Three kinds of industries: January 7, 2018 Snippets
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This week’s theme: Introducing a new series on the phenomena of escalating costs in certain industries, plus checking in on Wealthfront’s progress.
Happy new year! Welcome back to another year of Snippets. Just like last year, we’ll be grouping issues into themes: over the past 6 months, we’ve covered challenging topics like bubbles, cryptocurrency, reflexivity, and fake news; in 2018 we’ll continue with this format. If you have suggestions for topics you’d like to see covered, or even if you read something great you think Snippets subscribers would benefit from reading, please send them my way: either snippets@socialcapital.com, or hit me up on Twitter @alex_danco. And, as always, thanks for reading. There’s so much out there to learn, and we can’t wait to explore it with you. So let’s get started!
Consider the broad idea that there are three types of industries in the modern world. First, there are industries that have experienced great productivity gains over the last few decades, due to globalization and especially due to technology. To pick an example, the iPhone in our pockets is nothing short of a modern miracle: it is (at least!) an order of magnitude better and cheaper than the cameras, VCRs, telephones, and other consumer electronics it replaced. Nearly everything that goes into making your smartphone work — from the chips inside it to the telecom networks that send it data — is the outcome of relentless improvement in technology, supply chains and global infrastructure, paired with economies of scale and plunging prices that have put smartphones into the hands of a billion people in developing countries. It’s not just Silicon Valley tech: air travel is another example of an industry where, despite our complaints, it has gotten cheaper, safer, and more widely available every year. This is the good stuff: industries that are changing quickly, getting more productive, producing better and cheaper goods, all the time.
Now consider a second category of industry: those that are fairly mature, lying mostly out of sight of the modern consumer, and where the price of goods and services has remained more or less steady relative to inflation over the past few decades. These industries might be quite complex, yet we take that complexity for granted: we mostly care about getting good value-for-money, and we don’t expect any wild order of magnitude swings in price or quality in any direction. Food is one example: yes, there have been many incremental improvements in the agriculture and grocery supply chain, and food safety and standards have progressively gotten better over the years. But in general, food hasn’t gotten an order of magnitude cheaper and better in the past few decades, nor has it gotten an order of magnitude more expensive either. It’s been pretty stable. Energy is a second example; home construction (not the price of land, but simply the material and labor cost of constructing a house) is a third.
Now let’s consider the last category: industries and expenses that seem to be getting more costly with every passing year. There are a few usual suspects here: higher education; health care; urban infrastructure like bridges and subways (at least in North America). These industries seem to suffer from a strange phenomenon: they keep getting more expensive, and no one really seems to agree on why, as a general rule. Is it wage increases and escalating costs? Is it regulations? Is it a failure of free markets to work effectively?
Over the next few weeks, we’re going to take a look at that third category of industries, especially health care and higher education, and try to understand what sets them apart. On the one hand, we’d like to understand their ballooning costs: why we’re paying more and more for the same product with each passing year, whether it’s a university degree, a medical procedure, or a mile of subway track. On the other hand, we want to appreciate the fact that these industries are disproportionately the ones creating new employment: the “Meds and Eds”, as they’re sometimes called, are critical drivers of work and wage growth in the developed world. If the future of work and employment in a world of tech-driven efficiency looks increasingly like the jobs we see in the Meds and Eds, then we’d better try and understand them.
Here’s why this is important: suppose that over the next fifty years, the modern tech industry runs its course, and productivity gains show up everywhere. Industries of all shapes and sizes get rearranged by software and the internet; the Uber- and Amazon-ification of the world proceeds on schedule. This world is going to arrive, one way or another; we need to be able to plan for it. And the way to plan for it, to borrow the classic Jeff Bezos quote, is not to try and anticipate everything that will be different, but rather to focus on what we believe will remain the same. Steady cost increases in industries like the Meds and Eds, for all we can tell, are phenomena that are persisting. We see the same effect on the other side of the coin: attractive employment and wage growth in the Meds and Eds is something that is persisting. We need to understand why that is so. We need to appreciate what Steve Grand calls “the first law of nature”: Things that persist, persist. Things that don’t, don’t. So we’re going to spend some time learning about these persistent phenomena: whether we think of them as ballooning costs, or wage growth, or both. Starting next week, we’ll learn about an interesting theory called Baumol’s Cost Disease that offers a tidy explanation for this phenomenon — but doesn’t tell the whole story either.
Elsewhere in the world:
African countries need a huge increase in doctors to curb surgery deaths | Sarah Wild, Quartz Africa
Paper pushing and information recording in 2018:
Post-apocalyptic life in American health care | David Chapman
American Reams: why a paperless world still hasn’t happened | David J Unger, The Guardian
Orality and Literacy from Homer to Twitter | Tim Carmody, Kottke.org
Thoughtful crypto writing for the new year:
Inflation and participation in stake based token protocols | Doug Petkanics
A tale of two Bitcoins: BTC vs BCH in 2018 | Vinny Lingham
95 Crypto Theses for 2018 | Ryan Selkis
Mysteries of the brain:
A reboot for chronic fatigue syndrome research | Amy Maxmen, Nature
Podcast episodes for your listening enjoyment:
Emergence: the bottom-up logic of complex systems where there is no leader | Radiolab
Anil Dash talks about tech industry ethics | Masters in Business with Barry Ritholtz
Other reading from around the Internet:
Trashed: inside the deadly world of private garbage collection | Kiera Feldman, Pro Publica
Innovation and productivity: the secrets to wealth in America | Warren Buffett, in Time Magazine
An evaluation framework for choosing the right startup to work for | Jonathan Golden, Noteworthy
And just for fun:
In this week’s news and notes from the Social Capital family, some good news and a milestone from Wealthfront to pass along. Wealthfront is ringing in the new year with a fresh $75 million dollars in funding, which should be “more than enough” for them to reach profitability according to CEO Andy Rachleff:
Investing in You | Andy Rachleff, Wealthfront
Wealthfront lands $75 million in a new fundraising round | Frank Chaparro, Business Insider
Wealthfront raises $75 million, led by Tiger Global Management | Julie Verhage, Bloomberg
As one of the largest digital wealth management startups that has not partnered or been acquired by a larger firm, Wealthfront now finally has the customer base and assets under management to begin building some real, innovated products on top of their financial advisor foundation. Their “Operating System”, as they call it, is a brokerage and banking system they’ve built from scratch which allows them to introduce new roadmap products like Path, portfolio lines of credit to help access cash quickly, and more. But they haven’t forgotten their roots: at the core, it’s about pairing high-quality advice with near-zero fees that is only possible with a software-only solution. In a recent interview with Tearsheet, Rachleff explains why this is precisely what makes Wealthfront stand out among alternatives like Charles Schwab and Betterment:
“We’re the only company making the bet that future of financial services will be completely automated. The rest of our competitors have partnered with advisors. Older people clearly prefer to talk to someone; younger people are the exact opposite. Our clients tell us they pay us not to talk to them; the majority of our clients are in their 30s and 40s and want to access Wealthfront solely through an app on their smartphone or laptop.” This belief was echoed by Lee Fixel of Tiger Global Management, who shares the same belief and goal to “help Wealthfront become to the millennial generation what Charles Schwab is to baby boomers.”
At the end of the day, Wealthfront exists because people across the economic spectrum deserve to live secure and rewarding lives. There’s no longer a good reason why expert financial advice can only be something for the few; we’re excited that Wealthfront is in a position to legitimately help, and look forward to their impact growing along with their AUM. (As Andy tweeted out the other day: it took them 13 months to attract their first $100 million in assets under management; this past week on January 3rd, they grew by $100 million more in a single day. That’s what momentum looks like!) If you want to get on board, Wealthfront is currently hiring for a number of open positions in Redwood City, including in engineering, product, marketing, recruiting, research, and client services. If you or anyone you know might be interested, please send them Weathfront’s way.
Have a great week and happy new year,
Alex and the team from Social Capital
