What the Bubble Did to Technology
An interesting piece of correspondence today from a person who observed how easy money dramatically transformed the technology industry, from rationality into mania.
I am deeply involved in the technology industry-- specifically computer software and the Internet-- and I lived through the tech bubble. What impressed me about the tech bubble was not only the mania and the crash, which you describe quite well, but also how much damage the tech bubble itself did to my industry.
That damage has been lasting. We don't see it because we're still coasting on the value that was created back when virtue, hard work, and real innovative thinking ruled this field.
I grew up with computers, getting my first and learning to program it around age four or five. I remember back before the bubble. Innovators would work for years on genuine significant innovations, often either privately in their basements or in academia. When those innovations started to really blossom, they would cautiously and prudently step out into the business world and attempt to commercialize them. There was venture capital available if something actually took off, but it was hard to get (read: you had to actually have a business or at least something with provable solid demand and a valid business model).
It was this world which gave us the PC and the Internet. The PC came out of personal and academic experimentation that was then cautiously commercialized starting with communities of enthusiastic hobbyists. The Internet emerged from two things really: academic research (DARPAnet, etc.) and personal hobbyists building their own private communications networks between private bulletin board systems (BBSes). When the academic research networks met the BBS hobbyists, the Internet Service Provider was born. The rest is history. The web browser was invented by an academic institute to categorize scientific papers and make them available to other scientists. It was commercialized by someone who had direct contact with that program and saw its commercial potential.
It all just came together naturally, organically. Yes there was government backing at the academic level and to build early experimental networks, but it was a far different animal from inflationary bubble cash. Ph.D research is real work... the total opposite of flipping and coasting on a bubble.
It was glorious and fun. I remember those days. I was younger, but I lived through it. I really have to underscore how exciting and fun it was. Anyone could get into it, and there was a sense that if you worked hard and smart you could make your mark on the field regardless of who you were. There was a real community around the whole thing, often referred to as "hackerdom." (Hacker in the classical positive sense, not the criminal sense.) People helped each other. They met, exchanged ideas, and had a great time.
Then the bubble came.
Billions and billions of inflationary money is always being created, and its always looking for somewhere to flow. When the PC revolution converged with the 'net revolution and "it all came together," M1 once again found a great way to become M2.
The nature of the VC business changed dramatically almost overnight. Before, VCs invested in solid businesses or at least provably solid ideas (in the case of early-stage high-risk VC). Now, VCs just wanted to get in on "dot com." It didn't matter if it was solid or not. If it was "dot com" it was gold. So much money started to flow into the sector you could make money just by getting a slice of the pie and then flipping it... just like housing in 2004-2005.
Also just like housing, this attracted an avalanche of new people to the sector. Your mom wanted to become a technology entrepreneur. *Everyone* wanted to start a startup or work for one. All you needed was a very fluffy hand-wavey business plan and *some* kernel of potential value and you could grab some of that flipper cash. As the bubble got bigger, standards dropped... just like housing. Eventually you didn't even need the kernel of value.
Like the housing bubble, it was exciting while it was happening. Like a hard drug high, you don't realize the damage it's doing until it wears off. It was only after, in retrospect, that it became clear just how the bubble had damaged the field.
The first casualty was the benevolent fun community. "Hackerdom" is all but dead. The flood did two things: 1) it brought in a huge sudden flood of drab careerists and manic opportunists who didn't actually care about the field and 2) it made every little kernel of an idea something to be guarded and squabbled over. The sharing stopped. The community ended. After all, if you reveal when you're doing then someone else will steal it and beat you to the punch. It turned into a race to guard and protect and then hype and cash out.
The second casualty was quality and genuine innovation. In a flipping environment, quality doesn't matter. Quality and innovation are deeply linked in technology, so by extension innovation no longer mattered. By innovation, I mean *real* innovation... the kind that actually takes brains and hard work. So everyone set aside the hard deep innovation they were working on to chase the mundane but hype-laden trend of the week.
The third casualty was long-term investment and commitment to things once they entered the commercialization stage. Instead of "how will you become profitable" and "how will you sustain your business" the question became "what is your exit strategy?" This means "how will you flip it?"
The fallout of the bubble persists today. The bubble mentality still dominates even though it no longer really works... the easy money moved on to drown housing and I'm sure will move on to something else soon.
I described the tech field pre-bubble, so now let me describe the desolation.
I would describe the tech field-- particularly the "startup" world of today-- as a bunch of hucksters and manic sociopaths leading the jaded.
Your typical tech entrepreneur has disdain for genuine innovation. It's a waste of time, and the people who do it are silly geeks who don't "get it." Sitting in front of a monitor for years and trying to make really hard stuff happen is, like, work! Most of the time nobody even pays you for it, or if you're an academic instead of a basement hacker you might get a graduate stipend or a professors' salary. Suckers work. People who really "get it" leverage and hype and flip, doing the absolute minimum amount of actual work required. Of course, like I said, the people who are best at doing that are manic charismatic sociopaths. Hype, cut corners, and flip, and be sure to position yourself to screw as many people as possible while not getting screwed yourself by the time the cash out event comes.
It is, for the most part, not fun anymore. The environment is either hostile or jaded.
I have worked for years on something hard, and I lost two years of work when I started doing the fun thing and trying to share and develop a community. I almost instantly came to the notice of one of these "flippers" and got lied and hyped into joining what turned out to be an absurd business venture. I had to walk away from quite a bit of work in order to guard myself against future IP issues. I am rebuilding, but it takes a long time and was quite a setback.
You can't share what you're doing openly until you "vet" someone by really getting to know them for a while. The whole industry is crawling with opportunists of various types, and most who aren't opportunists have absorbed the prevailing mentality that hard work and innovation are silly and will look at you with disdain and pity for doing it.
I am sitting here hoping for a second great depression. Maybe if everything completely crashes and resets then the field will finally heal and we'll have the old world of exciting innovation and responsible honest business back. I would rather eat garbage out of a dumpster for the next two years if after that I could have sanity return.
But a violent purge is not going to happen... though I do see some "green shoots." Not the kind the pundits talk about of course... the green shoots I'm talking about are manic hype-laden hot air businesses going bankrupt. Despite the propping up of the economy, it is happening. I give a silent cheer whenever one gives up the ghost. Die! Die worthless hype!
The vacuous flippers and con men continue to mill around, but subsequent bubbles are luring them away. I cheer too whenever I see one leave tech for "greener pastures." Look! Over there! There's a bubble in pork bellies! Go! Good riddance.
So I suppose that if the bubble machine stays away from our field we might finally return to sanity. "Hackers" will start innovating again, and real honest sustainable businesses run by businessmen without diagnosable mental disorders will begin once again to dominate the field.
We can only hope.
.
Comments (22)
Johnathan
So true...as a resident of Silicon Valley from 1993 to present, an early participant in three startups and also an employee of two fortune 50 companies, I have witnessed every single thing spoken about in this article.
Published: August 12, 2009 11:02 PM
Andras
You could have said the same about biotech.
I guess nothing can escape the casino mentality. It was the same during the roaring twenties.
Published: August 13, 2009 12:44 AM
mushindo
Nice piece. If I had to choose the one thing that most powerfully demonstrates the state of mind driving the absurdity of which the writer speaks, it would have to be that nasty lawsuit over the single-click online order patent.
Published: August 13, 2009 6:14 AM
anon
I appreciate for posting this. Enjoyed it, thanks.
Published: August 13, 2009 7:49 AM
David Janello
The 'Good Old Days' in technology were a direct result of government spending, specifically, spending on the space program and the nuclear arms race.
In return for a 4.3 trillion dollar investment in nuclear arms (from the Manhattan Project to the fall of the Berlin Wall) the United States received in return:
a) nuclear electric power generators, currently providing 20% of the US power supply with zero emissions and the potential of supplying much higher levels
b) the digital computer, invented in its modern form by John von Neumann to solve the engineering problems posed by the hydrogen bomb
c) the Internet, created as a network capable of functioning during and after an atomic attack
d) modern industrial industries (semiconductors, cryogenics, electronics, optics, etc) that were first developed on classified projects, and the technology and manufacturing processes transferred to the industrial arms of the defense conglomerates.
Much of this government spending occured during the Great American Inflation of 1962-1982.
Published: August 13, 2009 8:14 AM
Ron
David,
I weep for the lack of those things that would have been created had that $4.3 trillion been left in the hands of consumers and entrepreneurs.
Published: August 13, 2009 8:58 AM
pussum207
"The flood did two things: 1) it brought in a huge sudden flood of drab careerists and manic opportunists who didn't actually care about the field and 2) it made every little kernel of an idea something to be guarded and squabbled over. The sharing stopped."
A couple of comments, although my own observations and experience are similar to your correspondent's.
First, the change in character of the industry, particular on the internet side, was, to some degree, a natural and unavoidable by-product of it maturing into a global industry from what was previously an extended group of hobbyists or enthusiasts. As industries grow, one is forced to rely to a greater degree on "drab careerists". As firms grow, one "needs" both individuals with the "visionary" CEO or senior management mentality and those who are essentially salesman to sell the story and raise money. At least some of these people will be "manic opportunists."
Second, there are only two means to ensure that one can maximize competitive advantage as a result of innovation: IP or trade secrecy. As the industry grows and there is real money is at stake, it is to be expected that "every little kernel of an idea something to be guarded and squabbled over". This is not unique to high-tech. Stronger IP means more squabbling. Weaker IP means more squabbling AND more secrecy. When serious money is at stake, one cannot expect the collegial environment of academics or hobbyists to continue.
Published: August 13, 2009 9:20 AM
David Janello
>>I weep for the lack of those things that would have been created had that $4.3 trillion been left in the hands of consumers and entrepreneurs.
The government spending on the nuclear arms race and the space program was non-economic in nature. Consumers and entrepreneurs would not have undertaken these projects because they would have lost billions of dollars. And had the socialists and communists won the Cold War, there would be no entrepreneurs or consumers at all.
A more interesting question is why the United States was able to monetize its government spending and its principal rival, the Soviet Union, was not able to do so. The mechanism of the conglomerate corporation, where one division could work on non-economic classified projects, and a related division could use the critical technology knowledge obtained from the classified work in the private sector for competitive advantage, seems to be a key factor.
Not surprisingly, after the collapse of the Soviet Union many conglomerates in the US were forced to restructure or liquidate.
A second interesting question raised by the cold war is whether a government run on sound money can compete militarily against inflationist adversaries. During the Pelopennisan War the Athenians were on a strict silver standard and had to pay their trireme crews with precious metal currency. When the government coffers were exhausted the Athenian war efforts ceased.
The funds in the Athenian treasury were limited by the maximum tax rate imposed on the populace, which in a democracy cannot approach 100%. In contrast, the German Reich in World War I imposed an indirect hyperinflation tax of 100% on all liquid savings above and beyond the taxes imposed during the war. Had the Germans used a direct tax of 100% instead of the indirect inflation tax there is no possibility they could have purchased the military infrastructure they used to start and continue the conflict.
Like the inflationists, the economic policies of the Communists and Socialists also enforce an implied tax rate of 100%.
The question arises, as to whether inflationist and communist regimes with a tax rate of 100% can militarily dominate capitalist regimes with tax rates of less than 100%.
Published: August 13, 2009 9:49 AM
Andras
@David,
"...had the socialists and communists won the Cold War..."
Earth to David: They won it, after a while!
Published: August 13, 2009 10:38 AM
Boris
you have put in writing the thoughts that haunt me way too often. Thank you!
Published: August 13, 2009 11:08 AM
David Janello
"...had the socialists and communists won the Cold War..."
Earth to David: They won it, after a while!
@Andras,
The war between fantasy and reality is never over.
We are in the opening stages of our current inflation drama, we haven't even had the obligatory wage and price controls yet. In the chaos yet to come, there are a number of plausible scenarios that may unfold, see my blog at http://66.151.24.54/InflationFund.html
for more.
Published: August 13, 2009 12:09 PM
anon
"A more interesting question is why the United States was able to monetize its government spending and its principal rival, the Soviet Union, was not able to do so."
It's called Bretton Woods. So the burden was generously shared by the pro-American nations.
Published: August 13, 2009 12:25 PM
anon
David says: "The 'Good Old Days' in technology were a direct result of government spending, specifically, spending on the space program and the nuclear arms race."
That story didn't really disagree there. There's a distinction to be drawn between academic funding for research and bubble mania.
pussum207 comments on the inevitability of some of this...
I think you have a point, but without the bubble mania this might have happened in a much more rational and orderly way.
The point seems to be that the bubble rapidly shifted everything from substance to hype and decimated real innovation.
Published: August 13, 2009 12:35 PM
Ke
@David Janello
The government had nothing to do with the investment in the infrastructure of drilling oil in the late 1800s. What makes you think we would not have had private investments in nuclear power if not for the government?
Space race and nuclear arms race... Why were they even necessary? The Soviet Union and the U.S. got together in a race to see which government can blow and waste the most money. The U.S. came out on top and the Soviet Union imploded. Were those nukes even necessary? Would the Soviet Union have triumphed over the U.S. if they had 1000 nukes and we only had 100? What are we going to do with all of the nukes we have today?
Published: August 13, 2009 12:41 PM
Adam I.
I see a lot of posts here about the role of government financing in this, and they underscore one of the things that makes economics (and political science) hard: we cannot do an experiment comparing a non-inflationary more laissez-faire America A with a more inflationary state-driven research America B. So it's very hard to say if that research would have happened via other mechanisms or not. Did the state create the computer revolution, or did the computer revolution just get channeled that way because that's where the money was at the time.
Correlation does not imply causation either way.
Published: August 13, 2009 12:42 PM
Adam I.
Another point here is the repeated comments about "manic sociopaths."
I've met several of those. They're intensely charismatic, relentlessly energetic, excellent at lying, and very short-term and opportunistic in their thinking.
It has always been obvious to me that bubble conditions intrinsically favor individuals with certain mental disorders, specifically manic conditions, bipolar disorder, and sociopathic/narcissistic tendencies. Inflationary bubbles are wealth transfers to the delusional and the depraved.
Think for a bit about what that does to a civilization if repeated over and over.
Published: August 13, 2009 12:54 PM
David Janellod
>>The government had nothing to do with the investment in the infrastructure of drilling oil in the late 1800s. What makes you think we would not have had private investments in nuclear power if not for the government?
No firm or collection of firms had sufficient capital to launch the Manhattan Project in 1945. It was a non-economic event. Private capital could not enter this domain until the basic parameters were tested, explored and proven to work in the first place. It is reasonable to assume that the government outlays accelerated development of this technology by many decades at a minimum.
From the beginning The Golden Age of Technology was driven by anti-rational forces. Seymour Cray's life and career encapsulates this entire period, he began designing and building supercomputers after the Second World War, experienced success after success only to have his final venture go bankrupt at the end of the Cold War in 1993. Personally, I would date the end of the Golden Age of Technology with Cray's death in 1996.
By the time the dot-com tidal wave of cash arrived, a key source of unimaginably expensive technical knowledge had already shut down and disappeared. Without a sufficient number of proven but uncommercialized technologies to exploit, investment flowed into an endless stream of 'me-too' ventures. The fatal flaw of the dot-com era was not that the firms failed financially, but that they were technically uninteresting.
Published: August 13, 2009 2:39 PM
Adam I.
David says: "Without a sufficient number of proven but uncommercialized technologies to exploit, investment flowed into an endless stream of 'me-too' ventures."
So it seems like what you're really saying is that private capital is not capable of doing anything except picking up that which already exists and carrying it over the finish line of final commercialization.
Like I said earlier, we don't get to run experiments in history. History is an experiment with no procedure, no repetitions, and no controls. That makes it hard to ask "what if" questions. But it seems to me that Bell Labs, the old Edison Electric Company, and the work of Philo Farnsworth (search it) come to mind as counter-examples of privately funded research working quite well.
Remember that if we didn't have a giant government sitting on top of us that there would be a lot more private capital around. High-risk investments like R&D are only made when there's a lot of money burning holes in peoples' pockets, but economies do tend to create surplus if it isn't confiscated.
BTW, a side issue comes up on which I do agree: I don't think laissez faire is feasible without peace. There is no way a laissez faire society could maintain and defend itself and remain free in the face of military competition from inflationary permanent warfare states. Peace is a precondition to true liberty. So all genuine capitalists should be peace activists. :)
Published: August 13, 2009 2:57 PM
David Janello
>>So it seems like what you're really saying is that private capital is not capable of doing anything except picking up that which already exists and carrying it over the finish line of final commercialization.
In terms of the most advanced areas of technology this is true.
No matter how wealthy a society there are certain projects that are too big, too long-term, and too risky for private investment. Since there is no profit motive, these projects are driven by emotion and mass psychology rather than facts. At times they fail spectacularly (see Japan's MITI next-generation computer project ca 1989). However, once an anti-rational technology project shows signs of success, private capital that exploits the anti-rational source of knowledge has a competitive advantage over private capital that has no access.
Bell Labs provides an excellent example: once the government-enforced monopoly on telecom services was removed, the decades-long stream of major non-economic innovations (the transistor, fiber optic cable, discovery of the big-bang background radiation, the UNIX operating system, the C and C++ programming languages to name a few) came to an end.
It is not necessary to compare one historical period versus another. Simple logic indicates that the current Administration's round of non-economic 'investment' will not have the unexpected and counter-intuitive payoffs we received from the nuclear arms race.
Published: August 13, 2009 4:03 PM
TJ
Philosophers avoid this dilemma by focussing on things that can't be monetized.
Yeah, those old days were fun. So were the old days of radio and electronics and windmills and academics and UFOs. "Laboring in the vineyards of obscurity" still exists as an option ... for whoever's willing to accept a 'quieter' lifestyle. But obscurity's getting harder to find, what with so many mouths to feed.
Published: August 13, 2009 7:30 PM
Chuck
No matter how wealthy a society there are certain projects that are too big, too long-term, and too risky for government investment.
Published: August 14, 2009 3:53 AM
Matt
I always love the idea governments should take on too risky endeavors. As if buying more lottery tickets will eventually let you win money in the long run. Often most of thing governments do, they do it when it's WAY too early. Yeah nobody was wasting vast amounts on computers the size of rooms and creating internet, because it wasn't useful yet. Governments have no clue what to subsidize, so they try to subsidize it all. Any one though with a brain knows, whats the first area of a business that goes when profits reduce, such as with government taxation, is research and development. Therefore it not surprising many innovations have links with government funding. Yet even though the internet had a partial root from the government, it was invented well before it was useful at all. Thus any real benefit from government subsidies on the industry are rather limited, not to mention the problems of picking millions of wrongs choices. Nor is it any bit surprising when government alters the environment innovations take place, that once government starts to move away the industry changes.
Lastly, how can anyone know what the ideal amount of money spent on ridiculous innovation is, even if it does help when the government comes in. Considering that if money wasn't constantly being stolen, and that for many things the government tries to snatch intelligent projects, the field for private innovation is substantially smaller then it would be, but the still happened for the first half of the 20th century. You could say almost any project could fit the field into an expensive and high risk project. Its such wide field to consider funding for it, is like trying to find a needle in a hay stack, except the needle is painted like hay.
Published: August 14, 2009 4:09 AM