The hedge-fund billionaire says we need more innovation — and less herd-thinking — to open a new frontier.
Editor’s Note: Peter Thiel will speak at the Republican National Convention in Cleveland this Thursday. In 2011, he spoke with National Review in the below wide-ranging interview.
Peter Thiel may be most famous for his role (portrayed by Wallace Langham in The Social Network) as the venture capitalist who gave “The Facebook” the angel investment it needed to really launch. Before that, Thiel was known in Silicon Valley circles as the “Don of the PayPal mafia,” (his official role at the e-commerce site was founder and CEO), and more generally for his centrality as an investor in tech startups. Now, Thiel serves as the president of Clarium Capital, a hedge fund that (though it has suffered recently) made extravagant gains by betting against the housing market in 2007.
Though he’s primarily a businessman, Thiel has dabbled in libertarian activism. Most recently, he caused a stir by establishing the Thiel Fellowship, which will select 20 college students under the age of 20 and pay them $100,000 each to drop out of college and embark on entrepreneurial careers. Thiel is also an intellectual of astonishing breadth and depth who finds time, while running a major hedge fund, to produce thought pieces that survey the Western Canon, the geopolitical landscape, and financial economics at a gallop (such as this one for the Hoover Digest).
NRO’s Matthew Shaffer spoke with the philosopher-CEO in a wide-ranging conversation about net neutrality, the higher-education bubble, the future of seasteading, income inequality, why the wealthy have gone blue, Leo Strauss, and more. Thiel wants to take us back to the future, to once again, like in the 1950s, imagine how innovation — technological and otherwise — can radically improve our lives.
matthew Shaffer: As a major investor in a number of online startups, what are your thoughts on the recent push for net neutrality?
PETER THIEL: There’s something very odd about it. It does seem like an attempt to use the political system to reapportion property rights. Along those lines, one should be extremely skeptical of it. We’ve been having this debate for 15 years. The arguments have not changed very much during that time. Net neutrality has not been necessary to date. I don’t see any reason why it’s suddenly become important, when the Internet has functioned quite well for the past 15 years without it.
shaffer: So far, it’s been a solution without a problem. But is there a future in which big Internet providers have a realistic incentive to abuse their property rights in broadband?
THIEL: The model where Internet companies have enormous power that they abuse in various ways depends on a view of the Internet as a fundamentally static thing where nothing changes much. That might become an issue at a point where it’s an extremely mature industry, but that’s not the way most people think of it now. Until it is a mature industry, we have no idea where real abuses would be. As a policy matter, from a government perspective, not only would you have to decide that it’s mature, you also would have to decide that you knew exactly how to reallocate these property rights.
Government attempts to regulate technology have been extraordinarily counterproductive in the past. The antitrust lawsuits against AT&T and IBM in the ’70s, Microsoft in the ’90s — it turned out that all these companies eventually saw tremendous competition within the technological space. Technology, to the extent that it is changing a lot, is an area that is extremely difficult to regulate, because it’s not like you have some incredibly entrenched interests that are somehow systematically distorting the field. (Even if there were interests distorting the field, I’m not sure you should regulate it.) That’s almost by definition impossible, because technology involves areas of tremendous change.
shaffer: Thanks to The Social Network, you may now be best known as a pivotal player in the creation of Facebook. Do you think someday the history books — or, I guess, history websites — will write you up as effecting a millennial transition to people living their lives online?
THIEL: People are still living primarily in the real world. Cyberspace’s status as an alternative to the real world has been somewhat overstated. There are libertarian perspectives from which cyberspace is appealing because it is relatively free of state regulation and intervention. But the basic problem, or basic fact, is that people are biological, physical entities that live in the real world. So the Internet really cannot be a substitute for reality.
One of the main factors behind Facebook’s success, relative to a number of earlier attempts, is that it was focused on real identities. It was looking at real people; it was not people pretending to be a cat or a dog on the Internet, or something like that — which might have been the way people would have envisioned it in the 1990s.
shaffer: Speaking of major changes in the way we live, you’re also interested in “seasteading.” Can you talk about your interest in and advocacy for it?
THIEL: Seasteading was thought up by acolytes of Milton Friedman. The idea is that we need to create competition between governments. If it’s very hard to reform existing ones, we need to create new sovereign states — in the oceans or elsewhere. There’s a technological question about how far away we are from these kinds of things. It’s probably not around the corner. But these technological projects are worth pursuing.
It’s one of the ways in which I see things in the U.S. as having declined from the 1950s, when people had a real sense of the future, and the future was an important subject for public discussion. We thought about being on the moon, or living underwater, and what we were going to do about farmlands and forests and so on. Different ideas about how technology would change in the future played an important role in our society. That sort of collapsed with everything else in the late ’60s and into the ’70s. I want to go back to the future and back to a time when people were thinking about how to use technology to make the world a dramatically better place — not like the present, where technology is largely seen as irrelevant and specifically as bad.
Now, the broader issue with seasteading is that a lot of people are quite sympathetic to the idea that we need more competition in government, though you can debate whether seasteading is the best way — or a possible way — to bring it about. If there weren’t some competition between governments, the overreach would be dramatically worse than what we’ve seen. A lot of state governments would like to dramatically increase taxes and increase regulations on businesses, rather than reform their bad ways. But they’re under extraordinary pressure because people may just choose to leave.
The U.S. government is under somewhat less pressure, because it is a lot more difficult to leave the U.S. But it’s under more constraints today, because the U.S. is now living in a much more competitive world than it was in the 1970s. It’s hard to simply devalue the dollar, or simply inflate, or tax in a confiscatory way. So competition among governments is an extremely valuable and very good thing. The seasteading netroots are best seen against that larger background.
shaffer: I understand you think we’re in a big higher-education bubble.
THIEL: Yes. Education is a bubble in a classic sense. To call something a bubble, it must be overpriced and there must be an intense belief in it. Housing was a classic bubble, as were tech stocks in the ’90s, because they were both very overvalued, but there was an incredibly widespread belief that almost could not be questioned — you had to own a house in 2005, and you had to be in an equity-market index fund in 1999.
Probably the only candidate left for a bubble — at least in the developed world (maybe emerging markets are a bubble) — is education. It’s basically extremely overpriced. People are not getting their money’s worth, objectively, when you do the math. And at the same time it is something that is incredibly intensively believed; there’s this sort of psycho-social component to people taking on these enormous debts when they go to college simply because that’s what everybody’s doing.
It is, to my mind, in some ways worse than the housing bubble. There are a few things that make it worse. One is that when people make a mistake in taking on an education loan, they’re legally much more difficult to get out of than housing loans. With housing, typically they’re non-recourse — you can just walk out of the house. With education, they’re recourse, and they typically survive bankruptcy. If you borrowed money and went to a college where the education didn’t create any value, that is potentially a really big mistake.
There have been a lot of critiques of the finance industry’s having possibly foisted subprime mortgages on unknowing buyers, and a lot of those kinds of arguments are even more powerful when used against college administrators who are probably in some ways engaged in equally misleading advertising. Like housing was, college is advertised as an investment for the future. But in most cases it’s really just consumption, where college is just a four-year party, in the same way that buying a large house with a really big swimming pool, etc., is probably not an investment decision but a consumption decision. It was something about combining the investment decision and the consumption decision that made the housing thing so tricky to get a handle on — and I think that’s also true of the college bubble.
One important difference between the housing bubble and the education bubble is that there was sort of a class aspect to the housing bubble: upper-middle-class people in the U.S. tend to be invested in equities, and middle-class people tend to be invested in housing, so there was a way in which the housing bubble was a way of making fun of the middle class for various sophisticated elites that ran all the way through the housing bubble. It was sort of like, “Look at those dumb people and beatniks in suburban America who are doing this crazy housing thing.” So even though it was a crazy bubble, there was at least a kind of counter-narrative; you had a bit of a dissenting narrative. Education is an upper-middle-class thing, and so something that is not questioned by elites at all, and that’s why the education market is more likely to be distorted.
You know, we’ve looked at the math on this, and I estimate that 70 to 80 percent of the colleges in the U.S. are not generating a positive return on investment. Even at the top universities, it may be positive in some sense — but the counterfactual question is, how well would their students have done had they not gone to college? Are they really just selecting for talented people who would have done well anyway? Or are you actually educating them? That’s the kind of question that isn’t analyzed very carefully. My suspicion is that they’re just good at identifying talented people rather than adding value. So there are a lot of things about it that are very strange.
The Great Recession of 2008 to the present is helping to bring the education bubble to a head. When parents have invested enormous amounts of money in their kids’ education, to find their kids coming back to live with them — well, that was not what they bargained for. So the crazy bubble in education is at a point where it is very close to unraveling.
In early 2009, there was a question of why the stimulus money was not going to infrastructure, and a very large amount was going to subsidizing college loans and encouraging people to go back to school. The argument was that we get a higher return on human capital than on infrastructure. While that’s certainly possible, and I agree that human capital is extremely important, I think we’re not actually measuring the return we’re getting on the human capital. It is, in fact, considered in some ways inappropriate to even ask the question of what the return is. We are given bromides to the effect of, “Well, you know college education is good, but it’s good precisely because it doesn’t teach you anything specific; you become a more well-rounded person, a better citizen, you learn how to learn.” There tends to be an evasion of specificity of what exactly it is that is learned. And so these human-capital intuitions may be very far off in a lot of colleges.
shaffer: But people are freely choosing all this education in a free market, despite those extravagant costs, presumably because it’s the only way to signal things like self-discipline and intelligence. So the market does seem to demand those signals. Are there any alternatives?
THIEL: Yes, college is a signaling mechanism. It is possible that the universities were too cheap in the ’70s and ’80s, and they are sort of these somewhat parasitic entities that could capture way more of the share of the gains from providing this signaling mechanism. And so they were providing this signaling service, and they now are capturing most or all of the value.
But one part of it that I do not think is market-driven is that the government sector is one in which your pay grade is very mechanically driven by your university or your degree. So I tend to think we shouldn’t say that it’s a market that’s demanding education when probably the most dogmatic part of the market involves government workers. Do teachers need to get an education degree to become teachers? Do you pay people more if they’ve had a master’s degree than if they haven’t? I tend to think that if you shifted the requirements for government workers to a pure merit thing, that would help resolve a lot of the market distortions. And it might also set a very good precedent for large corporations in the private sector that sometimes function like government bureaucracies
shaffer: So what do we do to, as it were, short the education market?
THIEL: Well, I don’t want to transfer this into equity advice [laughs]. But I would say that for people who are starting college or thinking of going to college or graduate school, the exercise that’s probably very valuable to go through is to think of what the teleology of education is, what the purpose of it is, where it is going. When I look back on my own education — I went to Stanford undergrad and law school, I went straight through, graduating from law school at 24 — I don’t have any big regrets about doing it. The costs have gone up way more, so it’s trickier now. But if I had to do something over, I would try to think about it a lot more than I did at the time. Paradoxically, education has become a way to avoid thinking about your future. Instead of thinking about your future, you go to school and defer thinking about your life.
There are a lot of different things that could be done on a policy level. We should have less government subsidy of college loans. We should be getting rid of government guarantees for student loans — that’s one of the main reasons these things get underwritten. What we have going on with Sallie Mae is very analogous to the Fannie Mae problem with housing. We should get rid of educational credentials as a legitimate hiring criterion for the government. That’s what I’d start with.
shaffer: Is the Thiel Fellowship mostly about promoting technological entrepreneurship, or is it about helping to pop the education bubble?
THIEL: The specific context of the Thiel Fellowship is somewhat anathetical to becoming an entrepreneur — taking risks, thinking about what you want to do, not having a tremendous amount of debt. It’s mostly about entrepreneurship and getting people to create something new. The place where we can help people the most in that respect are technology-venture companies. We certainly would be open to people doing entrepreneurial ventures that are not technology-related, or even not-for-profit things. The main goal is to identify very talented people who could do a lot better without college than with college. As a society, we should not be waiting for them to get a college degree and be burdened down with enormous debt to the point where they can no longer take any risk.
As a society, we do not take enough risk. And high debt is very inimical to risk-taking, which is an extremely important component of progress. Beyond the 20 people that are going to be chosen for the fellowship, we hope it will encourage a broader conversation about whether college makes sense or not. This is where the elite bias comes in. The elitist view in the U.S. is that even if people concede that college is not for education, the caveat will be that, well, surely it’s for all the smart people. What we want to suggest is that there are some very smart and very talented people who don’t need college.
shaffer: You once said that the tech bubble of the ’90s migrated into an entire financial-services bubble. What does that mean?
THIEL: There’ve been a whole series of these booms or bubbles in the last few decades, and I think it’s a very complicated question why there have been so many and why things have been so far off from equilibrium. There’s something about the U.S. in the last several decades where people had great expectations about the future that didn’t quite come true. Every form of credit involves a claim on the future: I’ll pay you a dollar on Tuesday for a hamburger today; I’ll buy this house, and I’ll pay off the mortgage over 30 years; and so you lend me money based off expectations on the future. A credit crisis happens when the future turns out not to be as good as expected.
The Left-versus-Right debate tends to be that the Left argues that the expectations were off because of ruthless lenders who sold a bill of goods to people and pushed all this debt on people, and that it was basically the problem of the creditors. The Right tends to argue that it was a problem with the borrowers, and people were sort of crazy in borrowing all this money. In the Left narrative, it starts with Reagan in the ’80s, when finance became more important. The Right narrative starts in the ’60s when people became more self-indulgent and began to live beyond their means.
My orthogonal take is that the whole thing happened because there was not enough technological innovation. It was not really the fault of the borrowers or the lenders; the problem was that everybody had tremendous expectations that the country was going to be a much wealthier place in 2010 than it was in 1995, and in fact there’s been a lot less progress. The future is fundamentally about technology in an advanced country — it’s about technological progress. So a credit crisis happens when the technological progress is not as good as people expected. That’s not the standard account of the last decades, but that’s the way I would outline it.
People were expecting house prices to go up 8 percent a year. That would be quite possible in a society where the GDP was growing tremendously and where there were tremendous gains in efficiency and technological innovation. But we’re not having that much innovation and, because of that, the housing bubble was unrealistic. It’s also possible that the housing bubble was very deeply linked to the tech bubble. The tech bubble was about extrapolating technological gains; it turned out that the gains didn’t materialize as quickly, or at all, and then people went back to housing and back to credit to get the 8 percent returns. But housing and credit still depend on an underlying society that is progressing, and that sort of progress was not actually happening. So, if the tech bubble was fake, then the housing bubble would almost certainly have to be fake. The real root of the problem is always technology.
Income or wealth inequality is a somewhat different problem. I think it’s probably not right to blame technology or finance of any of the industries that are doing well in the U.S. It’s better to think why a lot of people are not seeing as much progress as they’d like. And that loops in all sorts of things, from the failure of the education system to the lack of technological innovation, to the closing of the frontier.
One of the factors that equalized things in the 19th century was that people could move out to the frontier. Now, the geographic frontier has been closed — outerspace is too far away, cyberspace is not quite real, the oceans may still be not quite there. Then there’s the technological frontier; there are some things there, but it’s more limited. So if you wanted to reduce income inequality in a non-confiscatory way, or in a non-redistributionist way, it has to involve opening up a new frontier.
shaffer: You’ve always been interested in Leo Strauss. Isn’t he the consummate anti-modernist, an opponent of scientism and our fixation on economic growth, etc.? What do you like about him?
THIEL: Well, there’s no two-minute answer to this [laughs]. If I had to say where I thought there was an intersection between Straussianism and the generally libertarian framework, it’s that the central problem in Leo Strauss is the problem of political correctness, which is the whole idea of Persecution and the Art of Writing — the idea that societies are less tolerant than people think, that there are truths that cannot be told and people have to disguise what they say. The problem of political correctness is a much deeper and more pervasive problem than is generally believed in the optimistic liberal understanding of the world. Properly understood, the problem of political correctness is our greatest problem — the problem of how people can think in a way that is independent of the mob. That’s what I understand as central to the Strauss corpus.
Shaffer: In 2004, liberals were distraught over the working class’s going Republican, and they asked, “What’s the matter with Kansas?” Then, in 2008, financiers and the wealthy generally went overwhelmingly for Obama. As somebody ensconced among both the financial and tech elite, can you tell me, what’s the matter with Greenwich?
THIEL: There’s a degree to which it is just a status and political-correctness issue. The debates are for the most part not about the policies or about the ideas, but what is cool, what is trendy. Take something like the climate-change debate. I think it’s an important question, and I think it’s actually quite hard to figure out what the science is. It might be something for us to worry about. But I think there’s actually no debate at all — there’s no attempt to understand the science. It’s mostly moral posturing of one form or another.
Beyond the posturing, it’s a form of cowardice that’s very much linked to political correctness, where it’s not fashionable or not cool to offer dissenting opinions. In that sense we have this problem. In a way, the Greenwich problem is the libertarian problem is the Straussian problem. They are linked in the same way.
My hope is that in some sense Obama represents the end of political correctness — in the Hegelian sense of both culmination and termination — that maybe people could sort of get it out of their system once and for all in 2008, and that at this point people are going to be somewhat more open to really thinking about our problems. That’s what I’m optimistic about.
— Matthew Shaffer is a William F. Buckley Fellow at the National Review Institute.