62 highlights from The Sovereign Individual: “The morality of the Information Age will be the morality of the market”

Ok I didn’t actually count the number of highlights, but there are a lot. It’s a dense book, with fancy language, and I had to slog through sections. But the time invested was worth it. This is a book I’ll read again, particularly as I see some of its sweeping predictions come to fruition. It’s already helped me to better understand the American political and emotional climate, the rise of bitcoin and cryptocurrency, and the evolution in what it means to work and to have a career.

The lens through which they analyze world events:

the most important causes of change are not to be found in political manifestos or in the pronouncements of dead economists, but in the hidden factors that alter the boundaries where power is exercised.

The thesis of the book:

The massed power of the nationstate is destined to be privatized and commercialized.

…leading to the rise of what they call “The Sovereign Individual.” I think in the authors’ view, a good example of someone approaching Sovereign Individual status would be Peter Thiel: defensibly rich, tech savvy, an independent thinker, future oriented, and now with citizenship in multiple countries.

I thought this was well-written, if a bit pandering:

A system that routinely submits control over the largest, most deadly enterprises on earth to the winner of popularity contests between charismatic demagogues is bound to suffer for it in the long run.

Please note: I share all of these highlights not as surrogates for my own views, but as food for thought and examination. I read the book at the same time as Yuval Harari’s Homo Deus and there was quite a bit of overlap in how they see our future.

HIGHLIGHTS

All nationstates face bankruptcy and the rapid erosion of their authority. Mighty as they are, the power they retain is the power to obliterate, not to command.

Farming created stationary capital on an extensive scale, raising the payoff from violence and dramatically increasing the challenge of protecting assets. Farming made both crime and government paying propositions for the first time.

Whenever technological change has divorced the old forms from the new moving forces of the economy, moral standards shift, and people begin to treat those in command of the old institutions with growing disdain.

From the vantage point of the Information Society, the spectacle of soldiers in the modern period traveling halfway around the world to entertain death out of loyalty to the nationstate will come to be seen as grotesque and silly.

[Adam] Smith explains how eighteen separate operations are employed to produce pins. Because of specialized technology and the division of labor, each employee could make 4,800 times more pins in a day than an individual could fabricate on his own.

It was rather a case of the Church as a predominant institution shaping moral, cultural, and legal constraints in ways that were closely fitted to the imperatives of feudalism. For this very reason, they were ill-suited to the needs of industrial society, just as the moral, cultural, and legal constraints of the modern nationstate are ill-suited to facilitating commerce in the Information Age.

For centuries, the nationstate made all outward-facing walls redundant and unnecessary. The level of monopoly that the state exercised over coercion in those areas where it first took hold made them both more peaceful internally and more formidable militarily than any sovereignties the world had seen before. The state used the resources extracted from a largely disarmed population to crush small-scale predators.

Suppose the phone company sent a bill for $50,000 for a call to London, just because you happened to conclude a deal worth $125,000 during a conversation. Neither you nor any other customer in his right mind would pay it. But that is exactly the basis upon which income taxes are assessed in every democratic welfare state.

Most democracies run chronic deficits. This is a fiscal policy characteristic of control by employees. Governments seem notably resistant to reducing the costs of their operations.

“Almost all warmaking states borrow extensively, raise taxes, and seize the means of combat-including men-from reluctant citizens who have other uses for their resources.” CHARLES TILLY

Nationalism made it easier to mobilize power and control large numbers of people. Nationstates formed by underlining and emphasizing characteristics that people held in common, particularly spoken language.

Information technology promises to alter dramatically the balance between protection and extortion, making protection of assets in many cases much easier, and extortion more difficult.

Most factory jobs could have been performed by almost anyone capable of showing up on time. They required little or no training, not even the ability to read or write. As recently as the 1980s, large fractions of the General Motors workforce were either illiterate, innumerate, or both. Until the 1990s, the typical assembly-line worker at GM received only one day of orientation before taking his place on the assembly line. A job you can learn in a single day is not skilled work.

Wherever societies have formed at a scale above bands and tribes, especially where trade routes brought different peoples into contact, specialists in violence have always emerged to plunder any surplus more peaceful people could produce.

governments have never established stable monopolies of coercion over the open sea. Think about it. No government’s laws have ever exclusively applied there. This is a matter of the utmost importance in understanding how the organization of violence and protection will evolve as the economy migrates into cyberspace, which has no physical existence at all.

A theme of elementary education in North America is that the colonists came from Europe seeking freedom and opportunity, which is true. What is seldom told, however, is how reluctant most people were to take the trip […] In the middle of the seventeenth century, inmates locked up in Bridewell, London’s notorious house of correction, revolted to show “their unwillingness to go to Virginia.” In 1720, there were riots in the streets of Paris to free vagabonds, thieves, and murderers scheduled for deportation to Louisiana.

Paper money is a distinctly industrial product. It would have been impractical before the printing press to duplicate receipts or certificates that became paper currency.

Cybermoney will be all but impossible to counterfeit in this way, officially or unofficially. The verifiability of the digital receipts rules out this classic expedient for expropriating wealth through inflation. The new digital money of the Information Age will return control over the medium of exchange to the owners of wealth, who wish to preserve it, rather than to nationstates that wish to spirit it away.

As Lane said, “I would like to suggest that the most weighty single factor in most periods of growth, if any one factor has been most important, has been a reduction in the proportion of resources devoted to war and police.”

the true obstacle to development in backward countries has been the one factor of production that could not be easily borrowed or imported from abroad, namely government

We also suspect that nationstates with a single major metropolis will remain coherent longer than those with several big cities, which imply multiple centers of interest

An intense and even violent nationalist reaction centered among those who lose status, income, and power when what they consider to be their “ordinary life” is disrupted by political devolution and new market arrangements.

Shaw and Wong focus on five identification devices used by modern nationstates to mobilize their populations against out-groups. These are: 1. a common language 2. a shared homeland 3. similar phenotypic characteristics 4. a shared religious heritage and 5. the belief of common descent

Information technology is also creating supraterritorial assets, which will help to subvert the embodiment of the in-group, the nationstate. Ironically, these new cyberassets will probably be of higher value precisely because they are established at a distance from home. All the more so if there is an invidious backlash of the kind we expect against the economic inequality arising from increasing penetration of information technology in the rich industrial countries.

Bethke Elshtain observed, nationstates indoctrinate citizens more for sacrifice than aggression: “The young man goes to war not so much to kill as to die, to forfeit his particular body for that of the large body, the body politic.”

Yet blacks, as a group, are major beneficiaries of income transfers, affirmative action, and other fruits of political compulsion. They are also disproportionately represented in the U.S. military. Therefore, they are likely to emerge, along with blue-collar whites, as among the most fervent partisans of American nationalism.

By eliminating the beneficial impact of competition in challenging underachievers to conform to productive norms, the welfare state has helped to create legions of dysfunctional, paranoid, and poorly acculturated people, the social equivalent of a powder keg.

Predatory tax rates made the democratic state a de facto partner with a three-quarters to nine-tenths share in all earnings. This was not the same thing as state socialism, to be sure. But it was a close relation. The democratic state survived longer because it was more flexible and collected more prodigious quantities of resources compared to those available in Moscow or East Berlin.

A system that routinely submits control over the largest, most deadly enterprises on earth to the winner of popularity contests between charismatic demagogues is bound to suffer for it in the long run.

For human beings it is the struggle rather than the achievement that matters; we are made for action, and the achievement can prove to be a great disappointment.

We can see the history of public morality as a cycle between disorder and authoritarianism; the modern authoritarian moralities, both feminism and fundamentalism, have emerged as a cyclical response to the hedonism of the 1960s.

Like most elites, the cognitive elite tend to be a bit above themselves, are rather arrogant, and think they can set their own standards. They are alienated from society as a result.

In science, three thousand years completely changed what human knowledge is; in morality, we may actually have fallen back. The average psychotherapist probably gives the patient less good moral advice on how to lead his life than the average Jew would have received from his teacher in the period of Moses.

A good social morality has certain characteristics. It should contribute to the survival of society and of individuals, in a dynamic rather than static way. It should include tolerance and avoid self-righteousness. It should be religious, rather than merely agnostic. It should not pretend to decide questions of scientific fact. It should be neither anarchic nor authoritarian. It should be widely shared and deeply held. Such a social morality is particularly important to the family and to the raising of children as independent and responsible adults. It provides the focus of a good society.

The morality of the Information Age applauds efficiency, and recognizes the advantage of resources being dedicated to their highest-value uses. In other words, the morality of the Information Age will be the morality of the market.

Today most people believe that cultures are more matters of taste than sources of guidance for behavior that can mislead as well as inform. We are too keen to believe that all cultures are created equal, too slow to recognize the drawbacks of counterproductive cultures.

Protection will be more technological than juridical. Walling out troublemakers is an effective as well as traditional way of minimizing criminal violence in times of weak central authority.

Because incomes for the very rich will rise faster than for others in advanced economies, an area of growing demand will be services and products that cater to the needs of the very rich.

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.

9 Highlights from Peter Thiel’s Startup Class Notes

I spent 4 hours reading through Blake Master’s notes from Peter Thiel’s startup class.

First, HUGE thanks to Blake for writing such detailed and thoughtful notes. After reading them, I *almost* felt like I was in the class, and I learned a TON in a short period of time.

In the spirit of being more mindful about what I consume & learn, here are some of my biggest takeaways:

1. True innovation is going from 0 to 1, not 1 to n. Google’s search technology was a 0 to 1 problem. They had to create something completely new, with relatively few precedents or comparables. The numerous Groupon clones are solving 1 to n problems, since the core product innovation has been accomplished.

Maybe we focus so much on going from 1 to n because that’s easier to do. There’s little doubt that going from 0 to 1 is qualitatively different, and almost always harder, than copying something n times. And even trying to achieve vertical, 0 to 1 progress presents the challenge of exceptionalism; any founder or inventor doing something new must wonder: am I sane? Or am I crazy?

Anyone on a mission tends to want to go from 0 to 1. You can only do that if you’re surrounded by others to want to go from 0 to 1.

2. Great companies create meaningful value that lasts, and they (ideally) capture a lot of that value.

Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create.

Consider great tech companies. Most have one decisive advantage—such as economies of scale or uniquely low production costs—that make them at least monopoly-esque in some important way. A drug company, for instance, might secure patent protection for a certain drug, thus enabling it to charge more than its costs of production. The really valuable businesses are monopoly businesses. They are the last movers who create value that can be sustained over time instead of being eroded away by competitive forces.

3. Start with a small, or new, market; dominate it; then expand to adjacent markets and grow larger over time

First, you want to find, create, or discover a new market. Second, you monopolize that market. Then you figure out how to expand that monopoly over time.

Markets that are too big are bad for all the reasons discussed above; it’s hard to get a handle on them and they are usually too competitive to make money.

The best kind of business is thus one where you can tell a compelling story about the future. The stories will all be different, but they take the same form: find a small target market, become the best in the world at serving it, take over immediately adjacent markets, widen the aperture of what you’re doing, and capture more and more. Once the operation is quite large, some combination of network effects, technology, scale advantages, or even brand should make it very hard for others to follow. That is the recipe for building valuable businesses.

4. Founders, and founding moments, are crucial to a company’s long-term success

The insight that foundings are crucial is what is behind the Founders Fund name. Founders and founding moments are very important in determining what comes next for a given business. If you focus on the founding and get it right, you have a chance. If you don’t, you’ll be lucky at best, and probably not even that.

The ideal is the combination of high trust people with a structure that provides a high degree of alignment. People trust each other and together create a good culture. But there’s good structure to it, too. People are rowing in the same direction, and not by accident.

5. Power law dynamics and exponential things are more common, and more powerful, than we think. For VCs to make money, a single investment must return the fund. Remember this when you’re pitching!!

If you look at Founders Fund’s 2005 fund, the best investment ended up being worth about as much as all the rest combined. And the investment in the second best company was about as valuable as number three through the rest. This same dynamic generally held true throughout the fund. This is the power law distribution in practice. To a first approximation, a VC portfolio will only make money if your best company investment ends up being worth more than your whole fund.

Despite being rooted in middle school math, exponential thinking is hard. We live in a world where we normally don’t experience anything exponentially. Our general life experience is pretty linear. We vastly underestimate exponential things. If you backtest Founders Fund’s portfolios, one heuristic that’s worked shockingly well is that you should always exercise your pro rata participation rights whenever a smart VC was leading a portfolio company’s up round. Conversely, the test showed that you should never increase your investment on a flat or down round.

6. Distribution is vastly underestimated among startup success factors. Build it and they will not come. CLV > CAC

But for whatever reason, people do not get distribution. They tend to overlook it. It is the single topic whose importance people understand least. Even if you have an incredibly fantastic product, you still have to get it out to people. The engineering bias blinds people to this simple fact. The conventional thinking is that great products sell themselves; if you have great product, it will inevitably reach consumers. But nothing is further from the truth.

It is very likely that one channel is optimal. Most businesses actually get zero distribution channels to work. Poor distribution—not product—is the number one cause of failure. If you can get even a single distribution channel to work, you have great business. If you try for several but don’t nail one, you’re finished.

Distribution isn’t just about getting your product to users. It’s also about selling your company to employees and investors. The familiar anti-distribution theory is: the product is so good it sells itself. That, again, is simply wrong.

7. What’s your secret?

What important truth do very few people agree with you on?

What great company is no one starting?

The focus should be on the secrets that matter: the big secrets that are true.

8. Are you a pessimist or optimist? Do you view the world as determinate or indeterminate? SUCH a powerful framework…

If you believe that the future is fundamentally indeterminate, you would stress diversification. This is true whether you’re optimistic or pessimistic. And indeed, chasing optionality seems to be what most everybody does. People go to junior high and then high school. They do all sorts of activities and join lots of clubs along the way. They basically spend 10 years building a diverse resume. They are preparing for a completely unknowable future. Whatever winds up happening, the diversely prepared can find something in their resume to build on.

In a strange way, China falls squarely in the determinate pessimistic quadrant. It is the opposite of the U.S.’s optimistic indeterminacy.

But the indeterminate future is somehow one in which probability and statistics are the dominant modality for making sense of the world. Bell curves and random walks define what the future is going to look like. The standard pedagogical argument is that high schools should get rid of calculus and replace it with statistics, which is really important and actually useful. There has been a powerful shift toward the idea that statistical ways of thinking are going to drive the future.

9. Great people throughout history have been both extreme insiders and extreme outsiders. Things go great (ie, you’re the King) until they don’t (ie, you get killed). Some analogues with startup founders

The dynamic might work like this. People start out being different. They are nurtured to develop their already somewhat extreme traits. Those traits become more important, and they learn to exaggerate them. Others perceive that inflated importance and exaggerate in turn. The founders thus end up being even more different than they were before. And we cycle and repeat.

And we’ll end with a powerful excerpt from Abe Lincoln:

The question then is, Can that gratification be found in supporting and maintaining an edifice that has been erected by others? Most certainly it cannot. Many great and good men, sufficiently qualified for any task they should undertake, may ever be found whose ambition would aspire to nothing beyond a seat in Congress, a gubernatorial or a presidential chair; but such belong not to the family of the lion or the tribe of the eagle. What! think you these places would satisfy an Alexander, a Caesar, or a Napoleon? Never! Towering genius disdains a beaten path. It seeks regions hitherto unexplored. It sees no distinction in adding story to story upon the monuments of fame erected to the memory of others. It denies that it is glory enough to serve under any chief. It scorns to tread in the footsteps of any predecessor, however illustrious. It thirsts and burns for distinction; and if possible, it will have it, whether at the expense of emancipating slaves or enslaving freemen. Is it unreasonable, then, to expect that some man possessed of the loftiest genius, coupled with ambition sufficient to push it to its utmost stretch, will at some time spring up among us?

Hope you enjoyed these snippets. Read the full notes on Blake’s site.

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.