A New Mindset for the Information Revolution
Technological revolutions always impact capital markets. And research has unveiled a pattern in how the two interact. It’s most clearly marked by a bubble and then the ensuing crash.
In her book, Technological Revolutions and Financial Capital, Carlota Perez researched how technologies impact markets over periods of 40 to 60 years. Her research shows that technological revolutions arrive with remarkable regularity and that economies react to them in predictable phases.
Ms. Perez studied four completed technological revolutions over the past 240 years:
· 1771: The Industrial Revolution
· 1829: Age of Steam and Railways
· 1875: Age of Steel, Electricity, and Heavy Engineering
· 1908: Age of Oil, Automobiles, and Mass Production
According to her model, there are two major phases in every technological revolution: the Installation period when the infrastructure is built and the technology enters the market, and the Deployment period when the technology becomes widely adopted. Between the two phases is a “turning point” which typically begins with a financial crash that leads to a recession, a recovery phase, and finally to harmonious growth.
See the Technological Surge Cycle chart below from Perez’s book:
Technological Surge Cycle: Where Are We Now?
Following this model, we’re approximately in the middle of the Age of Information and Telecommunications, starting the Deployment period for the next 20 to 30 years of a typical technological surge cycle. The 1990s and 2000s were about creative destruction, the beginning of new paradigms, and infusions of capital to fuel development. This is when the technological infrastructure was built during the Installation period.
The crash after Web 2.0 marked the end of the Installation phase and the ensuing start of the Deployment phase. This time was about the masses adopting the technological infrastructure into their everyday lives. With scarce capital available for companies post-crash, the Lean Start-Up movement gained popularity, focusing companies on finding product/market fit. That was great for a number of years, but it’s become almost irrelevant today because of the increasing speed of the Deployment phase.
A Reset is Coming
Readily available capital is shrinking the timeframes required to hit billion-dollar valuations. Money is chasing shiny objects and hype cycles. The Windows/Intel (Wintel) explosion in the 1990s produced 14x growth, paling in comparison to the growth of Google, Amazon, Facebook, and Apple, which is three times larger than the Wintel explosion.
Ubiquitous internet and mobile usage are allowing exponential laws to intersect (Metcalfe’s Law, Moore’s Law, Reed’s Law, Gilder’s Law) which is turning companies into movements. This has been building since the 1990s and we’ve arrived at the turning point in 2019. The costs of building a startup and scaling a startup are equalizing, but only for the best companies; the bad ones are throwing money at headcount. It’s a natural part of the cycle, and it will clear overfunded, non-essential companies from the field and allow the new vintage to succeed.
A reset is coming. Resets historically weed out the weak companies and create the best vintages. It’s a natural part of the cycle. Google, Amazon, and Facebook rose out of the past reset. Which unicorn companies will rise out of this one and be the leading tech companies of the next decades?
The Reset Mindset
In my view, we will need to think differently if we want to ride out the rest of this technological revolution successfully. The world is more connected than in previous revolutions, and the decisions of the few can affect people across the entire globe, positively or negatively. The stakes are high. I believe that we need a new mindset in four major areas.
New Mindset for the Application and Governance of AI
In her book The Big Nine, Amy Webb discusses the big nine corporations — Amazon, Google, Facebook, Tencent, Baidu, Alibaba, Microsoft, IBM and Apple — as the new gods of AI. However, the United States companies are using AI for commercial gain, without careful thinking about the negative applications of it, while the Chinese government is focusing on how AI can benefit its people or government before allowing it to be deployed into the market. While AI today can only outperform the human mind on a single task, in 20 years, it’s possible that AI will have the ability outperform the human mind on every task. If we don’t change our current thinking, we will continue to short-change our future for the sake of immediate financial gain. In the hands of the wrong people, autonomous weapons could cause mass casualties — either to win a conflict or to prevent a larger-scale conflict. AI is unlikely to exhibit human emotions and could lack the empathy that has prevented conflict in the past. We need cooperation amongst the entities funding the deployment of AI technologies, before it’s fully developed, to create a framework for how AI will affect our next generations.
New Mindset for the Regulations of Blockchain and the Worldwide, Peer-to-Peer Exchange of Value
Currently, the IRS, SEC, CFTC, and FinCEN define a digital asset such as Bitcoin or XRP as a property, a security, a commodity and a currency. The US has dragged its feet on updating 80-year-old laws that aren’t applicable to the technologies being used today. Blockchain innovations will continue to be deployed far faster than the regulators can try to control them. While the proposed Token Taxonomy Act, which would exclude these assets from being classified as a security, is just a start, it provides the beginning of a clearer framework for cryptocurrencies and their supporting infrastructure and could accelerate their adoption. Without regulatory framework, the US government could stifle innovation and cause us to fall behind other countries in the deployment of blockchain technologies. The Internet of Value could unlock tremendous economic opportunity for billions of people throughout the world (there are an estimated 2 billion people who aren’t part of the banking system), but if we try to hold onto the outdated legacy financial system, or even prevent the transition to the digital exchange of value, we could prevent the ability to exchange value at the same speed as we exchange information, which would blunt the positive impact of this technological revolution.
New Mindset from Our Elected Leaders
The major political parties in the U.S. have been waging a backyard brawl since the Bill Clinton impeachment of 1999. Democrats and Republicans focus on hurting the other party, not on solutions for the growing number of problems facing Americans today. Spending is out of control, with the Congressional Budget Office (CBO) projecting that by 2023, the federal government will spend more on interest than defense. Interest payments will continue to grow rapidly, rising from $389 billion in fiscal year 2019 (the current fiscal year) to $914 billion in 2028. Overall, net interest costs will total nearly $7 trillion over the next decade. We don’t have enough money to support our citizens; the middle class continues to shrink, the 401(k) program hasn’t worked, and few solutions are being discussed. The Deployment period of any technology and capital revolution always starts with a Golden Age, a period of growth and prosperity as the new technologies improve production and employment. The risk isn’t that this won’t happen, but that the United States will miss out on much of the prosperity (that other countries will experience) because it’s distracted by political infighting and clings to outdated methods of financial controls. We need leaders to bring people together to prepare for a brave new future and take advantage of the coming new economic prosperity and strengthen the financial position of our government and our lower income and middle classes.
New Mindset for Healthcare
Healthcare in the United States is a mess. We are currently spending nearly 20% of our GDP on healthcare, which is unsustainable. Our Hinge Capital partners are interested in finding ways to improve healthcare at a lower cost to our society, not by continuing to exploit the system by adding cost layers. We need a new mindset that embraces preventative healthcare, since this is the highest-leverage way to improve health. Eliminating healthcare red tape, using technology to better educate the public on healthy habits and using technology to create and distribute healthier foods can help us slow the increase in healthcare costs and allow more to live longer, healthier lives.
Emerging Economies in the Deployment Period
As we continue into the Deployment period of this current technological revolution, I think the greatest economic growth will come from the emerging economies of Africa, South America, and southeast Asia. As the 2 billion people who are off the main economic grid in these poorer continents and countries will be brought into the mainstream, the worldwide economy will shift.
Across Africa, household consumption is predicted to rise to $2.5 trillion by 2030. Many South American countries are rich in natural resources, presenting good opportunities for future growth. A number of economies in Southeast Asia have been growing significantly; the digital economy in Southeast Asia alone is predicted to reach $197 billion by 2025.
While emerging markets will certainly grow in the decades to come, what will happen to the current superpowers — the US, Europe, China? The future success for each — particularly for the United States — may very well be determined by how they choose to address the above four areas.
These decisions could lead to greater wealth inequities and revolutions, or to increased quality of human life unparalleled in the history of mankind.
