Most of the week I was in San Francisco and today want to share a framework for tech that I think you will find helpful. Before doing so, I will briefly touch on what is going on in the world because things are moving so fast. Whether via work, savings or relationships, we are flying through an economic/geopolitical typhoon.
Here is the summary:
Outlook
In response to high inflation, we are in the midst of a rapid reduction in the amount of money being printed. Mechanically, this will drive unemployment up, wages and stock prices down. But the impact is disproportionate so far. Tech stocks are down 30%, unemployment has not risen much. Unemployment needs to rise for inflation to fall, meaning the central bank needs to be restrictive, which is terrible for stock prices.
Russia is in a dangerous, self-reinforcing deterioration. In response to mobilization, educated Russians are fleeing and others forcibly enlisted, which will lead to a dire shortage of capable people running the country’s institutions. The political convulsions to come may be along the lines that occurred in 1991 (collapse of Soviet Union) or 1917 (collapse of Czar), but at a time when the world is far more globally integrated. The world is (was) dependent on Russian energy and minerals, Russia is dependent on Western technology and medicine.
The combination of the above is forcing Europeans to accept lower living standards. This is in the form of more of their money going towards paying for energy and perhaps rationing of energy this winter and less consumption on everything else. The risk is a fracturing of political consensus around the opposition to Russia. China is also in a self-reinforcing weakening caused by a combination of zero Covid policy, ideological rigidity and the popping of a massive, slow moving real estate bubble.
That is a lot to digest! If you feel jittery looking at your savings or the stock price of the company you work at or your nation’s borders, you are correctly perceiving an environment of heightened risk. All the above is happening against the backdrop of a tech revolution.
Tech Frankenstein
To deeply understand the above, you have to understand what is going on with technology. I’ll explain the Frankenstein reference a bit later. This week, biking past the downtown San Francisco offices of companies that have changed our day-to-day— Slack, Uber, Google—and, a bit down the road, addicts injecting themselves in the open, I searched for a framework to make sense of what I saw.
As I’ve noted before, we have been going through waves of innovation over the past 200 years, including canals, railroads, combustion engines, electricity and antibiotics. All were disruptive but they disrupted in different ways. What is specific to this wave?
Four attributes stand out: scale, wealth, specialization and ethical blinders.
Scale—America is regional economies, film in LA, finance in New York. In Silicon Valley it’s possible to go from idea, to program to concept to a few billion users. A lot of people are touched by the railroad, but not a few billion people at once. That’s why they call tech “viral.”
Human beings don’t grasp scale. As one person said to me, “the reason why a Google engineer can obsess over the difference in a shade of color on a banner is because if the click through rate goes to 0.3 from 0.2 that can translate into hundreds of millions of dollars.”
Most tech start-ups fail and don’t reach this scale. But those that do win big. Everyone in tech-land is looking for the next profit hockey stick (i.e. exponential wealth) based on unprecedented scale.
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