I’ve been in tech now for a long time. They say the American economy is incredibly productive, and the engine of the world. Here’s why we should be more worried than we are about the substance of our economy.
Types of Non-commodity Products Sold in America
The nonstandard standard item. You buy a sedan and when you take delivery, it doesn’t have wheels, and there are no options to add wheels. You call them and say “um, this isn’t what a ‘street legal sedan’ is supposed to be” and they say “it meets 90 percent of the standard and it’s 100 percent street legal.” You say “but it can’t move, how can it be street legal?” They say it is legal to move it on the street on the back of a tow truck. You say “this is ridiculous, I can’t use this.” They say “we do not guarantee fitness for any particular purpose, did you not read the end user agreement?”
The just-in-time item. You buy a sedan from a “lean, efficient” company with a promise that your car will be delivered in three months once it’s manufactured. What you don’t realize is that they know they won’t deliver in three months because the factory doesn’t exist yet and in fact there isn’t even a blueprint yet. They plan to use the revenue from all the car purchases to design and then manufacture the cars. They have set an “aggressive timeline” of one year to delivery based on preliminary “market research” saying that only 40 percent of customers will cancel the order before a year is up. They also have a “stretch goal” of three quarters for delivery of the first car.
Eighteen months on, you are receiving breathless updates via email and snail mail about how great it’s going to be and how amazing progress is. Meanwhile, they have raised three more venture rounds. In another month, they wind down, thank everyone, talk about “all they’ve learned,” and the C suite walks away with millions. You never get your car.
The recurring revenue model item. You buy a sedan and when it arrives, the ignition key doesn’t seem to do anything—no start. So you call them up and they explain that for the ignition to be “enabled,” you need to subscribe to their “ignition key” service at $10 per month or you can save money by paying for a year at a time for $99 per year, or $80 per year if you pay for three years in advance. You grit your teeth and pay for three years of “ignition key” but then find that you can’t shift it into reverse to back out of your driveway. They tell you that you can subscribe to the “reverse gear” service for an additional $10 per month, or that you can get it as part of the “whole transmission bundle” which only runs $49 per month…
The low-cost item. You buy a sedan and think you got a very good deal as it was only $8,999 new. You start to drive down the street and within the first mile, the right passenger side wheel begins to wobble. As you try to limp to the mechanic, you realize that you are slowing down no matter how far you press the accelerator, you eventually can’t get past 10 miles per hour. Then, as you pull in to the mechanic, the steering wheel comes off. Your mechanic takes a look and says, “the problem here is that most of these parts are made of cheap plastic or literal tinfoil, bonded into thicker material by gluing layers of tinfoil together with cheap adhesive.”
You contact the company and they offer you either 10 percent credit toward an identical replacement or five percent cash refund. They explain that they can’t give you any more than that since it’s damaged. You balk and they explain that perhaps this isn’t the right product for you as it was never advertised as being useful for “heavy duty applications” such as driving down the street. Meanwhile, positive reviews continue to roll in to the website as it dawns on you that they’re probably all astroturfed.
The not a customer customer item. You browse the website about a sedan, put down a $10 deposit to be guaranteed a spot as one of the “first 100,000 deliveries” if you decide to buy. Based on this $10 deposit, the manufacturer counts you among 100,000 sales for the full value of the car in their reporting. You decide you don’t want the car, but they continue to send apparent bills demanding payment, though these aren’t backed up by any teeth as you have agreed to nothing. In between these demands, you receive slick communications thanking you for being a customer and for being a part of the sedan’s “community.”
They use their initial 100,000 “sales” and all that booked “LTV” to do several funding rounds at which point they can actually build a car, though not a great one. When they deliver the first actual car to the first actual customer, they hold a big investor event celebrating their 100,001st customer and the “incredible success” they’ve had “in such a short period of time.”
The baitish and switchish item. You buy an alternate-marque sedan because it’s supposed to be based on the platform and use the components from another major auto manufacturer, but at a lower price. When you take delivery, however, it looks dissimilar from the photos and marketing materials in troubling ways, though not in significant enough ways to be clearly the wrong item. Quality looks somewhat lower, and some of the design cues you really liked are different in what you received. Worse, over time as you own the car and find the reliability to be low, your mechanic repeatedly informs you that the parts are not from the major auto manufacturer you thought they were from.
When you ask other owners, you start to realize that there are many “versions” of this car out there, with parts from a wide variety of manufacturers. Turns out they buy parts on the “spot market” on price, and adjust designs as they go to be able to use the lowest-priced parts at any given time. Ultimately you determine that you got one of the “bad versions” though you’re happy for your friends, who mostly bought the “good versions.”
The vertical integration meets rent-seeking item. You buy sedan with great features and great quality and are initially thrilled, but you are surprised on the second day when you turn onto a particular street and it just dies. You get a tow back to your house and suddenly it seems to work again. Then the next day again you turn onto a different street, and once again it just dies. You contact the manufacturer, who explains that the car drives only on “approved” streets owned either by the manufacturer or by one of its “partners.” They refer you to their website, where the list of “current partners,” which seems to change monthly or so, lets you know which streets you can drive on today. At your first fill-up, you’re no longer surprised to learn that you also can only use fuel from the manufacturer or one of it’s “approved partners” and there is a page on their website for fuel as well…
The manufacturing partner item. You buy a sedan from a “manufacturer” but at your first warranty service, you’re directed to an obscure dealership that you’ve never heard of that doesn’t seem to actually sell cars, just service cars like the one that you bought. You soon learn that actually your car is identical to another car that sells overseas for a fourth of the price. The only difference is the paint and the badge.
After some digging, you find out that the “manufacturer” exists only on paper in this country; they are essentially a marketing department to advertise and a finance department to collect money. The overseas manufacturer makes cars for lots of different companies of this kind worldwide, not at particularly high quality levels.
As you look at marketing materials for all the companies around the world who “sell” this car, you realize that the real manufacturer does almost all the marketing and all the finance as well—when they sign up a new “sales partner” in a country, they provide this sales partner with all the materials, television ads, campaigns, software to run finance, etc. It’s actually somewhat unclear just what the “manufacturer” in your country does, other than pay a one-time fee to become the “exclusive sales channel” in your country for the real manufacturer. When you go to the real manufacturer’s website, you find that it’s listed as a “turnkey business” and in fact they have a ready line of major capital providers lined up to help new “businesses” around the world to start selling their cars, rebadged, in new international markets.
You realize you’re never going to be able to get parts, or service, or even talk to a real person in your own language about it. You try to sell it but soon realize it’s just going to live in your backyard forever as you buy a new, proper car…
Bubble, Bubble, Toil and Trouble
Have I missed any? As I said, I’ve been in tech for a long time, which—let’s face it—is really just about everything these days. It’s hard to think of a product category that isn’t tech.
The thing is, the above practices aren’t considered bad. They’re considered best practices, ways to “execute,” to be “lean,” to “drive shareholder value,” to “enable rapid scaling,” etc. If you aren’t doing one of the above things—if you just sort of plod along making honest, good quality things and delivering them to customers to grow at a few percent CAGR (“compound annual growth rate”), investors will absolutely punish you. And ironically, so will consumers, who seem to focus more on the Instragram presence of a company and its products than on actual product fitness—and companies that focus their dollars on “product fitness” and growing within their means based on real deliveries to real customers who have real experiences with them… those companies don’t have spare venture money to invest in an entire glossy social media team or a high-dollar “marketing partner.”
A lot of dollars move around in our economy, and a lot of business is done. A lot of consumers and a lot of companies go into debt to participate in this economy, and that generates a lot of growth productivity, and new dollars on the books.
But the thing is, it’s all fake. The list above is probably 80 percent of the actual products and services out there, and it’s not real. In another era, this wouldn’t have been “tremendous exciting growth,” it would have been “smoke and mirrors and dishonest business practices.” A whole huge bunch of our economy is actually not real economic activity in the sense of efficiently distributing valuable resources that can and will be used in the production of society. It’s nonsense for Instagram (both for producer and consumer) and nonsense for the financial books (both for producer and investor, who these days is also consumer).
This is just one small part of our problems, but it is the problem with actual hard goods and services delivery, which is often presumed to be the “real” part of the economy, as opposed to the financialized assets and business lines.
Fact is, almost none of it is “real.” Most of our economy is a bubble of fake money used to purchase or deliver fake goods and services. The numbers are big, but the underlying substance is relatively small.