A number of thinkers, including Tyler Cowen, have drawn on Peter Thiel’s ideas about a “technological slowdown.” Some of these ideas are reflected in the Founders Fund manifesto, which includes a number of awesome passages:
Not all technology is created equal: there is a difference between Pong and the Concorde or, less glibly, between Intel and Pets.com. Microprocessing represents real technological development, peddling pet food on-line, less so. Conversely, things that may be dismissed as fake technologies (Amazon and Facebook occasionally receive this critique) often resolve very challenging technological problems. Among its many innovations, Amazon helped develop intelligent customer recommendations and logistical efficiencies that allow you to order almost anything, anytime, and get it the next day; Facebook developed ways to manage large numbers of connections in a computationally efficient way, create an effective developer ecosystem, and to make it pleasurable to administer your online relationships. These also deserve attention, of course: though the Internet is no longer the virgin field it once was, we dismiss as bunk the idea that the Internet is tapped out. Web companies that fail are the companies that fail to exploit the true power of the medium.
Over time, the market tends to call out fake technologies and companies, which makes it a risky proposition to invest in them – it’s possible to flip a born loser and make a handsome return, but you need to get lucky with timing (i.e., sell into a bubble). Real technology companies tend to create durable returns, making timing much less important. If you invested in webvan.com, your window of opportunity was measured in months; if you backed Intel, your window of opportunity was measured in decades. Therefore, as investors, we should seek companies developing real technologies.
Have we reached the end of the line, a sort of technological end of history? Once every last retailer migrates onto the Internet, will that be it? Is the developed world really developed, full stop? Again, it may be helpful to revisit previous conceptions of the future to see if there are any areas where VC might yet profitably invest.
The discussion of potential investment opportunities that follows is fascinating.
In his National Review article, Thiel takes this “end of the future” in a number of interesting directions. Early on, he discusses the slowdown in energy innovation:
When tracked against the admittedly lofty hopes of the 1950s and 1960s, technological progress has fallen short in many domains. Consider the most literal instance of non-acceleration: We are no longer moving faster. The centuries-long acceleration of travel speeds — from ever-faster sailing ships in the 16th through 18th centuries, to the advent of ever-faster railroads in the 19th century, and ever-faster cars and airplanes in the 20th century — reversed with the decommissioning of the Concorde in 2003, to say nothing of the nightmarish delays caused by strikingly low-tech post-9/11 airport-security systems. Today’s advocates of space jets, lunar vacations, and the manned exploration of the solar system appear to hail from another planet. A faded 1964 Popular Science cover story — “Who’ll Fly You at 2,000 m.p.h.?” — barely recalls the dreams of a bygone age.
The official explanation for the slowdown in travel centers on the high cost of fuel, which points to the much larger failure in energy innovation. Real oil prices today exceed those of the Carter catastrophe of 1979–80. Nixon’s 1974 call for full energy independence by 1980 has given way to Obama’s 2011 call for one-third oil independence by 2020. Even before Fukushima, the nuclear industry and its 1954 promise of “electrical energy too cheap to meter” had long since been defeated by environmentalism and nuclear-proliferation concerns. One cannot in good conscience encourage an undergraduate in 2011 to study nuclear engineering as a career. “Clean tech” has become a euphemism for “energy too expensive to afford,” and in Silicon Valley it has also become an increasingly toxic term for near-certain ways to lose money. Without dramatic breakthroughs, the alternative to more-expensive oil may turn out to be not cleaner and much-more-expensive wind, algae, or solar, but rather less-expensive and dirtier coal.
Warren Buffett massively capitalized on both of these trends with his $44 billion investment, most made in late 2009, in BNSF Railway — making it the largest non-financial company in the Berkshire Hathaway portfolio. Understandably, the Oracle of Omaha proclaimed “an all-in wager on the economic future of the United States” and downplayed any doubts he might have harbored. For present purposes, it suffices to note that 40 percent of railroad freight involves the transport of coal, and that railroads will do especially well if the travel and energy consumption patterns of the 21st century involve a regression to the past.
In the past decade, the unresolved energy challenges of the 1970s have broadened into a more general commodity shock, which has been greater in magnitude than the price spikes of the two world wars and has undone the price improvements of the previous century. In the case of agriculture, at least, technological famine may lead to real old-fashioned famine. The fading of the true Green Revolution — which increased grain yields by 126 percent from 1950 to 1980, but has improved them by only 47 percent in the years since, barely keeping pace with global population growth — has encouraged another, more highly publicized “green revolution” of a more political and less certain character. We may embellish the 2011 Arab Spring as the hopeful by-product of the information age, but we should not downplay the primary role of runaway food prices and of the many desperate people who became more hungry than scared. [Emphasis added]
As the article continues, Thiel addresses wage stagnation and the credit crunch:
Like technology, credit also makes claims on the future. “I will gladly pay you a dollar on Tuesday for a hamburger today” works only if a dollar gets earned by Tuesday. A credit crisis happens when earnings disappoint and the present does not live up to past expectations of the future.
The current crisis of housing and financial leverage contains many hidden links to broader questions concerning long-term progress in science and technology. On one hand, the lack of easy progress makes leverage more dangerous, because when something goes wrong, macroeconomic growth cannot offer a salve; time will not cure liquidity or solvency problems in a world where little grows or improves with time. On the other hand, the lack of easy progress also makes leverage far more tempting, as unleveraged real returns fall below the expectations of pension funds and other investors.
This analysis suggests an explanation for the strange way the technology bubble of the 1990s gave rise to the real-estate bubble of the 2000s. After betting heavily on technology growth that did not materialize, investors tried to achieve the needed double-digit returns through massive leverage in seemingly safe real-estate investments. This did not work either, because a major reason for the bubble in real estate turned out to be the same as the reason for the bubble in technology: a mistaken but nearly universal background assumption about easy progress. Without fundamental gains in productivity (presumably driven by technology), real-estate values could not go up forever. Leverage is not a substitute for scientific progress.
The technology slowdown threatens not just our financial markets, but the entire modern political order, which is predicated on easy and relentless growth.
Thiel makes a number of surprising remarks, many of which challenge conservative political correctness as much as liberal political correctness:
The give-and-take of Western democracies depends on the idea that we can craft political solutions that enable most people to win most of the time. But in a world without growth, we can expect a loser for every winner. Many will suspect that the winners are involved in some sort of racket, so we can expect an increasingly nasty edge to our politics. We may be witnessing the beginnings of such a zero-sum system in politics in the U.S. and Western Europe, as the risks shift from winning less to losing more, and as our leaders desperately cast about for macroeconomic solutions to problems that have not been primarily about economics for a long time.
The most common name for a misplaced emphasis on macroeconomic policy is “Keynesianism.” Despite his brilliance, John Maynard Keynes was always a bit of a fraud, and there is always a bit of clever trickery in massive fiscal stimulus and the related printing of paper money. But we must acknowledge that this fraud strangely seemed to work for many decades. (The great scientific and technological tailwind of the 20th century powered many economically delusional ideas.) Even during the Great Depression of the 1930s, innovation expanded new and emerging fields as divergent as radio, movies, aeronautics, household appliances, polymer chemistry, and secondary oil recovery. In spite of their many mistakes, the New Dealers pushed technological innovation very hard.
The New Deal deficits, however misguided, were easily repaid by the growth of subsequent decades. During the Great Recession of the 2010s, by contrast, our policy leaders narrowly debate fiscal and monetary questions with much greater erudition, but have adopted a cargo-cult mentality with respect to the question of future innovation. As the years pass and the cargo fails to arrive, we eventually may doubt whether it will ever return. The age of monetary bubbles naturally ends in real austerity.
On the political right, we are seeing a quiet shift from the optimism of Jack Kemp to the pessimism of Ron Paul, from supply-side economics to the Tea Party, and from the idea that we can combine tax cuts with more spending to the idea that money is either hard or fake. A mischievous person might even ask whether “supply-side economics” really was just a sort of code word for “Keynesianism.” For now it suffices to acknowledge that lower marginal tax rates might not happen and would not substitute for the much-needed construction of hundreds of new nuclear reactors. [Emphasis added]
As for hoping that public investment will save us, Thiel suggests that it reflects a fundamental misunderstanding of the scale of the challenges we face:
Most of our political leaders are not engineers or scientists and do not listen to engineers or scientists. Today a letter from Einstein would get lost in the White House mail room, and the Manhattan Project would not even get started; it certainly could never be completed in three years. I am not aware of a single political leader in the U.S., either Democrat or Republican, who would cut health-care spending in order to free up money for biotechnology research — or, more generally, who would make serious cuts to the welfare state in order to free up serious money for major engineering projects. Robert Moses, the great builder of New York City in the 1950s and 1960s, or Oscar Niemeyer, the great architect of Brasilia, belong to a past when people still had concrete ideas about the future. Voters today prefer Victorian houses. Science fiction has collapsed as a literary genre. Men reached the moon in July 1969, and Woodstock began three weeks later. With the benefit of hindsight, we can see that this was when the hippies took over the country, and when the true cultural war over Progress was lost.
Today’s aged hippies no longer understand that there is a difference between the election of a black president and the creation of cheap solar energy; in their minds, the movement towards greater civil rights parallels general progress everywhere. Because of these ideological conflations and commitments, the 1960s Progressive Left cannot ask whether things actually might be getting worse. I wonder whether the endless fake cultural wars around identity politics are the main reason we have been able to ignore the tech slowdown for so long.
However that may be, after 40 years of wandering, it is not easy to find a path back to the future. If there is to be a future, we would do well to reflect about it more. The first and the hardest step is to see that we now find ourselves in a desert, and not in an enchanted forest.
Not surprisingly, I believe that there is a great deal of truth to Thiel’s diagnosis.
My colleagues at Economics 21 organized a conversation with Thiel just yesterday, the video of which will be found here once it’s ready.