WTF?: What's the Future and Why It's Up to Us

by Tim O'Reilly

if I know a stock price is going up or going down before you do, I can act on it. . . . [I]t’s a bit like knowing the result of the horse race before it’s run. . . . The time advantage of a high-frequency trader is so small, it’s literally a millisecond.

Lewis noted that this divides the market into two camps, prey and predator, the people who actually want to invest in companies, and people who have figured out how to use their speed advantage to front-run them, buy the stock before ordinary traders can get to it, and resell it to them at a higher price.

They are essentially parasites, adding no value to the market, only extracting it for themselves. “The stock market is rigged,” Lewis told Gross. “It’s rigged for the benefit for a handful of insiders. It’s rigged to . . . maximize the take of Wall Street, of banks, the exchanges and the high-frequency traders at the expense of ordinary investors.”

In short, both high-speed trading and complex derivatives tilt financial markets away from human control and understanding. But they do more than that. They have cut their anchor to the human economy of real goods and services.

Before long, the gospel of shareholder value maximization was taught in business schools and enshrined in corporate governance.

Whether or not the unit provided useful jobs to a community or useful services to customers was not a reason to keep on with a line of business. Only the contribution to GE’s growth and profits, and hence its stock price, mattered.

role. But by elevating the single fitness function of increasing share price above all else, they hollowed out our overall economy. The preferred tool of choice has become stock buybacks, which, by reducing the number of shares outstanding, raise the earnings per share, and thus the stock price.

the amount spent on dividends and buybacks by companies that make up the S&P 500 was greater than the entire operating profit of those companies.

However, even with the most generous interpretation, little more than half of all Americans are shareholders in any form, and of those who are, the proportional ownership is highly skewed toward a small segment of the population—the now-famous 1%.

the bulk of jobs are provided by small businesses, not by large public companies. She was warning me not to overstate the role of financial markets in economic malaise,

the true effect of “trickle-down economics” is the way that the ideal of maximizing profit, not shared prosperity, has metastasized from financial markets and so shapes our entire society.

notes that in the decade from 2004 to 2013, Fortune 500 companies spent an astonishing $3.4 trillion on stock buybacks, representing 51% of all corporate profits for those companies. Another 35% of profits were paid out to shareholders in dividends, leaving only 14% for reinvestment in the company.

The decline in corporate retained earnings is critical, because they are the most important source of funds for business investment.

“the primary role of the stock market has been to permit owner-entrepreneurs and their private-equity associates to exit personally from investments that have already been made rather than to enable a corporation to raise funds for new investment in productive assets.”

“the resource-allocation regime at many, if not most, major U.S. business corporations has transitioned from ‘retain-and-reinvest’ to ‘downsize-and-distribute.’

One casualty of the shareholder value economy has been the decline of corporate scientific research.

The biggest losers, though, from this change in corporate reinvestment have been workers, whose jobs have been eliminated and whose wages have been cut to fund increasing returns to shareholders.

Lazonick believes his research demonstrates that this trend “is in large part responsible for a national economy characterized by income inequity, employment instability, and diminished innovative capability—or the opposite of what I have called ‘sustainable prosperity.’”

It isn’t Wall Street per se that is becoming hostile to humanity. It is the master algorithm of shareholder capitalism, whose fitness function both motivates and coerces companies to pursue short-term profit above all else. What are humans in that system but a cost to be eliminated?

If profit is the measure of all things, why not “manage your earnings,” as Welch, the CEO of GE, came to do, so that the business appears better than it is to investors? Why not actively trade against your customers, as investment banks began to do? Why not dip into outright fraud, selling those customers complicated financial instruments that were designed to fail? And

Who is the market? It is algorithmic traders who pop in and out of companies at millisecond speed, turning what was once a vehicle for capital investment in the real economy into a casino where the rules always favor the house.

“The single biggest unexplored reason for long-term slower growth,” she writes, “is that the financial system has stopped serving the real economy and now serves mainly itself.”

nearly all the income gains since the 1980s have gone to the top tenth of 1%.

Despite United Technologies’ rhetoric, it is not a company that needs to cut costs “for the long term competitive nature of the business.” I believe that a set of money managers, already members of the .01%, are demanding that profits rise in order to drive up the stock, so that their own incomes will increase. Top managers in the company go along with this plan because their compensation is also tied to that rise in stock price and because they will lose their jobs if they don’t deliver on it. This is a forced wealth reallocation from one set of stakeholders in the company to another.

The system is rigged. Companies are forced to eliminate workers not by the market of real goods and services where supply and demand set the right price, but by the commands of financial markets, where hope and greed too often set the price.

Why do we have lower taxes on capital when it is so abundant that much of it is sitting on the sidelines rather than being put to work in our economy? Why do we tax labor income more highly when one of the problems in our economy is lack of aggregate consumer demand because ordinary people don’t have money in their pockets?

Why do we treat purely financial investments as equivalent to real business investment? “Only around 15% of the money flowing from financial institutions actually makes its way into business investment,” says Rana Foroohar. “The rest gets moved around a closed financial loop, via the buying and selling of existing assets, like real estate, stocks, and bonds.” There is some need for liquidity in the system, but 85%?

Here is one of the failed rules of today’s economy: Human labor should be eliminated as a cost whenever possible. This will increase the profits of a business, and richly reward investors. These profits will trickle down to the rest of society. The evidence is in. This rule doesn’t work. It’s time to rewrite the rules. We need to play the game of business as if people matter.

That leverage makes stock an incredibly powerful currency, which swamps the purchasing power of the ordinary currency used in the market of real goods and services. Amazon’s profits in 2016 were just shy of $2.4 billion, and its book value (the actual value of its cash, inventories, and other assets less its liabilities) $17.8 billion, yet its market capitalization at the end of the year was $356 billion.

For a smaller company, like Salesforce, with a market capitalization closer to $50 billion, 1% would only be $500 million—so Salesforce can afford only a tenth as much to hire engineers even though it has a third as many employees as Google. As a result, one analyst said to me that Salesforce would eventually have to be sold to a bigger company. This same analyst believed that this was ultimately the reason that LinkedIn was sold to Microsoft. They just weren’t big enough to be competitive as a stand-alone company in today’s market, he said.

“All of the great advances in our society have come when we have made investments in other people’s children.”

Remember Saul Griffith’s comment: “We replace materials with math.”

The future is not just one of “smart stuff,” tools and devices infused with sensors and intelligence, but of new kinds of “dumb stuff” made with smart tools and better processes for making that stuff.

W]hen Elon builds a company, its core initial strategy is usually to create the match that will ignite the industry and get the Human Colossus working on the cause.” Proving

Stuart Firestein, in his book Ignorance, makes the case that science is not the collection of what we know. It is the practice of investigating what we don’t know. Ignorance, not knowledge, drives science.

The company wanted to know how to get more developers for its platform. David asked a key question: “Do any of them play with it after work, on their own time?” The answer was no. David told them that until they fixed that problem, reaching out to external developers was wasted effort.

He wanted to know why existing companies fail to take advantage of new opportunities. He discovered that breakthrough technologies that are not yet mature first succeed by finding radically new markets, and only later disrupt existing markets.

The point of a disruptive technology is not the market or the competitors that it destroys. It is the new markets and the new possibilities that it creates.

Jeff continued with four tips for staving off Day 2: “customer obsession, a skeptical view of proxies, the eager adoption of external trends, and high-velocity decision making.”

Jeff wrote, “customers want something better, and your desire to delight customers will drive you to invent on their behalf.”

Regarding “resisting proxies,” Jeff noted that one of the traps that leads to Day 2 is that “you stop looking at outcomes and just make sure you’re doing the process right.” We can’t just accept whatever results we get from following old rules; we must constantly measure our actions against their results. And when we see that the results don’t measure up to our dreams, we must rewrite the rules.

First, never use a one-size-fits-all decision-making process. Many decisions are reversible, two-way doors. Those decisions can use a light-weight process. For those, so what if you’re wrong? . . . Second, most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure. Third, . . . If you have conviction on a particular direction even though there’s no consensus, it’s helpful to say, “Look, I know we disagree on this but will you gamble with me on it? Disagree and commit?”

we can choose instead to lift each other up, to build an economy where people matter, not just profit. We can dream big dreams and solve big problems. Instead of using technology to replace people, we can use it to augment them so they can do things that were previously impossible.