it can:

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It’s for the best that these important lessons are learned by the next generation. Traditional sports will provide some of these lessons for many kids[3] — and the focus on athletic events at most top-tier schools & colleges is downstream of that realization. But sports don’t work for everyone, and per my note [3], they mostly fail to set up a framework to learn the lessons I’ve laid out above. The temptation for coaches and parents to intercede is too strong.

For those who feel they might have something still to learn, I recommend Gaming.

What’s the worst that could happen?

Notes, Critiques, and Responses

[0] Last week, really, but I banged this out on Sunday and I’m not changing it now

[1] If you can understand & relate to this paragraph from the very first page, then you’re 90% of the way there on the path “For Glory” —

[2] You’re in good company here though:

What then have I reserved to myself after all these labors, except this purple robe and this diadem? I have appropriated nothing myself, nor can any one point out my treasures, except these possessions of yours or the things which I am guarding on your behalf.

[3] Some of my strongest childhood memories are from sporting events. I was part of a national-championship-winning team at age 11 and a regional-championship-winning team at age 13, long before I had an internet connection good enough to play with and against other people on the internet. I also got to be being a team captain of 2 sports teams in England — a wonderfully educational experience, and one that not a single American child gets to enjoy.

British readers will be horrified to learn that most American sports captains are “elected” democratically by their fellow students…and have no meaningful impact on the game itself. The coach makes all important decisions from the sidelines. Student responsibility is abstracted away, and therefore the lessons learned are quite different.

American readers will be baffled at my comments here. The idea of a collective popularity contest for a largely-ceremonial prize with negligible genuine responsibility is a deeply American one. Don’t @ me <3

[98] This leaked communiqué describing Xi Jinping’s political aspirations, courtesy of a childhood friend and/or the National Security Council, is fascinating to read — most especially in the full context of the harrowing childhood experiences that Xi & his family endured. Thanks to N.S. Lyons of The Upheaval for introducing me to it.

I also liked Goethe in China by Edward Luttwak a lot.

[99] One response to some of this essay might be something like:

Why don’t you take all that energy and spend it on entrepreneurship or aid work instead? Surely you can learn the same lessons AND effect change in the real-world!

For some people, this is perhaps true. I hate to over-quote Paul Graham here, but unfortunately much of his early writing is just full of too much wisdom to ignore. In this case, the most-likely outcome is “playing house” AND failing to learn the underlying lessons & small-wisdoms that come from leadership:

Gaming might be fake, in so far as it’s virtual. But within the constraints of the virtual world, the problems CANNOT be faked or abstracted or privileged-access’d or made to sound meaningful for stakeholders in a pretty slide deck. Thus, even though the output will be mere pixels on a screen, the process to get that output must be true, meant in the fullest sense of the word “true”.

There are rare cases of super-genius teenagers being perfectly placed at the nexus of technological change and social development, such that they make the perfect founders. If you’re planning to start the next big social media startup, you might consider ignoring this essay. But there are many great institutions that require technical skills, work experience, personal networks, a track record, and access to capital that you won’t have until your mid-late 20s, at best.

Power and responsibility move together, and neither have been given very freely to the newer generations. When that time does come, at last, the millennial generation will find itself lacking without some avenue to acquire the skills & wisdom necessary for a bright future under their stewardship.

• Categories of Gaming
• For Personal Glory
• For Team Achievement
• For Self Discovery
• Winning Eve: The Real Endgame
• Generational Divides
• Notes & Related Reading

There’s a quiet worldview schism among today’s American elite, one I often shorthand as “New York” vs. “San Francisco” among my friends. But this schism is more fundamental than a mere city difference, and almost every part of our mainstream discourse is downstream of it.

Does Finance drive the world, or does the world drive Finance?

Elite Underproduction — a short summary:

• The schism concerns the primacy of Finance in determining causation of real-world outcomes

  • New York Schoolers assume Financial causation of all real-world outcomes

  • San Francisco Schoolers assume an unmodelable variety of real-world factors cause all Financial outcomes

    • The reality is that both perspectives exist as part of our societal “Creation Loop”:

• The New York School makes the world legible & so dominates Finance, Academia, Government, and Media

• It lets you model complex phenomena & predict outcomes. When it works, it helps you understand & direct the flows of capital that help build…everything

• Where it fails is by relying too much on abstracted models, leaving individuals confused & uncertain if they come too close to genuine building processes

• The San Francisco School provides a framework to actually build real-world projects

  • It lets you deconstruct & reconstruct systems of any complexity level, and its entire methodology is “begin by doing”

  • Where it goes off the rails is by assuming that a (metaphorical) screwdriver can fix any problem — and that there are no consequences for ignorance of the laws of Finance

• A primary role of “the elite” in any society is distilling & packaging complex phenomena into digestible Narratives for the public

  • Today, our Elite is heavily siloed between these two schools. There is minimal cross-pollination between the two

    • They war frequently on Twitter & across the frontpage of major publications, but rarely develop any understanding of “the other” perspective

    • As a result, the Narratives for our biggest problems end up being flimsy 2-D cutouts, not (exclusively) due to malice or incompetence, but because our biggest problems involve every facet of the societal Creation Loop — by definition, understanding them requires a multi-perspective appreciation for the complexity of the situation

      • Actually solving them requires the work of both Schools…but only a handful of individuals are able to bridge that gap today

• The “Underproduction” referenced in the title — Elite Underproduction — is not primarily an underproduction of Elites, it’s an underproduction by Elites of the sorts of fully-fleshed-out Narratives that would help us solve our biggest problems

  • Given that the majority of today’s American Elite exist primarily in one school or another, and that building a compelling Narrative that incorporates both New York and San Francisco School truths is a tall order, it might be that the only way to resolve the underproduction of Narrative is by producing more Elites, of a new phenotype, who can mend the schism…

  • …But with the democratization of messaging, it’s also possible that the schism can never truly be mended

• In the meantime, the primary takeaway for individuals is to be wary of anyone presenting a complete Cause → Effect model that only incorporates a single School’s worldview

  • And to note that the relationship between Finance and Real World Activity is just one example of a higher-level loop:

The Twin Schools

In short: To be a member of the New York School is to assume Financial causation of real-world outcomes. Finance becomes the default hypothesis for ~everything:

To be a member of the San Francisco School is to assume real-world inputs cause all Financial-world outcomes. All Financial outcomes are assumed to be the result of a near-infinite variety of unmodelable actions:

The answer is of course that both worldviews are true — the causation goes both ways, and is an example of endogeneity/reverse causation/simultaneity, known in Silicon Valley as “loops”.

I call this one the Creation Loop:

Here, “Finance” refers to society’s background financial situation as well as any specific initial financing provided, “Real World Activity” refers to the undertaking of production or consumption, “Outcomes” refers to products & services created or consumed, and “Financial Outcomes” refers to any positive or negative [Dollar] values associated with those real-world outcomes.

With a New York School mindset, you could imagine walking through this loop in Tech today like so: [Seed Funding Round] → [Engineering & Design work] → [A Product You Can Go To Market With] → [Revenue Growth At Your Company] → [Another Funding Round] → & so on.

Counterintuitively, understanding this loop above actually leads to more in-school bias than already existed: anyone predisposed to assume Financial causation will look at the loop above and realize that if they focus all their efforts on the “Finance” part of the loop, the rest should take care of itself.

Thus, New York School members tend to perceive reality like so:

In contrast, San Francisco Schoolers see this:

The real problem with loops is not how powerful they are, or how common they are, or even that people are oblivious to their existence.

The real problem with loops is that educated decision makers know how powerful they are.

Truly knowing about loops can let you lie to yourself about where best to spend your efforts. And decision makers lying to themselves is how everyone ends up in trouble.

No loop can withstand the efforts of a motivated true believer forever.

The New York School: Writing The Whole World Down 

The New York School has one huge advantage: legibility.

At the undergraduate level, Finance presents a suite of understandable input-output relationships that can be measured and predicted. At the post-graduate level (and here I humbly include real-world corporate experience), things become more complex, relationships more tangled, the math more dense — but even here, quantization is technically possible.

If you want to be able to reason about the future, you need a map/model of some sort. The New York School provides that map. It is thus most popular in domains that have a pressing need to produce a model of some sort: Finance, Government, and Academia.

By my “city-based” analogy, that would be New York, D.C., and Boston.

Legibility also allows for easier communication, making the New York School popular among people who write about what is happening in the world for a mass audience.

Accurate modeling of the future is a necessary skillset for any person or institution that wants to survive, and the burden of leadership in all domains necessitates making hard allocation choices with finite resources — which means someone has to be modeling the future.

If it’s not you or someone on your team, expect to lose to a competitor with a more accurate model of the world. As Andrew Carnegie put it:

In short, the New York School gives you the tools to understand and direct flows of capital in order to help stuff get made.

Downside of The New York School

The downside of the New York School is that it inculcates an abstracted view of reality, and the more mastery you gain over the tools & methods of Finance the more you rely on them to make sense of the world, and the further away you become from the underlying reality.

Many of the best and brightest minds from America’s elite move to working in the New York School immediately after college. I don’t say that sarcastically — I mean people with much higher SAT scores than the average internet reader, who have passed all the tests sent their way with ease.

This is perfectly rational on their part, as the American economic model is in many ways predicated on the strength of its financial system, and positioning yourself close to the primary driver of Wealth creation in any system is a great way to capture some of that Wealth for yourself:

But when you spend your whole academic life operating in a world of abstractions & models, and then you move immediately to an adult career building or communicating even more abstractions & models, it can be hard to develop a coherent sense of what’s actually going on in the world.

I’ve been there. It’s a strange place to end up in. You can describe what a thing is and build a fancy excel model of its future, but if you had to grab a wrench & tweak it yourself you wouldn’t know where to start. Your explanations are all neat and compelling, but listeners find something just a little hollow about them. Your descriptions use all the right terms, but if someone taboo’d enough jargon-words you’d stumble into an awkward, mumbling silence. You’re more afraid of that silence than anything else, even losing money, and you try very hard to pretend you know something, anything to fill any potential pause that might be interpreted as that silence.

You know the names of many things, but still lack…something. Many bright teenagers find themselves in this position, simply because their intellect has only ever been applied while sat in a chair, pen in hand, reciting a teacher’s password.

In my previous essay on methods of increasing societal-wealth, I connected Wealth-generation via Finance to magic, and specifically to Harry Potter magic. Harry Potter magic is wonderful because it’s: predominantly static, well-defined, knowable, teachable, primarily built of esoteric incantations, and relatively egalitarian (so long as you have the right alma mater bloodline).

This description also applies to the Financial world.

Whether you’re reading the Wall Street Journal or at a houseparty in Manhattan with investment bankers, the precise sequence of spells being cast around you will be warmly familiar. As with Harry Potter, the person casting the spell does not need an understanding of the exact mechanism by which the incantation results in a magical outcome. It matters not, the outcome happens regardless.[0]

While some of my finance friends might be offended at this thin depiction, I hope they can understand my point, which is that mastery of the mechanisms of Finance does not necessarily confer mastery of the underlying mechanisms of business, and indeed it is not necessary to ever master the underlying business mechanisms to become Wealthy & successful.

It’s possible to exist entirely within this wizarding world.

Really, it doesn’t sound so bad — and it’s not. Early in my career in Tech I received quite a few phone calls from young investment bankers interested in switching “Schools” and moving out West. Mostly, I convinced them to stay in New York by highlighting the negative-expected-value trade they were considering. My position was that those convinced by this argument belonged in the Finance world by default, while those who challenged the outcome I presented while still accepting the premise that “expected-value” was the best way to make career decisions would also find more happiness in Finance.

The New York School’s primary downside is simply the confusion and irritation that all wizards feel if they are ever forced to leave the comfortable world of abstractions and interact with the nitty-gritty world of grease and tolerance. It’s a small downside, really, relative to the potential gains. I encourage readers to become wizards.

But this is a real downside. It has real implications for creativity, self-confidence, security, and the willingness for an individual to roll up their sleeves and just get started.

The San Francisco School: Engineers Engineer Engines

In contrast, the San Francisco School has basically nothing going for it and many downsides.

The San Francisco School makes communication more complex by requiring participants to have a near-infinitely-deep understanding of both the micro- and macro- dimensions of any problem space they want to discuss.

All problems must be both specified and contextualized.

It does not allow for particularly granular forecasting and so is of limited use to people whose careers depend on making good forecasts 9 times out of 10 — which, in a complex modern economy, describes most people in positions of authority.

Its effects are hard to measure, making it more painful for democratic forms of leadership that like to actually earn their votes. With so many moving parts, proper attribution — and therefore a proper understanding of causation — becomes nearly impossible.

And its main applications of value in Academia are historical ones. While that might seem insignificant, it has relevance to how the ideas spread: ideas that do not suggest any course of action to those with political or economic power tend to take much longer to proliferate, particularly if they’re hard to encapsulate in a single paper.[1]

With the deck stacked like this, it’s a wonder the San Francisco School has any members at all.

There’s only one reason people join: it helps you make stuff. Emphasis on you.

The San Francisco School teaches that, with a sufficiently deep or novel understanding of the micro- and macro- environments in a given domain, an individual or institution can effect meaningful change in the real-world via direct action, regardless of any initial Financing considerations.

And it encourages you to pursue that understanding yourself, with your own elbow grease.

All the downsides I mention above? None of those matter when it comes to actually sitting down and building something. Those “downsides” either happen before (forecasting) or after (measurement) the process of creation.

Making stuff is hard. Really hard. Anything that helps people make stuff is to be treasured and protected. If you don’t understand it, or if you wish to learn more about The San Francisco School, the only way to do so is through experience. You can’t do a report on it and come away with anything meaningful — to look at it from the outside is to miss the whole point.

Once you’ve joined The San Francisco School, outward changes in Financial metrics — at all levels, from the individual to the corporate to the national — are viewed as downstream from concrete real-world choices made and actions taken by specific humans and their teams. And how could it be any other way? After experiencing the arbitrarily chaotic mess of the early days of most successful endeavours, how frequently they lived or died on the skills and commitment of a handful of people, what other conclusion could there be?

If you feel like I’ve done a good job describing the San Francisco School here, then I’ve probably messed up. A proper understanding of it is only acquirable via direct action upon the world. Words alone cannot suffice.

Ignorance Ain’t Bliss: San Francisco Edition

Aside from all the downsides of illegibility mentioned above, there’s a deeper downside to the San Francisco School that makes itself known when members are confronted by the Financial realities of their world.

When muggles enter the wizarding world, so to speak.

Because the San Francisco School encourages its members to make stuff and to view external Financing conditions as a downstream consequence of successful-or-unsuccessful building, it explicitly avoids teaching anything that looks like Financial Wizardry.[2]

Regrettably, the real world is subject to Financing considerations. You can’t just “build” your way out of some problems without considering the financial background around the problem space.

If you don’t appreciate the myriad ways that Finance can control your outcomes — seemingly existing outside your “black box” and still finding ways to influence either your inputs or your outputs — you’re going to have a frustrating confrontation with reality in the near future.

If the primary emotional reaction of the New York School when it fails is befuddlement, the emotional reaction of the San Francisco School when it breaks down is exactly that: frustration.

There are many possible branches for a frustrated person to go down, but there’s an underlying truth to the stereotype of a cynical veteran engineer:

You can build a better product and get outspent on distribution. You can build more product but magically make less revenue. You can build product more efficiently but somehow your inputs are all now more expensive. You can build a brand new product and get offered a “deal”: accept our offer to purchase your IP for twenty cents on the dollar or we’ll spend seventy cents on the dollar to put you out of business. You can build & ship a better product to more customers and make more money, but a market correction revalues your business 40% lower, ruining your ability to fundraise & attract new talent, starting a downward spiral you can’t pull out of.

You can navigate all these hurdles and meta-engineer the institution itself to withstand these forces, only for someone senior to leave the team and take all your meta-engineering with them.

Maddening.

Sidebar: Dual Membership: Have Cake, Eat Cake

One theme of my writing has been to try and emphasize areas where the “correct” view to take on a given topic is a synthesis of both sides, or at least an appreciation for the other side.

It’s not really possible to study at both the New York School and the San Francisco school, at least not at the same time. But it is possible to learn how both schools approach problems, learn to spot which might be more effective in a given domain, and choose which stance to take based on the circumstances. It’s not a coincidence I chose a famous Industrialist like Carnegie to represent the New York School — nor that the 3 faces I put in the San Francisco School’s starter pack have all demonstrated mastery over financing conditions.

The strong version of this pitch looks like this:

Basically: enlightenment or something. The goal is not merely to acquire a diverse set of perspectives, the goal is to integrate them.

Elite Underproduction: The Cost of Unnoticed Schisms

The divide between these two major worldviews goes unnoticed and undiscussed in today’s elite discourse.

Specific events — from the corporate level to the national level and beyond — are usually analyzed by the elites at whichever School is closest to the outcomes of a given event. They then only notice causation-type events that align with their own school.

To be specific: if an event is first noticed via a Financial Outcome, it will be viewed as a Financial Event and subjected to analysis via the New York School. This trend is somewhat exaggerated by the fact that our ~entire analytic & media class is comprised of New York Schoolers.

Last year I wrote about an event that is widely considered to be a Financial Crisis, despite shocking Industrial contractions occurring immediately prior to said crisis, with clear and obvious causal factors at every possible level of a San Francisco School style analysis:

One push-back I got on this piece was (paraphrased):

This analysis is simply an artifact of measuring in a single currency (USD). If you adjust all the numbers for changes in exchange rates, or make them all per-capita, many of these apparent trends disappear.

Which is (somewhat) true and also (mostly) unhelpful.

What drives the exchange rates? What economic theory suggests that raw-population-count is the appropriate driver of growth? What puts pressure on the various exchange rate pegs? Some of my readers might be religious, but I tend not to believe Divine Intervention leads to changes in the relative value of economies:

If you’re trying to work out what happened in Asia circa 1997 and your answer doesn’t include a San Francisco School-style analysis of the massive changes in trade policy & trade behavior by the largest consumer of products on the global market…

…I’d love to hear from you because I can’t make any sense of it.

Lest anyone think I’m unfairly targeting one school here, I also wrote last year about the archetypal overreach of the San Francisco School:

So on the one hand we have The New York School labeling an event as a Financial Crisis and analyzing it in the context of central bank actions & cronyism…despite clearly being precipitated by massive anti-Industrial pressures placed directly & indirectly on certain Asian nations by US trade policy-

-and on the other hand we have a strange Trumpian San Francisco School trying to spark an Industrial revival in the domestic United States without understanding any of the background Financial pressures that exist to counteract all of their efforts…and with no plan at all to mitigate them.[4]

I don’t want to go too deeply into the fallout of misdiagnosing these two events — it would take a whole book, and my essays are all longer than they should be already. If you’re curious still, and feeling somewhat cynical, consider the nature of the “Economic Reforms” that the IMF foisted onto certain Asian nations in response to their 90s crisis, all while China grew to dominate the region following none of those “reforms”. Try not to blame Western media for blaming cronyism & corruption in South-East Asian economies for their respective economic collapses instead of a realignment of American policy — nobody likes to look in the mirror that closely.

Or consider the cost to a nation of a Trumpian Trade War conducted alongside a completely misaligned Financial Policy:

Shifting gears, another #HotTopic where the wrong School is commonly applied:

San Francisco Schoolers often believe Japan’s Housing Policies are responsible for the relatively-more attractive cost of housing in Tokyo vs. San Francisco, instead of the economic performance of the two cities being the Ur-Factor, as seen in the two charts below:

Period of declining Japanese residential property prices:

Coincides with a period of poor economic performance:

You might imagine a similar graph for San Francisco and FAANG stock circa 2013→2020? Some readers might already be familiar with RandomCriticalAnalysis’s work on US Health Care Costs, which is probably the best and most detailed research on the topic that exists anywhere. His conclusions should not surprise anyone who fully understands the point I’m making above regarding economic performance of a geographic region and real estate costs.

Policy is a powerful tool, and San Francisco has policies that discourage home-building, and Japan might have better policies for making housing affordable, but you can’t fight the tide. On its own merits, Japan lost a decade of economic growth. Relative to global superpowers, it lost 2-3 decades of growth. It’s a big deal. I’ve written about it directly & indirectly recently:

Most comparisons San Francisco schoolers make are flawed in exactly this way — a “just so” dataset that supports their preferred nitty-gritty policy implementation. In 1989 the land beneath Tokyo’s Imperial Palace was worth more than all the land in California combined, one should assume this was not the fault of Tokyo’s housing policy. Refer to the Nikkei 225 Index above for a good mental model of how that sort of thing happens…

Alas, the belief that policy — which translates in my model to “Real World Activity”, at least in the political sphere — is the primary determining factor of outcomes is the key failure mode of San Francisco Schoolers.

Takeaway: Elite (Narrative) Underproduction Is Upstream Of Bad Policy & A Stunted Discourse

You can’t solve problems you don’t understand.

Members of both Schools always believe they understand the world around them — that’s what it means to have a coherent worldview. But believing a thing doesn’t always make it so, and there’s much to learn from looking at events through a different lens.

I framed some of the examples above in a more biased way than the underlying reality, in order to underscore my point about the underdeveloped Narrative from the “other” School. In truth, the correct framing of the problem always incorporates both Schools’ perspectives.

Finance and its levers really do matter for every single problem of note. As does the infinite variety of policies & actions & personalities that define the San Francisco School view.

If you take away one thing from this essay, it should be this: distrust anyone who presents a single-independent-variable model of causation for meaningful events. If you care about achieving or altering outcomes, seek to understand both the New York and the San Francisco perspectives.

The real world is messy and it’s loops all the way down.

The “Elite Underproduction” I referenced in the title is not an underproduction of Elites, it’s an underproduction by Elites of fully-fleshed out composite narratives that describe Cause-and-Effect of complex phenomena. Which is basically their ~primary role in society.

I don’t have any grand plans for rectifying this gap. I try to minimize the amount of advocacy that creeps into these essays, and this problem seems monumentally difficult to solve. How do we increase the number of people capable of integrating opposing worldviews about something so fundamental as “the causation of progress”?

With sufficient specialization of labor, a schism like ours seems almost inevitable. If I were the sort of person who liked writing strident advocacy-type pieces, I might conclude that we need a new Elite — one formed from the intersection of both schools — requiring a complete rethinking of our current {Talented Youth} → {Hallmarked Institution A} → {Hallmarked Institution B} pipeline. But I’m not that sort of person, and the truth is I have no great ideas on this front. I’m not even sure it’s possible to do at scale.

The reality of the democratization of messaging is that a polarized public will amplify whichever message aligns with their own “school” and, at best, ignore anyone trying to bridge the divide.

So the best advocacy I can manage right now is a simple reminder not to over-index on the claims and Narratives of people who exist only within a single School.

The fundamental relationship between “Finance” and “Actions” that I’m trying to articulate in my synthesis here generalizes beyond this one specific instance. In my mental model, Finance is basically the metagame within our societal creation process:

The most condensed version of our problem is:

The people who shape and play our societal Meta Game are unfamiliar with actual Gameplay, while those who play the game itself are barely even aware that a Meta Game exists above them.[5]

And if you want your Narrative to spread, you have to align with one of those two groups of people.

Notes

[0] One amusing feature of the Harry Potter world is the stunning incompetence wizards display outside of the wizarding world, continually confounded by operating simple mechanisms. When I was younger and actually reading the books, I thought this was a silly limitation to explain why wizards didn’t just rule the world or something.

Now, it seems to have a deeper truth: someone whose every interaction with the external world involves speaking magic words they memorized in their youth would have a very different map of causality to someone who grew up in a world where…buttons activated things, switches closed circuits, and pistons drove engines.

(I swear, I don’t even like the series, but once you’ve committed to a metaphor…fantasy nerds would clearly know that this cataclysmic worldview schism is a much better parallel to Patrick Rothfuss’ divide between Knowers and Shapers. Alas, not all my readers are nerds and so here we are, referencing Harry Potter….........................)

[1] Jason Crawford’s personal study on The Roots of Progress is the quintessential San Francisco Schooler’s approach to academia. A series of deep-dives into the technologies and sociologies underpinning human progress across all domains — the potential length & breadth of his study is unbounded. As someone who likes real progress, I’m a fan.

Alexander Hamilton’s 1791 Report on the Subject of Manufactures has a similar approach. The Wikipedia summary of his report is 834 words long, which is more than most history textbooks devoted to the subject. The actual report itself is 48,000 words long if you include the copious notes provided. Summaries of the report are absolutely horrific, not because they are short, but because they remove the entirety of Hamilton’s nuanced thought & earnest wrestling with thorny problems in favor of awful language like “Hamilton reasoned X” or “Hamilton believed Y” or “Hamilton had 3 points”, like the man was arguing in some high school debate club instead of trying to unpack the multidimensional problem of bootstrapping a fucking national economy.

“Hamilton advocated more [X]” is like saying “the chief engineer advocated stronger engine internals”. Yes, sometimes you can make straight upgrades to an engine and gain more horsepower. But often there are tradeoffs to be made among multiple dimensions, and stronger materials might place more strain on other parts of the engine or add more weight to your machine or cause other parts to wear & break etc etc. Listen to more on this here. Or, if you work in tech, consider the pain of someone writing: “[CTO] advocates shipping more code, faster, with less bugs.”

The irony, that Hamilton, first secretary of the treasury, creator of the US Mint, and in many ways the founding figure of the US financial system, counts as a member of the “San Francisco School” does not go unnoticed.

But there’s a reason I chose “New York School” and “San Francisco School” instead of simply “Finance School” and “Engineering School” — it is both possible and reasonably common to live and work in Finance (and to a lesser extent Government, Media, & Academia) but operate with the San Francisco School’s mentality. Many of the most famous & successful investment professionals operate this way.

Likewise, it’s possible to live and work in “Operations” (i.e. engineering & any domains related to shipping & selling product, however loosely defined) but approach your problems with a New York School mentality. Many of the hardest problems are solved this way.

[2] The reason is likely because it’s very hard to teach people about magic without them wanting to become wizards (“you mean it’s basically a guaranteed path to leveraged wealth generation so long as I’m above-median performance?!”) — but also because there is some part of The New York School’s worldview that tends to inhibit its members. Inhibition does not mesh well with The San Francisco School’s methodology.

Once you learn about risk-adjustments, everything that isn’t Finance starts to look a bit worse.

The inhibition perhaps comes from the belief that Financial considerations determine ~all outcomes, and therefore any non-Financial activity is a waste of effort. The Efficient Market Hypothesis applied to all non-Finance activity.

Also, one part of “a map is not the territory” is that certain things will be easier to map than others. People who build models must first build “maps” of reality — representations of phenomena in their model — and they will tend to exclude things which are hard to observe / predict / model. Sadly, reality is chock full of the latter.

[3] Seen through this lens, US businesses complaining about NAFTA are sort of missing the forest for the trees here. You could absolutely adopt an Industrialist lens and view the loss of your domestic business to Chinese and Mexican business as a thing that happened to the detriment of your own ability to Capture economic value — but NAFTA didn’t cause that. It just shifted the person who was going to benefit from [Japan/Korea/SEAsia] to [China/Mexico]. The tide was against you long before NAFTA.

Maybe things accelerated afterwards, but “you made things that were trending against us move faster than they were otherwise doing” is much less compelling narrative.

[4] Yes, this Trump stuff still counts as San Francisco School despite how hilarious and awkward that naming convention becomes when applied to the 2016 Trump administration. If you’re doing Industrial Policy and trying to get people to make stuff, you’re operating at least partially in San Francisco School territory. Sorry, but it is quite funny…

[5] To extend the gaming metaphor to its obvious conclusion:

The game developers, coaches, pro team managers, and journalists have 200+ years of collective experience, but have never even queued for a ranked match and experience ranked anxiety at the thought of it — while the actual players aren’t even aware that the choices they make are constrained by the decisions of the aforementioned developers, coaches, managers, and journalists.

The two groups get very upset at each other for the problems they can identify, but no progress will ever get made while the people at the pinnacle of both groups completely misunderstand each other.

[99] Various Associated Readings and Such

Commenting vs. Making by Chief of Stuff aka Karl Yang

From Byrne Hobart’s newsletter.

The highlighted part is very true, very relevant, and also a very meta-way to think about exactly what I was writing about here. It’s not a coincidence that many of the most successful “San Francisco Schoolers” have a deep understanding of the “New York School” — and vice versa. These distinctions are all just ways or narrowing down fractal complexity into something you can talk about.

Book Review: Seeing Like A State by Scott Alexander

The Uruk Machine, by samzdat

In Praise of the Gods: What the Rationalistic World Forgot by Simon Sarris

• The Schism: Two Schools
• The New York School: Writing The Whole World Down
• Downside of The New York School
• The San Francisco School: Engineers Engineer Engines
• Ignorance Ain’t Bliss: San Francisco Edition
• Sidebar: Dual Membership: Have Cake, Eat Cake
• Elite Underproduction: The Cost of Unnoticed Schisms
• Takeaway: Elite (Narrative) Underproduction Is Upstream Of Bad Policy & A Stunted Discourse
• Notes & Related Reading

Some words associated with the Left-Wing & the Right-Wing:

Maybe you disagree with me on some of these words? I threw some sketchy ones in there. But most of us carry a mental model that instinctively places these words in the same zone.

Question: Is it possible to describe that shared mental model?

What makes an idea — even one completely disconnected from politics — “Left” or “Right”?

⁂

In the wake of 9/11, controversial Right-Wing public intellectual & occasional investor Peter Thiel wrote:

One may define a “liberal” as someone who knows nothing of the past and of this history of violence, and still holds to the Enlightenment view of the natural goodness of humanity. And one may define a “conservative” as someone who knows nothing of the future and of the global world that is destined to be, and therefore still believes that the nation-state or other institutions rooted in sacred violence can contain unlimited human violence.

This has stuck with me, mostly because I find it unsatisfactory. And yet…there’s a recognition here that “Right” or “Left” begins somewhere much deeper in the psyche than mere politics.

To get a satisfactory answer to my question is going to require a good-faith engagement with two opposing intellectual traditions. I’m pretty sure that’s impossible. There are no neutral observers. Nonetheless. I want an answer.

Consuming any popular media content today makes it clear that most of us, content creators and consumers alike, carry incredibly low resolution views of the opposing teams. I’m no exception, and I recognize how hard this makes things. But an answer requires genuine engagement and so:

One of the methods of party to acquire influence within particular districts is to misrepresent the opinions and aims of other districts. You cannot shield yourselves too much against the jealousies and heart burnings which spring from these misrepresentations; they tend to render alien to each other those who ought to be bound together by fraternal affection.

Grab a shield.

The Base Layer of Society Is Feudalism

I’m not sure I did justice to the terror of Feudalism in my 2019 magnum opus, The Full Stack of Society: Can You Make A Whole Society Wealthier?

I worry many readers read that sort of thing and think:

lol, yeah, it would totally suck to be a peasant in a Feudal world

But a Feudal world is recursive, all the way up. Every local land owner, every baron, every lord, every king — all of them live with the stress and anxiety of knowing that their own lands will be invaded. It is an inevitability.

Every source of Wealth will be subject to seizure if it cannot be defended.

Your children will not be spared — not from rape/slavery/burning in the event of a successful invasion, and not from the infinite anxiety that they will inherit when you pass your title down to them.

Your grandchildren will literally be crucified if they grow too soft.

When I was 17, I used to get so stressed out before a track meet that I couldn’t hold any food more complex than bread and energy bars. Alexander the Great had already put down his first armed revolt by that age, and he wasn’t even King yet.

His dad, King Philip of Macedon had conquered all of Greece — the region’s superpower — but the Thracians revolted as soon as he left town. Most teenagers today are ecstatic when their parents leave for a weekend. Can you imagine if rowdy locals showed up with spears to kill you and seize your family house every time…there’s no rest for the wicked ambitious founders.

When you imagine being a Feudal-era lord, do you imagine that you’ll win every conflict? How do you imagine your mental state will endure the constant anxiety, the life & death stakes of every decision made under extreme uncertainty?

Yes, if you’re a peasant, life is undoubtedly “nasty, brutish, and short.”

But if you’re “lucky” enough to be a holder of some title or other, pray that you inherit genes for psychopathy:

…impaired empathy and remorse, and bold, disinhibited, and egotistical traits…

You won’t live through the night otherwise. Nobody is spared the terrors of Feudalism.

The Right-Wing Genesis: Making Monsters Of Our Own

This sort of Feudalism is less a social-construction and more a “base state of existence”. It applies metaphorically to any entity that wants to exist, from the lowest animal to the human individual to the business to the religion right up to the nation state and beyond.

Every source of Value will be subject to seizure if it cannot be defended.

In the same essay, Thiel describes French philosopher René Girard’s idea of a founding moment:

“…murder is the secret origin of all religious and political institutions and is remembered and transfigured in the form of myth.”

This idea is linked inextricably to the discussion of Right- and Left-Wing worldviews:

The backdrop of Feudal competition I describe above is as much the source of the Girardian Founding Myth — the violent act of creation — as Girard’s philosophy concept of "mimetic desire". In a Feudal world of all-against-all might-makes-right existential terror, the problem is not a lack of would-be Founders.

The problem is simple resource scarcity.

To create something out of the nothingness of Feudal competition requires clearing a space to breathe. To relax. To think. To eat more than bread & powerbars. Space to spend some valuable resources on innovation and play and exploration. Absolute competition, with your life & your kids’ lives at stake, does not allow any space for creation.

Creation requires “slack” in a system which offers none.

And so every would-be Founder must first commit violence upon their own Feudal world, not on distant far-off enemies, but on those who are closest to them, those who might otherwise have a different vision, those who would compete for the same resources, the same team members, and point them in another direction.

The first victims are those who, a generation later, would’ve been included beneath the tent — and it is their similarities, not their differences, that put them in the crosshairs.

Competing visions for the same resources cannot resolve peacefully when the backdrop is Feudalism. Tomorrow’s ingroup is today’s outgroup.

Si vis pacem, para bellum

“And don’t we all want peace?” This is one of the primary mind-spaces that (actually thoughtful, reasonably intelligent, sometimes worth-at-least-understanding) Right-Wing intellectuals inhabit.

They look at the world — particularly at the history books — and see the darkness of man, a reflection of the darkness of nature, a reflection of the darkness of existence.

To overcome that darkness, history is quite clear that only a monster hero will suffice. The Right-Wing response to darkness is to construct or become something, anything, that can endure.[0]

To create an individual or an institution strong enough to survive & overcome these challenges is to create something with the potential to be more terrible than the darkness.

To spell it out: the Founding Moment of every meaningful institution will necessarily have a Founding Murder that accompanies it. The murder might be literal violence, it might be a more metaphorical sort of violence. These sorts of unpleasantries are often done by Monsters of our own, individuals we idolize but never raise up to Sainthood — always in the back of our mind we know that they were not Angels.

The immediate consequence of the violence is a momentary but cathartic peace, “slack”, from which the institution can create whatever it wishes.

The longer-term consequences of this stain on the soul will be felt much later…

The Future The Right-Eye Sees

Which brings us back to:

…And one may define a “conservative” as someone who knows nothing of the future and of the global world that is destined to be, and therefore still believes that the nation-state or other institutions rooted in sacred violence can contain unlimited human violence.

In contrast to this take, I contend that the “conservative” (by which I mean & prefer “Right-Wing”) is consumed by the future and the global world that is destined to be. Consumed and tormented:

Perhaps the “conservative” believes violence can be contained by something like a nation-state, perhaps they don’t. One is optimistic, the other pessimistic, and both are understandable takes — though the pessimistic one is, in my view, the more aesthetically correct Right-Wing position.

Scipio wept, even as he slaughtered 350,000+ civilians — genociding the most wealthy North African civilization of his era. Perhaps of any era. The tears weren’t for them. But for his own people and the inevitability of Rome’s demise. Every major institution has its own Scipio.

The Right-Wing worldview is one that looks to the future and sees his own death, his family’s death, his company’s death, his religion’s death, his nation’s death, his tribe’s death, the death of all mankind, and then the final death of all life — each death horrific or depressing, all of them nonconsensual.

And then he sets about trying to prevent it anyway. To delay it, at least. If there are injustices committed in the fight against Feudalism, if there must first be violence, well:

“Mankind must suffer so that mankind can survive.”

Thiel quotes John Locke, founding father of modern Western liberalism:

“the first and strongest desire God planted in men” is not love of God or others, but a healthy concern with one’s self-preservation

And yet both Thiel & Locke — and all of us who are honest with ourselves — recognize that self-preservation is impossible. Perhaps the link between Right-Wing views and religion, with its eternal afterlife, is totally unrelated to this fact? I’d be surprised.

That there will be personal, familial, tribal, national, and species death as an inevitability is hard to argue with. A highschool understanding of biology explains the first two. A highschool understanding of history explains the third. And a highschool understanding of physics explains the last one. Energy must be conserved (E0 = E1), and Entropy must ~increase (S1 >= S0).

Things will fall apart.

Science fiction author Isaac Asimov might have identified as Left-Wing politically, but he quite beautifully lays out the inevitable loss that will be suffered by “Team Life” in his famous short story, The Last Question. You should read it. If you have an alternate ending to propose, don’t DM me about it, go tell the Nobel committee and they’ll give you a million bucks.

Consider how a (depressing) view of the future such as this intersects with various topics that the Right-Wing differs from the Left-Wing on:

“Sustainability” becomes meaningless by itself to the Right-Wing worldview — since even Life itself is not sustainable. It’s not that the concept is useless or uninteresting to them, it’s just viewed as a sort of non-sequitur without being attached to a broader discussion about tradeoffs and potentials.

Always and in every domain, the Right-Wing view will challenge every claim that the state of reality can be improved-by-fiat with questions about tradeoffs. No improvement is viewed as existing in a vacuum. Every improvement is viewed with the potential to destabilize the existing institution. (This is exhausting and infuriating to those with genuinely good ideas about improving reality. It’s also exhausting and infuriating for those with terrible ideas.)

All that matters to the Right-Wing worldview is the needle of progress moving forward, and the time-til-death being pushed backwards.

Of course, you can pitch them on the collapse of global ecosystems being a pretty sure-bet to cause “time-til-death” to accelerate. But you’ve got to convince them that the medicine isn’t worse than the disease. Elon Musk is perhaps the only “serious” person, in so far as Elon can be said to be serious, to discuss the near-certainty of another “Dark Age” in the future and how concerned he is with pushing the envelope of technology forward while we can. That is, ultimately, the tradeoff that today’s sustainability discussion often runs into.

I think Elon’s popularity “across the aisle” is not unrelated to the positive & circular framing with which he describes problems — and then provides solutions to those problems. Sustainability to enable a specific progress (see: electric cars). Multi-planetary life to enable a new level of sustainability (see: rockets).

Over the next 1.1 billion years, solar luminosity will increase by 10%…Earth's increasing surface temperature will accelerate the inorganic carbon cycle, reducing CO2 concentration to levels lethally low for plants in approximately 100–900 million years. The lack of vegetation will result in the loss of oxygen in the atmosphere, making animal life impossible.

Failure is inevitable.

Life on Earth is more than halfway done. At worst, data suggests we could be 85% done — and that’s assuming an asteroid doesn’t just yolo us all into nonexistence anyway by introduction of 1/2 mv^2.

Under this Right-Wing framework, all political questions, i.e. questions about the proper allocation of resources, resolve to the tension between the needle of progress and the clock of death.

Does it help move the former? Does it delay the latter? Almost every answer to one of those two questions has an opposite effect on the other question. Progress requires the consumption of energy, the destruction of finite resources, the expansion of population, and the growing of institutional borders to their breaking point.[1] Progress is built out of J-curves, and the beginning of every J-curve is pain, and the inflection point is buried in uncertainty.

Thus the tension: Progress hastens Death at first, but attempts to delay Death also delay Progress.

While these examples are all political in nature, I hope it’s clear how this model extends far beyond the political sphere.

If you’ve ever tried to push for change within an organization, you’ll have experienced this same process working to stifle your every positive suggestion, wasting energy on arbitrarily-deep analyses for people whose minds were already made up, instead of doing actually-meaningful things. Those people exist to raise the activation energy required to change the organization’s course. “Delaying Death…”

And if you’ve ever watched a naïve new hire join your organization, radically disrupt things, have a negative impact due to failing to fully comprehend the complex structure they rearranged, and then get promoted or hired away from the disaster they created, you’ll have felt what it’s like to be on the Right-Wing side of the table. “…hastens Death”

The Breakdown of Order: Right-Wing Tyranny or Abdication

If the world outside were to spontaneously become a Garden of Eden, ordered and harmonious and infinite — and if all other humans were to become satisfied and sated and harmless — the natural and social reasons for the Right-Wing worldview would surely….

Disappear.

Right-Wing perspectives are therefore always reacting to “external” threats, and understanding (the thoughtful & intelligent ones of) them requires a proper appreciation for the perceived horror of whatever ~Feudal future they are imagining.

Of course, all worldviews are mostly held by unthoughtful folks, so the mode Right-Wing view that you encounter will just be an unintelligible internally-inconsistent primal expression of existential fear. It can be hard to judge, at first, where someone else exists on this spectrum, and how seriously to listen to their perspective, but I find their outwardly-expressed emotional response to be a decent first indicator.

Fear? Anger? Rage? Disdain? Zzzzzzzzzzzzzz, press skip on that and save your neurons:

Sorrow? Commitment? Resignation? Bitterness, not towards others, but towards the cruelty of the natural order? Maybe worth at least brief consideration.

“I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes…”

Once you understand what’s driving it, it’s easy to see how the Right-Wing worldview can totally breakdown. Sorrowful commitment to the unpleasant-but-necessary [Task] easily becomes a thin veneer — a pretty lie you tell yourself to hide the truth: that you enjoy the struggle, the competition, the violence, and pursue it for its own sake.

When the task has been completed and the darkness banished — however briefly — does the individual relent? Do they take their space to breathe and relax and create in the clearing they made?

And therein lies the problem.

The “relatively-virtuous” Right-Wing predilection is to fight with every weapon at your disposal, even the nasty ones, in order to create, or at least to allow for others to create. The “Founding Murder” mythology puts “slack” in the system, and out of that slack comes creation.

Thus every Right-Wing individual who is able to resist absolute corruption when given power will tend to self-remove from influence/office/power once their goal is achieved:

Which leaves the rest of us dealing with…all the other ones.

The only alternative is to find some way for the capable and “relatively-virtuous” Right-Wing figure to remain in the fight without becoming consumed by it — a herculean task of discipline and commitment for any individual.

It is also necessary for the population at large — we subjects — to willingly believe whatever “fiction” allows us to accept the presence of a figure who, by all accounts, appears to have already won “the game”. Otherwise our tendency to revolt and claim what’s ours will ruin the whole system.

The need for these sorts of “fictions” explains Right-Wing intellectuals’ interest in Strauss:

“Every decent modern reader is bound to be shocked by the mere suggestion that a great man might have deliberately deceived a large majority of his readers,” Strauss wrote. “And yet [the ancient philosophers] were perhaps more sincere than we when they called ‘lying nobly’ what we would call ‘considering one’s social responsibilities.’”

…

What is the “social responsibility” of the intellectual?

Narrative fiction has a unifying power, while total & radical transparency tends to destabilize. Ultimately all leaders are human, and therefore fallible, and therefore can be made to look foolish or mistaken or uncertain or immoral. Nobody, no institution, could ever stand up to the infinite magnifying glass and maintain the mantle of leadership.

Right-Wing worldviews solve this dilemma by formalizing the creation of “cultural institutions” — from monarchies to religions — as a way to bring the “fiction” into reality.

These cultural institutions, fictional though they may be, serve a dual purpose:

• i) they solidify the relationship between Founder and people. Abdication becomes a thing to be ashamed of. Duty overrides the natural desire to “be free of” the game

• ii) they provide a framework to confer authority on Founder-type individuals that comes pre-baked with respect & obedience by “the people”. The institutions contain both the justification for the concentration of power, and the mechanism to transfer that power without disrupting the stability of the system.[2]

Unfortunately for the Right-Wing, most people will not believe a fiction once they know it to be false, no matter how “good for them” you shout that it is…

…and the relentless liberalizing march of modernity has democratized knowledge enough that ~everyone now knows our shared “fictions” to be manufactured falsehoods.

Encountering a true-believer today evokes a sense of bemusement:

"Could it be possible! This old saint has not heard in his forest that God is dead!"

— Nietzsche

Thus the Right-Wing dilemma — heroes who become tyrants or else abdicate their responsibility, buried beneath the red-tape of cultural institutions none of us believe in.

Right-Wing Narrative Failure In The Narrative Age

The importance of “Narrative” in today’s world is hard to understate. Anyone who writes anything that touches modern Culture tends to note it. People need a “why” to understand and act upon the world.

And anyone on the Right-Wing who leaves their bubble and looks out the window immediately notices that Right-Wing perspectives have taken L after L in terms of cultural relevance.[3] Of course, most mainstream Right-Wing prognosticators never look outside their window, which makes watching them claim cultural victory rather amusing.

But it occurs to me that this fundamentally pessimistic view of the future is one of the primary reasons Right-Wing worldviews fail again and again to create compelling Narratives.

What is there to rally around? Grim determination? “The night is dark and full of terrors”? That’s your pitch? That won’t appeal to anyone who lives above the Feudal cut off line. Anyone sufficiently removed from birth-to-grave Feudal anxiety/terror is going to scoff and laugh at your silly fears.

Today that basically includes the entire middle & upper-middle classes.

Always listen to fear. Never be ruled by it. Fear is like a cowardly friend. His advice is not always wrong, but, given the chance, he will drag you down into the pit he dwells in.

Nobody wants to be dragged down into that pit with you.

Fringe Right-Wing intellectuals have been pointing out that their tribe is failing to deliver a compelling Narrative since…forever. It’s practically a rite of passage. Again and again they deliver well-researched deeply-analytical tomes about their tribe’s failure to compel.

But then, having completed their analysis, they tend to fade away. Telling stories is hard. Telling stories people like is harder. Telling stories people believe in enough to act on?

Well that gets pretty hard when the future you’re selling is…an unwinnable battle between progress and death.

Right-Wing narratives fail in other ways, too — and by “fail” I mean they do not have a compelling explanation for an unmistakable illness that plagues society, nor a plan to solve it.

I mentioned “sustainability” earlier as a (somewhat) tame example of how Right-Wing worldviews lead to meaningful differences in policy prescriptions from those on the Left-Wing.

A more severe example would be the entire concept of “Justice”. Of course, “justice” with a lowercase-J is a sense & emotion familiar to all humans across the political spectrum, it’s not an unfamiliar feeling to those on the Right. It is so core to the human experience that we all expect it to be built into any and all human-created systems.

When you listen to Right-Wing narratives appeal to “justice”, they’ll do so with reference to a higher-power, a higher-purpose, some sense of objective “right & wrong”.

But as pretty as they might be, the Right-Wing worldview knows that those ideas are not present in the base state of reality. They are as beautiful, and as concrete, as dreams — and so they are not a meaningful measuring stick for any aspect of present-reality.

When a human-built system fails to live up to some standard of “justice”, defined however you please, the Right-Wing worldview’s default response is to shrug shoulders and say: “well, at least it’s better than the absolute hell of Feudal terror for all.”[4]

Within those pretty dreams there is no conception at all of something like “economic justice”:

The idea of linking “justice” to [fairness] or [equality] makes as much sense as linking it to [chromatography] or [geology] under the Right-Wing worldview. An act is either “right” or “wrong”, binary — because the Right-Wing worldview begins with a reaction to an external existential horror. An act moves you or your society away from the terror of chaotic Feudalism, or towards it.

“Of course there is injustice & inequality! Have you looked outside? The base state of reality is injustice — chaotic Feudal terror that results in a cruel and barbaric death — and the monsters we must create to overcome that are to be judged according to their success in overcoming the default!”

True as it might be within their worldview, this reads as either apathy or blindness towards what [those-outside-their-tent] view as genuine injustices.

Apathy & blindness do not tend to win you followers.

Injustice Is Fundamentally Solvable: And Therefore Intolerable

The nature of text as a medium means I have to structure this essay linearly — Right-Wing or Left-Wing must come first, I can’t just layer the sentences on top of each other.

By putting one first, I’m 100% going to change how the second one gets read. And I had to write one first, which undoubtedly has shaped & clarified my own thoughts in a particular direction.

Allowing for the possibility that my structuring of this essay has shaped my views, I nonetheless believe that this ordering is correct.

I closed the section above on Right-Wing Narrative failure by talking about the idea of “Justice”. I think this is perhaps the primary mind-space that (actually thoughtful, reasonably intelligent, sometimes worth-at-least-understanding) Left-Wing intellectuals inhabit.

I’m not sure how to do justice to the soul-crushing despair brought on by experiencing sustained Injustice from a human-created system. I know many who hold a Left-Wing worldview don’t need it spelled out for them — but it is perhaps the most important thing to communicate.

Just as “Feudalism” as a concept is merely academic, meaningless, if you can’t appreciate the abject existential terror that lies forever on your borders, so too is “Injustice” an inconsequential word to describe an alien phenomenon without the gut-deep understanding of what it does to a person’s psyche.

A world of “Injustice” is a world that has decided, collectively, that you will not be allowed to rise. That you do not matter, while others do. You may not build Wealth. You will experience harsher legal penalties. At every level you will be held back, either explicitly or implicitly, preferably both. When you are victimized you will not have any recourse, and if the spark of agency has not yet been stamped out and you seek “Justice” of your own, you will be deleted.

Stack enough of those experiences up and even the most strong-willed individuals will start to give up. To give in. To consent. Why bother resisting something so much bigger than any one person?

Everyone has experienced suffering in one way or another, which is usually helpful for building empathy & bridging divides. But in the case of Injustice experienced by someone else, we have a tendency to see only the individual act of Injustice and then reason about the response we would’ve had to experiencing that same act.

This fails because most humans are strong enough to put up with anything…so long as there’s a light at the end of the tunnel. Put a reasonable time-limit on the Injustice and most of us can imagine soldiering on for years. Leave it uncapped and we’re liable to crack in a handful of days.

The crack that forms is in your will. To action. To agency. Sometimes, to live.

If the main emotion evoked by a Feudal landscape is existential terror, the emotion evoked by a birth-to-grave world of Injustice is existential apathy.

Some might disagree with that, and I’d agree with them that the initial response is usually rage and indignation. Righteous fury is a baseline response to Injustice. But rage burns out quick. What’s left when the rage has run its course and the heavy chains of Injustice still hold you down?

“Why bother?”

The primary pain point for the Left-Wing worldview is not that all this Injustice is miserable — it’s that it is optional.

The institution, no matter what terror it was created to fend off, was made by humans, for humans. Consciously or not, that makes the Injustice a human creation too.

Injustice is just a pattern of continuing social treatment by…everyone else who touches the institution in any way. Everyone is complicit to some degree. Even the victim, if the conditions have been well-established.

Reality Has A Well-Known Left-Wing Bias: Surviving

If you consider the great Western Left-Wing battles of the last 805 years, and if you look at the arguments opposing them, you can almost always find someone arguing:

“The existence of [institutional Injustice] is merely a reflection of the natural order-”

From the Divine Right of Kings to [insert hot-button issue of today], it’s common for the debate to get bogged down in whether or not [some instance of the Injustice] can be found in the base state of nature…

…which, as I hope I have already established, is a Feudal hellscape for every living creature.

Of course there will be Injustices. That they exist [out there], beyond the pale of civilization, is immaterial to the Left-Wing worldview. The question is: Why did you bring them inside?

“Because it was deemed necessary at the time to build an entity tightly-knit enough to overcome the Feudalism that was all around us-”

I’m not saying this response is true in all cases, but let’s pretend that it’s true for some. Certainly the Divine Right of Kings seems like an understandable solution to the question of leadership during The Dark Ages: “Who made you king?”

“God did. And by way of proof, he helped me slay the last 37 guys who claimed otherwise. Are you going to join the list or can we start making society?”

“Amen.”

But what happens when you finish “making society?” Why would we continue to consent to such an arbitrary and barbaric leadership selection process?

Even if, hypothetically, the Left-Wing view grants that the Injustice was perhaps necessary at one point in the past, it cannot accept that it is necessary in the present. There’s no need to concentrate the power anymore. We won. Where “we” = [both those on the Right and the Left] = our shared institution.

Now, let us finally take the time to right the wrongs being done in our name!

And thus reality’s natural Left-Wing bias: because we have become successful, we may now increase Justice.

The Past The Left-Eye Sees

One may define a “liberal” as someone who knows nothing of the past and of this history of violence, and still holds to the Enlightenment view of the natural goodness of humanity.

As with his take on the “conservative”, I think Peter Thiel misses the mark here. I contend that the “liberal” (by which I mean & prefer “Left-Wing”) is consumed by knowledge of the past, as well as the present-day Injustices that unquestionably stem from past Injustices. Consumed and tormented:

Perhaps the “liberal” believes in the natural goodness of humanity, perhaps they don’t. If sustained human-created Injustice has worn them down, apathy and misanthropy are understandable reactionary positions, though the optimistic view expressed here by Thiel is, to me, the more aesthetically correct position.

The Left-Wing view is, after all, one that fundamentally believes Justice is achievable and attainable — nothing if not optimistic.

Which brings us to the Girardian Founding Myth:

“…murder is the secret origin of all religious and political institutions and is remembered and transfigured in the form of myth.”

Once you see this, you cannot unsee it.

There is not a single meaningful institution around today with a clean sheet. Both Republicans and Democrats who voted No on the celebrated Civil Rights Act of 1964 were still being elected to office in the 1990s. The most valuable companies in America today are also known for decimating small regional business, consumer privacy violations, epic anti-trust violations, and supporting the CCP before it was cool — and that’s just the fluffy California tech companies. Wait til you learn about oil & pharma & the wars we’ve fought & our various government agencies & university discrimination and-

The Left-Wing worldview is well-tuned to the traumas of Injustice, and when it looks at today’s most successful institutions it sees an undeniable litany of past abuses at every level — abuses that nobody today seems interested in rectifying.

From his own personal successes, which in our often zero-sum world are perceived to come at the expense of others (Harvard admits only so many kids each year), to his family’s success, to his company’s success, his nation’s success, his tribe’s success, and eventually even the success of all mankind — always and forever there is a cost that someone else has paid. Sometimes you have to look back hundreds of years to find who paid that cost, sometimes mere months.

Under this framework, all Left-Wing policy issues tend to resolve to a simple question: are we not, collectively, now at a point where we can afford to rectify a specific human-created Injustice?

The Breakdown of Justice: The Limits of Atonement

If the real world were magically rearranged into a perfect utopia of Justice for all, as perceived & agreed upon by every member of society, the natural and social reasons for the Left-Wing worldview would perhaps also…

Disappear.

Left-Wing perspectives can therefore be understood as reacting to their society’s “internal” conditions, and understanding (the thoughtful & intelligent ones of) them requires a serious appreciation for the perceived soul-crushing despair of whatever ~Injustice they are imagining.

Once you understand what’s driving it, and contrast that drive with the undeniable bodies buried in the past of every meaningful institution, it’s easy to see how the Left-Wing worldview can breakdown.

The optimistic desire to reform a minor Injustice out of society can quickly become a grim helter skelter that spirals you down faster and faster — as you begin by trying to reform a specific & seemingly achievable surface-level Injustice, only to realize that you must go deeper to address its root causes…and deeper…and eventually you hit the bottom and discover that the entire institution itself was founded on an Injustice: “the founding murder” is uncovered.

What then?

The Left-Wing worldview “breaks down” when it slams into the stone slabs at the bottom of this helter skelter and decides to burn the whole thing down, cathedral walls and all, for being an unreformable rotten mess.

Assuming our hypothetical Left-Wing individual has not been reduced to inaction as a result of years of Injustice leaving them in a state of emotional apathy, and assuming they actually try to tear down the corrupt institution, and assuming they actually succeed — what then?

Will there be more Justice, in the present and the future, for those alive and still suffering?

The base state of existence is still Feudal terror. Tearing down the Unjust institution does not change that fact, it reveals it. And into that vacuum will swarm all kinds of unsavory characters, all champing at the bit for their chance to create their vision of an idealized institution.

It is not an accident or a coincidence that this is the exact scenario that births Right-Wing figures into the pages of history.

Any Left-Wing worldview that is disgusted by the presence of rotten institutions and so begins “first, we must tear down-” will necessarily create the conditions for a Right-Wing-dominated institution to rise from the ashes, one that is almost certainly more-Right-Wing than the institution which was torn down, less forgiving, less allowing of individual liberties, less tolerant of the sorts of disagreements that allow people to say things like: “first, we must tear down-”

If a momentously heroic individual or movement — and they do exist — is able to successfully remedy a societal Injustice, however small, they will have achieved the impossible. A miracle. The force of that moment tends to stop their slide, as if a balcony opened on the helter skelter, just for them & their followers. It provides a temporary catharsis, draining a little action-potential out of the institution.

But, eventually, another Injustice will be brought to light and the march of progress will demand action, and the institution will move left or it will perish.

If You’re Not Growing, You’re Dying: Right Meets Left

The Right-Wing got an entire section on their pessimistic worldview’s core “Narrative failure” — I don’t think it necessary to devote an equal section to the obvious Narrative appeal of an optimistic movement that i) identifies a clear Injustice ii) believes it is fixable iii) demands action & iv) believes every individual who helps, matters.

In the world of storytelling, in the world of Narrative, there’s absolutely no contest. It’s not a fair fight. It’s not even the same sport. One team is shooting imaginary nerf guns, the other is building rockets.

But I want to close on an optimistic note of my own, and on how I perceive the necessary symbiosis of Right- & Left-wing worldviews:

…eventually, another Injustice will be brought to light and the march of progress will demand action, and the institution will move left or it will perish.

To be clear, when I wrote this, the “or it will perish” part is not necessarily a threat or even something done by Left-wing individuals. It is just the flipside of the observation that any organization sooner or later becomes left-wing. “Perishing” is as much a failure of the Right-Wing for building something so damn weak that it could not survive a move towards Justice.

Part of the value of the Right-wing is to create and maintain institutions strong enough to survive both the initial conditions and the ever-greater asks that will be made of the institution in the future. That is no easy task.

At the highest level of abstraction, it means spending energy to grow. At the middle-tiers of abstraction, it means forcing a new entity into existence and imbuing it with a rigid sense of order, such that it can continue to operate even without the Founder. At the lower levels of abstraction, it means revenue, role-based organizations, hierarchy, a plan for the next 3 quarters, and someone assigned the critical responsibility of janitorial work.

Part of the value of the Left-wing is also to provide growth and strengthen existing institutions! A sense of Justice, knowledge of good and evil, is as core to the human experience as existential fear.[5] Humans will not tolerate sustained Injustice forever, and an institution which is not willing to move closer towards Justice will become unstable as a result. Solving those sorts of problems — “solving genuine problems other people have” — is tremendously valuable to the meta-institution, and is something that the Left-wing worldview tends to do best.

At the highest level of abstraction, that means slowing things that increase entropy. At the middle-tiers of abstraction, that means identification of- & creative solutions to- emergent problems of complex systems. At the lower levels of abstraction, it means new product development, competence-based organizations, complex & fluid social graphs, long-term growth without needing a 172 page slide deck, and someone looking out for the people at the bottom of the current system.

In both of these cases, the Energy case and the Entropy case, there is a J-curve in play. To generate more Energy in the future, you’ve got to spend a good chunk today — enough that it’s not always clear you can pull through the deficit. And to slow the inevitable growth of Entropy, you’ve often got to increase the disorder a little at first — and that shit gets scary fast, for everyone at all levels of the existing hierarchy.

“Your Framework Is Dumb And Incomplete, And So Are You”

Obviously! It’s just a framework. Just one lens to help me understand how it is that we all have a shared model of meaning behind what it means to be “Right-” or “Left-” wing, such that we can all correctly categorize complex phenomena as “Right” or “Left”.

I have some sufficiently high-level answers now, and they satisfy me. Energy vs. Entropy. Existential Terror vs. Existential Apathy. Feudalism vs. Injustice.

An alternative title for this section is: “You’re wrong because I’ve never encountered a [smart/wise] [Right/Left]-Wing person!”

Which might be true! Hey, you are what you eat read, and your diet is none of my business, and social bubbles are more powerful than god:

I think this is a very real critique though: the average Right/Left-wing individual that you encounter is obviously going to be near the center of the bell-curve and not a shining intellect worthy of analysis. The average Right/Left-wing individual that your own social bubble shows you as an example of your outgroup will tend to be comically worse than that.

But what I’ve tried to explore here is the far-right end of the bell-curve — the pinnacle of both worldviews. I don’t see much value in spending time on anything lesser, bad diets and whatnot.

What’s nice about this framework is it has some explanatory value for the rest of the bell curve too.

For example: the overwhelming majority of Right-wing-identifying-persons are in no way, shape, or form capable of even appreciating the creation of enduring institutions, let alone actually undertaking the task themselves. Few people are. But these people, these relative mortals at the center of the bell-curve, still possess the same underlying concern (see: awareness of external existential terror), and so they tend to at least work to maintain existing institutions. Thus: traditionalism, seniority, hierarchy, respect for existing structures, resistance to change, process refinement, efficiency increases, cultural homogeneity, aversion to potential existential-risks, etc. etc. — broadly described: “conservative”

“If you can’t create something worthy, at least don’t make things worse”

And of course, there is the far-left of the Right-wing bell curve, where the individuals in question have no conception of their own drives, likely don’t actually have worldviews of their own and merely seek to fit in with broader tribe around them, mostly because it gives them an outgroup to hate and they already began with the hate, it just needed a ~justifiable target. Painting any specific outgroup as an existential threat is the fastest way to justify & channel pre-existing hatred.

I leave the similar example of describing the Left-wing bell curve as an exercise for the reader. Hopefully you’ll agree with me on the reasons why the word “liberal” is broadly fitting for the center chunk.

⁂

“Okay so this is sort of neat, and maybe I can see it, but it’s far too simplistic. Consider a Startup! From one perspective, they are plucky underdogs, they tend to have flatter hierarchies, and they are the most efficient machines at solving other people’s problems! Isn’t that all Left-Wing-coded?

But on the flipside, they are a Founding Moment of their own. Name any famous startup and we can all say who/what they “killed” with their Founding Murder. The Startup CEO is an archetypal Founder figure, and has far more explicit control than any big-company-CEO. So are they also Right-Wing?

And the answer is, of course, yes. To both. Because anything meaningful in real-life is a synthesis of both Right- and Left-. If something can be reduced to purely Right-Wing or purely Left-Wing it is either irrelevant or dying. Live Players have to deal with the twin problems of Energy and Entropy.

If you can look at an organization honestly and truthfully and not perceive any hint of both Right- and Left-Wing orientations in it, you’re probably looking at a zombie.

I submit that this is not unrelated to certain historical figures’ distaste for “political party” and “faction”.

⁂

Lastly, I’ve also studiously avoided any discussion of the y-axis on this popular chart:

Why? I don’t know exactly, and wrestling with that would take another 5,000 words that I don’t quite feel like writing. I stared at this chart for 5mins and asked myself “why don’t you care about the y-axis today, when it used to seem so obviously important to you? When you used to identify primarily along that axis and ignore everyone talking about Right/Left?” and the immediate answer I got from my gut was:

“There are no Libertarians in the Jungle”

A familiar play on the relationship between atheists and foxholes. I.e. the y-axis is reflective of how dire any individual believes their external surroundings to be.

Every ideology can go authoritarian, even the Paperclip Maximizers — and they will go authoritarian if the circumstances are seen as severe enough.

I’m not saying the y-axis is all just a LARP — obviously there are seriously harmful Authoritarian examples on every page of literally every history book, and I’m not exactly breaking boundaries by admitting to a Libertarian streak in my youth — I’m just saying this axis is much more a result of your surroundings than any internal character disposition.

That study I linked to says a lot. The pages of history likewise.

Feel free to disagree with me there, I’d be interested to hear other perspectives & hope my Lib and Auth readers don’t feel completely disgusted by my glib take — don’t expect a follow-up essay though. I hate writing about politics this directly and probably won’t have the nerve or the inclination to do it again.

Enjoy the election.

TL;DR

Ouroboros Theory:

Right-Wing organizations are created to combat a perceived existential threat. The more they succeed, the farther away they travel from their founding circumstances, the more their mission drifts towards also solving Injustice.

Left-Wing organizations adopt solving a specific Injustice as their primary purpose. The more they succeed, the clearer it becomes that there is a Founding-Murder at the root of their most treasured institutions. Seeking to undo the sins of the past can lead to efforts to tear down these treasured institutions, exposing “perceived existential threats” to everyone else, creating the necessary conditions for a Right-Wing organization to step-in.

Society exists in the balance of these two worldviews

Alternatively:

“Everything to my left is morally just, but impractical, while everything to my right is immoral and unnecessary”

Now define “just”, “impractical”, “immoral”, and “unnecessary” and you’ve summarized this whole essay.

“Conservative” and “Liberal” are both helpful and meaningful labels to describe opposing worldviews, but both of them belong at the center of their respective intellectual bell-curves, both suitable for people of average ability and modest ambitions

The intellectual pinnacle of both worldviews provide necessary and complementary toolkits to help create & maintain all our shared institutions in the unwinnable fight against the First & Second Laws of Thermodynamics.

Great leaders integrate both.

Energy & Entropy will win regardless, in the endgame.

Til then, we’ll do our best.

Notes

[0] A polarizing internet figure like Jordan Peterson spends a lot of his time being really confused why the whole world sees him as a “Right-Wing thought leader” since his personal politics & the concrete policies he advocates for are all, at most, center-left.

And then he releases his self-help book, to international sales success, and subtitles it: “An Antidote to Chaos”…a whole book about proactively taking personal responsibility for creating the future you want in the face of seemingly-endless external darkness.

To my mind, that is the defining characteristic of a Right-Wing worldview, whether it applies to individuals or societies: “the base state of existence is chaotic terror, and life is defined by the triumphant struggle of persevering through that darkness and ultimately emerging, briefly, victorious.” No amount of Left-Wing policy can hide your core philosophical alignment.

[1] The Peter Principle applies to every institution, not just individuals: every entity grows to its failure point.

[2] Of course, taken to an extreme, any worldview will end up with a dictatorship.

[3] Which is of course not the same as political relevance

[4] That’s what being wrong and right at the same time looks like btw

[5] Seriously, “knowledge of good and evil” is the 40th sentence in the (King James) Bible. The two things that supposedly separate God from animals are: i) The Tree of Life (i.e. not-dying) and ii) Knowledge of Good and Evil (i.e. Justice) — and this has mostly gone unchallenged by readers for the last couple thousand years.

I’m not a religious man myself, but the link between those two and my conception here of Right- and Left- seems clear as day.

[99] I’ve been made aware that Americans don’t actually have Helter Skelters, probably don’t have fairgrounds, and only know the term thanks to the failed attempts of some murderous racist nutjobs to start a race war in California. What a world we live in. I assume the complete lack of any connection between this case and my usage of the term is transparently obvious to American readers. In case any are confused, I recommend a quick Google and/or a holiday to the UK.

• Problem Setup
• Base Layer of Society Is Feudalism
• Right-Wing Genesis: Making Monsters Of Our Own
• Future The Right-Eye Sees
• Breakdown Of Order: Right-Wing Tyranny or Abdication
• Right-Wing Narrative Failure In The Narrative Age
• Injustice Is Fundamentally Solvable: And Therefore Intolerable
• Reality Has A Well-Known Left-Wing Bias: Surviving
• Past The Left-Eye Sees
• Breakdown of Justice: Left-Wing Atonement vs. Justice
• If You're Not Growing, You're Dying: Right Meets Left
• Criticism
• Notes

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]]>Ouroboros Theory: Describing The Nature of Right vs. LeftConrad BastableThu, 02 Jul 2020 21:00:20 +0000https://www.conradbastable.com/essays/unequal-growth-the-zero-sum-games-you-dont-see5a571a7d80bd5e91de77e8e6:5b7dc2f9032be4fd52b63a13:5ef26e4b8849d4662c05223eHow The Present Was Built

“Unequal Growth” describes the emergence of China, the growing economic irrelevance of Europe & Japan, and American dominance, using 30 years of public data provided by the World Bank.

This essay began with one observation: In the first decade of the 2000s, the top 2 nations generated 31% of all the Economic Growth. In the next decade, their share double to 60% of Global Economic Growth. Growth is now a 2-player game.

Readers whose preferred economic mental models are Zero-Sum, will implicitly translate the verb “generated” to “Captured”. Readers who default to Positive-Sum models will instead translate it to “Created”. They’d both be right.

What I hope to highlight is that the Zero-Sum folks and the Positive-Sum folks both rely on incomplete models. Despite first appearances, the two models are not mutually exclusive. When there’s no Growth at all in a system, Zero-Sum strategies are readily apparent.

But the largest payoffs for Zero-Sum strategies come when they change the beneficiaries of future Positive-Sum Global Growth periods. Which is to say: when Creation and Capture go together.

“Unequal Growth” — a summary:

• You can sum the GDP of every country in the world to measure “Global GDP”

  • This tells us when the “whole pie” is growing — “Positive-Sum” — and gives an indicator of the Global macro economic environment

• The World Bank’s public data set goes back through 1988, giving us a 30-year window into Global economic health

  • Graphing Global GDP shows 4 distinct periods of Growth, and 4 periods of Contraction — each with their own story of winners and losers:

• 1990-1996: United States of Japan (Growth)

  • USA & Japan drive/capture 44% of Global GDP increases

    • Germany and China earn honorable mentions as Industrial exporter nations

  • Rest of the world is a rounding error & seemingly irrelevant to Global Growth

• 1997-1998: China Wins the Industrial War, Upends Existing World Order, Financial Chaos Ensues (Contraction)

  • China’s Industrial machine kicks into gear, taking huge market share from other exporter nations (i.e. all of Asia and Germany)

    • Asian economies explode in financial crises when their expected growth fails to materialize

  • US completely unaffected, growth continues

• 1999-2001: Unrealized Growth Expectations (Contraction)

  • Japan’s struggle continues, nobody buys their products with cheaper Chinese goods on the scene & their GDP shrinks by $600B

  • Rocky Euro launch + Chinese competition stymie Germany, their GDP shrinks by $250B

  • USA & China both grow enough to offset these losses

• 2002-2008: World Unites, Sings Kumbaya Round Campfire (Growth)

  • The greatest period of Global growth is also the most egalitarian — no single nation accounts for more than 14% of Global growth, prosperity flows to everyone

    • The rich get rich, and the poor get richer

• 2009: If We Go Down, Then We Go Down Together (Contraction)

  • Egalitarian Growth necessitates egalitarian Contraction, and the whole world explodes as the Campfire becomes a Mortgage-Backed-Security bomb 

• 2010-2014: A Depressing Return to Growth Inequality (Growth)

  • 52% of Global Growth driven by USA and China

  • No other nation contributes more than 4.5% of the increase in Global GDP

    • To call it a “Growth” period overstates what happens to non-US, non-China nations

• 2015: The Global Economic Apocalypse Nobody Remembers (Contraction)

  • Largest Global contraction on record, with the only period of negative 3-year Growth in the dataset

    • 130/186 nations experience significant decrease in their GDP. All of Europe, Asia, Africa, & the Middle East

    • Americans completely unaware of the widespread economic havoc that happened…

      • …because the US & China together grew by over a trillion dollars

• 2016-2018: Locking in the Two-Player Game (Growth)

  • Distribution of Growth stabilizes, US & China get 45% of Global Growth, no other nation gets more than 5%

• Cumulative Result:

  • There are 2 kinds of Growth Period: “stable” and “unstable”

    • During stable periods, Growth correlates with Size — large economies grow a lot and small economies grow a little, such that the relative ranking of nations by GDP remains “stable”

    • During unstable periods, that correlation breaks down as Growth share is captured and the player rankings reordered

  • If you’re not Capturing any of the Growth Created in a Growth period, the total pie can grow while your slice stays the same size:

Intro: Is the World Greater than the Sum of its Parts?

Most international comparisons simply take one Nation they care about and compare it to another, usually picking whichever other nation happens to highlight the specific policies they’re advocating. “Sophisticated” studies will consider a self-selected basket of nations, but the point is the same. I.e. sophistry instead of analysis.

Consider them all, or none at all!

So: consider the entire planet. Each nation buys, sells, creates, invests, & consumes as it pleases. The result is their Gross Domestic Product (GDP).

You can sum the GDP of every nation and get the total economic product of the entire planet. Global GDP, or “Gross World Product”.

Here’s Earth’s GDP from 1988 - 2018 (30 years)

Our little planet increased its GDP from $19 Trillion to $84 Trillion over the last 20 years, an increase of $65 Trillion (+343%). That’s some serious Growth.

Score:

Earth: $65 Trillion

Mars: 0

Go team Earth!

What I want to do here is explore the context behind this Global Growth, without picking and choosing nations arbitrarily. To understand what it means to Create $65 Trillion over 30 years. And to understand who was able to Capture that growth.

By my estimation there appear to be 4 periods of Growth and 4 periods of Contraction in the World Bank’s records:

I’m going to chop this graph up and discuss each period of Growth and Contraction in the micro. I’ll try to swap hats between the Positive-Sum and Zero-Sum perspectives too, with the hope of demonstrating that neither is ever entirely wrong. 

Many people are familiar with a single period in recent history and instinctively extrapolate that one period’s Growth dynamics to the past, present, and future. But like the twinned eyepieces of binoculars, the image is best understood with the depth & nuance that comes from two perspectives. I’ll throw this telescope emoji in occasionally to highlight when I’m only considering one perspective: 🔭

1990-1996: The United States of Japan (Growth)

The chart on the left is total GDP in 1996 for the 20 largest economies. The chart on the right is how much each nation grew over the prior 6 years. So that big blue slice of pie on the right-hand chart tells us the USA added $2.1 Trillion to its GDP between 1990 & 1996.

You can clearly see on the right that the United States & Japan account for the majority of global growth in this time period. If I include all 182 nations, the United States & Japan are together responsible for 44% of Global Growth.

That’s pretty wild.

Germany & China together account for another 15% of the increase in global GDP. Brazil, France, the United Kingdom, and Korea are combined responsible for another 15%.

Those 8 countries drove 75% of the increase in Global GDP:

There’s enough material in this period alone to write a whole book about, but in doing so we might lose the forest for the trees.

To sketch a quick narrative for the top 4:

• The United States continues its manifest destiny unstoppable growth
• Japan fuels its internal consumption-driven growth engine by running a trade surplus with the USA & the rest of Asia:
• Post-reunification Germany begins to reallocate European Industrial activity to within its borders, as described here
• Some light switches have just flipped on in China, labeled “Industrialism” and “okay maybe markets can be useful”

Note that Japan, Germany, & China all operate forms of Industrialism during this period: their large trade surpluses help fuel domestic consumption and create Global Growth.

One response to this picture is to suggest that the nations who added the most to Global GDP are simply the nations with the largest economies. If the whole world grows equally by 10%, then anyone who started at $10B GDP will grow 10x more than anyone who started at $1B. You can graph the increase in national GDP during a Growth period vs. the size of each nation and clearly see this relationship: 

Positive-Sum people will take heart in the above chart. The Unequal Growth from 1990-1996 is scary, but perhaps it’s just an artifact of differences in scale? 🔭 However there’s a question about which number to use for the X-axis here — 1990 GDP (the starting point) or 1996 GDP (the ending point)? Does Scale lead to Growth, or is it the Growth that creates Scale?

When we switch to using the starting point for this Growth Period, the relationship gets slightly worse (though an R2 of 0.90 is still incredible for raw data & hard to argue with!):