Category: Web/Tech
My Conversation with the excellent Sebastian Mallaby
Venture capital most of all, hedge funds as well with the Fed tossed in. Here is the audio, video, and transcript. Here is one excerpt from the Conversation:
COWEN: What do you think of the view that in recent years, there’s been a huge consumer retail tech boom? Basically FAANG stocks, right? And when that is over — it might be over now — the excess returns to VC will go away. If you look at venture capital for biotech, which has been hammered lately, as we’re speaking here, late January 2022 — and maybe venture capital is a limited model for one period of time, and otherwise, it just does okay. True or false?
MALLABY: False. I say that because, in a cyclical sense, you might be right, but I think there’s a deep structural shift, which is really important. That is that intangible capital has become more and more important in our economy. The nature of intangible capital is that it’s hard to measure it in financial reports.
To understand whether a particular software investment, for example, is worth a huge amount or, really, nothing, you need to understand what that software development within the company is doing. You need to be hands-on. You need to have the technical skills to evaluate that software project. The more that intangible capital rises as a share of new GDP creation, the more this venture-style hands-on expert investing is going to be valuable.
COWEN: Your explanation — if I understand it — to me seems to suggest that venture capital for biotech won’t work very well. You’re portraying it as something that’s very, very hard to do, a very limited skill, so you’re going to be wrong a lot of times. That means the times you’re right, the product has to be scalable very rapidly.
But in biotech, there are regulators. You often need a sales force. It’s not scalable in the way that, say, LinkedIn or Netflix are scalable. Doesn’t that mean VC will just stay limited to a very small area of those things that are super rapidly scalable? Or if you think it’s pretty easy to pick winners, then you have to think the rents get exhausted.
MALLABY: [laughs] Yeah, this is a version of, actually, a wider debate which goes beyond biotech, which is the claim that venture capital is really only good for software projects, that software can be scaled very, very fast; there are network effects once you get product-market fit, and you don’t need much capital.
And this:
COWEN: I have some questions about other topics. You have some highly regarded books about hedge funds and about the Fed. In the late ’90s, the bailout of Long-Term Capital Management — was that a kind of original sin that just set us on a path of bailing more things out at higher and higher price tags? Should we have just let LTCM fall?
MALLABY: No, I think the original sin was Continental Illinois, much earlier in 1986, I believe, when the Fed bailed out this bank which it thought was too big to fail. I’m not sure it really was too big to fail, but it was a moment when the Latin American debt crisis was still casting a shadow, when the banking system was perceived to be fragile, and the Fed just wasn’t willing to let it go. That was the original sin because taxpayer money was used to bail it out.
There is much more at the link, and I am very happy to recommend Sebastian’s new and very good book The Power Law: Venture Capital and the Making of the New Future.
Netflix economics and the future of Netflix
Ted Gioia writes:
Netflix’s market share has been declining steadily, and has now fallen below 50%. One estimate claims that the company’s share of consumers fell more than 30% in a single year. Netflix’s recent quarterly report was a disaster, spurring a share sell-off. You could easily conclude that “Netflix’s long awaited funeral is finally here”—as Bloomberg hinted in its blunt assessment of the results.
Of course the company is still worth quite a bit, so my own view is no more or no less optimistic than what the market indicates. Still, it is worth asking what the equilibrium here looks like. There is also AppleTV, Disney, Showtime, HBOMax, Hulu, AmazonPrime, and more. I don’t think it quite works to argue that we all end up subscribing to all of them, so where are matters headed? I see a few options:
1. Netflix and its competitors keep on producing new shows until all the rents are exhausted and those companies simply earn the going rate of return on capital, with possible ongoing rents on longstanding properties of real value (e.g., older Disney content). These scenarios could involve either additional entry, or more (and better?) shows from the incumbent producers.
2. Due to economies of scale, one or two of those companies will produce the best shows and buy up the best content. We end up with a monopoly or duopoly in the TV streaming market, noting there still would be vigorous competition from other media sources.
3. The companies are allowed to collude in some manner. One option is they form a consortium where you get “all access” for a common fee, divvied out in proper proportion. Would the antitrust authorities allow this? Or might the mere potential for antitrust intervention makes this a collusive solution but one without a strict monopolizing, profit-maximizing price?
4. The companies are allowed to collude in a more partial and less obvious manner. Rather than a complete consortium, some of the smaller companies will evolve into “feeder” services for one or two of the larger companies. Those smaller companies will rely increasingly more on the feeder contracts and increasingly less on subscription revenue. This perhaps resembles the duopoly solution analytically, though a head count would show more than two firms in the market.
It seems to me that only the first scenario is very bad for Netflix. That said, it seems that along all of these paths short-run rent exhaustion is going on, and that short-run rent exhaustion is costly for Netflix. They keep on having to pump out “stuff” to keep viewer attention. It doesn’t matter that new shows are cheap, because as long as the market profits are there the “bar” for retaining customers will continue to grow. Very few of their shows are geared to produce long-term customer loyalty toward that show – in contrast, people are still talking about Columbo!
Putting the law aside, which economic factors determine which solution will hold? My intuition is that there are marketing economies of scale, but production diseconomies of scale, as the media companies grow too large and sclerotic. So maybe that militates in favor of scenario #4? That to me also suggests an “at least OK” future for Netflix. The company would continue its investments and marketing and an easy to use website, while increasingly going elsewhere for superior content.
What is the central political question of our day?
No, it is not about The Woke. From my latest Bloomberg column, here is the core argument:
How to respond to climate change is often postulated as the central question of our time, and while that’s undeniably important, I have another nomination: How will we stop our new and often splendid technologies from being weaponized against us?
I use the term weaponization quite literally — drone attacks, cyberattacks, hostile uses of artificial intelligence, and attacks from space, bioweapons and more. It’s good that the world is emerging from a period of technological stagnation, but therein lies a danger: It is a general principle of world history that new technologies, even the most beneficial ones, are eventually used either as weapons themselves or as instruments of warfare. That was true of the horse, the railroad, the airplane and, of course, nuclear power. It likely will be true for these new developments, too…
Most current ideologies are unprepared for this coming new world. These problems do not have obvious solutions, nor do they offer any obvious way to confer political advantage. The U.S. hasn’t even made much progress on preparing for the next pandemic, and that is with more than 2,500 Americans dying a day from Covid-19.
Here is another point:
There are ideologies that address parts of the weaponization problem. Effective Altruist circles, especially those that focus on the dangers of artificial general intelligence (AGI), are afraid that super-smart AI will develop a mind of its own and impose its will on us, or otherwise engage in evil activities.
That may be a valid concern, but my fears are more general. If AGI is so powerful, then it stands to reason that intermediate products could, in conjunction with human efforts, cause a lot of military conflict. The problem isn’t necessarily Skynet going live. It’s that 40% of Skynet will be plenty dangerous.
The Luddites also have an ideology, namely that the development of new technologies should be stopped altogether. One could debate the benefit-cost ratio of that decision, but suffice to say that China, Russia, and many other rival nations have no such plans, and the U.S. has no real choice other than to try to stay ahead of them.
China is discussed as well, recommended.
The incidence of India’s crypto tax
The crypto tax is the first item listed in a section of the budget memo headed “Revenue Mobilization”. The document [PDF] explains that India wants to tax income from crypto-assets at a 30 per cent flat rate.
By comparison, India currently taxes short-term capital gains made by selling shares at 15 per cent. The budget memo also calls for a one per cent tax on sales of cryptographic assets, payable by parties to the transaction, to widen India’s tax base.
Here is the first article link. As I understand it, the 30% is on net income from crypto, and there is no tax deductions for losses (see this explainer). (Does the tax define gains “year by year,” or “for each bitcoin sold”?)
I am wondering what is the incidence of this tax. Presumably India is a price-taker in the crypto market as a whole, so this initiative should not much affect the global price of crypto, unless you take the policy as a signal about other, future crypto taxes to come around the world.
Under one (unlikely) scenario, all Indians were marginal crypto buyers, and so with a 30% tax they just stop holding crypto. The Coase theorem suggests that others are always willing to bid more, because in many other countries the crypto taxes are lower.
More realistically, many Indians are infra-marginal buyers, with sufficiently high expectations of price appreciation that some of them will stay in the market. The “saner” marginal buyers will drop out, and sell their crypto to non-Indians, and the most optimistic Indian buyers will stay in. Looking forward, crypto in India will be shaped by the giddiest and most bullish asset holders, compared to the status quo. More crypto will be held by fewer, more enthusiastic hands.
The Indian government is also signaling that it will not ban crypto outright. That ought to increase the demand of the “giddy” buyers all the more. If you are going to stay in with the higher tax burden, at least you know that bitcoin and other markets will continue in India.
How does the tax affect the value of the rupee? In the short run, some Indian taxpayers may sell their crypto for rupees, raising the value of the rupee, but probably very slightly. Longer term, the rupee may be worth less because it is a less effective vehicle for investing in crypto, again with the effect here likely being small.
Otherwise, the demand for non-crypto risky assets in India will increase. If those assets can be used for loss offsets, they will be relatively more valuable because crypto cannot be so used.
Insofar as India has a local, “India-only” crypto market, new issues there will have to be lower in price to attract buying interest. That will serve as a tax on those Indians who supply inputs into crypto production.
Indians who have made a great deal from crypto may attempt to give up their Indian citizenship and Indian taxpaying liabilities (how easy is that?).
What else?
A simple theory of culture
The transistor radio/car radio was the internet of its time. Content was free, and there were multiple radio stations, though not nearly as many as we have internet sites.
People tuned into the radio, in part, for ideas, not just tunes. But the ideas that spread best were attached to songs. Drug use spread, in part, because famous musicians sang about using drugs. Anti-Vietnam War themes spread through songs, as did many other social movements. Overall, ideas that could be bundled with songs had a big advantage. And since new songs were largely the province of young people, this in turn favored ideas for young people.
Popular music was highly emotionally charged because so much of it was connected to ideas you really cared about.
Of course, by attaching an idea to a song you often ensured the idea wasn’t going to be really subtle, at least not along the standard intellectual dimensions. But it might be correct nonetheless.
Today you can debate ideas directly on social media, without the intermediation of music. Ideas become less simple and more baroque, while music loses its cultural centrality and becomes more boring.
We also don’t need to tie novels so much to ideas, although in countries such as Spain idea-carrying novels remain a pretty common practice (NYT). A lot of painting and sculpture also seem increasingly disconnected from significant social ideas.
In this new world, celebrities decline in relative influence, because they too are no longer carriers of ideas in the way they used to be. Think “John Wayne!” Arguably “celebrity culture” peaked in the 1980s with Madonna and the like.
When I hear various complaints about the contemporary scene, sometimes I ask myself: “Is this really a complaint about the disintermediation of ideas”?
In this view, the overall modern “portfolio” may be better, but the best individual art works, and in turn the greatest artists, will come from the earlier era.
We need a better tax system for crypto
From N., an MR reader:
I own crypto in 3 different centralized exchanges, two hardware wallets, one software wallet (Metamask), have four cryptos staked in multiple different pools and I also have some cryptos I gained by mining them using my GPUs. I have made 600+ transactions between the exchanges, wallets, and staking pools. I hold 75% of my portfolio and trade the rest. So most of these transactions were for trading one coin for another from which I have profited handsomely in the 2021 bull cycle run.
But I am doing my Crypto taxes right now its an unbelievably complicated nightmare. Prior to 2020 I only held a Coinbase account and I downloaded the tax forms or the transaction list as a .csv file from it and submitted them to my tax advisor. But in 2021 I have gone deeper into crypto and I have purchased hardware wallets, held crypto in soft wallets, DeFi platforms like Aave, staked crypto, mined crypto, and traded crypto between exchanges for lower transaction fees, for coins that are available only in certain centralized and decentralized exchanges, etc etc. Many of these types of crypto transactions are taxed differently and are from different institutions.
So it’s impossible for me to do my crypto taxes easily with just a single tax form from Coinbase. I have to link all my exchanges (and expose all my crypto holdings and trades) to a crypto tax website, I have decided to use Koinly.io which charges $99 to do my taxes. I do not have any other realistic choice.
After I linked all 3 centralized exchanges where I hold crypto, the capital gains estimate Koinly.io gave seemed too large. I realized it was because it was counting the crypto I sent from centralized exchanges like Coinbase to my hardware wallets as a “Sell” so it was counting them as capital gains. I have too many transactions of this nature to manually go through them one by one and mark them as “Transfer” i.e. transfer between my own wallets. So if I want the tax software to do it automatically, I have to expose the public keys of my hardware wallets so Koinly can automatically mark them as transfers. (I haven’t done this step yet because I don’t want to expose my hardware wallet public address to anyone or anywhere and I am researching alternate ways to do this.)
But if there isn’t any other way either a) I have to spend hours going through each transaction manually and marking them as “Transfers” or b) expose the public keys of my hardware wallets to Koinly.io.
Also, there is more manual work to be done for categorizing certain transactions as moved to staking pools, marking transactions from my mining pool to exchanges as income, etc.
I know that fiat currency debit and credit card purchases are absolutely not analogous to crypto but that’s the comparison many crypto maximalists make (“take down the traditional financial and banking system!”).
Imagine if TurboTax needs your complete transaction history from your banking institutions and it goes through all credit and debit card transactions to accurately do your taxes. Would anyone accept that?
Dominant Assurance Contracts and Quadratic Funding
Here is my keynote talk for the ACM Advances in Financial Technologies conference. I discuss Two Novel Mechanisms for Funding and Discovering Public Goods, namely dominant assurance contracts (with experimental support here) and the Buterin, Hitzig, Weyl work on quadratic funding.
Lots of other excellent talks on blockchains, AMMs, decentralized finance and so forth are at the link.
Twitter hack
Just an FYI that my Twitter has been hacked. I am in touch with the company, hope to have it back to normal soon!
Update: Twitter now fixed!
TikTok returns
TikTok stars are dancing their way to the bank. Some are making more than America’s top chief executives.
Charli D’Amelio, who started posting videos of herself dancing on TikTok in 2019, brought in $17.5 million last year, according to Forbes, which recently ranked the highest-earning TikTok stars of 2021. With 133 million followers on TikTok, she makes her money from a clothing line and promoting products in TikTok videos and other ads.
By comparison, median pay for chief executives of S&P 500 companies was $13.4 million in 2020, according to a Wall Street Journal analysis of data from MyLogIQ. CEO compensation figures include stock and option awards, which typically make up most of executive pay, as well as annual salary and bonus, perks and some kinds of retirement-benefit gains. Only some 2021 CEO compensation figures have been released so far.
Here is the full WSJ article, via the excellent Kevin Lewis.
*The Voltage Effect*
From the excellent John List, the subtitle is How to Make Good Ideas Great and Great Ideas Scale.
Noah Smith Substack interviews me
Here is the interview. Here is one excerpt:
N.S.: So how would you generally describe the zeitgeist of the moment, if you had to give a simple summary? What do you think are a couple of most important trends in culture and thought right now? My impression has been that we’re sort of in a replay of the 70s — a period of exhaustion after several years of intense social unrest, where people are looking around for new cultural and economic paradigms to replace the ones we just smashed. But maybe I’ve just been reading too many Rick Perlstein books?
T.C.: I view the 1970s as a materialistic time, sexually highly charged, and America running into some significant real resource constraints, at least initially stemming from high oil prices. Mainstream culture was often fairly crass — just look at disco, or the ascendancy of mainstream network television. The current time I see as quite different. Sexually, we are withdrawing. Society is more feminized. America has far more immigrants. And we are obsessed with the virtual and with make-believe, to a degree the 1970s could not have imagined. Bruno Macaes is one author who is really on the right track here, with his emphasis on how America is building virtual and indeed often “unreal” fantasies.
I think today the variance of weirdness is increasing. Conformists can conform like never before, due say to social media and the Girardian desire to mimic others. But unusual people can connect with other unusual people, and make each other much weirder and more “niche.” For instance, every possible variant of political views seems to be “out there” these days, and perhaps that is not entirely reassuring. A higher variance for weirdness probably encourages creativity. But is it a positive development on net? We are going to find out.
Recommended throughout, and of course do subscribe to Noah’s Substack.
How decentralized really are blockchains?
At this point, there are basically two companies. Almost all dApps use either Infura or Alchemy in order to interact with the blockchain. In fact, even when you connect a wallet like MetaMask to a dApp, and the dApp interacts with the blockchain via your wallet, MetaMask is just making calls to Infura!
These client APIs are not using anything to verify blockchain state or the authenticity of responses. The results aren’t even signed. An app like Autonomous Art says “hey what’s the output of this view function on this smart contract,” Alchemy or Infura responds with a JSON blob that says “this is the output,” and the app renders it.
This was surprising to me. So much work, energy, and time has gone into creating a trustless distributed consensus mechanism, but virtually all clients that wish to access it do so by simply trusting the outputs from these two companies without any further verification. It also doesn’t seem like the best privacy situation. Imagine if every time you interacted with a website in Chrome, your request first went to Google before being routed to the destination and back. That’s the situation with ethereum today. All write traffic is obviously already public on the blockchain, but these companies also have visibility into almost all read requests from almost all users in almost all dApps.
Here is the full essay by Moxie, interesting throughout. And more generally:
One thing that has always felt strange to me about the cryptocurrency world is the lack of attention to the client/server interface. When people talk about blockchains, they talk about distributed trust, leaderless consensus, and all the mechanics of how that works, but often gloss over the reality that clients ultimately can’t participate in those mechanics. All the network diagrams are of servers, the trust model is between servers, everything is about servers. Blockchains are designed to be a network of peers, but not designed such that it’s really possible for your mobile device or your browser to be one of those peers.
Recommended. Via Nabeel.
There is now an Android app for Marginal Revolution
As a Marginal Revolution reader, I wanted an Android App. Then one day I realized, wait a second, I’m a programmer — why not just make one myself? I couldn’t think of a good reason not to, so I did. It went better than expected, and resulted in Fractional. Here are five reflections on the process.
Here is the rest from Lifan Zeng. This app is not from us, but if it is useful to you — great!
Samsung markets in everything
What would Marshall McLuhan say?:
Staring at your non-fungible tokens on a smartphone or laptop screen is fine and all, but why not remind everyone who visits your home of the money you spent on digital art NFTs by showcasing them on your TV screen? Somehow we’re in a world where that’s about to become reality: Samsung says it’s planning extensive support for NFTs beginning with its 2022 TV lineup.
Here is the full story, via the excellent Samir Varma.
Dan Wang’s 2021 letter
Here it is, one of the better written pieces of this (or last) year. It is mostly about China, manufacturing, and economic policy, but here is the part I will quote:
But Hong Kong was also the most bureaucratic city I’ve ever lived in. Its business landscape has remained static for decades: the preserve of property developers that has created no noteworthy companies in the last three decades. That is a heritage of British colonial rule, in which administrators controlled economic elites by allocating land—the city’s most scarce resource—to the more docile. Hong Kong bureaucrats enforce the pettiest rules, I felt, out of a sense of pride. On the mainland, enforcers deal often enough with senseless rules that they are sometimes able to look the other way. Thus a stagnant spirit hangs over the city. I’ve written before that Philip K. Dick is useful not for thinking about Hong Kong’s skyline, but its tycoon-dominated polity: “governed by a competent but fundamentally pessimistic elite, which administers a population bent on consumption. Instead of being hooked on drugs and television like in PKD’s novels, people in Hong Kong are addicted to the extraordinary flow of liquidity from the mainland, which raises their asset values and dulls their senses.”
And then on Mozart:
Among these three works, Figaro is the most perfect and Don Giovanni the greatest. But I believe that Cosi is the best. Cosi is Mozart’s most strange and subtle opera, as well as his most dreamlike. If the Magic Flute might be considered a loose adaptation of Shakespeare’s Tempest—given their themes of darkness, enchantment, and salvation—then Cosi ought to be Mozart’s take on A Midsummer Night’s Dream.
Donald Tovey called Cosi “a miracle of irresponsible beauty.” It needs to be qualified with “irresponsible” because its plot is, by consensus, idiotic. The premise is that two men try—on a dare—to seduce the other’s lover. A few fake poisonings and Albanian disguises later, each succeeds, to mutual distress. Every critic that professes to love the music of Cosi also discusses the story in anguished terms. Bernard Williams, for example, noted how puzzling it has been that Mozart chose to vest such great emotional power with his music into such a weak narrative structure. Joseph Kerman is more scathing, calling it “outrageous, immoral, and unworthy of Mozart.”
I readily concede that the music of Cosi so far exceeds its dramatic register.
Recommended! There is much more at the link, substantive throughout. Though I should note I am less bullish on both manufacturing and China than Dan is. I fully agree about Bleak House, however, and at times I think it is the greatest novel written…