The free market has an enemy (E)

0:00If you know what you want, we've developed something, an extraordinary thing, to help you get it. If you want a big box of live ladybugs, if you want glue that even works underwater, if you want a Nicolas Cage mermaid pillow, you can get it. You can get it from the free market. But the free market has a surprising opponent. And if we're not careful, the free market will devour itself. Hey, it's Ajay, and this is a special archived episode of Akimbo.

0:41You don't need Adam Smith to tell you that the peer-to-peer free market has an invisible hand. Somehow figuring out the things that you want or maybe even need and somehow alerting people who want to fight with each other to help you get it more easily and more cheaply. We call it the free market. The thing is, this free market, buyers and sellers, people scurrying around to try to figure out what others want, is fragile indeed. It's rarely free, and it's hardly stable. And some people, the people who have drunk the Milton Friedman flavor aid, will tell you that the enemy of the free market is government regulation.

1:31I'm not sure that's true. I think the enemy of the free market might be capitalism. Capitalism can fuel the free market, but it is not the free market. Capitalism is the idea that capital, money, can be used to get machinery to build systems to make things more productive, which leads to a ratchet called progress. But capitalism has at least three significant defects. I got this question called in from one of our amazing listeners. Hi, Seth. Sebastian from New York here. I heard you talk about Facebook being a monopoly, which I agree with, but I don't exactly know why. Would love to hear your thoughts on that.

2:19Thanks. What does it mean for something to be a monopoly? Does it have anything to do with the board game? Well, one of the things that an investor seeks, particularly lately because of software, is monopoly. Taking away people's choice. Because if you don't have a choice, you have to pay extra. If you don't have a choice, you have to do what the capitalist wants you to do. Hundreds of years ago, the concept of Hobson's choice developed. Hobson's choice means you can have anything you want as long as it's the one the innkeeper gives you. Monopoly, in its current incarnation, means you can have this, but you can't have it any other way except the way that the monopolist wants you to have it.

3:08which means that cable companies fight tooth and nail to ensure that you don't have an easy way to switch where exactly you're getting your broadband. It means that yes, indeed, Facebook is a monopoly. It's a monopoly in the following sense. If all of your friends and colleagues are sharing their social graph on Facebook, you can't go anywhere else if you want to engage with those people in that way. If you're an advertiser and you want to reach those people, there aren't multiple ways other media companies bidding for you to run the ad. There's only one place to run the ad. If you're a company and you are using Facebook to connect with the people you think of as your fans and your followers, you will be surprised to discover that soon after you get started, Facebook starts charging you to reach the people who said they wanted to hear from you in the first place.

4:10If you're disgusted by this and want to go to another social network where all of those people are, you can't. And you can't because Facebook is taking advantage of network effects. In essence, once enough people are part of a social circle, that social circle gets better. And as it gets better, more people join it. And as it gets better, more people join it. Now, what does better mean? Better simply means all the other people like me are here. And it's sticky. It's hard for all the people to decide at the same time to leave. It happens. But it's difficult. Back in the day when Microsoft was under assault for antitrust, I saw this firsthand.

4:59And Microsoft controlled the operating system on most computers so firmly, in fact, that when Dell wanted to offer machines that only had Linux installed, they still had to pay Microsoft for a Windows license for that machine. Once you control the operating system, getting people to use your software, things like Word and Excel, is significantly easier because you bury the hooks deep into the operating system. And once you do that, well, then you're on your way. So when Microsoft decided to get into the online business, AOL was already there. CompuServe was already there. The company I ran, Yo-Yo 9, was one of the leading creators of content for services like those in Prodigy.

5:46Got a call from Microsoft. They said, we're going to be launching an online service next year called Chicago. We're inviting you to build content for it. We would like you to do it for free. If you don't do it for free, you won't be on the service. And if you're not on the service, you'll be invisible because we're going to build the online service deep into our operating system. And you're just going to disappear up to you. It's this sort of integration that makes it easier and easier for software companies to control the whole stack. Google began with a simple search engine with only two buttons on it.

6:26But bit by bit, they took that attention and they farmed it and they fenced it to the point where, yes, they are building a resilient monopoly of how many people are doing many of the things online. Are there alternatives? Sure, you can use DuckDuckGo. I do. But it's always less convenient. And when people start sharing files, for example, in Google Docs, you have to use Google Docs if you want to share a file with them. This helps explain the crazy valuations and the enormous amounts of losses that companies like WeWork and Uber have experienced. Why would an investor, a capitalist, back this?

7:11Well, the answer is because they figure if they give enough away, if the deals are irresistible enough, if they put enough people inside what they're building, then they will create the same sort of profitable monopoly that Google and Facebook have created. that in fact, many of these investments are not about the free market. They are investments in long-term monopolistic behavior. So back to the rant about capitalism. The second challenge that capitalism presents is it is more and more about the short term. The reason it's about the short term is that capitalism is measured on return on investment.

7:59And return on investment has a denominator, which is time. How much money did you get back per day you had the money out there? So a 10 % return in a week is a lot better than a 10 % return in a year. And as a result, the short-term thinking of capitalists combines with the short-term thinking of consumers. And we're left with a cycle where nobody is thinking about the long-term. So when I grew up in Buffalo, New York, Love Canal, 20 miles from my house, became a national sensation because the Hooker Chemical Company just dumped effluent into the canal year after year after year. They just dumped it.

8:43Someone else's problem down the road. Short-term thinking is what the capitalist who doesn't know better embraces. How do we make the quarter work? Should we spam everybody? Because after all, if we don't, we won't make the quarter work and our stock price won't go up. So we have monopolies, we have short-term thinking, and the third one is corruption. Left to its own devices, bad players in the market will bribe or otherwise cajole or lobby people to get an advantage. There's an expression which is bad money drives out good. People don't really understand what that means. What it means is if there is counterfeit money in circulation, anyone who is holding counterfeit money will spend it before they spend the real money.

9:43because when the music stops, you don't want to be left holding the counterfeit money. So what happens is the velocity of money that's counterfeit goes up and up and up until it gets to the point that the only money that's circulating is fake money. This is why we have to work so hard to make sure that$100 bills that are fake don't start showing up because once they start showing up a little, they'll start showing up a lot. Well, this idea of the bad driving out the good also works in the idea of corruption. Because if one capitalist figures out how to bribe a building inspector so they can put up a shoddier building, if one person figures out how to bribe a purchasing agent at Walmart to get more market share, well, then the other players are going to be engaged in a race to the bottom.

10:37because the free market doesn't know what to do in a world without boundaries. It's the boundaries that make it free. It's impossible to play a game of hockey on a rink that's infinitely long. You need the boards. You need the boards to bounce the puck against. You need the boards to be able to focus your energy. So the free market hates monopoly. The free market wants people to have a choice, not the investors of Facebook. But the people who look to get their needs and wants satisfied want the freedom to be able to choose, to choose a better alternative. But in markets that are stuck, in places where there is stickiness, where conventions or standards or rules, which have been put in place by the dominant forces, keep outsiders from getting in, suddenly the free market isn't so free anymore.

11:37second the short-term thinking means that it's difficult to build things for the long haul it's difficult to focus on quality meaning things that will last it's difficult to embrace the idea of side effects being just effects what are you putting into the atmosphere how are you changing our culture sure you can make more money making this pepsi so that a teenager can drink the whole bottle in one slam. That's what they call it. But what are you going to do 20 years from now when that teenager drops dead from the complications from diabetes? In the long run, it is not in Pepsi's interest to kill off its customers even 20 years from now.

12:21But in the short run, share of stomach, getting people to drink more, figuring out how to make your market share go up, that's what drives the capitalist. And then the last one is corruption. The idea that you can buy your way forward, that you can bully or power your way through the rules and structures that enabled the free market in the first place. So if we care about choice, if we care about making things better by making better things, what we have to do is stand up and realize that defending the free market is not the same as defending capitalism. and that crony capitalism, that oligopolies, that kleptocracies are not something that we want more of in our culture.

13:09That what we really want to do is figure out how to amplify long-term thinking, how to help people differentiate between what they want and what they need, how to put education back in the fore, not because you have to do it, but because it makes things better. It opens the door for more possibility and more productivity. We are capable of using this leverage that we've got, the most leveraged free market in history, to surface more needs, more wants, more desires, to bring more fairness and opportunity to the marketplace, to better distribute the options that so many people have and want, rather than giving in to what a few oligarchs are trying to do, which is to corner the market, make capitalism work for them, and walk away from the very idea of the free market that got us here.

14:06That's my rant. Thanks for listening. We'll see you next time. 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. Hey, 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. As always, I love to hear from you. You can ask your question by visiting akimbo.link. That's A-K-I-M-B-O dot L-I-N-K and press the appropriate button.

14:48you'll also find the show notes for this and every other episode we got two questions about software we'll start with those here's the first one hi seth this is matt from the uk i'm following up on your podcast about why software is so bad i'm aware that some of the people who write the software aren't the people who decide what gets made and the people who decide what gets made aren't always aware of what's technically possible is this an education thing what can be done about That's it. I'm keen to hear your thoughts. Thanks. Yeah, this is a great point. Here's the deal. The people who are real estate developers are rarely architects.

15:25The people who can greenlight a movie are rarely film directors. And book publishers? Most of them aren't writers. Here's the difference. The difference is that in all three of those cases, and in most other cases, the technology of what is being approved or imagined doesn't change very much. That building a building is still like building a building. And when someone like Frank Urie shows up, it actually changes the game. Same thing happened in the movie business when Pixar showed up. A whole bunch of people in the animation business didn't understand what to do because they weren't close enough to the medium the way that Ed and the rest of the team at Pixar were.

16:12And so now in software, the problem shows up constantly because the technology keeps changing. And so the software executive, who was really good at her job a little while ago, doesn't understand what is possible next, which is why so many software innovations seem to come out of left field because they are made by the rare programmer that also has the empathy for what the customer needs, as well as the insight about how to bring it to market. So the way to address the challenge, I think, is for the people in the front office to spend more time in the factory with the programmers, for them to invest the time and the effort, and yes, the humility, to be able to say to the best programmers, what are we able to do?

17:04because processing that insight helps them imagine what is possible, and possible is the future of software. Hi, Seth. This is Florine from Transylvania. Yes, that's Transylvania from Bram Stoker Novels. As you know, it's a region of Romania, Eastern Europe. So, I am a software developer, and my question is regarding your latest episode, the fact that software is not regarded as a physical product in the way of ownership, of paying money for it, for example. So what has to change to make a digital product as hard to steal as a physical product? Or maybe is it a question of scarcity in the way that by stealing a software, you do not make it unavailable for initial owner?

18:09Thank you, Seth, and thank you for delivering. Thanks for this question. It is, in fact, our first question from Transylvania. It put a big smile on my face, so thank you. Thanks for the work that you do. Back in the day, software people were obsessed with piracy. I was in the software business in 1983. the Software Products Association spent tons of time and money trying to persuade people to turn in their co-workers for pirating stuff. There were big fancy dongles. I came up with this system where you would call 1-800-MAC-LISA, which was the kingpin in the software business, to buy not the software itself, but a code that would make the software work for you.

18:52But as Tim O 'Reilly has pointed out, In a world of network effects, your enemy isn't piracy, it's obscurity. And that by many measures, it's the piracy of software. It's spreading from person to person that enabled the network effect in the first place. And the future of software, it seems to me, clearly lies in registering and paying a monthly fee. That when you register, it's your data connected to your software. It's unlikely, unlike Netflix, that you're going to share your password very much. And when you pay a monthly fee, it means you're the customer, not the product. The problem with most social networks is that they're free, and therefore they're exploiting their users to make a profit.

19:41That the future of software in the business-to-business setting anyway is going to be businesses that care enough about what's being created that they will pay a monthly fee. and then the software company can spend all of its time making things better for the customers who care enough about the software to pay for it. So spread the software as far as you can, but if you want to use it in a professional setting, register and pay for it. That's my take on it anyway. Hey Seth, this is Jesse from Rochester, New York, just down the road from Buffalo. You frequently talk about the cool projects that you've worked on in your career so I have to believe with so many different projects that at some point you've encountered a plateau.

20:27To me, and I'm sure a lot of other listeners, these plateaus can be extremely frustrating. We stagnate in terms of readers or listeners or earnings, maybe even pounds lost on the post-holiday diet. So I'm wondering, Seth, how have you pushed through these plateaus? What advice or maybe even empathy can you offer those of us stuck on a plateau? Thanks, Seth. This is a great question. Thank you so much. You know, plateaus are interesting because they're mostly about more. They're not necessarily about better. How do I get more clients? How do I get more market share? How do I sell more copies? And as I heard your question, I thought about it.

21:11And I realized that almost all of my career has not been about getting out of a plateau. So it has been about, do I get to do this work? Do I have enough followers? Do I have enough credibility with the publisher? Do I have enough resources to do the work? And can I do the work better? Because that's enough. I'm not willing to compromise the work to get more. And one of the challenges we have in an environment where we are surrounded by survivor bias, where the ones that get on the covers of the magazines and the ones we're all talking about and the ones that are used as examples, these are the projects or businesses that have broken through.

21:57They are the Airbnbs of the world where there's just one zero after another zero. But maybe that's not the journey. And maybe a plateau is exactly what we need. A plateau where we can get firm footing, where we can figure out what we want to do next and to do it well. Now, I have spent lots of time on sinking plateaus, on rafts that are taking on water, on projects where there isn't going to be a next one. When I was in the CD-ROM business, it became pretty clear there wasn't going to be a next one, that there are projects and brands and clients that I've had where, no, there isn't enough to keep going.

22:39And in those situations, I didn't look at it as a plateau. toe. I looked at it as a sinking iceberg. Where do we go from here? Because the journey is to keep doing the work. The journey is to figure out how to find, elevate, and connect the people we seek to serve. And so taking a deep breath and walking away from that, walking away when AOL had been my biggest customer to say, well, we can't support working for AOL anymore because they changed their business model. And these gaps, at least for me, these gaps let the light in. Because when you're looking at the fact that there might not be a raft to hold on to a platform to work on, that's when you take a deep breath and say, I'm going to have to do something that feels risky right now.

23:25Not just the intellectual risk of what will I make next, but the existential organizational risk of if we don't dig in deep and figure out where our next platform is, We're done. And I've probably had a dozen of those shifts in the last 30 years. And I hate them and I love them at the same time. Because it's energizing to realize that you're going to have to do it again. You're going to have to discover again. You're going to have to earn trust again. And then you get to do the work for a while anyway. But you know in the back of your head, it's never the end. because this place that we are playing in, it's not stable.

24:10Frank Gehry shows up and changes architecture. The Kindle and Audible show up and change book publishing. Go down the list. The platforms keep changing. That's what this podcast has been about for 100 episodes. The platforms are going to keep changing, and that's what we're in it for, the chance to surf it, the chance to create something new because the very destruction that made it hard to figure out what's going to happen next is what opened the door to let us figure out what's going to happen next. Thanks for listening. Go make a ruckus.