On Technological Shifts and Golden Ages
OCTOBER 8TH, 2020
As a early stage investor, one of the main components of my job is understanding how and when the world is going to change. The companies within my portfolio are creating or utilizing sizable societal and technological shifts to create valuable business. By understanding societal and technological shifts, the best investors are able to position themselves ahead of the futures they believe in. My portfolio is a collage of various futures based on these shifts that I believe in.
It isn’t good enough to be reactionary to great societal and technological shifts. In order to maximize value creation, we must model when, why and how a shift happens and take convicted stances on the opportunities that the shift will create. In order to model what the next decade’s shifts might look like, we need a reference framework for how to predict them.
I like to reference Carlota Perez’s extraordinary Great Surges of Development framework, which stems from a historically-based model of the way in which successive technological revolutions are assimilated in the economic and social system, generating great surges of development that follow a recurring sequence and involve major readjustments in the economic, technological and and societal spheres. I think Perez’s framework is deeply relevant today.
One divergent future that I’ve been using this framework to analyze recently is the role crypto will play in the continued development of the internet.
Historically, the 'Installation Period' of Perez’s framework is a 20-30 year period, characterized by a broad decoupling of new and old industries, decoupling of growing and declining regions, as well as rising economic inequality and social polarization. It is during this period that the new paradigm is learned and the old one gradually unlearned; it is also when the new infrastructures, creating the main externalities to facilitate the application of the new technology, are installed. The period is marked by the emergence of a major technology-related financial bubble, the collapse of which marks the end of the 'Installation Period'.
If we look back on the history of the internet, I believe it’s clear that we’ve witnessed the Installation Period of the internet. In the late 90’s and early 00’s we saw internet penetration in the US surpass 50% of the population, allowing for internet companies like Amazon, Google, Paypal, and more to emerge as large-scale growth stories, even though less than 7% of the world was online. Investors and founders began to understand the implications of widespread internet access, and we saw the emergence of unicorns like Facebook, Twitter, Dropbox, and a host of others. As internet access has gone global, the previous 9 year-period has produced more billion dollar tech companies each year than ever before, as well as a surge in market cap of mature technology companies. The new paradigm has been learned and the new infrastructures have been installed.
In addition, all of the macro hallmarks of the Installation Period are present. We’ve seen a decoupling of new and old industries as a result of the rise of the internet over the past 30 years. In 2011, Marc Andreessen famously summed this up by saying “software is eating the world”. At the same time, we’ve seen the decoupling of growing and declining regions- evidenced most starkly by the rise of Silicon Valley and the demise of the industrial heartland. We’ve also witnessed rising economic inequality and social polarization. Finally, while it hasn’t burst, one could make a case that we’re witnessing a major technology-related financial bubble today, with public tech companies trading at valuations we haven’t seen since the original dot-com bubble and a new tech SPAC emerging daily.
According to Perez’s framework, the Installation Period culminates in the 'Turning Point'. The Turning Point is usually achieved through government intervention, with regulation curbing the many excesses that are revealed after the collapse of the bubble, and with market-expanding policies of one sort or another. Both are spurred by the duration, depth and stubbornness of a recession and its consequences, as well as by the political pressure of the excluded. We are witnessing the beginnings of these Turning Point hallmarks today. Government intervention in the tech sector is becoming more likely with each passing day, with support from both sides of the aisle. We’ve witnessed significant market-expanding monetary and fiscal policies. Political pressure from the ‘excluded’ is boiling over. While we haven’t witnessed the bursting of the tech bubble, I do believe the other hallmarks suggest that we are in the earliest stages of the Turning Point.
Now for the good news. When conditions have been made favorable, i.e. all hallmarks of the Turning Point are achieved, the second half of each great technology surge can begin. This is the 'Deployment Period', which typically lasts two or three decades. These periods are the so-called 'Golden Ages' of a technology. These are the times when the full potential for wealth creation contained in the paradigm is displayed. The rhythm of growth may not seem as intense as towards the end of Installation Period, but it is a steadier and more balanced prosperity, tending to spread to wider and wider portions of the population. It is a period characterized by greater levels of employment combined with increasing productivity, allowing greater security and rising standards of living.
Ok, so how does crypto fit into the framework? I think of the above chart differently than Perez. I look at the 5th great surge as the ‘Internet Surge’ which began in the late 90’s. I think the Turning Point is now. During the Installation Period, the infrastructural networks necessary for the deployment of decentralized (crypto) technology systems have been built and deployed. This infrastructure, which is always necessary to facilitate the next Golden Age, is present today. After the Turning Point, the new paradigm (crypto in this case) is generally accepted as 'commonsense'; successful business models have been tested; the industries that will replace the previous engines of growth of the economy have been identified; the core firms of the technological revolution have become the new giants and possibly formed oligopolies. All of this is happening now. The one hallmark that lags the others is crypto being accepted as ‘commonsense’. However, I believe it will get there given the extent to which it solves the most pressing concerns relative to big-tech today. Crypto has the potential to solve censorship issues (automated on-chain governance), data privacy issues (users own their data), business model issues (no reliance on ads), and income inequality issues (value accrues to users, not billionaire CEOs). The other hallmarks of the Golden Age are begining to emerge- successful crypto business models are emerging and have the potential to be next-gen growth engines for the economy, with value accruing to a wide swath of the population. The core winners of the Installation Period (Amazon, Google, Facebook, etc.) have become the new giants and have formed an oligopoly.
Back to where we started- frameworks and models predicting possible futures. As I’ve tried to convey, I think it’s clear that the Internet Surge is at the end of its Installation Period, and entering its Turning Point. I think one possible (likely?) Golden Age that will follow the Turning Point is the transition to a crypto-enabled decentralized internet. Golden Ages historically display more balanced prosperity, tending to spread to wider and wider portions of the population- a feature baked into the very DNA of a crypto-enabled decentralized internet. These periods last two or three decades and are generally characterized by greater levels of employment combined with increasing productivity, allowing greater security and rising standards of living.
I’m both hopeful and bullish that we are about to enter just such a Golden Age.
