Creative destruction (E)

0:00I've done a fair amount of research, and as far as I can tell, Karl Marx never once had sushi. Hey, it's Arav, and this is a special archived episode of Akimbo.

0:19Specifically, Karl Marx is different than Marxism. Karl Marx was an economist who thought very deeply about a lot of critical issues. And in fact, he agreed with Adam Smith, father of the free market, and with Schumpeter, father of creative destruction, in a whole bunch of different ways. First, the Adam Smith part. What Karl Marx did after he did the math was realize that capitalism was a system that was inevitably going to take everything it could from the worker. that once a capitalist finds a machine that is efficient, it is in his or her interest to use that machine and to pay workers less.

1:09Or if there is no machine, it's in the capitalist's interest to pit workers against one another to pay them as little as possible. Because if you own the means of production, the factory, you have something the workers don't have, which is the means of production. So if you can pit workers against each other and they will bid down and down to get the job, you come out ahead. He saw this and said, workers of the world unite, because if you don't, the capitalist will simply take more. Adam Smith saw the same thing and said, buy a pin-making machine, buy a machine that will enable you to own the means of production and go forward.

1:54So that's what the laptop is, the means of production. That's what our connection to the internet is, that what's happened in the last 10 years or so is that the workers of the world have been given access to almost precisely the same machines that giant capitalists have. But what I really want to talk about is his other breakthrough idea, which he interpreted differently than Joseph Schumpeter did. Here you go. capitalism says we will pay interest give a return to a capitalist who is willing to take a risk that if you have acquired capital money and you are willing to invest it in a company that company can use it to buy the means of production can use it to make things more efficiently and you the person who has the capital will get rewarded for taking that risk by earning interest, a return on your investment.

2:55But if you do the math, what this means is that in one industry after another, there will be capital at work trying to make things more efficient. And sooner or later, the argument goes, you can't make this particular process more efficient, which means that entrepreneurs, innovators, will seek a new process a process that will undermine the one that came before. And so we get to sushi. In 1977, when I was 17 years old, I am certain I had never had a piece of sushi before. And in 1978 or 1979, I'm not sure exactly when, my friend Steve Dennis took me to a restaurant in Harvard Square and we were served raw fish with rice.

3:48This was a stunning innovation. It was something I had no real awareness of before I tried it. The thing is that lots of restaurants in Harvard Square went away because students and others said, I don't want yet another place that's going to sell me yet another not very good hamburger. Instead, they became sushi places. And sushi places, as they began to proliferate, started impinging not just on other restaurants, but on other sushi places. So some of them, the result of a lot of hard work from an entrepreneur who was stretched thin, went away. And then recently, the last few years, they figured out a way to cool fish cold enough that the chances of you getting sick from sushi went way down, which meant that instead of it being made with care by someone who'd been trained in Japan, who was flying it in, who was very careful with the supply chain, now just about any yutz could make a California roll that wouldn't put you in the hospital.

4:55If you were one of the old school sushi guys, not good news. Because you'd earned your stripes. You'd earned the right to serve real sushi the right way. But here comes all these heathen dumping soy sauce all over your stuff, wondering why it costs so much money, insisting that they get it to go and on and on. And so destruction happens. The business that got built, first that old hamburger joint, then that fancy sushi place, and then the next, and then the next. And so capitalists who are always looking for a couple extra basis points for more return on their money, because if they don't get more return on their money and their competitors do, their money will shrink in value, look for the next opportunity, the next efficiency.

5:42which leads to an insight. The insight is that markets are listening devices, that markets are really good, the most efficient thing we know of, to find out what people need. Because if you need a red hairbrush and you're willing to pay extra for it, some capitalist, some entrepreneur, or some industrialist, is going to figure out a way, if it makes sense for them, to bring you a red hairbrush. The government isn't that good at being a listening device. They're really good at other things, but not that good at listening. Markets, on the other hand, are effective listening devices, at least in the short run, at least when they are free and open markets.

6:30We have a whole other conversation about monopolies. We're not going to get into that right now. So what we've got is this cycle where the culture decides what parts of the culture want, speaks up, and then part of the market responds. And when it does, it might destroy a stable business that was already in place. And so the cycle continues. And what is marketing? Marketing combines the listening of the market with the speaking of the marketer, a way of saying to people who have expressed an interest in the marketplace, yes, we have what you need. Yes, we have what you want. And so the cycle continues.

7:18It happens in every industry. The people who made buggy whips and horse-drawn carriages worked very hard, raised a lot of money, put themselves on the line, sweated, to get to where they got to. And then, willy-nilly, without caring about them, the car companies wiped most of them out, just like those sushi places, one after another. Consumer goods, business goods, and innovation comes along, created by someone who is under pressure to reward capital with a bigger return, and it ends up destroying what came before. Now back to Karl Marx. Karl Marx did the math, and he said, well, when you add it all up and you look at all this destruction and all this destruction, capitalism can't work.

8:06It can't work to serve the needs of the most people in the best possible way. Maybe not in the short run, but in the long run, it will eat itself like an Ouroboros eating its tail. Joseph Schumpeter looked at Marx's work, giving him full credit, and said, let's rename this creative destruction. He willfully ignored the pain and suffering in the short run of the people who would be encountering these disruptions and focused on the idea that first we're going to need a Kodak camera. And then there's going to be a Polaroid camera. And then there's going to be a digital camera. And then there's going to be a phone.

8:50And with each cycle, the people who were working so hard before, they stumble. They might even fall. But the marketplace gets served. The market gets what it wants, hence the name creative destruction. Now, what's overlooked by many arch-capitalists is where he ended up. Where he ended up is, this can't continue forever. And like Marx, he pointed out that sooner or later, it hits a dead end. Well, thanks to Moore's Law and a hundred other innovations, it hasn't hit a dead end. In fact, it might not hit a dead end, not in the sense of we're going to run out of things to invent. But right now, all around us, we see destruction.

9:37Part of that destruction was caused by airplanes, by world travel, by people connecting to far more folks than they used to. that 400 years ago when we lived in small villages, it's unlikely that a virus would spread quite so far. The plague, which was like a plague, killed an enormous number of people, but it didn't spread all the way around the world. Now we are living with destruction, not the destruction caused by innovation and technology, but the destruction caused by a virus and by the way we are reacting, responding, and spreading fear about a virus. That our reaction, which leads to lockdown and social distancing, has wiped out millions of jobs, and it will wipe out millions more.

10:29And what Schumpeter and Marx would point out is that is what the system is optimized around, that this destruction opens the door for the next innovation. Now, the next innovation is going to be a little bit more complicated than Zoom plus Amazon. It's going to be a whole new world of people doing different things to listen to the market, to do marketing, to show up and make things better by shipping something that people want. Overlooked in all of it is the fact that there are humans involved, humans who are suffering, humans who have problems with health, who are putting dinner on the table.

11:10Economists don't like to talk about those folks very often. And so now we see one of the things that government is good at, that when we are dealing with a widespread public health issue, just about everybody becomes in favor of government, how government can establish how all of us can work to slow the spread, how government can offer first aid and solace when it's not going to get paid for it, how government can issue assets and resources to reboot the economy, the belief in the economy, the trust in the economy, so that capitalists have a chance to go around the wheel again. 10. It's an open debate as to whether the single best way to solve every problem is with the market.

12:01We know that the single best way to solve the problem of what kind of iPhone case you should have is with the market. It's not clear that that's how we should solve the problem of how does everyone get a vaccine. But that's a conversation for another day. What's worth noting is this. One, destruction is painful. It hurts. It leads to dislocations. It leads to tragedy. It leads to a lot of discomfort for each of us because people are people, and in the short run, people feel it. And two, destruction, creative destruction, if you want to call it that, is not new. We have seen it before, and we will see it again.

12:43It is built into the very nature of using capital to create assets that listen to the market to solve problems. And around and around and around it goes. We are in for a slog, a long slog, a painful slog. But on the other side of that slog, there will be another side. And so the question each of us has to ask, whether or not we have financial capital to invest, is this. What will we learn? Who will we connect? Who will we choose to lead? How will we show up in the world now that we have the means of production as someone that others want to work with, to connect with, to be a customer with? We need to ask ourselves questions about how we use the market as an effective listening device, not just to listen to the people who have the most to spend, but perhaps to listen to the people who need something or want something but have been ignored.

13:45We have the chance using these tools, this magical Moore's Law internet connection system, to create something on top of what was here before. But to do that, we're going to need to take a breath and think hard about the change we want to make in the world and what we want to build on top of what's already here. Thanks for listening. Here's to peace of mind and a better tomorrow. Hey Seth, it's Maria. Hey Seth, my name's Kyle. Greetings, Seth. This is Stephen out in Madison, Wisconsin. Hi Seth, Alicia from Charleston here. Hi Seth, this is Anupam. Hi, this is Caitlin. Hi Seth. Warm greetings from Curacao.

14:24Hey Seth, my name is Nick Ryan from Pittsburgh, Pennsylvania. Hey Seth, this is Rex. Hey Seth. Hi, this is Vasilis from Greece. Hi, this is Roberta Perry. My question is... And that completes my question. If you've got a question or want to check out the show notes, visit akimbo.link, that's A-K-I-M-B-O dot L-I-N-K, and press the appropriate button. Hi, Seth. This is Larry Downs from Indianapolis, a proud Alt-MBA alumni. I have a question about two of your episodes. The first was the business model episode. And in that episode, you talk about the strategy or business model that Trader Joe's has, which is to curate food products from food producers that then they put their logo on and brand for themselves and put in their stores in order to sell them.

15:20And it felt to me as you talked about that, that you were approving of that strategy. In the curation episode, at the end, you mentioned that Richard Marks, who had wrote a song, and Kenny Rogers required him to give him co-writing credits in order for it to be on Kenny Rogers' album. And you seem to have a disapproving tone when it came to that particular anecdote. My question is, first of all, if I've misunderstood or misinterpreted your tone on those two stories, then I apologize. And the rest of this question is moot. But if you do have differing opinions on those two, I'm curious as to why, because it seems to me that they are the exact same strategy.

16:09One is you allow us to white label your product and brand it for Trader Joe's so that you can have access to our stores. And in the Kenny Rogers example, you give Kenny his co-writing credits in order to get access to put it on what I'm sure at the time was one of the largest selling music artists of the time. So if you do feel differently about those two, can you help me understand why? I appreciate your work, Seth. Thank you very much. Thank you for this, Larry. It's probably worth an entire episode, and I may do one, but here's the short version. First of all, as I said earlier, just because something's a good business model doesn't mean I approve of it, but I'm not in charge of what business models get approved of.

16:59In the case of Trader Joe's, I think that everyone involved in the chain, the person who makes the goods, Trader Joe's, and the customer comes out ahead and willingly engages in the bargain. The reason that you sensed my disapproval, I'm guessing, is because you had a little bit of it as well. And it comes down to the French term of droit moral, or moral rights. Copyright, of course, is all invented. So is the right to own a piece of land. But it's a lot more amorphous when we let someone who makes up a song own it. So I can whistle.

17:47But I'm stealing when I do that because I didn't make up the song. A human being who wasn't me made up the song. And we decided as a culture not to let someone protect a joke, but it's okay to protect a song lyric. Not only is it okay to protect it, but the moral right lives with the human who did the work. In Europe, it cannot be assigned to someone else. So my problem with the Kenny Rogers story is that he crossed a line. He didn't say to Richard Marks, if you pay me a share of the money that comes in, I will go ahead and feature this record. That is a business transaction between consenting adults.

18:32The problem is I want to claim that I wrote part of this song. I want the moral right from you, part of it, right now, or else no one gets to hear this song. Corporations are not people. and people don't need to be corporations. We invented this special subset of copyright to establish that somebody, a human, made something up. We'll do more of this when I talk about Led Zeppelin and monkeys taking pictures of themselves, but the short version is this. As somebody who has stared deep into the abyss and come up with work of my own that I've put my name on, I am really delighted that our culture has established a carve-out.

19:23It's a carve-out that is rarely crossed, where someone who made something up gets to say they made it up. We get to put our name on our work. What happens to the money? That's fine. Leave it to you and Milton Friedman to figure that one out. But let's leave Duat Moral, the moral right, the fact that you made it, let's leave that one alone. We got one more question just before we put this episode to bed. I thought I'd try to squeeze it in. Hi, Seth. Owl Lovelady from Macon, Georgia. Thank you for the generous work that you do. We certainly appreciate it. In the curation episode, you spoke about how the advent of social media has given individuals and groups unbridled, unregulated access to the masses in order to push their unproven medical claims and their conspiracy theories for fame and profit.

20:14The mainstream media was already on that track, first reporting the news, later spinning the news, and finally, to compete with social media, I suppose, creating the news based on what they think their audience wants to hear. My question is, can we fix this, or have we permanently replaced facts that inform with the Internet and the mainstream media's twisted version of those facts, which were created simply to maximize their profits? Thanks. There are two parts to this. Let me take them one at a time. The first is distinguishing between the errors of mainstream media and the errors of what could be called news that's fake to distinguish it from the overall pejorative fake news.

21:01Mainstream media. Mainstream media has been guilty for a really long time of the sin of omission. During the Spanish-American War, during the era of William Randolph Hearst, all the way up to the tabloids in London, there have been media companies that just made stuff up. But generally, certainly since the dawn of television, the FCC combined with competitive pressures built around scarcity meant that if you got caught making something up, you were in really big trouble. If you were a newspaper editor, it was probably the end of your career. Large entities really focused on fact-checking. And when they got caught, got caught making stuff up, filming things that didn't happen, putting explosives in the middle of things to make tests look even juicier, they got in trouble.

21:55The mindset of most people from the mainstream media has been, don't make stuff up. At the very same time, there are huge sins of omission. At the very same time, in industry after industry, public policy issues, and on and on, the media just looks the other way. And so we profess to be surprised because we weren't informed. We didn't know. Omission was built into the system because there was scarce airtime and scarce paper, and it was easier, perhaps, to avoid offending people in power. But once we open up to an infinite world of digital and people are racing for attention, things shifted. Years and years ago, I did a book with the weekly world news, the people who do Bat Boy and other crazy stuff at the checkout at the supermarket.

22:52And I was stunned to discover when I went down to their offices in Florida that there were only three people making up the entire newspaper every week. The Weekly World News consisted of three filing cabinets. And in those filing cabinets were a nearly endless series of stock photos, weird photos, Photoshop photos, and photos of their friends. and they would just rearrange them every week, mentioning Elvis, mentioning unnamed scientists, mentioning Bigfoot, just to amuse the people who were reading the newspaper. But the reason we did the book, the reason it was okay to work with them, the reason they went to work with a smile on their face every day is that everyone should have been in on the joke.

23:37They were making stuff up. And what has shifted as we are looking at a different news cycle is this. There are people who call themselves media outlets who go to work to make stuff up. They're either intentionally making stuff up or averting their gaze as they publish stuff that they know other people made up. And there's a big difference between a sin of commission, actively publishing things you know to be untrue, versus the troublesome but slightly different act of leaving stuff out. So we have both problems, leaving stuff out and putting stuff in. So where do we go? How do we get to a place we can trust?

24:19Well, you might be surprised to hear that Wikipedia is doing a great job of this. Wikipedia is out of balance at all times. Some things get mentioned too much. Some things don't get mentioned enough. Wikipedia has a cumbersome governance structure. Wikipedia has to struggle with deletionists. If you go to an article on Wikipedia on a contentious topic, it's really fascinating to read the talk page and to read the article itself. Because more often than not, they are not committing either sin. They're not often omitting things when they should be mentioning them. And they rarely are including things that someone just made up.

25:00So no, we're never going to get to the truth of anything. The map is not the territory. We will always have a disconnect between the summary of something and what actually happened. There's no such thing as accurate history because we weren't there. And even if you were there, as we've seen from eyewitness testimony in every court trial, you don't remember it the way it actually happened. So with all of that said, I think going forward, human beings are making it clear to each other that we'd like there to be a canon, an official document, at least an unofficial way of understanding how things work.

25:38And engineering and the scientific method demand we come up with processes and approaches that work time after time. Not superstition, not make-believe, not political diatribes, but actual practical useful tools. So I'm an optimist at heart, and I hope we will get there faster. One thing to take away is this. There's a difference between the useful truth that some people are acting on and what the masses are paying attention to. And we had a very short window where the masses were paying attention to Walter Cronkite, where the masses were paying attention to inherently thoughtful and careful newspapers and media outlets that were trying very hard to not make any mistakes.

26:31that window's closed. And now in this open space, the masses are probably not going to be drawn to the thoughtful, detailed article in Wikipedia. It's way easier to get angry about a tweet. I don't see how that goes away anytime soon. But my hope is that the people we are counting on to keep us healthy, to organize the world around us, to lead our organizations, also understand that their obligation is to do the reading, to do the work. If you've got good science, publish it. If you don't have good science, keep it to yourself. Because the best way to persuade an engineer that you've figured something out is to show your work.

27:16Showing your work, omissions, commissions, all of it, showing your work is the key to helping other people believe that you've done your homework. Well, that's a little bit of a rant on my part. Thanks for your question. We'll see you next time.