Throwing Rocks at the Google Bus
Like many people I tend to use the products of the digital revolution more easily than I think about the economics of it. I see the astonishing figures of acquisition value for companies that have yet to make a profit and something seems odd – but I’ve never sat down and examined what. I suspect I’m not alone in this. Rushkoff’s book examines the financial industry, particularly around digital startups to show us just what is wrong with our economy, and offers the beginnings of some solutions.
The main argument are that our existing economy is set up to serve constant growth, and the wealth generated in that economy accrues to a minority at the top, leaving the majority worse off.
The book begins with a discussion of an unusual protest; local residences of San Francisco’s Mission District lay down on the street in front of some of the Google buses that were used to ferry employees from their homes to the Google campus. This is a symptom of the dysfunctional economy.
We have all bought into the growth myth; we need and deserve more – in financial reward for our work, the size of our homes, the shininess of our possessions or the pool of money for our pension. But in nature things grow to maturity and then stop growing, they reach a size that’s appropriate for their physical limits and their ecosystem. An oak tree doesn’t keep growing, it maintains itself over time, growing new leaves each year, but the size remains more or less constant.
Companies have a growth imperative, the market expects growth in their market capitalisation to give investors a return. Which is why the market gets excited about huge audiences on Pokemon Go, and gets jittery when Apple iPhone sales stagnate.
In the theories of business that I learnt in business school a company had to manage multiple stakeholders and keep them all happy to ensure long term success. Put simply a company must keep employees well-trained and motivated to make customers happy, ensuring income for the company to return to investors over a longer term. Stakeholder theory says that the needs of all three must be kept in balance and that neglecting the needs of one will affect the other two.
Rushkoff explains that in today’s market there are relatively few investors in the sense of people wanting to own a piece of a company and be vested in its success. Instead the market is full of traders, those who trade shares amongst themselves and might never know what the company makes or what is on its balance sheet. The most advanced of these is using sophisticated technology and complex algorithms and trading on minute shifts in share price. This trading is done digitally, using microseconds of difference in share price enabled by digital, and the activity is so removed from actual business activity according Rushkoff, that it is creating a distorted market.
The startup economy takes all this to the next level, it effectively gamifies investment.
In the start up economy it’s venture capitalists doing the investing, and they are not interested in the long term profitability of your company, they’re looking for a maximum return “on exit”, which is either your company being acquired by a larger company or an IPO. Here’s a simple breakdown of how the funding works and the share of return at the IPO stage. Venture Capitalists invest significant amounts in multiple startups and expect some to fail. Conversely the ones that succeed need to do very, very well.
The drive for high valuations of startups is less about the net present value of the company, and more about the expectations of the venture capitalists. The VCs expect a return on their investment not of percentage points, like a traditional investor, but in multiples.
History of Money
Rushkoff points out that it wasn’t always this way. In simpler times we bartered our goods directly, and then as trading grew in the bazaar towns developed a form of script allowing more exchanges. Quality was ensured by a set of guilds who could control a trade. As the bazaar emerged Europe enjoyed rapid economic expansion. However, he suggests, the nobility feared losing their system of value creation, as feudalism broke down, and instituted measures to limit or eliminate local currencies.
The discussion of the changes in how money functioned in the past points to ways that it could function in the future.
Money has two functions, measuring accumulated assets and transactional, the system we have now works far better for the former function and not that well for the second. Solutions revolve around changing the currency system in various ways.
- Local currency; eg the Massachusetts Berkshares
- Free money; eg; the Worgl currency
- Cooperative currencies; eg; Fureai Kippu
- Local bank; reforming banking to enable local investment
- Crypto currency; eg Bitcoin, which frees up money for transactions.
Rushkoff also points to some different models of business building, where businesses are established specifically not to grow – or at least not to grow beyond their chartered purpose. He asks that new entrepreneurs think of more in the stakeholder model that delivers long term sustainable growth.
You can see a discussion of the book at the Commonwealth Club;
The book explains all the history and the theory very clearly, I think it’s a must read for digital professionals, economists and those with an interest in sustainability or social justice. There are plenty of examples throughout the book – most real and a few hypothetical. The book answered a lot of my “how does that work?” economic questions, but also made me curious at how do we solve this for ourselves and for future generations.
I look at the overwhelming wall of opposition, the “vested interests” and the conflicted interests – after all even as I see the sense of this revolution I am relying on the growth of investments to pay for my future, and the solutions offered seem too small and too vulnerable. For real change it will take government regulation to change, in the meantime I’ll look for alternative models that I can employ today.