Build the right thing
We now have the will to invest in service of ourselves and the planet. The establishment’s slowly taking note of it
Venture capitalist Marc Andreessen’s most recent article has been making the rounds with a bold premise: it’s time to build. The Western world, and the US more specifically, have been systematically under-investing across all sectors of the economy. Both the private and the public sectors have been failing to allocate the fantastical surplus of economic growth into productive investments at home that would enable continued prosperity and welfare — preferring instead to spend on wars, bailouts, trade wars, dividends, share buybacks, and other money sinks.
IT'S TIME TO BUILD
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Andreessen argues that this — a monumental failure of social choice — is at the root of the shortcomings in the healthcare sector that are currently so visible (lack of R&D enabling the development of therapies and vaccines, lack of manufacturing capacity to scale production of tests and medical equipment, etc). It is also at the root of the present lack of housing in our most economically important cities; in the education sector that has been stagnating both in capacity and in ability to deliver outcomes; in the manufacturing sector that only haltingly takes advantage of the new economics of automation and fabrication; and in the inefficient and outdated transportation sector. (As an aside, one can also see it as the root for our woeful under-investment in cheap but critical risk-prevention activities such as asteroid detection, in the development and scaling of true energy breakthroughs like nuclear fusion, and much more.)
Indeed, from an economist’s perspective, Andreessen’s diagnosis is almost tautological. Investment is the motor of output: fail to sow today and you’ll fail to reap tomorrow. Thus, the slowdown of economic growth in the West, as well as the stagnation in technological innovation and labor productivity across most sectors, are predictably tied to under-investment. Conversely, the spikes in technological innovation which lead to productivity gains and increased prosperity are invariably driven by investment in the relevant area. Further, this is a self-fulfilling prophecy, as lower output growth calibrates down future growth forecasts and therefore projected RoI for planned investments.
This relationship is called the Incremental Capital-Output Ratio (ICOR); economists argue greatly about the details — exactly how much additional GDP an extra 1% of investment will buy you, and what determines that ratio — but there is no doubt that this causal relationship exists, as does the historical downtrend in investment as a proportion of output, both in the West and worldwide (as shown by the graphs below).
Under-investment as anomie
More interesting to me is the explanation provided by Andreessen for why this massive under-investment exists at all. Most of the explanations that are popular with economists fall in one of the following buckets:
- Rational decisions by firms, which at various times have included offshoring investment into countries with cheaper production costs, and reducing investment due to uncertain economic prospects, high capital costs, or hostile business climates.
- Rational decisions by firms’ executives and governance institutions — for instance, to choose low-risk, low-reward portfolios due to asymmetries in incentive pay; or to spend profits on share buybacks or dividends to increase realized returns on their own capital.
- Inadequate economic policy — whether “the public sector is too active” (eg: high capital gains taxes, crowding-out, excessive regulation) or “the public sector is too timid” (eg: excessive monetary and fiscal austerity).
Now, I definitely agree that all of the above are real considerations that do play a big part in the decisions. And they are not mutually exclusive, but rather often mutually reinforcing, or stuck in a pendular movement between unproductive extremes. However, Andreessen has a radically different (or rather more fundamental) explanation:
The problem is desire. We need to *want* these things. The problem is inertia. We need to want these things more than we want to prevent these things. The problem is regulatory capture. We need to want new companies to build these things, even if incumbents don’t like it, even if only to force the incumbents to build these things. And the problem is will.
Under his lens, under-investment is a social psychology phenomenon, a consequence of a specific self-reinforcing pattern of anomie that biases decisions towards the quick profit, the low-hanging fruit, the status quo, the zero-sum, the “cost of goods sold” — the exact opposite of the high-risk, high-reward, positive-sum, long-term thinking that leads to revolutionary growth. This is uniquely evident to investors like Andreessen (as well as Peter Thiel and Ray Dalio, who have both made similar arguments in recent books), as opposed to either academic economists or policy advisors. As investors are observing and participating in the actual day-to-day of economic decision-making, they need only pay attention to see the gears turning in their heads and others’ every time that an important, high-risk investment is declined or underfunded.
From my experiences in economic consulting, project valuation and finance, and entrepreneurship, plus many conversations with colleagues across several industries, this theory rings true. It definitely helps explain why, even though the business world is enraptured with the exceptions to the rule — Page & Brin, Bezos, Gates, Musk— and constantly dissecting the “secrets” to their success, the fact remains that they continue to be the exceptions, by a wide margin.
For this article, I’ll skip the fascinating and important academic question of whether we can gather concrete evidence for or against this diagnosis (for instance, by analyzing the correlations between investors and executives’ self-reported belief systems, their firms’ actual investment portfolios, and the economic performance of those portfolios). Rather, I’ll focus on what, in my opinion, should have been the key takeaway of Andreessen’s piece.
Investment as righteousness
If we take that diagnostic seriously, Western society — and more notably, the community of investors and executives that hold the majority of the investment purse strings that are in private hands — is locked into a vicious cycle of bad beliefs. The cushions of their wealth, access to abundant capital and networks, and expertly crafted incentive schemes have historically protected them from most of the negative consequences of holding this collective mindset.
That is the bad news. Now for the good news: the future looks radically unlike the past.
For perhaps the first time in modern society, all humans are being confronted with the reality of our shared fate as a species. In business, this translates to a new paradigm, variously called stakeholder capitalism, conscious capitalism, the meaning revolution, etc. This new paradigm has purpose front and center. The name of the game is no longer just building — growth for growth’s sake — but building the right thing — growth in service of the planet and society. This higher bar means:
- Divesting from harmful or wasteful projects/areas, such as military technologies, oil fields, slash-and-burn agriculture, or traditional construction.
- Investing in projects/areas with high potential to benefit long-term prosperity, such as healthcare R&D, clean energy, regenerative agriculture, and green architecture and construction.
- Optimizing portfolios for holistic (ecosystem) outcomes, not merely for traditional aggregate risk/return measures.
- A focus on efficiency throughout, shifting from a “wasteful by default” to a “resource-conscious by default” mentality.
- A focus on accountability and governance throughout, to introduce and keep commitments that align practice to intention.
This new paradigm has very different “rules of the game”: new models of business and project governance, criteria for valuation, financing, accounting and reporting, and critically, new expectations regarding the role and responsibility of executives and investors in society. The pain of change in adapting has so far kept many investors and businesses clinging to the old paradigm. However, we can be confident that this adaptation will eventually happen as the ball has gotten rolling, because this game is a better “equilibrium” for all involved: it generates more wealth and welfare for all parties, and reduces systemic risk. In Robert Wright’s parlance, it has much more “non-zero-sumness”. It’s where all the big gold mines of the future lie.
Furthermore, the increasingly constrained availability of capital will further accelerate its deployment towards better uses. As managers of other people’s money, most investors and executives are already facing increased scrutiny, and the widely accepted definition of a good investment is quickly pivoting from short-term yields to long-term resilience, which is only achievable through bold, intentional (and responsible) investment. Early experience with ESG funds is already underlining the wisdom and practical success of this paradigm shift.
Finally, younger generations’ desire for meaning and values, with its well-documented effects on the labor and consumer goods markets, will continue compelling business and investors to not only commit to the new paradigm, but to deliver on their promises.
All the above phenomena have been set in motion years or decades ago, but have developed slowly and gradually. No more: COVID-19 has given a large swath of the population the opportunity they never knew they needed to rethink everything. From now on, investors living in the old paradigm will be the odd ones out, ostracized from the new future-oriented networks of value. The fear of missing out will beat the fear of change.
Andreessen identifies a failure of will. My claim is that the will is there, as of now. And it is already coalescing around a set of concrete efforts and approaches that align the younger generations’ desire to do right with society’s need to invest and produce. We mentioned above sustainable/regenerative production, clean energy, healthcare innovation, and green building; other important areas include new methods and technologies for education, business collaboration, travel… The list is long. On the other hand, sectors that have historically been big contributors to economic growth, while directly or indirectly contributing to waste and other forms of harm, are having to rethink themselves around existential risks.
In sum, the time has come not just to build, but to build the right things, and to do it at an unprecedented scale and pace. In doing this, we’ll break the vicious cycle of anomie; elevate investors to a new role as custodians of effective resource allocation for humanity; and continue inching towards a model of living and building together that allows us to live out our most deeply moral sentiments.