Welcome to The Riff, where writer and investor Byrne Hobart and I discuss the major inflection points caused by technological change. Our weekly conversation covers the obvious and not so obvious ways in which markets and businesses will adapt as a result. Let's jump right in.
Hey listeners, Eric here. Today, instead of my usual conversation with Byrne, we're releasing a conversation Byrne recently had at a live event in Austin with InterIntellect, which you can learn more about in the description. Byrne talks about his book, economic cycles, financial markets, and more. Please enjoy the conversation.
Everybody, thank you for coming. Thank you for being in the space. And today we're here to talk about — your name is Byrne, right? That's Byrne Hobart's new book, Bubbles and the End of Stagnation. Boom. Yes. So this is a book that's sort of — I was just saying to Gina — it's sort of on techniology, as I like to think of it, which is sort of a really interesting topic. The way this is going to work, I think, is that I have prepared some questions and then we can sort of open it up into a little more of a discussion, like what was sort of planned. So the book is — the book is like really great. It's divided into — it's extensively researched, extensively referenced. There's a ton of books that I've heard people mention before that I didn't know how they sort of fit in for people that I now know how they fit in for people. And thematically they're sort of divided into two parts. It's sort of like the ideology of stagnation and then what some might call like the ideology of progress. So perhaps like an interesting place to start would be the first part. And the thing that I found perhaps most interesting about the first part is the way you guys sort of argue that financial markets inhibit risk taking — that in particular low interest rates, which intuitively one would think of as encouraging risk taking, are actually much more ambiguous about that. So I'm kind of curious, can you sort of talk more about how — first of all, what do you mean by hyper-financialization, as it was called, and why is it that this inhibits risk taking or is ambiguous?
Yeah. So there are definitely a lot of paradoxical relationships here because in one sense financial markets — well, I guess, like in full disclosure, they're very fun for me. I enjoy reading about them, writing about them, interacting with them in various ways. So I do personally like them, but in one sense they are just a really elegant mechanism for directing capital towards potentially high return activities, but they can also end up with feedback loops that are fairly toxic — feedback loops where they don't interact with the real world except in a more pathological way and they can kind of detach themselves from reality. And there's a paradox there which I think the best way to resolve that is to talk about a different section in the book where we taxonomize bubbles and talk about extrapolation bubbles and mean reversion bubbles. And we use a bunch of different terms to describe this. But basically, you can think of one set of bubbles as predicting this total rupture with the past — that things will never be the same and, you know, travel will be faster or energy will be cheaper or transportation will be more abundant and easily accessible or computation will be cheaper, etc. Like all these, they imagine a radically different world where you can just do things that were not doable before. And then there's a different set of bubbles where what they imagine is that the future is a lot like the past except that there is more of it and it occurs within a narrower range of possibilities.
So if you look at something like the housing bubble, that was — it wasn't driven by any new development in building cheaper, better houses. It wasn't driven by any new, you know, aesthetic change in what kind of house we want to live in that caused everyone to invest in something totally novel. It was just we had suburbs and then we had more suburbs and more suburbs and it kind of kept feeding on itself. But where financialization kicked in was that it started to develop this internal logic where housing prices were increasingly driven by the availability of credit for buying new houses. And then defaults were also driven by — the lack of defaults was also driven by depreciation of housing prices. So if you bought a house with your subprime mortgage and a couple years later you lost your job, you couldn't really pay the mortgage, but the house had risen in value such that your equity had doubled, then you could just take out another loan. You could refinance and you have enough cash flow to continue servicing your debt. And when people looked at the aggregate performance of subprime mortgages, what they found is that defaults were actually much lower than expected, which they read as the American consumer or the American home buyer is more creditworthy than we give them credit for and we should make more loans to them. But part of what was going on was that the American home buyer was flushed because their house had gone up in price.
And over time just a growing share of economic growth came from things that were adjacent to housing. It was, you know, the financial sector was doing extremely well and construction was booming. And so you had a set of — a chunk of the economy where it existed because there was this continuous inflow of credit and then that continuous inflow of credit was predicated on the existence of this piece of the economy. And that lasted for a while, but eventually it just reached its limits and there were various shocks that happened. You know, housing prices kind of leveled off and started going down and oil prices started going up and that exerted this — higher oil prices are basically a flat tax, or were at a time when people were driving internal combustion vehicles, no EVs, and those vehicles were not getting great mileage. So it was basically a flat tax increase and that started to cause people to actually default and then things started running in reverse. We found that some chunk of the mid-2000s economy was kind of a temporary fiction.
So those bubbles do tend to be pretty damaging because they're treating the future as if everything you need to know about it is contained in the past. And I think that is true at a much higher level of abstraction, but is not literally true in the sense that if you see a chart and you see that there's a line moving in some direction, you can just extrapolate that line in a definite plane. So that's part of our concern with the hyper-financialization thing. And I think another piece of it is just there's always a question — and the book implicitly and explicitly asks this question — of what do smart people do with their lives? What do they decide to spend their time on? And if you look at the case studies in the book, the first few case studies, the first two case studies are both government-funded mega projects. So you have the Manhattan Project and Apollo Program and then the rest is more private sector focused. And these case studies are roughly chronologically ordered. And that's not a coincidence. So in the 1930s, the government was the growth sector. If you were a young, ambitious person, you wanted to be in — have lots of responsibility and live in the world. The second best options were not very good at all. You really wanted to get involved in some New Deal program. You'd probably get promoted very quickly if you knew what you were doing and you'd have a lot of authority while you're still in your 20s.
And so the government in the 50s and 60s was still run by those people, people who'd been selected from the upper tier of achievement and ambition. And so that government was capable of doing really, really impressive things. But over probably the post-war period — starting in the post-war period and accelerating since then — there's been a lot more selection for ambition in the private sector instead. So that's where the really competent people end up going. And after finance got more fun and exciting and deregulated, a lot of them went into investment banking, hedge funds, private equity, venture capital, etc. And these are all fun, interesting professions. And in fact, I've dabbled in more than one of them. So I like them, but it is probably the case that there are people who could have developed things that impact the non-abstract world and instead are applying their talents to currency or something.
Okay. So yeah, this version of — so many of the things — so I'll skip the stagnation questions and then go to them. So perhaps one interesting thing to kind of go off the last thing you said is — so I feel like this book is very strongly influenced by sort of ideas that are associated with Peter Thiel, basically. Yes. And George Soros also makes an appearance in the book and I always thought that these were sort of two similar characters. They're both sort of wealthy. They both have this deep devotion to a particular philosopher, which will be Hegel in one case and Karl Popper in the other. And they also have some kind of relationship to these bubbles, but it does appear to be somewhat different. So I don't know, how do you see these two characters and do you feel like they captured this distinction between these kinds of bubbles you were imagining or not?
So, that is an interesting question because Soros has written really interesting things on bubbles as sort of a practitioner in them and he has these quotes like when I see a bubble I want to jump in with both feet, or invest first, research — you invest first, investigate later, etc. So he's very much a fan of looking at some change and inferring that there's something important going on and he should chase it and then figure out what the nature of that change is. And actually there's been some research subsequent to Soros's active investing career looking at that kind of phenomenon. And there's an interesting paper that actually looks at Soros's record and looks at what kinds of systematic replicable factors — like what kinds of — you can write an algorithm that says, you know, if this currency is outperforming other currencies by some — and those kinds of strategies do tend to produce good returns over time. They did over Soros's career. And if you run all the linear regressions, do all the attribution, what you find is that the Soros-specific skill actually had a negative contribution and that you can account for more than 100% of Soros's returns by looking at what assets did he invest in and what broad replicable strategies did he follow.
So in other words, if the strategy is something like buy the currencies that are going up and in this year the yen and the Deutsche Mark both run up — if in a year where the yen did a little bit better, Soros probably bought the Mark and vice versa, but over time he was generally picking the right kind of trend. So you can look at that and say, okay, this means he had no skill whatsoever, or you can look at it and say that Soros just by reading headlines and thinking very hard and having lots of conversations with lots of different people was able to intuit a statistical relationship that the rest of us didn't figure out for another 20 or 30 years with lots more data and much faster computers.
But Soros does talk about not just that he likes bubbles and enjoys chasing momentum, which is true, but he and — I think I'll take a side note — there is this problem that a lot of Jerry Dorfman Philosopher people have, which is that they can take any personality flaw they have and discuss it at great length and discuss it as the highest of human virtues. So Soros is just a degenerate gambler who loves buying — who just has this Pavlovian reaction to seeing a line in a chart go up. He can articulate a reason this is actually really, really clever of him and not just general gambling. And he has this wonderful memo where he talks about the theory of reflexivity where he says — he gives an example of this particular kind of company that was popular in the late 60s, early 70s, called a mortgage or real estate investment trust, basically a mortgage trust, where the idea was you get a pool of capital, you borrow money against it and you buy a bunch of commercial mortgages and then you basically collect the spread between what those mortgages earn and what you pay to borrow against a diversified portfolio of them.
What he pointed out was as the value of those trusts — as their stock prices went up, they were able to borrow more cheaply because lenders would see that clearly investors think these companies are going to make a lot of money and therefore it's probably fairly safe. And as that happened, the companies would issue more stock, use it to make more of these investments, borrow more money, etc. And so their fundamentals started looking better and better. And meanwhile, as in the residential real estate bubble of the 2000s, because they were lending to people who were buying these buildings, the value of the buildings went up, which meant that the collateral was getting more valuable, so the loans looked safer. And so he said this is one — this is totally unsustainable. Like it is entirely an artifact of financial markets over-extrapolating from the past, but two, those stocks are going to go up, so I'm going to buy them. And then I'm going to hold them until I decide that sentiment has changed and probably sentiment will change before their earnings deteriorate. But once sentiment changes, once they are no longer getting all of these inflows, suddenly building prices aren't going up that much and the last building that someone buys in the cycle they probably borrowed too much and the building's rents are probably not that great. It's just not a great investment.
And of course if this sector is growing and the bubble is growing a lot more of the assets are going to be bought at the very end rather than at the very beginning. So it's going to be net destructive of capital, but for a while things will be really good. And so Soros's view is basically you buy them when the stock is going up and you expect earnings to go up and then you sell them when the stock is going down and you expect earnings to actually go down. And so he made a lot of money on that and that pattern does repeat itself in other sectors. Like when you look at the mechanics of it, he's describing something that is very much driven by the interplay of equity markets and loans and the collateral that backs those loans. So it feels like a special case. But if you consider, say, software companies in the last couple years — you know, this period in 2020 and 2021 where there was this acceleration in growth — and again looking at the mechanics of it, if there's a company that has a lot of salespeople and they suddenly hire a bunch more salespeople, now they have added a bunch of seats to their DocuSign subscription, they've added a bunch of Zoom accounts, they've added Slack, etc. So now DocuSign and Zoom and Slack are all growing faster.
And so investors can see that these software businesses grow incredibly fast and so they invest in more of them. The new software companies are doing business with the old ones and it all just kind of chases its own tail until you have like 2022 where there's this spike in inflation. The VCs get skittish. People start thinking about costs again. They start doing layoffs and suddenly all of that organic-looking growth — of, you know, Zoom would grow 35% a year if it never signed a new customer because its customers are all growing so fast — well, suddenly Zoom needs to sign up new customers just to stay even. And so suddenly the equity values decline and when that happens it's a lot harder for these companies to hire really good talent because they pay them primarily in stock. So suddenly really, really smart people are not jumping to the nearest startup. They might be staying at their big tech jobs. They might be staying in grad school a little longer or going to grad school to just stay out of the scary hiring market, etc. So yeah, those feedback loops do show up in a lot of places.
So that's like the high-level Soros summary where he likes being long the bubble and that he will short the bubble once the prices show that the bubble has peaked even if the fundamentals still completely — and he seems to take almost exactly the opposite attitude towards looking at bubbles, where he's also looking at the mechanics of bubbles and looking for where they can't be sustained, but then he's looking at betting against the bubble being sustained. And I think if you look at some of his big trades — one of them was betting on oil, betting that oil was underpriced in the early 2000s and that it could only go up or was very likely to go up. And, you know, that sounds like we're betting on something going up. We're betting on a better, brighter, bolder future, etc. But the world basically has a short position in oil where we don't — it's all like you gratuitously consume it and we have to use a lot of oil-based products.
And so when oil goes up, it usually means that the world in the aggregate is a bit poorer and oil-exporting countries are a bit richer. So it is actually a pessimistic bet to say that oil is going up. And so it's essentially shorting the concept of an economy that can be indifferent to energy costs in the face of one, oil being a depletable resource, and two, growth of emerging markets, where if they — the last time I looked at this was that if emerging markets all reached US standards of living and US standards of oil consumption, we would be using about four times as much oil as we currently produce. And obviously that makes the price go up but it also implies a much worse world, specifically for people in developed countries, which is where the equity market cap is concentrated.
And perhaps to kind of go off on this, because I sort of merged two questions into one. So the thing about the way people normally value financial assets is this discounted cash flow view of it, and it appears to me that when it comes to these bubbles that is just sort of impossible — be it good ones or bad ones. In particular because, I mean, if you just focus on the good ones for example, there is no way to arbitrage generally because there is no way to short anything basically, right? And so I suppose my question is, what do you see — like if one is trying to make money off of these bubbles, what is sort of the right approach to that? Or to phrase the question differently, when it comes to these bubbles, who are the people that sort of end up making the money and who are the people, you know, that think they are investors but end up being visionary philanthropists for the future?
That's a good way to put it. And yeah, a lot of people do end up just making a large charitable contribution to something like very affordable broadband infrastructure to the next generation or whatever. I would say that one piece of this is that the people who do the best in bubbles are typically not the investor class. Like the investor class will make the most money from when we first call it a bubble to the peak, but it's usually the founders who actually make the most money. And one reason for that is that the founders tend to be many steps ahead of the broader public and the investing public. So when Bezos was founding Amazon.com he was noticing that the internet is just experiencing explosive growth and that even if it slows down dramatically it will be a very, very big deal. But he was also pretty aware of just the fact that there was a lot of froth, that people were overinvesting. And unfortunately in his case, what he had to do was also overinvest because he knew that there's just no honor in raising a more prudent amount of money and grow it a little bit more slowly at having the second-best everything store be the everything store that actually wins just because they raised more money and built bigger, but the slightly shoddier enterprise.
So those founders, they do tend to know a little bit more about where the market is going but they also kind of recognize when there's this divergence between what the narrative about the bubble is and what the underlying facts on the ground are. And so Amazon — they were basically growing as quickly as they could in the '90s, in the late 90s, and then in the early 2000s when they recognized that capital was not going to be as abundant they cut very, very aggressively. Their growth slowed at one point to almost zero and they were still losing money. So at that point it kind of looked like every dot-com skeptic had been vindicated because the dot-com bull case was yes they're losing money but they're growing insanely fast and when they reach scale they will be very profitable. And one other way to phrase 'when they reach scale' is 'when they stop growing.' And he demonstrated that when Amazon stops growing it still loses tons of money.
But — and this actually gets back to your discounted cash flow question. So it was very hard in the '90s to put a discounted cash flow valuation on Amazon because you were just making up numbers. But internally, Amazon was paying very close attention to their cohort metrics. So if you signed up for Amazon at the beginning of 1998, how did your spending trend in 1999 and 2000 and so on? And what they generally found was that yes, they were spending a lot of money to acquire these customers, but these customers were sticking around and spending more and more money over time. And if you started to extrapolate that, you could say that a lot of the customers that they acquired very expensively early on were actually going to be incredibly lucrative really. And Amazon acquired me as a customer in the early 2000s. I think they've gotten their money's worth at this point. So they were thinking about actual logical questions like what is the return on investment, but I think it was a fairly deliberate strategy on their part to not talk too much about this because it was not really in their interest for their competitors to understand this.
And as long as investors were accepting a fairly dumb narrative of just we get big fast and every year our revenue doubles and our losses about equal to revenue also double — as long as investors are satisfied with that, you don't need to tell them any more. But when it's time to get serious, when it's time to cut costs and think about margins and things, I think they were a little bit more willing to tell people that this is actually a business model that makes sense because people keep on buying. And it is also a business where you have fixed costs — the fixed costs are very high. But at some point, if you have just the largest delivery infrastructure and you have the best recommendation engine, then your marginal profit on each individual unit sold is higher than anybody else's. And at that point, as long as people do actually do a lot of their shopping online and as long as Amazon doesn't run out of money, it is going to be worth more than its competitors. And that was the right bet.
Right. Right. Good. Yes. And I suppose the next thing that I'm sort of — I guess sort of curious about even in relation to that. So all of these cases, these visions of the future seem to sort of play a big role in how — so okay, so the reason is that some of these bubbles are about stories about the past and some of these bubbles are about stories about the future. But it seems to be the case even in the case where it is about the future, stories about the past play a role. So, for example, in your book, you have things like the Manhattan Project, the Apollo Program, and so on. How do you see this relationship between visions about the future, stories, legends about the past — how do they interact to allow people to do things? I'm kind of asking in the spirit of like how do they help people coordinate, in a sense?
Yeah. So, I think what people are really trying to do is — I guess if you're a STEM person, you'd say it's a principal component analysis. If you're more of a liberal arts person, you might say that they're looking at like the platonic essence of these different events. They are looking at what are these deep commonalities that are expressed in very different ways because they're always expressed circumstantially, but they do actually exist. And that's a lot of what we tried to get at in the book — is that there are commonalities that occur across time, across different circumstances. Like one is that people build a bunch of different things in parallel that just don't make sense to build on their own. And in the very first case study we talk about the Manhattan Project. So to build a nuclear weapon in the early 1940s, you need to do at least two things. One of which is design a nuclear bomb that actually explodes. And the other is get enough fissile material that you can actually build a bomb that explodes. And these are two separate tests.
You could imagine sequencing them and saying, we're not sure if we could actually design a viable bomb. Let's design one and then we'll find some uranium or plutonium and build it. But if you did that, your bomb doesn't get done until 1950. And at some point, Congress cuts your funding. And we read books about the Manhattan boondoggle instead of the Manhattan Project. And it's just kind of one of the ways that the US wasted money in war. But if you build it in parallel, you're building things knowing that it is possible that you — it's certainly going to waste some of your money and it's possible to waste all of it, but that's the only shot you have at actually building this thing. So we spun up multiple ways to get fissile materials. Some of them worked, some of them did not, but enough of them worked that we had enough for two different bomb designs. Meanwhile, we did pursue multiple bomb designs, we got at least two that actually worked and we were able to test one and then deploy two in wartime. So that just would not have happened had we tried to do one piece at a time. We would have either maybe done part of one piece and then given up or not actually done any of it.
And this shows up in the private sector bubbles like the dot-com bubble is a really good example where you've had this simultaneous buildout of infrastructure to get people online and of content that is purely online and of efforts to take content that's offline and bring it online. And if you think of Amazon from the perspective of what is the easiest kind of content to bring online, one way to think about the book business is that it's just the business where shopping is as close as it can be to just querying a database. You know, you're selecting books where author name equals X and ordering by publication date, or you're selecting books where genre equals Y and ordering by total sales over the last month. So, you know, one of those is an author page and one of those is a bestseller list in a particular category. And that doesn't really make sense if you're selling fruit or something — like there's not really a bestseller list telling you that bananas are really big this month. And it's not really how people shop, but they absolutely do pay attention to bestsellers and they do shop by author and genre and topic and publication date and things like that.
So you have a product that as it existed was already built as — you basically already had the database schema defined and then all you had to do was put an HTML front-end on it and find a way to accept people's money and ship them the product they ordered. So books had a lot of advantages in that respect and that meant that if you were going to sell pretty much anything online, something like books was a really good place to start. Also they tend to be in pretty consistent sizes. It's just very easy to put something like this in the mail and send it anywhere. So that's where Amazon started and then they moved into electronics — they moved into CDs and electronics at around the same time and CDs also have a lot of those categories where you can search by genre, you can search by artist, you can search by timeliness and by popularity. And then electronics was a little bit messier both in terms of you have a lot more dimensions to care about and there's a lot more specifications and a lot of people don't really shop by specification or they shop by particular things and aren't into other things. But once you have the infrastructure that can ship books, it's a smaller lift to add one more product category than it would be to start with something that was a little more heterogeneous, a little harder to think about what the process was.
Okay. And so perhaps to go a little bit off on that. So we've talked about the investor part, but I feel like for a lot of people that work on building these technologies, what kind of drives them is that at least emotionally what they want to get out of it is that they kind of want to be a part of one of these legends that people have sort of seen in the past. And I'm sort of wondering in the end — so I asked the question about who kind of gets to be the visionary philanthropist. So do you think that people that work on these technologies ultimately, like the experience they get out of doing that — is it what is kind of promised? Does it feel like being a part of them and having the project to work on, the AI, or is it ultimately more like a story that gets people on board but ultimately leads to disappointment?
I mean when I talk to them right now, it does — they definitely like to give that vibe. I don't know how true it is but it seems directionally true that they're working on something that they can honestly view as the most important thing that anyone could be working on right now. And I think another piece of it is — one piece of it is they want to be on the team that does really cool things and they want to have those memories. But another really important piece is if they think it's possible to get built and that now is the time when you can get this confluence of funding and of talent and of public approval in order to actually be able to build it, there's also a question of what version gets built. And I think this actually motivates a lot of people — the recognition that it will probably exist, or one possibility is it only exists if I work on it. Another possibility is it will definitely come into existence and the only version I can tolerate interacting with is the version that I myself would build. So it is a question of militant taste for what these products look like and how they function and how they're used. And yeah, a lot of the really successful tech companies that are very product-oriented — that's part of what they're doing. You know, someone who looks at MySpace in 2004 just wants to vomit and says like this is hideous, everything is flashing, and I open three tabs and now I have three different pop songs playing and I hate it all, burn it down.
They want to build something clean, minimalist. And they also look at this wasteland of, you know, there's a page for someone's Chihuahua, there are 50 pages for every celebrity, there are pages for concepts and things. They say, no, we linked together computers in order to link together people. We didn't link together computers in order to have everyone interact with basically a cartoon or a mascot or something. So instead of letting anyone be anything online, the mandate was you can be online, you can interact with other people, but only as yourself. And this actually turns out to free-ride on a lot of social norms because on MySpace, yeah, if you have an account under somebody else's name or under a fake name or something, you don't really suffer in your real-world spots if you're obnoxious. And that means the average level of obnoxiousness is pretty high. But if you're on a real-name social network and your real-world reputation is going to be partly affected by what you do online, then you do hold yourself to a different standard. Not that people on Facebook always hold themselves to really high standards, but I think it's much better than it could be.
And another thing that was sort of remarked at the beginning of the book is — so one difference that I see between people that are, say, in the kind of business or entrepreneurial world versus the science world is that in the entrepreneurial world people are very, very keen to paint these big, you know, kind of dramatic visions of the future. We're all going to live forever. There's going to be a base on the moon and we're going to build a network state. People in sort of science-type things are very reluctant to put visions like that and what they sort of want instead is the thing that was kind of mentioned towards the beginning, which is just this curiosity-driven research where people want to — well, this is something interesting, we want to go off and explore it, but there is no real vision. I feel these two things often get lumped into the same thing but they are quite distinct. So when you look at the sort of approach that the scientists often want, it just sounds much less charismatic. Do you feel like these are two different approaches and you can get different things out of them, or do you think that the science people should basically get into the sci-fi vision business?
What I think is that part of the magic of bubbles is they do bring together people with different motivations. And if you look at the Manhattan Project, you have people who were genuinely curious about the science. You have people who did actually have a utopian vision and they felt like unlocking the secrets of the atom means unlocking infinite energy and that's what we need to achieve the world we want to live in. And then you have people who really want to win a war, you know, either against the Nazis or against the overall Axis. And then towards the end people start to realize that the war against the Axis is pretty much won but the war against the Soviets is just getting started. And so, you know, we still want to build this to make sure we intimidate Stalin even if we don't actually need it to win
And the fact that they had different views on what the ultimate purpose was did not preclude them from working together. In fact, you had really ardent Cold War hawks working side by side with people who were literally spying for the Soviets, and both sides managed to contribute to actually building the thing.
Hey everybody, Eric here with a word from our sponsors. What does the future hold for business? Ask nine experts and you'll get ten answers. It's a bull market. It's a bear market. Rates will rise or fall. Can someone invent a crystal ball? Until then, over 41,000 businesses have future-proofed their business with Netsuite by Oracle, the number one cloud ERP, bringing accounting, financial management, inventory, HR into one fluid platform. With one unified business management suite, there's one source of truth, giving you the visibility and control you need to make quick decisions. With real-time insights and forecasting, you're peering into the future with actionable data. When you're closing the books in days and not weeks, you're spending less time looking backwards and more time on what's next. If I had needed this product, it's what I'd use. Whether your company is earning millions or even hundreds of millions, Netsuite helps you respond to immediate challenges and seize your biggest opportunities. Speaking of opportunity, download the CFO's guide to AI and machine learning at netsuite.com/102. The guide is free to you at netsuite.com/102.
And I also think when you consider a lot of the figures who lead some of these more bubbly organizations, they do actually tend to synthesize that curiosity and ambition. So they want to understand the world and they want to tinker and they like messing around with interesting new technologies just for their own sake. And then once they find something that's genuinely novel, they want it to be as enhanced as possible. Bill Gates, for example, he was just relentlessly curious about computers. It's weird. Gates and Arnold Schwarzenegger are two people where their biographies both include late night bike rides home as kids in school from the thing that would make them famous.
Schwarzenegger has this story about how the first time he went to the gym, he rode his bike several miles there and then he did too many squats and he had to walk back at night. And Gates would also sneak out of home at night because there was a shared computer and there was cheap computer time or free computer time at night, and he could go to their office and play around with the computer as long as he told them of all the bugs that he found. So you have people who are just really really curious about some narrow aspect of the human experience. But then once that curiosity has led them to build something new, it almost seems like there's this moral obligation once you've made something new to get it into as many hands as possible. That's part of the purpose of it, is to affect people's lives. And so I think there is just a synthesis between those two attitudes at the very top of achievement in managing and thriving in bubbles.
Okay, and maybe just like one final question before opening it up. So at the beginning of the book, one of the reasons for this stagnation might be that we are so good at giving people kind of these virtual experiences that satisfy either kind of more base needs or even sort of more transcendent needs, spiritual needs. And that people are kind of able to satisfy that virtually rather than sort of seeking it through pursuing things in the real world. Ultimately, if you had to explain why people should prefer the real over the virtual, what would you say?
I don't think that's really amenable to persuasion. I think people who are satisfied with the virtual are just perfectly satisfied with it, you know. I don't think I could tell someone anything they wouldn't already know about the difference between winning in a simulation and actually winning something real. I think the best you could do is a bit of light shaming and just kind of have this sense that people pursue glory in virtual environments because they know that they wouldn't achieve it in the real world. But I think a lot of people would also kind of quietly admit that to themselves. And so maybe it's more depressing than inspiring to say it. But I also can't judge that much. I enjoy map steering games plenty and I do suspect they do some good for the world. Like there's someone out there who would be conquering the real world and instead they're conquering a virtual world. Yeah, it's really good that we have those. It's a nice outlet.
But yeah, I think it just comes down to a philosophical question about whether you prioritize your experience of reality or reality. And I don't think you could persuade someone in either direction. If someone actually believes that the real is what matters and that the suffering they feel in order to achieve glory or success or whatever is worth it, you can't really persuade them that they'd have more fun smoking weed and watching Netflix, right? Vice versa. But people do burn out of real world achievement. Sometimes temporarily, sometimes permanently, and they also burn out of the virtual. And I think the real world is just a bit more gratifying, a bit more engaging. And it tends to bring you back in a way that the virtual doesn't. There are just not that many people who stopped playing video games 20 years ago because they realized it was a waste of time who just have this aching curiosity about what the games are like today. Whereas there are people who worked really hard at their startup, their startup failed, they were really depressed for a while, they did the Ayahuasca retreat, it didn't fix anything. And then six months later they're using some app and they're like, this is just unbelievably bad. And everyone involved in this should be humiliated. I'm going to start a company specifically to punish them. And then they're back in the game.
Okay. Well, so with that, there's a lot of stuff we could talk about but yeah, let's go for it. We can go to the Q&A.
So it is unfortunately for a work of artistic criticism, it is just a data-driven approach, which is that there are, I don't know what the number is, but a lot of US market cap, public and private, is tech companies that were founded in the last 15 or so years. And the inputs into that, the limiting factors, include things like how many people choose to major in computer science versus other STEM fields or versus a liberal arts field. And how many people, once they have that major, choose to start a startup rather than do something else like work at a big company. And you know, there are plenty of interesting gratifying jobs that you have. If you're really good at programming, you can get a job at John Deere and analyze lots of data from tractors and figure out how to make them slightly more efficient. You are actually feeding people like on the margin. There are people who would starve who do not starve because these software engineers do what they do. So that is really valuable, but it is also valuable as a way to optimize an existing process, not to build something completely new.
And I think The Social Network, so the data-driven cases are things like the number of people at MIT who majored in computer science went up dramatically after that movie came out. The number of applications to Y Combinator, Paul Graham posted a graph of this years ago, there's this step function increase. And he tweeted a graph, he said, can anyone guess what happened then? And yes, the answer was when The Social Network came out.
And I think some of that, like, you could criticize that. You could say, wait, if you change your life based on a movie, how influential would you really be? And the counter, the answer to that is Vladimir Putin is a very influential person. Not for good that he is influential, he will be in the history books. And the reason that he is in charge of Russia now is that he was a very high-profile, very successful spy before the collapse of the USSR. And the reason he was a successful spy is that once when he was a teenager, he watched a movie about spies and decided he should apply for a job at the KGB.
Top Gun, the original one, did lead to an increase in the number of people who applied to be in the air force. So you do have cases where real world changes are downstream from the cultural changes. And I think one of the mechanisms of that is that people see them on the screen and say, I want to be like that. But another mechanism is it makes the choice more legible. It's not that they have permission from themselves to do this, it's that they have permission from their parents or their in-laws or other people in their lives. Where someone like, if the year before The Social Network someone told their parents, I am dropping out of school in order to start a company, Mom and Dad associate that with pets.com. They do not associate that with Google necessarily because Google is just less salient. It's kind of a utility. Everyone has it, everyone uses it, no one really has to think about it. And yes, it's valuable, but it's not as valuable as the whole dot-com sector was. That is no longer the case, but it was the case circa 2010. And your friends also either think that's a weird nerdy hobby or just don't care that much.
But once the movie glamorizes that and says this is a choice, it's a choice people make. There are moments of high drama, there are highs and lows, and in the end, if you do it right, you make a ton of money. And Hollywood, and anyone who watched the movie and then looked into it, realized Hollywood actually had to add the part where Mark Zuckerberg is not happy. Like he's married to his girlfriend, who was his girlfriend during all of the events of the film. So the entire emotional drama that is not business related is fake. The business related emotional drama is, you know, based on a true story. So yeah, that's the Social Network hypothesis, is that it just made the choice legible. It made it make sense to more people and caused a lot more people to found these companies. And these companies do just have a very enlarged effect on how the world operates.
And then The Dropout came out the same year or the year before it was Rising Star, right?
Yeah, but it was, I guess you could say it certainly made Elizabeth Holmes more well-known. I think Elon tries very hard to, well, he tries to make himself seem like Tony Stark. Those movies probably had an advantage.
Do you feel like movies have a different kind of cultural footprint? Because if you try to tell someone, try to relate to someone who read that book when the book came out, try to relate to them about a particular chapter, like, hey, do you remember that chapter where they hired the guy from J.C. Penney to redesign the store? Like, yeah, maybe a handful of people who read the book remember that.
The reason I bring that one up is it is the only chapter of the book where I specifically remember what that chapter was about. Whereas a lot of scenes in movies are just much more memorable. Like, me, yeah, they all remember that and they all remember the Victoria's Secret dropout thing. They did not. A lot of people do. I do. But they remember the scene with the interns who are drinking and trying to rack a server or whatever. So there's a lot of scenes where they're touching points for talking about this in a relatable way.
And books, because people buy books and don't read them, but people don't go to a movie theater and just stare at the wall. You watch the movie, therefore you've seen the scene.
The Rocketeer, right? Back in the day, and we had black-and-white propaganda posters. The ones with the muscular man smacking hammers near the gears and things like that. You think you might have the point now?
The Soviet posters were really bad things, but they were really good at capturing that technological sublime. They really liked having posters with gears and really muscular man smacking hammers near the gears and things like that. And so I think they did just put across that vibe that progress is this tangible thing, it is being built before your eyes, and that your life is just automatically great compared to what your parents or grandparents have even realistically accepted, and that it is the result of human effort and human decisions. So yeah, if I were a propaganda minister, I would probably want to put up a lot of posters of things like that and a lot of videos of things like that everywhere, unavoidable.
But to take the question, because it does sound to me like Aaron Sorkin is basically the unsung hero of Silicon Valley in this way, right? And yet he's not an ally of that world, as I understand, in the same way that Lee Harvey Oswald is the unsung hero of the moon landing. But then it got really unpopular to question things that JFK wanted after he was dead. So yeah, you often have that dynamic where it's the energy of interacting with critics. In fact, going slightly earlier in the space race, there was this moment where the US had, the Russians had launched Sputnik and Sputnik 2, and the US was doing test launches and one of them blew up on the launch pad. And the Russians got up in front of the UN and said that Russia has a program to provide engineering assistance to underdeveloped nations and they would be happy to send some of their engineers to America to help them build a rocket that can actually get off the ground. And I feel like this really is one of the reasons that people have walked on the moon. Not Soviets, Americans have walked on the moon, is just it was such an insulting thing to say and there is no comeback. You can't have a comeback like, we have really really big Cadillacs and you don't, or we have TVs and you don't. No, the actual comeback is, we have walked on the moon, our flag is up there, you can look up and see it, and back on Earth where you are stuck.
Interesting. So I think that is basically the reason why I guess the Silicon Valley world isn't able to get a similar kind of a cultural product to The Social Network, say, from its more allied voices?
Yeah. I think that the criticisms of a lot of these products that are more purely digital, where they provide a layer that you interact with the real world through, it was just less of a tangible thing to criticize. But you can criticize their social effects. And a lot of tech critics and even people who are broadly supportive of technological progress but just concerned about the specific areas where there's more progress, like really addictive video apps or whatever, they do have to point to the social effects because there's just not really a glamorous visual of the downsides. You can show a picture of someone alone in a dark room just staring at their phone, but you don't really know if they're watching TikTok or reading Moby Dick. So you actually don't, you need some kind of external cue to even know if this is supposed to be depressing or this is like a really inspiring picture of someone who is just so thirsty for knowledge that they can't stop reading the great works of the canon.
Love it. Curious to hear, or the very rules of field or problem space seem like kind of a flagship movie, or just something to increase the sheet of field, would be especially helpful.
I think it'd be nice for there to be a movie starring Timothee Chalamet just to get your list. But I think a movie about Operation Warp Speed and about the entire leadup to it would be really really interesting. Like the leadup to it. It feels like you could have a very nice one-season Netflix drama that ends the day that COVID is sequenced. So you have all of the ups and downs of someone working relentlessly on an approach that many of their peers think is not a great approach. And I've always felt like you can sort of read between the lines where if someone is working in a field for a really long time and everyone else is just irrationally conflict-prone with respect to them, it is entirely possible that this person is actually really hard to get along with. But also, most of the great achievers in history are really hard to get along with, because a really easy way to get along with people is to tamp down your ambition and tell them, no, you don't actually have to do that, or no, you don't have to give me permission to do that. So I think a certain amount of disagreeability is really helpful, but it also would make it a more complex and interesting story.
And then going from we've sequenced this and it takes two days, to there's a sequence, to we have a prospective vaccine, and then from that to there are shots going into people's arms in less than a year, is just one of the great achievements of humanity. But it's also, you're basically telling two different stories, where one of those stories is this sort of dystopian organizational story and a story about maybe a lone genius artist who's constantly true to their work and their mission despite all of these social obstacles. And then it transitions to a story about mass production and cold chains and how do you get the vaccine from point A to point B. And also how do you get the vaccine from, we have a little message that tells your body to build a bunch of spike proteins so that they terrify your immune system and you build antibodies. But getting that actually into someone's body in a way that survives and also deploys, and it's not just you have a little bit of mRNA and then you excrete it after a while, that is also very complicated, challenging, and I'm sure would produce some amazing visuals. So I think that would be good.
I think SpaceX, part of the problem with doing a dramatization of SpaceX is that they do plenty of that themselves. If you want to watch a really really cool video that tells the story of SpaceX, just go to YouTube and look up SpaceX and you'll find them. So that one, yeah, less so. And then AI, I think we're just too much in the middle of the story to tell the story just yet.
Casablanca, but how would you generalize characteristics of a successful narrative that inspires versus the ones that don't? Because there are a lot of backfiring stories that don't happen.
I don't know. I feel that this is a question for the artist. Like, because I haven't made anything that is as culturally impactful as a Social Network, and it does seem to be a talent that Sorkin has. There was that wonderful article about Obama staffers who all watched The West Wing and I think they had misconceptions about how the US government works specifically because they were watching The West Wing. Apparently there's this like ISIS was strong book. Or there's an NPR thing a while ago about wiretapping New York mobsters and how when mob movies came out they would all start talking like the movie mobsters and they adopted the idioms. It was really funny and we loved it.
This also happens with things like people at boiler room brokerages watching the movie Boiler Room because the speeches are just top-notch. So you do have that weird feedback loop where there's a real world phenomenon, someone just crystallizes it perfectly in a movie, and that movie defines the phenomenon and defines how people think about it.
I think it was the first time that offices started storing alcohol, like WeWork, as a year, because of Mad Men. This was completely out of the ordinary for our industry. We can have draft beer and that's great.
