Doozer solutions for all

I’ve been asked to explain how/why the doozer model can be taken advantage of by other economies other than China, especially debt engulfed ones like Europe.

Let me try to explain this as simply and quickly as possible. It takes something of a mental leap of faith but work with me.

The doozer model is based on the prevailing assumption that money (which is fundamentally a reciprocal claim against someone else for services already rendered) is less valuable than. environment and quality of life. A life full of purpose is better than one without.

Once this is understood, as is the fact that there is more than enough wealth in the world to go around if everyone is sufficiently motivated to generate that wealth, all else is irrelevant.

Debts in that context don’t matter. Neither does the prospect doing something for nothing if the process of doing that something makes your life richer.

Reciprocity is reframed.

Our established financial markets are, however, based on a presumption that reciprocity matters. If you do something for someone else and don’t get something of equal value back you are evolutionarily disadvantaged. You are more likely to die out because you have been a sucker.

If you apply this mindset to the doozer model you come out thinking the doozers are indeed suckers, because they work all day whilst the fraggles do nothing.

But that’s not really the situation at all. For the doozers work is a hobby. And without work their life would have no purpose.

The real world obviously isn’t like that. Also splitting the world into doozers and fraggles, shouldn’t be the aim. We should all have a little doozer and fraggle mentality.

But as it stands, more and more of us can afford to be fraggles but insist on being doozers regardless,

There aren’t enough fraggles and there’s a whole lot of wannabe doozers who have overbuilt and are desperately searching for someone to consume their wares.

Our conventional economy doesn’t appreciate that. It doesn’t understand the merit of working for stimulation’s sake rather than for survival’s sake.

It consequently likes to punish the doozers for simply being doozers. It also likes to punish the fraggles for not challenging the doozers to work harder in more punishing industries if the stuff the doozers produce is no longer needed. I.e it wants the fraggles to become ever more demanding.

“Yes, you’ve fed, watered and sheltered me to my heart’s content. I now would enjoy some pampering. Okay so now i’ve got all the pampering i need, i would like some entertainment. Okay, now i’ve got all the entertainment i need, i’d like to travel to space.”

And it’s via this process we eventually get to Mars.

Problem is, as fraggle demands become more frivolous they represent the desires of fewer people. What’s more, the sort of work they encourage doesn’t even appear as work to the fraggles. Everyone wants to be an actor, a writer or a muscian. Even a fraggle.

How does this relates to Europe? Well, for one thing, Europe already has its own version of the doozers: the germans. But these doozers don’t yet appreciate that they can’t expect reciprocal payment for their work from their eurozone counterparts. There is simply not enough demand to allow the german doozers to work to their heart’s content and the periphery to work. The only way for the german doozers to get paid in equally valuable units is if they start consuming like fraggles as well. They must desire the products and goods the periphery can make.

And to some degree they do, because the best product the periphery provides to the germans is a sunny disposition, holidays and tourism more generally, for when the germans finally decided to take a break. If more germans worked less, and went on holiday more in spain, a rebalancing of sorts might occur.

But if they want to stay doozers, they need to realise that they are working out of choice not necessity, which means they can’t expect peripheral europe to reciprocate in equal measure. They should be grateful that they’re there consuming at all.

That by and large means internal debt defaults, and a superficial appearance of impoverishment. But in reality all of europe is stronger and better off, both due to the goods that have been distributed to the periphery but also because of the debts funded via that distribution, which have incentivised doozer activity of the periphery’s own in areas such infrastructure and housing development.

So it all comes down to reciprocity between nations.

The problem for the world is that most nations would prefer a more balanced distribution of fraggles and doozers.

Problem is, without entirely doozer dependent economies in the world, there probably aren’t enough fraggles to justify conventional doozering.

The doozers in other words have got too efficient, and are forcing ever more of us to be fraggles.

Unfortunately, at least for now, human mentality is more suited to doozering than fraggling. We can’t quite get our heads round the idea that we collectively all don’t have to work that much.

Until we do, we’ll either have to come up with ever more frivolous tasks for the doozer in all of us, deploy the doozers to areas where they now from the outset they can expect nothing in return or purposefully create problems and deficiencies so that they can overcome them.

Information asymmetry and umbrellas

I’m a little obsessed with information efficiency paradox theory. Probably because I am even more obsessed with the idea of purposeful information asymmetry.

The Stiglitz paper on HFT and information asymmetry makes for very interesting reading in that regard.

As it happens, I’ve been thinking about many of the same consequences, the only difference is that I’ve been referring to it as the “end of arbitrage” phenomenon.

Stiglitz takes this further by pointing out that if there is no information arbitrage, there are meaningful consequences for worthwhile economic allocation and information discovery incentives.

In short, in a perfect world where all information is known, nobody has an incentive to do anything and we all converge to the Borg and/or a stagnated blob.

Before I get to the consequences of this for encryption, and information channels more generally, I would like to point out my umbrella coincidence.

Stiglitz uses umbrellas thusly to explain the difference between useful markets and useless markets:

If there is one umbrella, and there is a 50/50 chance of rain, if neither of us has any information, the price will reflect that risk. One of us will get the umbrella. If it rains, that person will be the winner. If it does not, the other person will be the winner. Ex ante, each has the same expected utility. If, now, one person finds out whether it’s going to rain, then he is always the winner: he gets the umbrella if and only if it rains. If the other person does not fully understand what is going on, he is always the loser. There is a large redistributive effect associated with the information (in particular, with the information asymmetry), but no real social benefit. And if it cost anything to gather the information, then there is a net social cost.

Umbrellas are used above to demonstrate how the whole phenomenon of purposeful asymmetry and purposeful discovery of that information (by an HFT) is tantamount to a socially useless activity. It’s just a game.

This, meanwhile, was me on umbrellas – in the context of monopolisation in gold markets — and how such monopolies can lead to information asymmetries which impede useful economic allocation and thus are equally socially useless:

Gold is a false market because its value is dependent on market squeezing.
It’s the equivalent of hoarding all the world’s umbrellas in a thunderstorm and releasing them to the market at well above their cost of production. Problem is, the premium over the cost of production only encourages new umbrellas to keep entering the system. Without the balance of new umbrellas being directed into a hoard, a surplus influences the clearing price of umbrellas until the price falls to the cost of production.
At this point production only makes sense if it can be hedged at a better rate than the cost of production. I.e only if the futures curve is in contango.

No contango, a surplus, and no additional hoarding… ?The umbrella monopoly is finally threatened, in such a way that prices can eventually even go to zero.

Okay, I get to the same point in a slightly different way. Basically the idea is that monopolies represent purposeful asymmetry which is socially useless. (No market is more useless than the gold or Bitcoim market, where prices are created by purposeful monopolisation/hoarding of supply. )

But here’s the thing. In my example, the act of breaking the monopoly (a.k.a purposeful asymmetry) breaks down the useless/damaging social consequences of the asymmetry. It floods needless hoards back into the market.

I guess that’s where I differ with Stigltz.

In my world, a world of growing information efficiency kills arbitrage, which encourages those who have been used to making money (achieving hierarchy) from asymmetry into making asymmetries on purpose, i.e. obscuring and misallocating resources to send false signals to confuse everyone. It’s worse than socially useless. It’s purposeful inefficiency. It makes people work to dig up commodities or mine data which nobody actually needs, for the purpose of creating a winner vs loser scenario.

In my world those who bust up such cartels are doing the market a favour — especially if those cartels are operating in markets that still have meaningful quality of life consequences for the world. (Less so if the cartels are operating in Bitcoin or gold, which represent socially useless zero-sum games, which become paradoxically socially useful when they encourage market participants to forge purposeful asymmetries within them rather than in more useful markets.)

Consequently, I’m not so sure that just because these ‘HFTs’ kill arbitrage and the incentive to mine new information they’re threatening efficiency in the way that Stiglitz alleges. What’s known is hard to then be unknown. (Unless there’s a giant meteorite or a war that destroys capacity and knowledge. At best, they just encourage asymmetries to be created in increasingly less socially useful markets.)

The bigger risk (as I always point out) is the apathy which could come along with total information abundance once we realise most of the market is just a pointless psychological game, and a coalmine thought experiment designed to keep us stimulated and doing something rather than nothing. The risk then is that once society has busted all the cartels (and information asymmetries with it), that it will have no purpose.  And when that happens we will need people to set up asymmetries on purpose just to keep us challenged and active. (Cue Oculus Rift).

Hence the socially useless element of the current market, which above all represents the necessary gamification of the economy to keep us socially active. It’s us moving on from useful allocation and over to games to avoid total psychological stagnation.

We in that sense are the doozers. And we need the fraggles to destroy the stuff we make intentionally so as to give us an excuse to build some more and to provide us with a purpose to life more generally.

I’ll finish this one with the following thought:

Ever since I was little I always thought to myself “If only I had a book with all the answers to all the questions in the world.”

In my mind this book would not only have the answers to everything humans have discovered thus far but also all the things humanity doesn’t yet understand: from the meaning of life, the purpose of dying, the need for pain, the nature of matter and time, and all that deeply philosophical stuff.

In a nutshell I wanted to know EVERYTHING.

I now strongly believe (and I’ve written about this before) that the internet age is bringing us closer to the point where we are capable of knowing everything humanity has discovered/learned thus far. For now, the only thing that prevents us from doing so on an individual level is the processing power and capacity of the human mind.

This can only be overcome by some sort of technological upgrade or hive-ification.

In which case, the real risk of universal information efficiency may not be stagnation per se but the loss of individuality if not humanity (as we know it). Sounds profound I know, but individuality is deeply related to information asymmetry. (On a personal level, trend followers equal HFTs that distribute trends widely, while trend setters equal those who create new asymmetries to differentiate themselves.)

If that really is the risk, then one could argue libertarian efforts to protect information privacy, digital rights, encryption and so forth represent a strident effort to keep humanity individualised and fragmented, when the evolutionary trend might be very different.

I can’t comment about whether that’s good or bad. But it does make me think of the Amish community for some reason. As well as the real purpose of encryption. But more of that later.

The information efficiency paradox

Thanks to Michael Lewis’ book the HFT debate has become even more dualised, than it already was. (*note to person on twitter who patronisingly corrected me that I probably meant duelised not dualised — I didn’t. I specifically meant dualised, as in the dualism that brings us the philosophical/metaphysical fight between good vs bad.)

This is a shame.

It’s a shame because I don’t think it’s ever useful to make things into a good vs evil debate. Real life is much more complex. There’s good and evil in hft, but there’s good and evil in the opposing position as well.

I tend to fear absolutism because there’s usually a little truth in everything (even Bitcoin and gold). This is why, I guess, I can appear annoyingly contradictory at times. Personally, I don’t see it as contradictory. I see it as an unhealthy curiosity in life’s paradoxes. Some situations simply are paradoxical.

A lot of opposition to the HFT rationalists is focused on the fact that HFT traders are cheaters, anti-capitalistic and/or get unfair advantage by cutting deals with exchanges, and/or are insincere.

A typical comment: “We need market makers & they need to be rewarded by the exchange but MMing isnt about front running, spoofing & quote stuffing”

First of all WHAT is market making really?

Mostly, it is the actual bread and butter activity of the main dealer banks.

The bulk of trading at the big wall street banks is and always has been market-making or swap dealing (matching long and short smartly). Though, the fact that the banks deploy their own balance sheets to facilitate that matching makes it principal trading to some degree.

The reason they make so much money out of this is because banks have always attracted the sort of order flow that made them liquidity hubs. How they choose to process that flow is how they make money. They can take it to the public exchange, wear it on their own book (take the opposite position of their client) , find a better deal for the client off exchange or nowadays take it to a competing market place. Either way, they have the information flow advantage, mainly because they can see both sides of the flow and act upon it. They make money because they are popular with lots of different types of people essentially.

Broker dealers

The clue of course is in the name “broker dealer”. Conventional commission-based brokers don’t take positions. They match buy and sell orders for a fee by working the orders around the market until they get done.
That’s great but it can take a while to get done, and the market can move in the meantime. Bids and offers can fall through as well. Yes, people get flaked on in the world of voice broking all the time as well!

But broker dealers guarantee you a bid, because they take the risk of matching that flow onto their own balance sheets.

For decades that meant if you were a big institutional buyer or fund, which sent a lot of predictable or informed flow to the broker dealer in question you would get preferential treatment vs the little guy, whose order flow was much less significant and thus much less of an information advantage to the broker dealer. Broker dealers competed for large informed flow as a result.

This meant there were multitudes of different prices in the market depending on your size and your relationship with the broker dealer. And more often than not the little guy couldn’t hope to trade at public exchange prices let alone preferential ones.

A dedicated market maker on an exchange, meanwhile, was obliged to make prices no matter what for the sake of public liquidity. This of course was risky if you got the price wrong because you could be wiped out. Hence why market maker spreads widen whenever conditions become illiquid or distressed.

A market maker who was affiliated with a large dealer bank had an information advantage when making those prices and could more often than not charge tighter spreads. Those who didnt have flow advantage had to use their nouse instead. That more often than not meant acquiring information in more conventional forms, everything from being cushy with the buyside and market participants (with charm alone!) to running or specialising in strategies that were known arbitrages. (Whether that was arbitraging two different regional markets, or asset classes or whatever.)

In any case exchanges always had deals with market makers because they helped to guarantee them liquidity, which was what their business depended on. From the market makers’ point of view they had the opportunity to benefit from winning strategies, relationships or wider order flow. And in some cases to influence the public market.

But to become a market maker and benefit from the liquidity of the public exchange took a) a relationship with the exchange b) capital and c) reputation. It was a small privileged market.

And that remained the case for as long as the market structure depended on one public exchange and the broker dealer network.

But then came market liberalisation and the formation of competing liquidity hubs. For a long time this benefited the banks directly. A) they knew competing hubs couldn’t make it unless they dedicated their flow to them, meaning the hubs were dependent on good relationships with the banks (or in some cases were owned by them) and b) the market fragmentation allowed them to benefit from alternative arbitrage opportunities (jurisdicational, a la ICE vs CME, or latency effects.)

The point of liberalisation of course was to breakdown the monopoly of the public exchanges and allow banks and other participants to get a slice of the action in these markets instead. From the point of view of the banks it was a no-brainer to want to get involved, especially given the flow advantage they had.

The social media equivalent

Think of it in terms of Facebook. Until liberslisation there was only one public platform. If you were a major social animal you had flow and popularity regardless. Facebook was just an outlet that allowed you to enhance your own popularity and allow you to plug into an even wider network when you needed it. It also allowed you to influence that network. Nevertheless Facebook was more dependent on your commitment to its platform than you were to it. You using facebook brought your friends and relations with it.

Liberalisation however allowed you to sponsor Google plus with your popularity too (or even form your own hub). If you were influential enough you would bring your friends and relations with you (your flow).

If you continued to operate on both platforms that would create an information asymmetry between the two platforms requiring frequent updating and/or forming a need for your friends to monitor two hubs instead of one just in case they missed out something. In other words you could never get the full story just from Facebook. That created an information advantage to anyone who could be bothered to watch both spaces. Especially if that information was split in a way that benefited you. (Say the friends on Google were professional and the ones on FB were your friends and family).

If information is power, withholding some of it from facebook in favour of another platform — especially if access to the other is controlled (by charging fees or allocating the info say to just work friends instead of relatives, or depending on the fact that most of your technologically challenged friends wont have time to monitor two hubs) — empowers you the informant. It also creates a market in the restricted or harder to acquire information.

What the banks didn’t anticipate was that liberalisation would allow a new type of market trader to arbitrage that intentional fragmentation, by effectively spotting and publishing the differences between the two markets.

They also failed to anticipate that those new entrants — the equivalent of the paparazzi — would want to draw out the information withheld from all the public platforms (including FB) and do so by essentially sending out false info to the public market to see what the banks ended up denying or not. We are talking about “forensic” methods used to do figure out the really important stuff which you don’t want anyone to know because it could entirely change how your public profile influences the public sphere. In some ways no different to the methods used by Newsweek to deduce the identity of Satoshi.

This of course made the banks seek out even more private venues where the paps were not welcome. Which, of course, made the paps want to peer into those venues even more.

The question is are the “paps” evil? Especially given the nature of the information they are exposing and the “public” methods they are using? Not to mention the demand from the public about truthful information

They, like Newsweek, are using publicly accessible data and the testing of that data in the market to arrive at informed opinions about the truth (a.k.a prices), the sort that are as close to the real truth (which for the most part is retained from the market) as possible.

Sometimes they have to pay for that data, sweet talk sources, or appoint spies that can tip them off about misleading or real information heading elsewhere. Consider the way paps work with doormen for advanced knowledge about celebrity arrivals.

But it is all public domain. And anyone has the chance to make a better offer to the doorman if they feel inclined.

At the same time it is also understandable why celebs get upset about their real lives, which don’t quite match their public profiles, being exposed. Their ability to misdirect is impeded, and warts and all are exposed in a way that makes the public at large question whether such celebs should be entitled to the special treatment they are used to, or whether we need them at all.

People don’t like paps because they are predatory and make markets in information others would rather not give out. But we still take the information they provide hungrily.

The celebrity defence so far has been PR misdirection, voluntary distribution of favourable data and the growing tendency to cut deals.

Overall, the direct result is more information for the little guy than he knows what to do with, and the chance for him to form opinions based on much more information to hand, more quickly.

Predators are part of nature

For me it’s hard to argue for or against the predatory nature of the information gatherer. On one hand information dispersal of this sort empowers the little guy and limits the power of a select few “popular” entities to misdirect or overly influence (in their favour) the wider public disingenuously. It may not be nice but it’s fair game, especially if we are pretending that we operate in a free market which allows for gaming strategies of all sorts. Predatory strategies are after all a part of nature. If you move too far the other way you end up in a collaborative collusion model instead.

On the other hand, their techniques can be equally disingenuous and might result in a privacy cost to all of us in the long run.

Which begs the question what are the real costs of total market information efficiency?

The most obvious I would say is the end of privacy and arbitrage itself.

But what sort of unintended consequences might the presumption that there is no information advantage and no such thing as privacy have on social behaviour more generally?

Would we move towards an almost religious framework where the “crowd sees all”? Where every behaviour against the interests of the group is known about and thus punished/mitigated effectively?

Is the behavioural implication one of increased collaboration, on the basis that actions that benefit you disproportionately are known about and gamed instantaneously rendering them pointless?

Or does perfect information efficiency perhaps end up oppressing us in a way that kills our natural diversity and turns us all into the borg?

It is really hard to know the consequences. The alternative, of course, is purposefully maintaining information asymmetry that benefits some over others for the sake of human diversity.

That kind of suggests that life without information asymmetry isn’t very meaningful, or worse still cancels itself out completely.

I’m not a physicist, but doesn’t that echo our understanding of how the material universe came about in the first place?

Perhaps creating information asymmetry (where there otherwise would be none) really is god’s work?

China as the Doozers

Congratulations to Mike Konczal and team for a fabulous money edition of New Inquiry

The only let down for me is my own contribution: why China is to the world what the doozers are to the Fraggles. Or rather, why China’s post capital mentality means the government doesn’t mind putting spare capital to work irrespective of return.

But it’s entirely my fault because I wrote a cheque my body couldn’t cash in the time agreed, and ended up rushing things. Sorry Mike!

One thing I failed to mention in the piece that in hindsight is probably worth mentioning is that by initially reinvesting capital in USTs and GSE paper — rather than in say gold or commodities– they de facto ended up forcing the US to underwrite its own economy as well.

Which begs the question, did they successfully hold back capital from the west at all? I guess in many ways they obviously didn’t. Though they may have controlled the terms in which it was distributed.

To go all man in the high-castle, I do think had China not thrown its labour surplus at the capital surplus through aggressive currency depreciation, most of that capital would have stayed insulated in the West, leading to a technological disruption sooner than it actually did. Instead, because of China people ended up losing jobs to offshore workers rather than robots, in a way that was able to spread wealth to China.

At this point, the west became the consumption obsessed fraggles.

Had the dollars China stockpiled simply been burned, one might argue the conditions for risky lending and housing bubbles back in the US would not have been there. There would have been a shortage of capital for that sort of thing, and the economy would have had to figure out what to do with its own labour surplus which increasingly couldn’t afford anything. (Had it deprived the US of capital by burning dollars, it would simply have sparked a major deflation.)

But China reinvested in Treasuries and GSE paper, which transferred capital from private hands over to government hands and the housing industry, and helped to distribute housing and public goods to a much wider demographic than it might otherwise have been distributed to.

But it’s hard to know whether it really took China (and other export-driven countries) specifically to do this. If not for China throwing its labour surplus at the western capital surplus, rather than focusing on homegrown investment, the US may have ended up with self-manufactured cheap goods instead of Chinese manufactured ones, but equally massive demand for USTs and GSE paper — generated this time by the domestic bid rather than the foreign bid. Distribution may very well have happened anyway.

The only difference is that Chinese growth would not have had the kick-start it had from taking advantage of existing capital and would instead have had to depend on much more organic growth. Its development would have been much slower.

This got me thinking as to what it really means that China is parking more and more capital in idle commodities rather than USTs or GSE paper. Because ultimately, what the subprime crisis shows, is that capital controls or no capital controls — unless you burn the dollars you receive — you end up stimulating something disproportionately.

It seems logical, consequently, that instead of stimulating housing bubbles and massive housing oversupply in the west, by reinvesting in gold and other commodities Chinese “demand” has been stimulating and passing wealth over to commodity production. i.e. there’s been a direct handover of wealth to commodity producers, who’ve become the ultimate Keynesian coalmine experiment. Digging up commodities for the sake of providing the Chinese with something to invest.

Alas, things are not valued by their utility but their marginal availability. That means the country has also accumulated assets that this time can’t be bailed out if they are overproduced to the point that their value disperses. If prices fall, that will impact the small elite (and the countries) which benefited from producing those commodities the most, and it will be much harder for any government to support that market. Unless, of course, the Fed picks up the LME inventory directly.

China itself may not care if the price falls. Their post-capital mindset puts a value on the commodities  beyond their monetary worth. They’ll just end up as the emperor who was revealed as naked. The twist to them being that nakedness has its own advantages.

Using the broken window fallacy, one nevertheless has to wonder what might the money have stimulated  if it had not been misdirected into commodities and before that housing?

Technology? Gaming? Leisure? Health?

Perhaps it was not really misdirected at all? After all, subprime bubbles created much needed housing inventory whilst the commodity boom encouraged research into alternatives substitutes and renewable energy.

Perhaps what’s gonna happen is gonna happen regardless, irrespective of who plays the leading role.

Which to my mind means the only investment that stands to stagnate rather than accelerate society as a whole is gold. A high gold price after all only really incentivises gold production.

To my mind it’s better to encourage altcoin mining because at least focusing the world on altcoin production encourages people to educate themselves about cryptography and programming. It spreads wealth to those who can be bothered to learn about that sort of stuff.

Buying gold in this day and age is a bit like burning dollars. It hands wealth to a small elite who reinvests it on high-end living, and makes society dependent on the trickle down effect and greater inequality. Perhaps that’s why China is really so resistant about altcoins?



There can be only one

Facebook’s acquisition of Oculus provides an excellent opportunity to expand on my ongoing thesis that what we’re witnessing in the tech sector is a Highlander-style fight to the death in which only one name can survive and in so doing inherit THE WORLD.

The battle consequently isn’t just another rendition of the standard game of monopoly. This time, the stakes are much, much, greater because the technology involved opens the door to potential godhood itself. Consider what’s being played for: robot armies, artificial intelligence, control of all the data, all the electric power, all of space and probably the ability to manage matter if not biology itself — and on a totally borderless basis. Sovereigns don’t stand a chance against the power that could emerge.

Conventional economics won’t matter either when that day comes because we will all be serfs to the one guy who knows all the crypto command codes.

This is Bond villain megalomaniac territory.

So what’s the only spy who can save us from certain technological tyranny facing?

Let’s put this in the context of known megalomaniac super villains.

Mark Zuckerberg – a man who wants to dominate the world through ultimate “user” control. His method: never letting you leave a Facebook platform, because whatever becomes cooler he just gets absorbed by FB corp. Acquisition of Oculus is the first hint we have that he may also seek the keys to the technological afterlife.
My colleague Joseph thinks he’s Lex Luthor. I’m going with Ming the Merciless.

Elon Musk – in the pantheon of megalomaniac wannabe gods, he’s probably the least objectionable. He’s hoping we all think he’s Tony Stark. In reality he does perhaps have the makings of Hugo Drax.

Jeff Bezos – nobody knows or understands his motives. He could be Batman. But then again he could also be Ross Webster of Superman III.

Larry Page and Sergey Brin - They have all the data, absorb everything and want us to wear Google glass. Gotta be the Borg.

Tim Cook - Still controlled by the ghost of Steve Jobs which makes him Anakin Skywalker to Steve Jobs’ Sith Lord.

Profiles that still need filling: Ernst Stavro Blofeld, Zorin, Goldfinger, Dr. No.

Airheaded valuations and hospitality as a divine right

Airbnb is being valued at $10bn, which is $2bn more than the Intercontinental hotel chain according to the FT.

In my opinion this is a perfect example of how the capital system is failing to grasp the paradox of the sharing economy. And it will probably all end in tears.

Now I can see how at first inspection this sort of valuation makes sense.

You take the full unused spare room capacity of the United States and of course it amounts to more than the infrastructure provided by the Intercontinental group. Then you take a portal that facilitates access to that unused inventory, and even if providers operating on the platform eventually have to meet regulatory criteria and pay taxes on their earnings, you get a platform that can tap a huge proportion of those earnings.

But here’s the paradox.

You are flooding the market with untold inventory, which was previously unavailable. That knocks the potential revenue earnings of each unit in the system to the regulatory/airbnb membership cost breakeven point and initiates competitive forces that either drive out a huge proportion of supply (because the cost benefit of participating is no longer worth it, especially when regulatory burden turns a part-time venture into a full-time effort) or encourages investment in superior quality units by those operators who can be bothered.

Both factors have the effect of turning remaining participants into quasi professional service providers, that must compete with existing operators.

That means they have to compete with the standards already available in licensed b&bs and/or hotel groups like the intercontinental, even if they choose to market themselves on airbnb rather than expedia.
The point being… the cost advantage is fleeting, and once everything calibrates for regulatory and compliance costs, I would be very surprised if a non professional room renter could compete effectively with a professional operator like the intercontinental group or even regular b&bs which have standing capacity available and economies of scale on their side, and/or even the type of services that rent self-catering units.

The only way that airbnb can down the line add value beyond the system we already have, is if the price destruction is absorbed by a network that is happy to rent rooms below break-even returns.

I.e. Only if we return to the ancient concept of hospitality, whereby any traveller is entitled to seek accommodation in unfamiliar territory for free/or discounted cost because under the auspices of the gods (i.e. Fear of divine retribution) he is obliged to return the favour if a traveller comes visiting his way. Everything in the end evens out. The gods become the system regulators, ensuring everyone has an interest in adhering to the traveller code. In ancient times the code even worked in foreign lands with different religious systems because it mattered not whether you believed in the same god, just in some equal authority that kept tabs fairness.

That’s not to say there weren’t professional guest houses in ancient times. There were.

A traveller could pay for professional services if he wanted to, but those services would be tuned to professional traveller needs. They would have to offer an added value to just staying in someone’s house. Location generally determined this and the fact that some households ended up taking in many more travellers (due to trade route proximity) than the rights they were able to redeem elsewhere.

Ancient hospitality of this sort broke down as a competing force because modern society lost its trust frameworks, mainly due to it becoming increasingly easy to take from the system or abuse the system, and never give back because belief in a supervising power (god) had waned.

Professional operators, which on the other hand were regulated and supervised by social law and code, were able to police their code more effectively — and came to dominate as a result.

But one must not confuse the professional system for the hospitality system. The latter is unmonetisable by definition.

It is the hospitality system which is part of the sharing economy. As soon as you try to monetise it, you destroy the system and turn it professional.

In many ways, Airbnb markets itself as an extension of the hospitality system. In reality it is attempting to turn would be hospitality system members into professional providers.

Which is why IMO, airbnb miss-sells itself when it describes its offering as part of the sharing economy.

The home-swapping movement, on the other hand doesn’t. It works as a sharing concept because the additional inventory isn’t monetised. It’s a quid pro quo agreement similar to the ancient hospitality agreement, with the caveat that you get exclusive use of the property.

It still competes with existing professional capacity, but on a different level.

What airbnb is doing is blurring the lines between unmonetised hospitality — in keeping with the ancient traveller code — and the professional regulated network.

The irony is that modern-day internet platforms do allow for the potential return of the old hospitality system, by replacing god supervision with peer reputation supervision, in which we all benefit.

But airbnb is not doing this. It instead is trying to turn non professionals into professionals, by turning the ancient art of hospitality on its head.

A real sharing economy is mutually beneficial. You take part because you have an interest in redeeming the “brownie points” acquired from the system one day. The efforts are not one sided.

But there is no incentive for a network of hosts to unconditionally take guests at a cost/burden to them but never redeem their own rights to hospitality elsewhere, unless they are compensated in some other way.

But then you are competing with conventional market forces and are not part of the sharing economy. More to the point you only have an incentive to stay operational if the service you are providing is not oversupplied.

A true sharing economy would therefore only manifest in this space if airbnb provided all members with access to inventory on a non monetised basis, and instead allowed hosts to redeem from each other, perhaps with the brownie points they had accumulated, a la a babysitting club, or some such.

The alternative model is a membership or club model where a pool of people collectively share ownership or operational costs of infrastructure for their exclusive (albeit infrequent) use.

That at least is how I see it, but of course I am open to being proven wrong or hearing arguments against.

For the benefit of new readers

It’s come to my attention that I’ve picked up new readers who aren’t necessarily familiar with my overall view on things. Since they’ve come in cold to the conversation they have a tendency to wrongly presume things and/or take comments off topic or into areas I simply cannot be bothered to justify or explain over and over again on a personal basis.

It’s also come to my attention that I’ve never really defined the house commenting rules (largely because I never expected this many comments).

Let’s start with the latter.

First I would like to emphasise that I am truly grateful for all the comments I receive. It is really great to hear from you all and I am flattered that any of you would be prepared to take time out of your busy days to share your opinions with me on this blog at all.

I welcome all comments whether they agree or disagree with my posts/opinions or not. I particularly welcome constructive challenges that inspire me to reconsider my thoughts or take things I haven’t previously considered into consideration. Obviously I also welcome any comments that point out factual errors or similar.

In an ideal world I’d like comments to reflect a mutually beneficial exploratory conversation focused on a better understanding or consideration of the points raised.

Whilst I don’t wish to silence anyone’s opinions I feel strongly that this is not the place for evangelism or ideological bullying — especially when that evangelism fails to account, consider or input the overarching theme of this blog or points already expressed ad nauseum before. This is not a platform for libertarian or extreme free market propaganda. If you don’t like the spirit of the writing here please deploy your market power and drive my readership figures down by simply ignoring me or going away.

As to my overall position.

This is not a blog that preaches any overarching political position. I am politically agnostic. In fact I care very little for politics generally.
If I had to classify myself as anything it would probably be as a dynamic capitalist, and by that I mean that I believe capitalism is a beneficial system most of the time but not always.

In other words I don’t believe any particular system is perfect or absolute because our political economy is generally dynamic and variable, meaning a one size fits all approach doesn’t work.

There is a time for capitalism/free markets and there is a time for socialism/government intervention. Sometimes there is a time for both simultaneously. Most of the time capitalism has to be saved from itself by socialism and vice versa.

Absolutism is rarely constructive.

Most political/economic ideologies probably have a little truth in them.

The key point I am making (as reflected by the John Maynard Keynes quote at the top of the blog) is that one thing we can be sure of is that civilization is on an evolving course. Personally I believe we will probably arrive at a steady state equilibrium due to technological efficiency (robots, automation, connectivity, collective knowledge) at some point soon, unless incumbent forces purposefully prevent us from achieving that state for the sake of preserving their social superiority.

Either way I believe abundance undermines the positive aspects of capitalism and turns the system into a socially destructive force.

The capitalistic market economy we have in place was born out of a scarcity focused world and depends on scarcity for its continued survival.

Consequently nothing undermines the value of capital more than abundance, even though paradoxically capitalism is what brings us closer to the abundance point. Capitalism consequently is going through something of an existential crisis as a result. It is acting loopy — which is what the financial crisis is about — because to preserve itself it has to act against general human interest.

I’m not saying that there aren’t still scarcities in the world that need to be overcome, but increasingly those scarcities exist because the capitalist system is cultivating them on purpose so as to defend the incumbent hierarchy rather than because they have to be there.

As the old saying goes the future is here, it’s just been badly allocated. And in my opinion it is being badly allocated on purpose so as to justify a capitalist system that can’t work without there being dependable pockets of scarcity in the world.

If you want a more comprehensive introduction to these thoughts see some of my series posts on FT Alphaville, among them my “beyond scarcity” and “gross domestic collaboration” series.

You can also look around my old “Towards a leisure society” Tumblr which preceded this blog.

I hope that helps.