Bryan Caplan  

Thiel, Schmidt, and Consumption-Biased Technological Change

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Hummel on Graeber... Peter Thiel's Question...
In a fascinating debate, Peter Thiel challenges Google's Eric Schmidt:
Google is a great company.  It has 30,000 people, or 20,000, whatever the number is.  They have pretty safe jobs.  On the other hand, Google also has 30, 40, 50 billion in cash.  It has no idea how to invest that money in technology effectively.  So, it prefers getting zero percent interest from Mr. Bernanke, effectively the cash sort of gets burned away over time through inflation, because there are no ideas that Google has how to spend money.

[...]

But, if we're living in an accelerating technological world, and you have zero percent interest rates in the background, you should be able to invest all of your money in things that will return it many times over, and the fact that you're out of ideas...
Moderator Adam Lashinsky adds:
You have $50 billion at Google, why don't you spend it on doing more in tech, or are you out of ideas?  And I think Google does more than most companies.
Schmidt is pretty clearly stumped.  Here's what I would have said if I were in his shoes:
The reason we're not investing more in new technology isn't that we're out of ideas.  It's that we're out of ideas that we think will make money.  Why are we out of ideas that make money?  Because millions of people keep giving away incredible innovations to everyone for free! 

Challenge for the audience: Think of something you want.  Now use Google to locate whoever's already providing it for free.  I could do this all day.
Google's "problem," in short, is what I call consumption-biased technological change:
Sure, high-skilled workers' incomes have risen a lot faster than other people's over the last forty years.  But iPods, Google, Twitter, and much of the Internet demand virtually zero workers of any skill level.  From this perspective, "skill-biased technological change" is a major misnomer.  A much more accurate description is consumption-biased technological change.  Firms are figuring out ways for small numbers of workers to create tons of value - then give it away to consumers for pennies or less.  And as far as I can tell, the CPI totally ignores these benefits.
 

CPI bias: Now worse than ever.  Quality of life: Now better than ever.

Note to Google and all its actual and potential competitors: While I'd prefer to get a self-driving car for free, I would be delighted to pay cold hard cash to get one.  Build them, and I will buy.

HT: Alex



COMMENTS (18 to date)
Steve Sailer writes:

Keep in mind that tech companies have much of their money piled up in offshore tax havens. For example, Microsoft operates a disk stamping plant in Puerto Rico and thereby takes most of its North American profits in Puerto Rico. You might think of MS as a Washington-based software company, but to the IRS, MS is an industrial goliath based in Puerto Rico, Ireland, and Singapore, with a money-losing R&D office in Redmond.

For some reason, MS doesn't think it would be profitable to do a lot of R&D in Puerto Rico. Probably just prejudice, I'm sure.

Ken writes:

Your last sentence was going thru my head from the beginning of the article. $50 billion is a nice little war chest if you want to take on Detroit. Then there's the Google fiber roll out (testing in Kansas city soon) and talk of Google TV and cable. I really doubt they are out of ideas.

Mark Bahner writes:
On the other hand, Google also has 30, 40, 50 billion in cash.

I haven't ever thought about this, but why wouldn't Google have its extra money invested broadly indexed stock market funds?

Firms are figuring out ways for small numbers of workers to create tons of value - then give it away to consumers for pennies or less. And as far as I can tell, the CPI totally ignores these benefits.

I have thought about this. This effect is going to accelerate dramatically as we approach the Singularity (only a few decades away).

Consider that Foxcomm expects to have 1 million robot workers by 2014. It's fairly easy to imagine a few more decades where virtually all assembly of electronics is entirely by robots.

1 million robot workers by 2014

And the electronics (or frozen food, or desks or chairs, or clothes...you name it) come out of the totally automated factory, and get driven by fully computer-driven trucks right to your doorstep. No electronics stores (sorry, Best Buy)...no stores, period (sorry Walmart, Target, Kroger, Safeway, Walgreens, CVS, etc. etc.).

John David Galt writes:

If we're undergoing technological stagnation, it is an effect, not a cause.

The causes are easy to see, just ask anyone who still has money to invest: (1) overregulation, (2) overtaxation, (3) uncertainty about what the taxes and regulations will be tomorrow or next year, (4) impending runaway inflation that will destroy both the euro and the dollar any time now, and (5) threats of war starting in several places in the Middle East, compounded by a president whose foreign policy makes Jimmy Carter look like a genius.

In terms of historical parallels, we can expect the next world war within 5 years, certainly within 10, and it will probably go nuclear and do about as much damage as WW2, but this time America's oceans won't keep us from suffering a lot of that damage.

The good news, if there is any, is that even if Red China winds up as the new dominant power, *some* country will manage to become once again safe to invest in. I just hope they'll let me immigrate there, wherever it is.

Ken writes:

I agree that consumption-biased technological change creates fewer jobs and also being less investment oriented may create less long term economic growth.

However, such technological innovation is bringing lots of value which is not measured in CPI, GDP or wages. What is Google search worth to the world? Way more than the $50 billion Google has in the bank.

Jamie_NYC writes:

Think of something you want. Now use Google to locate whoever's already providing it for free.

- Mass supersonic air transport
- Silent, emission free trucks and buses
- Human colonies on the Moon
- Human colonies under the sea
- Drugs that slow down aging
- Robotic domestic help

I think that from the view-point of 1970, all these technologies were expected to arrive by 2010.

TGS

nazgulnarsil writes:

Simple ways to create visualizations from large data sets.

Jon Leonard writes:

To me this looks a lot like access-to-credit arbitrage. The money markets are somewhat reluctant to lend to tech companies; if a tech company is going to be prepared to do some large expenditure, they need to actually have that much money in liquid assets. That's in contrast to banks (for example), which can borrow fairly cheaply and reliably (albeit partially due to government intervention). So the tech companies amass liquid assets, the banks amass debt, and at equilibrium they both have similar difficulty raising the next dollar of funding. It's just expensive for the less-credit-favored companies to get there.

Google's cash hoard (and that of other companies) can in some sense be viewed as an option on being able to fund lumpy expenses in the future.

Hugh writes:
Why are we out of ideas that make money? Because millions of people keep giving away incredible innovations to everyone for free!

Alarm bells go off when I hear the word "free": Google search is "free" but Google makes money by advertising that is tailored to your search. I expect it's the same for 99.9% of other "incredible innovations". As a consumer you can be sure that you will pay for all of this in the end.

rpl writes:
Think of something you want. Now use Google to locate whoever's already providing it for free.

- Mass supersonic air transport
- Silent, emission free trucks and buses
- Human colonies on the Moon
- Human colonies under the sea
- Drugs that slow down aging
- Robotic domestic help


The cash hoard that sparked the discussion is "only" $50B. You can't make serious progress on any of those problems with $50B. Perhaps Bryan cast a little too wide a net with his claim, but I believe the basic point is valid. Google invents a lot of great stuff that people really use, but it has a hard time making money off of it.
TGS
Yeah, right. More like "Everything's amazing, but nobody's happy."
Mike W writes:

What are the odds that a small number of people making the capital allocation decisions at these companies with so much cash are going to pick the right investments. It seems a lot like the nine guys at the top of the Chinese government...nobody believes they will successfully allocate the country's wealth over time.

So...how about if the government taxes away these huge profits and reduces taxes on the rest of the population? Distribute those allocation decisions.

Floccina writes:
CPI bias: Now worse than ever. Quality of life: Now better than ever.

You can shout that from the house tops.

Note to Google and all its actual and potential competitors: While I'd prefer to get a self-driving car for free, I would be delighted to pay cold hard cash to get one. Build them, and I will buy.

I am easier than that, build a car that drives itself on the interstates and I will be willing to spend about $40,000 on one.

Thomas DeMeo writes:

The problem is that profit mechanisms need some time and friction to work. We are squeezing that all out to the point where the markets are starting to not work so well.

Lord writes:

For an established company the problem is never that they don't think they can make a profit, but that they can't make as much profit as they do on their existing products. Companies don't maximize profits, they maximize profitability. Tarnishing their profitability with low return businesses would only reduce their pe growth multiple.

KLO writes:

This. The problem is that when a company hits a big winner, they make a ton of money that they cannot reinvest because any investment would not produce the same return as their current successful product. Overall, this leads to underinvestment in the economy, as a handful of highly profitable companies soak up most corporate profits and those profits never get reinvested. It is also probably the case that the handful of corporate managers at these firms would not invest the profits well, because they are, after all, just a few guys. Unless and until the markets pressure the firms to distribute the profits, those profits don't get put to an particularly good use.

Michael Rulle writes:

Jeez Louise!

They should give the money back to the people formerly known as "owners" who are now called "shareholders". Let that money get recirculated back into Hayek's spontaneous order world, rather than have Herr Schmidt try to catch lightening in a bottle a second time.

What are you thinking? This is like sending ideas to the Department of Energy to look for the next Solyndra. I at least give credit to Google for (supposedly) not wasting money.

Please see my similar response on Arnold's blog on this same point.

Mark Bahner writes:
I am easier than that, build a car that drives itself on the interstates and I will be willing to spend about $40,000 on one.

I think Cadillac and Lincoln are planning to have production cars able to do this by 2014.

Computer-driven cars can't come too soon, in my opinion. It's a huge deal for mobility for old people. Not being able to drive a car is a huge problem.

Rationalist writes:

Imagine that we are looking back on the big innovations (in AI, biotech/biomedicine, robotics, nanotech, etc) which happened in the years 2012 - 2100. I am willing to bet that a lot of those innovations will be dependent on academic research which hasn't been done yet, and that even with perfect knowledge of which areas are going to be important, Google wouldn't be able to get anything out of it's cash without embarking on a large corporate "blue skies" R&D program of the same calibre as Bell Labs.

And as far as I am aware, Bell Labs provided a huge amount of value to the world, none of which accrued to Bell.

We might look at Google's unspent war chest as a consequence of not having an economic system which rewards companies who "do a Bell".

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