We live in a time of radical monetary policy and dramatic technological change. Cheap money finances innovation, and innovation helps hide the full effects of cheap money. In the process, everything we know about work, investment, and consumption is being redefined.
To understand what this means in practice, let’s start with a familiar example.
Taken for a Ride
Uber has more than 100 million customers and is synonymous with “getting from A to B.” But this does not mean it has a good business. On average, every time someone takes an Uber, the company loses money. Over the past decade, investors kept Uber from going bankrupt by pouring more money into the company. In essence, these investors are subsidizing Uber’s customers.
Uber and its investors are part of a bigger trend which Derek Thompson first described in 2019. Companies such as Casper, Peloton, Uber, WeWork, DoorDash, Lyft, and Postmates lowered their prices to a loss-leading level in order to maximize their growth. They got more customers but lost money on every sale. By doing so, these companies and their investors helped fund the lifestyle of their customers — mostly young people living in cities. Thompson calls this the “Millennial Lifestyle Sponsorship.”
This strategy offers important hints about the future of other businesses and professions. But before we get to these, we need to understand how technology and monetary policy enable the Millennial Lifestyle Sponsorship and why this strategy is more reasonable than it sounds.
“Money never sleeps,” Gordon Gecko explains to a young banker in the original Wall Street movie. Gecko is referring to the fact that markets are always open somewhere. But his deeper message is that money cannot rest: it needs to generate more money. Sleeping means missing out on investment opportunities and losing value to inflation.
In the past, “not sleeping” could simply mean putting your money in a savings account, treasury bills, or quality corporate bonds. The yield generated by these investments was higher than the official rate of inflation. Most people also invested in stocks of profitable, well-known companies. These stocks were more volatile than bonds, but they were still tame. The average person did not have to be as aggressive as Gordon Gecko to protect their savings.
Today, things are different. Over the last few decades, traditional investors developed a growing appetite for alternative asset classes such as venture capital, private equity, hedge funds, and real estate projects. These alternatives promised higher returns and low or negative correlation with traditional stocks and bonds.
This shift was driven by pension funds and other entities that manage the retirement savings of regular people (and whole countries). These institutions had promises to keep to retirees who expected a monthly pension. But the traditional retirement model no longer made sense. People were living longer and needed more money to live in retirement. And low-interest rates meant traditional investments generated less income than planned.
Since pension systems could not get rid of their customers, they had to make up the shortfall by investing in asset classes that could generate higher returns. This meant pouring money into venture capital, among other things. What started as a trickle gradually became a flood. Last year, institutional investors allocated 16% percent of their portfolios into alternative investments, pushing U.S. venture capital fundraising to an all-time high of $70 billion.
With so much money to invest, venture capital funds had a new challenge on their hands. It was no longer enough to find good companies to invest in. They had to find companies that could absorb massive amounts of money. To do so, many VCs shifted their focus away from traditional software and internet companies and developed an appetite for businesses that operated in the offline world, dealt with things like buildings and cars, and operated in very competitive and highly regulated markets.
WeWork was the prime example of this process. It is easy to think of Adam Neumann as a conman who took billions from naive tech investors. In reality, these investors had to invest in something, and Neumann was one of the few people who were willing to take their money and try to do something productive with it.
Beyond the need to allocate a lot of money in a short amount of time, gambling on companies such as Uber and WeWork also makes financial sense.
Winner Takes Most
The internet, software, and globalization make it possible to build businesses that are bigger than ever. And in an interconnected world, an early advantage leads to even bigger advantages later on. As venture investor Fred Wilson pointed out:
“The history of the Internet and mobile is that in many categories the winner takes most of the market..... The reasons are many, but at the core are network effects and the fact that the more users and data a service has, the more value it can create for its customers and users.”
“Network effects” refers to a business in which every additional customer improves the experience of all other customers. Uber is a classic example: The more users it has, the easier it is for it to attract drivers, and the more drivers it has, the easier it is for users to catch a ride quickly, anywhere.
In addition to network effects, technology markets have a few other dynamics that tend to reinforce winners. The algorithms on Facebook or Amazon emphasize the posts and products that are already popular. Software and content businesses require a significant upfront investment, but once they succeed, they become more profitable with every additional sale — well beyond the “economies of scale” of traditional industries.
In such a world, making one good bet can make up for dozens of bad ones. And doubling down on bets that show a hint of potential tips the odds in your favor. Venture capital is not a casino. The probability of winning a game of dice is the same, whether you bet one dollar or a billion. But in venture capital, the amount of money you bet changes the odds. If you keep pouring money into Uber, you might ultimately corner a significant part of a giant market (or run out of money, which is why funds that play this game need to become bigger than ever).
This dynamic does not apply only to companies. It also affects individual people.
Money for Nothing
Innovative companies depend on innovative individuals. One successful hire can make up for dozens of bad ones. Human productivity is no longer a matter of measurable input. The most valuable ideas often come in a flash. Spending time on a problem still matters. But the relationship between time and output is no longer linear or predictable. And defining (or inventing) the problem is a big part of the work.
As with companies, the success of creative individuals is often amplified by network effects, algorithms, and zero marginal costs. And the inventions of a relatively small number of people can create enough goods, services, and wealth to take care of everyone else.
But while failed companies cease to exist, people stick around even when they’re no longer productive. And they get angry if you make them feel useless. To survive, capitalism needs to generate new ways for people to be productive and feel needed; and it needs to enable more people to enjoy the fruits of network effects.
There are early signs that capitalism is already doing exactly that.
NewNew is a popular app that lets people vote on what other people eat and wear and who they spend time with. Voting costs money, and the more you put in, the more power you have over the lives of people you don’t know. NewNew enables thousands of people to be productive by doing mundane things, and it allows millions of people to feel useful by making inconsequential decisions.
The world of crypto offers additional examples. On Axie Infinity, people earn money by playing a computer game that generates tokens that can be converted into actual cash. The game is increasingly popular because players get paid to play; players get paid because investors are buying their tokens; investors buy the tokens because they think their value will increase due to the game’s popularity.
On Bitclout, people can buy "shares" in individual creators and entrepreneurs. When these creators and entrepreneurs becomes more succesful, the value of the shares go up and their "investors" can cash out. Once you invest in someone, you have a clear incentive to help them succeed.
Uniswap, a financial exchange, gave its early users tokens that enabled them to vote on the project’s evolution and benefit from its success. Since users are incentivized to make the project successful, they help market it to new users and sometimes contribute code and ideas to help make Uniswap better.
Many Uniswap users also pay to acquire more tokens in order to increase their influence, show their commitment to the project, or simply as a form of investment. In a sense, these users buy shares in order to be part of something. They pay for the privilege of contributing to an open-source project. I do it too! As a Uniswap user and token-holder, I contribute by writing about it and getting more people interested.
These examples point towards the next phase of capitalism. Instead of only subsidizing us, investors will pay us directly to consume. Instead of protecting our money by keeping it in cash and bonds, we’ll gamble it on bets that, at least, promise to generate a return. And instead of getting paid for productive work, we’ll pay to contribute to projects that give our lives meaning.
Have a great weekend.
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- Special thanks to Zach, Sam, Packy, Ben, Elle, Tim, and Kyle, and for their feedback and putting up with my endless deliberations on Reasonably Optimistic. And an extra thank you to Elle for explaining to me how Axie Infinity works.
- Richard Florida wrote a great piece on urban centers in a post-covid world, quoting my book.
- Eli Dourado wrote a thought-provoking piece about the technologies that will reshape our lives over the next decade. This podcast with Eli is also excellent — probably the most informative 50 minutes you can spend this week.
- Several readers asked me how I create the cover art for my newsletter. I recorded a video of the process.