Sociability > Profitability
When you think of free market economics, undeniably the most championed principle is deregulation. By removing the obstacles that prevent us from economic exchanges, we become wealthier. Letting individuals be in total control of their financial decisions is the path to prosperity, as the thinking goes. Getting the state out of the way increases the number of transactions that will take place.
Inspired particularly by a book called The Rainforest by Victor Hwang and Greg Horowitt, I want to argue that traditional “free” markets are great, but that they’re not the pinnacle of value-creation.
Think about what opportunities in your life usually look like. I’ll hazard a guess based on a little experience: someone you didn’t originally have any reason to believe would greatly influence your life, did.
Sound about right?
I’m sure some of those opportunities were made possible by your loving parents. But on the whole, how often does it happen that your dad gets you a job? Unless your dad is VP of VPing at Goldman Sachs, it might happen a few times, but the trajectory of your life usually isn’t determined by your parents.
I’m a big fan of theoretical examples. Let’s explore one, shall we? Imagine Person A has a really hairy legal problem. They need someone with the most knowledge and expertise in their particular area of business, and they need them yesterday.
Person A connects with Person C, who turns out to be the perfect match for the job. Person C is experienced, nearby, and he and Person A can expect to work together reasonably well.
Question: Who gives a shit if Person C is someone Person A personally knows, as long as they can trust each other?
Let’s say Person A calls Person B, a friend whom Person A regards as the best lawyer that he knows. Unfortunately, Person B is involved in Widget law, and Person A needs someone familiar with Foobar law. But, because of the circles Person B is in as a result of being an esteemed Widget lawyer, he knows plenty of Foobar lawyers, and recommends Person C.
Didn’t Person B just achieve just as much as if he had actually represented Person A? In actuality, if Person B hadn’t existed, the connection between A and C wouldn’t have existed. In a universe of random chance, Person A and C might have met, but there’s no reason to believe they necessarily would have. Person C might also have been less inclined to work on such a difficult matter with Person A without a strong introduction.
Without a lot of Person B’s, it’s unlikely that we would ever get to all the Person C’s who could potentially make us sucessful. Google is a Person B. Facebook is a Person B. The Internet is a Person B.
This. This is the efficiency of markets. Not the movement of money from one account to another, but the smooth connection of problem solver to problem.
In a similar vein, I believe that the most valuable thing college affords you is the time and motivation to socialize without feeling bad about it, while you learn to be a productive human being. The mixture varies for everyone, but at the end of the day, you could Google most of what your professors talk about. The reason Stanford charges so much isn’t that they have a monopoly on good information. What they have a monopoly on is their network.
Thinking about my time in high school, I can’t remember a lot of people who were excited to learn. I remember a lot of kids who were at this stupid thing because they had to be. It should be no surprise that in this environment, being the best at school isn’t what’s idealized. What’s idealized is being popular, and having lots of friends.
One great thing about college is that the number of people who feel like compulsion is their only reason for being present greatly diminishes. Sure, there’s some existential “must” at play — you’re here to get a job, a career, a life partner, ultimate meaning for your existence, whatever. But mostly you’re just there doing whatever you want for the first time in your life, meeting more people than you’ve ever been able to, or had a reason to.
As soon as you remove compulsion from peoples’ lives, they naturally trend toward the things they inherently care about. This is a foundational principle of capitalism: people shouldn’t be compelled by the state to be a bean farmer if they’d make a better painter. To do great things, people have to want to do them. When a job is hard or undesirable, you make up for it with a big paycheck or lots of vacation time, so the motivation is still there. When a venture capitalist wants to invest in a startup, they have to be mindful not to take too much equity, so that the entrepreneur is still motivated to make the business succeed.
But there’s an oft-missed requirement to this. Before money ever becomes a question, the first step is opportunity. And opportunity looks a lot like another human being, or lots of other human beings.
Let’s say Sam Pull was born and raised in rural Mississippi. His father was a professor of philosophy and his mother was in the theater. Sam wants to grow up to be an actor.
Capitalism says: Go for it!
There’s no bureaucrat who’s going to come around and tell Sam, “sorry, we’d love to let you be an actor, but what we really need are more cubicle workers.” There’s no secret police force who’s going to come reeducate him for acting in a bad indie film.
That’s what classical capitalism and democracy guarantees: that Sam is allowed to be an actor.
But if you think about it, what is the greater determinant of whether Sam will be a successful actor? At some basic level, he has to have the right to make his own decisions about his career, but that doesn’t guarantee that he’ll be the next George Clooney. What will determine Sam’s success, more than anything, is his ability to 1) meet the right people to advance his career and 2) put on a performance that people appreciate.
Some might be confused by my ordering there. Aren’t his abilities the most important thing? Ask yourself this: if Sam was the best actor to ever live, what would it take for him to actually fulfill his destiny, living in Mississippi? What steps would Sam take to gain acclaim and respect?
He’d either wow people in rural Mississippi so much that the talent scouts came to him, or he’d move to Hollywood like every other aspiring actor. Which do you think happens more often?
Remove “Sam’s career” and insert “just about anything.” Without the opportunity, any amount of ability is worthless. Sam might play the best Hamlet in his hometown, or even the world, but if the only thing anyone around him wants to watch is Duck Dynasty, he’s S.O.L.
I might have all the dollar bills in the world, but if all the parking meters take quarters, I need someone who can get me some damn quarters! Someone who has a few quarters might not think they’re particularly valuable, but if I’m in sufficient need of them, I would be willing to pay exorbitantly to get them.
This. This is opportunity. Money isn’t opportunity. If there is money, but no will to execute on a particular thing, then that thing is doomed. If there is will, if there is a community or a network or a movement, then as it grows, the money will come.
Not every actor who goes to Los Angeles becomes rich and famous. But almost every (American) actor who gets rich and famous goes to Los Angeles first.
When you think about the highest times in your life, whether meeting your significant other, nailing an interview or performance, or some other personal achievement, what was the best part about them? Undoubtedly it made you feel proud of yourself and your achievements. But at least in my case, it would be misguided to say that this ego boost was all that mattered.
Where did the pride come from? If no one acknowledges your achievement, it’s like a tree falling in the forest with no one around to hear it, or the sound of one hand clapping. Like it or not, most people crave social approval.
As a programmer, I’ve had lots of private victories over time. Late night “aha!” moments and clever bug fixes. But I can’t remember any of them, looking back now. What I really remember is when people are happy with what I’ve produced, and when they’re not.
What will people remember Steve Jobs for in 40 years? Does anyone actually know or care that he contributed variable-width typography to computing? I doubt it. Judging by how much celebrity in popular culture that such influential figures as Donald Knuth and Linus Torvalds have, I’ll go ahead and guess that his technical achievements will be close to the bottom of the list.
What did Steve Jobs really do? He brought computing to people who were otherwise distrusting of it.
No one wanted a mainframe in their households. No one wanted a computer in their pockets. He made computers something that the average person wanted.
To his credit, this is a monumental achievement. But when people talk about Jobs, they sometimes wax poetic about how brilliant he was to come up with the iPhone or any of the other products he touched. He made great products. Will you use those products in 40 years?
Honestly, I really hope not.
Think about how the world will remember Bill Gates 40 years from now. Will they think “Gee, what a great guy. He helped pioneer the practice of charging for software. Windows NT was the best.” Or will they see the billions he invested in his his philanthropic endeavors, like working to eradicate Malaria?
Say what you will about Gates, eventually (if not already) Jobs will be seen as the brilliant, miserly asshole, and Gates will be the saint of software, his antithesis. It’s not fair, but unfortunately Jobs doesn’t have the opportunity to change that now.
The lesson, as I see it, is this: your ability to connect with people is the greatest contributor to your success. More important than financial capital is social capital.
Many in the start-up community proselytize about “getting to know the user.” Go out and get to know the person you intend to sell to, and actually solve problems for them. Just because you want to solve a problem, doesn’t mean anyone wants to pay you to do it. In the earliest stages of a company, your potential customer should be the only thing you think about. Is it a surprise that sales are the most important indicator of a strong early-stage startup?
Economists might talk about “market conditions” when talking about why a country’s economy isn’t prospering. Let’s say liquidity or equity or interest rates or whatever are “bad” because confidence is “low.” Often, economic analysis is presented in a bland, numeric context, but the most important determinants of market conditions are human behavior. People are dumping stocks and buying gold. People are being turned down for loans. People made unwise investing decisions.
“It’s not what you know, but who you know.”
These are all saying the same thing in a different way: you must have social capital to get financial capital.
You might want to argue with me on this point. It certainly didn’t used to be the case. Finding a huge reserve of oil under your land was a golden ticket. What I’m arguing is that that will happen less and less often in the future, and that more often than not, your actual financial value will hinge upon your social abilities more than anything else.
In the age of the Internet, it’s not sufficient to be the number 1 anything. To get the number 1 clients, you have to get in front of them, and hopefully before number 2, 3, and 4.
Saying a market is “efficient” is the same as saying that every person who wants something that exists, gets it in the most cost-effective method possible. It underpins the logic of removing trade restrictions: if Widgets are cheaper when made in Malaysia, then make sure that you can buy as many Widgets from Malaysia as you want and can afford.
But what if what you want isn’t a product? This view of handing blocks of matter to each other to get pieces of paper is nice, but simplistic. We’ve moved from the “industrial economy” to the “service economy,” and now on to the “information economy.” We’re going from producing Widgets to producing thoughts and ideas. And thoughts and ideas don’t exist without people. The barriers aren’t geographic, but theoretical and personal.
When you produce a tractor, you can say, “Aha! I have built it! A supreme victory over Mother Nature. I will sell this for quite a profit.” Then, whether you sell the tractor or not, you have made a thing, and as such, you expect to get some things back (money) in payment, or at least some things to eat (produced by working with the tractor). If no one buys the tractor, you can sell it for scrap metal. The hardest part about giving it to someone is transporting it.
As much as every wantrepreneur would love you to believe it, an idea is fucking useless without people behind it. There’s no selling a worthless idea, and nothing driving a good idea except the person or people behind it.
We’ve reached a level of excess in Western society where we can’t create material things for the wealthiest people to spend their money on. It would be ridiculous. Think of what Larry Ellison could realistically buy with his $41 billion. An Eiffel tower made of gold? Why?
I’m glad I dug up that Forbes link on Ellison, because on the Forbes Welcome page was the perfect quote for this article:
A man’s true wealth is the good he does in the world. — Mohammad
“Good” could be proceeded by “for other people” here, but I believe it is implied.
The network effect (alternatively Metcalfe’s Law, named after Dr. Bob Metcalfe, a man I highly respect) says that the value of a network increases exponentially with the number of nodes on it. This logic comes from the following principle: in a fully connected graph of N things, the number of connections any one node is capable of making is N-1, making the total number of possible connections N * (N-1).
In English: In a room with 500 people in it (including me) I can connect with 499 people, and those 499 people can potentially connect with me and 498 other people, etc.
This law is seen all over the place, from Facebook to telephones. Dr. Metcalfe realized it when trying to sell people on Ethernet networks: if there is no one else on the network with you, what’s the point? If there are more people in the phone book, there’s a greater chance that someone you want to talk to is in it. Otherwise you’re shouting into the wind.
I’d argue that the real value of a network in practice is only in the number of connections that actually do form. It’s all well and good if Facebook has a billion people on it. It makes it slightly easier to contact a person knowing that if I’m looking for any given person, they can be reasonably assumed to have a Facebook.
But it’s like the dark night sky paradox: There are more stars in the universe than we can even conceive of, and assuming there’s nothing theoretically preventing it, we should see a night sky filled with nothing but stars. Alas, we only see a relatively small number. Likewise, despite millions of people using the same site as us every day, we still form the same cliques that we have in real life, and rarely get contacted out of the blue by Nigerian princes offering us wealth beyond our wildest drams.
There are more people a click away than you’ll ever meet in your whole life. But you won’t. You won’t because you don’t know how to interface with the daily goings-on of a person who lives half way around the world. You struggle to find common ground to work from.
It’s for this reason that I suggest the following: the most important factor for efficient markets is sociability. The ability to pull together vastly different talents to work on something greater than any of them individually is what built America. From the outset, we were the outcasts, the dreamers, the adventurers. With no established rules, we had to figure out our own ways of doing things. And with a melting pot of different cultures and beliefs, it wasn’t always easy.
But if we hadn’t overcome this uneasiness of existing together with other crazy people like us, we would never have been a great nation.
The pioneering spirit was vital, but America wasn’t filled with people who set out on their jet skis to seek their fortune. Everyone had their own ideas for what they wanted out of America, but they were forced to work with other people to get there and survive there.
It was the same with the Western migration: going off into the wilderness alone was a surefire way to die alone. Covered wagon trains weren’t the norm because they were cool-looking.
The rugged individual, exemplified by the writings of Ayn Rand, is a great theoretical concept that is livable for exactly as long as there are no problems that need solving that you can’t solve yourself.
As the Beatles song goes, “money can’t buy [you] love.”