Edward Tenner’s *The Efficiency Paradox*, or are big tech and finance actually the same?

The author is Edward Tenner and the subtitle is What Big Data Can’t Do.  Overall, I prefer to read Tenner on engineering more narrowly construed, but still I found some novel and interesting ideas in this book, as you might expect.

Most notably, I was struck by his claim that the rise of “Big Tech” and the rise of finance are more or less the same thing.  Many of the tech innovations are in fact transactional innovations, and both the “financialization” revolution and much of social network tech promulgate the idea of “life as a portfolio,” albeit portfolios of different kinds.  Both have an ideal of “friction-free commerce,” or social interactions, as the case may be, and of course in both cases this is organized by code.

Furthermore, if you make buying and finding things much easier, finance as a percentage of gdp likely will go up.  Do not forget that Jeff Bezos was first a young star at Shaw, a hedge fund.  Is it any accident that finance and tech are often, these days, competing for the same pool of talented young quant workers?

Here is one good bit from Tenner:

We have all heard of Jeff Bezos, founder of Amazon.com.  Only technical specialists and historians have heard of Jacobus Verhoeff.  Yet when Bezos planned to transform online retailing, bookselling was a natural beginning because, thanks to Verhoeff’s algorithm, more books had standardized product numbers than any other category of merchandise.

You can buy the book here.

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Tech companies seem to be more like toy companies in my opinion. Who has the best new toy?

That makes it pretty clear that you don't understand said tech companies: The money is not in things that one could compare to toys. While Apple has quite a bit of hardware-based revenue, a large percentage of tech companies make their money off of services, not manufactured items.

What makes a large majority of tech companies special is that a very small percentage of their expenses come from keeping their current products working: The equivalent of manufacturing for anyone not selling hardware. Instead, the efforts are spent building more capital: Capital that new entrants will have trouble replicating quickly. While every line of code written is often considered by engineers to be debt, something that could go wrong and have to be fixed later, the fact of the matter is that so much of it is a necessary evil, and the value it produces is more than a barrier of entry than patents. Take something like Twitter: The poof of concept for it seems like a weekend of work, at best. But what is necessary to monetize it and scale it so that it can handle superbowls, elections, Kanye West and Trump tweets is hundreds of man years worth of effort. Without them, twitter couldn't afford to be popular, and thus make any money, and neither could a competitor. In fact, Twitter engineers will talk about all the time they spent doing, from the consumer's perspective, absolutely nothing, other than making sure the site didn't go down to high traffic, and making targeted advertisements work. Similar stories can be said of pretty much every tech company out there, including most you'd never have heard of: Go look at how many public tech companies with high market cap you actually recognize, and see where they make their money: You'd be surprised. And then there's those that just remain private because they have great financials and have no need for more funding: As long as a company keeps growing fast, venture capitalists are quite patient when it comes to cashing out.

A whole lot of the money in tech is, as the author describes, a lot like finance, as the value it provides comes from lowering transaction costs, even in firms: From companies that make it easier to do ecommerce (Amazon's marketplace, Shopify, Paypal, EBay, Stripe), to those that make it easier to pay shared bills, rent your apartment, hail a taxi, meet singles, invest, estimate the next corn harvest, and a million other things: All of them trying to speed up commerce, harm old school middlemen, and becoming newer middlemen that take smaller slices of far larger pies.

I for one I am very interested to see what happens in markets where incumbents make so much investment that setting up a competitor becomes intractable: Right now companies are just milking said markets a bit more than they need to, and then becoming private investment funds, as they think they are better off buying off smaller, completely non synergistic firms instead of sending money to shareholders directly: Will America build their own digital version of Japan's old zaibatsus? Will those companies just go to sleep at the wheel? It's going to be fun to watch either way.

"A whole lot of the money in tech is, as the author describes, a lot like finance, as the value it provides comes from lowering transaction costs, even in firms: From companies that make it easier to do ecommerce (Amazon's marketplace, Shopify, Paypal, EBay, Stripe), to those that make it easier to pay shared bills, rent your apartment, hail a taxi, meet singles, invest, estimate the next corn harvest, and a million other things: All of them trying to speed up commerce, harm old school middlemen, and becoming newer middlemen that take smaller slices of far larger pies."

In other words, tech cuts GDP. The labor costs of doing x is cut, so consumer spending buying x is reduced. And the quantity of x produced will be limited by consumer spending on x. (X is the sum of all goods and services where labor costs, "friction", have been cut.

That is a zero sum tanstaafl economic analysis.

Note, investment is labor costs in any real economic model. Using profits to cut productive capital assets is rent seeking. Ie, merging two competitors cuts labor costs in investment in competing capital assets, whether factories, or marketing and sales infrastructure. Unless government subsidizes consumption, cutting labor costs will cut consumer spending and GDP.

Since Reagan turned cost cutting into public policy, government subsidizing consumption has gained favor among conservatives. Ie, EITC is government subsidy for consumer spending to try to offset the GDP cutting effects of cost cutting. EITC is not paid to the top 20% to reward hard work because they would never spend the government debt given to them. Its given to the people who spend more than they earn, and then default, on an ongoing basis.

This is in contrast to technology that increases costs by paying so many workers to produce the technology incomes rise to afford paying higher costs. Cell phones cost more than visiting people to talk to them, using one of the millions of landline phones, including pay phones, or even sending letters and post cards.

Rent seekers do not want investment, but they want more consumer spending for less labor, including labor in capital assets, aka investment.

Building factories is contrary to the interests of rent seekers. Thus it's remarkable that Bezos and Musk have managed to explode labor costs building capital assets which make their enterprises money losers for decades. China has managed to create many more Bezos and Musk clones since Reagan sold America on free lunch economics with workers better off from spending less (and earning far far far less).

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True.

These toys are like government and fire. They can be very dangerous.

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"While Apple has quite a bit of hardware-based revenue, a large percentage of tech companies make their money off of services, not manufactured items."

Like videogames.

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It's true that the large hedge funds are replacing analysts with quants, as investing is becoming less about fundamentals and more about squeezing a profit from mathematically predictable movements (up or down) in markets. Of course, the lesson of 2007-08 is that risk can have fat tails, a lesson all but forgotten by 2018. What's the tail risk for Facebook? Tenner's analogy is accurate, but only in the sense that finance and tech have come to rely on big data as the core of their business model. What that means for users of tech (e.g., Facebook) is invasion of privacy (for which, despite all the recent brouhaha, users place a very low value). What that means for the financial system is the lesson finance will never learn and more crises ahead to be suffered by the rest of us.

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For someone as 'famous' as Verhoeff, why isn't his Wikipedia page lengthier? I have not read the Tenner book but a cursory search shows that the ISBN system for books predates the Verhoeff algorithm. Is this just another 'chicken vs. egg' problem? Did Bezos really think that because of Verhoeff, books were the way to begin with Amazon.

I do with Professor Cowen would have given a little more thought to this post as correct product identification that can be easily automated is crucial to our economy.

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All due respect, this has been obvious for a long time. Add media companies. They are highly scalable information machines with network effects.. How could anyone have missed this point?

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I wish the review revealed the book's main ideas.

I know a big data consultancy that has created cloud-based data lakes for clients and performed analytics on them with a real track record of increasing sales, improving operational efficiency, and reducing customer churn.

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The other obvious reason for using books to launch Amazon was that the industry standard for payment was net 90, but credit cards paid the consumer side in a few days. Another financial angle.

Also easy to ship, relatively easy to stock a selection that exceeded even a pretty good bookstore, well understood (by the buyer) one-size-fits-all product which minimized returns. There were already paper catalogs for books (usually remainder type stuff), so all the concepts were already familiar to people who bought books, the implementation was just better.

What's really amazing about Amazon is the evolution from bookstore to what they are today.

Amazon launched in Seattle because the country's largest book warehouse was located in Washington State.

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Amazon's look inside was interesting (efficient?) and Tyler features in the introduction.

A love of efficiency and then, what is efficiency, is something I have thought a lot about. I agree that reducing waste is first principle, but then toward what goal?

It has to be toward happiness, and the more enlightened the better.

A Prius might get you some place more efficiently than a Camaro, but maybe sitting and meditating is best of all.

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I'm surprised that Tyler is surprised.

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If big data and finance are ultimately the same, doesn't this portend good things for distributed ledger technologies in general, and cryptocurrency more specifically?

Here is a related tweet.

Casinos have every reason to fear smart contracts, as it removes rent seeking middlemen (such as casinos) from gambling.

Also, this is 2018. Who uses "Not" anymore?

Low effort shitpost, -1.

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