The problem of identifying secular trends to craft long-term investment priorities can be addressed through ethnography, a form of abductive reasoning based upon interviewing the participants in and around a given movement or organization. To read more about Iterative Capital's ethnographic process, click here.
In this article, we discuss secular trends that interest us, largely because they are adjacent ty the cryptocurrency phenomenon – but also because they will have impact upon the investor class and the institutions they support, making them more broadly relevant.
“We find ourselves trying to bend the course of events in a way which will bring the probable closer to desire. And this is the reason that we study the future.”—Bertrand de Jouvenal
Secular Trends Adjacent to Cryptocurrency
Here, we'll rattle off some trends broadly observable:
- Financialization of Business vs. Wages: Financialization is defined as as profit margin growth without labor productivity growth; it is evidenced when the ratio of earnings to sales is increasing in the S&P 500. Financialization relies heavily on tax arbitrage or balance sheet arbitrage, wherein profit margin growth is “pulled forward” from future real growth, and “pulled backward” from current economic risk-taking. Happening now in US stocks and Chinese real estate, and indicates an "zombie economy." Real wages have stayed flag for almost 40 years.
- Employment Trends vs. Full Time Work: “Software is eating the world,” with tech jobs in highest demand. (Healthcare too, but this is just a preamble to a biotech boom.) Growth of freelancing and ad hoc “gig” employment disintermediates middlemen (ie., Airbnb and Uber).
- Moral Fashions vs. Institutional Power: Diversity, equity, inclusion, #MeToo, concern for the marginalized; demands for transparency and fairness. Scrutiny and judgement of large powerful organizations. This movement portrays centralized power as a safe haven for abusive behaviors. Leaderless movements similar to Occupy Wall Street and Arab Spring.
- Quantification of Everything Social: New Social Hierarchies: Skill-based hierarchies forming in online communities where “likes” (and engagement generally) are a yardstick for talent, success, and value. Followers and audience size beget network effect (“virality”). Verifiable game scores and viral videos sanctify elite community members. Streaming viewership means viewers can live vicariously, and in pseudonymity.
- Demographic Certainties: Millennials (born between 1982 and 2000) number 83.1 million, over 25% of the nation’s population, exceeding the 75.4 million baby boomers. (US Census). They are diverse, with 44.2 percent being part of a minority race, and the Most educated generation ever (Pew Research).
- Future of Work Is Less Hierarchical: Witness the automation of financial services, retail, military, and construction tasks. Large corporations restructuring to anticipate future restructurings. Trends towards no-boss, no-plan, “pickup basketball” workplaces ala Github/Spotify/Microsoft/Yammer/Valve/WL Gore (who has been working "open allocation" since 1967!). OA begets emergent consensus. There is common ground, organizationally, between an OA company and a leaderless movement like Occupy Wall Street.
- Generational Values (vs. Business): Young people today value identity and experience over material things. Desire entrepreneurial lifestyle; idealistic. Highly leveraged (student loans and revolving credit) with a low rate of savings makes them highly motivated to "cash in" on natural talents. Living check to check; but care about employer ethics (eg., Google protests; 996 protests in China). “This engineer’s lament is a microcosm of a larger trend,” reported Vanity Fair in August of 2018, writing of the Google protests.
Vision of the Future
“The truth was, their revolution was not about an idea. It was about how you manage things.” BBC filmmaker Adam Curtis, re: Occupy Wall Street
Where are we headed? Rather than walk you through the gardens of possibility, or the process that led us to the following conclusions, we'll get straight to the point: we're headed for a leaderless "emergent consensus" based economy. That is: a digital bazaar of self-selected groups of skilled individuals, working in a loosely organized fashion, with highly automated processes – not the traditional hierarchical companies and entities we're used to today. Here's how it will look:
- Companies will organize in a Dual-OS fashion, with a small number of full-time roles and a large number of contingent roles.
- Emergent groups will engage in decision making coordinated by software. Today, version control systems like Github enable collaborative work and limited discussion. More sophisticated decision making tools like Glassfrog and Parabol, drawn from the highly-regimented Holacracy organization design, add nuance and layers of permissions to automated decision making infrastructure.
- It's said by industrial economists that industrial economic activity is non-zero-sum, and commercial endeavors are limited by transaction costs. Systems like Bitcoin allow communities to create a workspace with extremely low transaction costs, lowering the threshold for productive collaboration and peer-to-peer commerce.
- Self-selecting, skill-based, pseudonymous groups are extremely tight knit, and do not share qualities with traditional definitions of “voting blocs,” will not fit into existing political coalitions.
- Representational decision making (ie., democracy) is unnecessary in an environment with extremely low transaction costs. Law, corporate entities, and personal property also become moot. (R. Coase).
- Emergent consensus (ie., ad hoc decision making and resource allocation) is only possible in environments with low transaction costs.
“In the absence of transaction costs," Coase wrote in 1987, "it does not matter what the law is, since people can always negotiate without cost to acquire, sub-divide, and combine rights whenever this would increase the value of production. In such a world, the institutions which make up the economic system have neither substance nor purpose.”
Let's back up and talk about the trends that led us to these conclusions, discovered while in the process of putting together research for clients of Iterative Capital Advisors.
We won't go through each step exhaustively in this article – it's extensive, and you can read more about it here – but we'll include some of the more interesting highlights.
- Roughly half of the 23.8 million management roles in the United States are unnecessary.
- U.S. workers spend a staggering 710 million hours per week on internal compliance activities such as budgeting and planning.
- 50% of all compliance activity isn’t adding value. What equates to work of 9 million people is being wasted each year on “bureaucratic theater.”
- Organizational debt (ie., bureaucracy to deal with bureaucracy) is high, based on self-report.
- In 1958, the average tenure of a company on Fortune 500 list was 61 years.
- By 2016 it was 24 years.
- In an analysis of more than 25,000 companies, the half-life of all firms was roughly 10.5 years (ie., they last 21 years).
- The average holding time for a stock has gone from eight years to five days (HFT over value investing).
- Of US companies, the top 25% have seen ROA drop from 12.9 percent in 1965 to 8.3 percent in 2015.
- Google engineers protesting work with China.
- Facebook workers protesting content moderation jobs.
- Twitter accused of selective de-platforming political news outlets.
- Among firms that pursue patents aggressively, small business produce 16x more patents than large businesses.
- 47% of all jobs in the US were susceptible to automation (as of 2013). Secretarial and sales most.
- Labor productivity today is at its lowest since 1945.
- Wages increased only 12.5% since the same year.
- Productivity has outpaced pay by 5.9x.
Our Primary Forecasts
Out of the process above, we arrived at a series of primary forecasts:
- The firm entry rate will continue dropping. The number of startups less than one year old as a share of all firms was cut in half between 1978 and 2011
- Self-employment continues dropping. More people will rely on large corporations for work. Among people aged 15 through 34, self-employment has been dropping since 1990.
- More companies will close up each year than will start up. The firm exit rate (the number of business deaths as a share of all firms) has been higher than the entry rate since 2008.
- The companies that stick around will be the old ones, not the upstarts. The share of firms aged 16 years or older went from 23 percent in 1992 to 34 percent in 2011. That’s a 50 percent increase in 20 years.
- Economy will enter state of “graceful degradation.” Graceful degradation is the ability of a system to maintain limited functionality even as a large portion of it has been rendered inoperative, to prevent catastrophic failure.
- Globalization creates new bureaucracies, which requires more tech, which increases speed and change further. Technology does not decrease bureaucracy; it increases our collective capacity for it.
- As economic conditions worsen, democracy becomes vulnerable to manipulation. Working people have less and less time and resources to educate themselves on the issues; rely more on mass media or hearsay.
- Global workforce rises from 3.9 billion in 2010 to almost 5.3 billion in 2050.
- Over 70% of workers live in emerging economies. Waves of successive outsourcing hit the West, where social stratification increases—cognitive elites pull further ahead.
- “Information-monopoly capitalism” grows unabated. Small number of companies dominate each industry, protected by a bulwark of data, financialized consumption, immaterial labor, and network effects.
- “Information-monopoly capitalism” becomes “surveillance capitalism.” In an effort to anticipate changing tastes and buying habits, and to sell government contracts, technology companies engage in de facto espionage.
Companies will naturally try to re-organize to move more quickly; the history of their attempts at doing so can be found here, in the final section.
Secondary forecasts attempt to intuit how the situation will change when ameliorative actions are taken after Natural Reactions are felt.
- Many workers never get inside a hierarchical full-time employment role, and are instead relegated to contingent employment or self-employment. Coveted hierarchy jobs will be few, whereas most workers will perform some network role, on their own time and off-site.
- No economic or social action will be forgotten. Any activity of import is time stamped on a public blockchain, from your car’s automatic software updates to your paycheck to your highway toll.
- Steganographic techniques allow new stores of value. Game-makers and marketers will hide small fortunes in MP4 song files, or high-resolution images, allowing for hacker scavenger hunts or games of chance.
- Viral scavenger hunts will be the most critical recruiting tool for cooperative networks to recruit smart contributors. There’s a natural segue into “bounty” style work, as done by Bithub or Gitcoin.
- Identity and communication will be governed by user groups, creating value using stigmergy, or ad hoc collaboration. Overlapping online societies create social acceptance, and guarantee social contracts despite pseudonymity. (Think: Reddit)
Broader Impact: The Waning of Authority
As employment becomes more self-directed, company “rules” are enforced by employees themselves, leading to broader societal peer-policing, especially online. (Think: Reddit justice).
Individuals with advanced knowledge have conversations with peers, in view of the larger organization. Transcripts, summarized by AI, might help younger employees integrate more readily with their peers in the network. Institutions become databases and assets, and employees maintain the business logic between them.
How will people be informed about democracy in the future?
- By peers with proven skill-sets or knowledge-bases.
- Empirically as well as anecdotally (ie., interpretations of data).
- Not from reporters.
- Not from bosses or other business leaders, who will become mootVia profit motive (ie., which political positions butter my bread?).
- Through a future-skill-acquisition lends. Faster-moving economy means workers ask peers “what do I need to learn next?”
Where will voters discuss issues?
- In large group chat channels
- In small private group chat channels
- “Around the content” ie., Gab; Rap Genius; YouTube; Twitch & Discord
- In person, at private events circulated within chat channels
Where will institutions interact with communities?
- Community now dictates to the institution, because the community knows more about the future.
- Only if the institution has a person who is a legitimate member of that community. This person cannot join as a function of the role, but must be hired in from the target community.
- Through individual reporters, whose names overshadow the publications they write for. Do not associate strongly with publications!
- In places where skillset groups congregate, not identity-based or geographical-based groups. That’s not how people associate online. You can’t “prove” your identity online but you can prove skills and knowledge.
What value do institutions provide in the future?
- Institutions are bridges to the past: their value to communities lies in conferring reputation; bridge to older generations, enabling greater reach.
- Co-builders of community infrastructure, lending resources to these groups to earn their loyalty.
What kind of eventualities should institutions be aware of?
- When ad hoc employment is common, employers not good “bundlers” of people.
- Grants will be outstripped by community funding proposals (such as Decred's Politeia).
- Application processes for grants needs to be transparent.
- Projects seeking grants more participatory; brick-and-mortar.
- High levels of debt may put grant recipients on a longer timeline for success.
- Open sourcing of large datasets might make institutional insight less valuable.
- Internationalization of communities may make it harder to render grants in USD.
Assuming this landscape comes to pass, how to we think about the trends that will result or amplify?