Tag Archives: technologies of resistance

The Great Disintermediation

Yesterday at Forbes, William Pentland had an interesting piece on possible disintermediation in the electricity market.

In New York and New England, the price of electricity is a function of the cost of natural gas plus the cost of the poles and wires that carry electrons from remotely-sited power plants to end users. It is not unusual for customers to spend two dollars on poles and wires for every dollar they spend on electrons.

The poles and wires that once reduced the price of electricity for end users are now doing the opposite. To make matters worse, electricity supplied through the power grid is frequently less reliable than electricity generated onsite. In other words, rather than adding value in the form of enhanced reliability, the poles and wires diminish the reliability of electricity.

If two thirds of the cost of electricity is the distribution mechanism, then, as Pentland notes, there is a palpable opportunity to switch to at-home electricity generation. Some combination of solar power, batteries, and natural gas-fired backup generators could displace the grid entirely for some customers. And if I understand my electricity economics correctly, if a significant fraction of customers go off-grid, the fixed cost of maintaining the grid will be split over fewer remaining customers, making centrally-generated electricity even more expensive. The market for such electricity could quickly unravel.

While it remains to be seen whether electricity generation will indeed become decentralized, such disintermediation would be the continuation of a decades-long social trend. It all began (plausibly) in 1984. The Macintosh was released, and desktop computing became a thing. Desktop printers disintermediated printing departments, Kinkos, and the steno pool. The Internet has disintermediated telephone companies, music labels, television networks, newspapers, and much more. Online education is unbundling university courses.

What’s even more exciting is the next generation of disintermediating technologies. Bitcoin could displace some financial institutions—to varying degrees, banks, the Federal Reserve, Western Union, and credit card companies. Mesh networks could solve the last-mile problem of Internet service delivery, which tends to be monopolized or at least concentrated. 3D printers could disintermediate supply chains. 3D chemical printers could disintermediate drug companies and the FDA.

Delivery drones like Amazon Prime Air‘s arguably disrupt package delivery services, though not entirely because FedEx and UPS will still run drone-utilizing distribution networks. More importantly, delivery drones disintermediate the real estate market for small businesses. It will no longer be important, if you run a local business, to have a storefront in a prime location. Your customers can order online and items can be delivered to them in half an hour straight from the factory or artisanal workshop. It could be the Etsyfication of the economy.

If information, electricity, money, and production all get disintermediated, what is left? If these trends continue, the future will be one in which human interaction is unmediated, and to a surprising degree, unregulable. It will be difficult to stop a willing buyer and seller from transacting. Information about the proposed transaction might not be censorable. Payment via Bitcoin or other cryptocurrencies can’t be stopped. Production and delivery of the item may be difficult or impossible to detect and intercept.

Intermediaries are often used by governments as points of control. As we shed intermediaries, it may become possible to live one’s entire life without any particular authority even knowing that one exists. I doubt that we’ll ever get that far in the process, because using non-abusive intermediaries often makes economic sense. But for the next few decades, at least, I expect the trend to continue and the world to get a lot more interesting.

The Most Important Issue of the 2012 Election? TacoCopters

The election is in full swing, and both sides are trying to make it sound like there’s a lot at stake. But the truth is, on many of the issues that divide the country, there are not as many degrees of freedom as politicians claim. The government can’t keep running trillion-dollar deficits forever, so at some point that will stop. There will be some mix of tax increases and spending reductions regardless of who is elected. Many issues have already been decided cumulatively, over the last decade, and merely await congressional or presidential acceptance of reality.

But there are some important and under-appreciated issues that will genuinely be decided in the next four years. Chief among these is that the FAA is scheduled to make its first rules for the commercial use of drone aircraft by September 2015. Under current rules, such use is illegal. But the cost of drone components is plummeting so quickly that widespread use of drones is now an option. As Dan Shapiro notes, “A single high-quality gyro used to go for a thousand bucks.  Now, you can get 3 gyros, 3 accelerometers, and a nice CPU to manage the whole thing for under a sawbuck.”

When most people think of commercial drones, they think of TacoCopter, the fake-but-delicious-sounding taco delivery service. The idea is simple. Download an app, place your order, upload your location, and within minutes, a small unmanned quadrocopter shows up with your tacos. If the FAA makes good rules, such a service is likely to emerge. In fact, thousands of such businesses might even get started. FoodCopter services will be more convenient than food trucks, and more able to withstand local regulatory efforts provided that federal rules are well designed.

Other local delivery services will also suddenly become possible. Farhad Manjoo has written about how Amazon is making a push into same-day delivery. But package-delivering drones greatly reduce the logistical costs of the same-day delivery business, to the point that quite possibly most companies will offer same-day drone drop-off. Drones could change not just the way we shop, but the way our cities develop—we could live more densely, and with narrower streets, if we did not need to drive to the store so much, and if trucks did not need to make deliveries.

The use of commercial drones in long-distance delivery might be even more important. Chris Anderson says that FedEx founder Fred Smith is extremely interested in switching their fleet to unmanned aerial vehicles.

He says that they’d like to switch their fleet to UAVs as soon as possible but that this will have to wait for the FAA, which has a tough road ahead in figuring out the rules of NAS integration. Unmanned cargo freighters have lots of advantages for FedEx: safer, cheaper, and much larger capacity. The ideal form is the “blended wing” (example shown). That design doesn’t make a clear a distinction between wings and body, so almost all the interior of both can be used for cargo. The result is that the price premium for air over sea would fall from 10x to 2X (with all the speed advantages of air).

Reducing the cost of air transport by a factor of five and making it competitive with post-shipping container ocean transport would be an astounding achievement. It would increase the number of mutually-beneficial trades that are possible, which is pretty close to the definition of economic growth. And think also of the fuel savings and environmental gains.

Making air transport competitive with ocean transport would have additional benefits. When I was in Rwanda last year, a number of officials and business leaders that I talked to cited the fact that Rwanda was landlocked as an obstacle to growth. Even though there is little corruption in Rwanda, the corruption in neighboring countries is cutting Rwanda off from trade. As I reported with Rohac and Shah,

A study by the Rwandan Ministry of Trade and Industry reveals that in order to reach the port in Mombasa, Kenya, some 900 miles away from Kigali, a lorry driver needs to pay an average of USD 864 in bribes, and stop at 36 different road blocks and 10 weighbridges. The representative journey used for the study, using a tea shipment of two containers, took over 93 hours to reach the destination.

If the price of air transport fell to only twice the cost of ocean transport, corruption in neighboring countries would not disrupt the flow of goods. Rwanda would have a shot at more exports. Drones are a technology of resistance for Rwanda viz. its neighbors.

But of course, Rwanda is not where drones are going to be further developed, at least not any time soon. A lot of commercial drone development is going to happen—or not happen—in the US in the next several years. And the “not happen” possibility worries me. After all, consider that commercial use of the Internet was unnecessarily delayed for decades:

A handbook on computing at MIT written in 1982 warned students: “It is considered illegal to use the ARPAnet for anything which is not in direct support of government business. . . . Sending electronic mail over the ARPAnet for commercial profit or political purposes is both anti-social and illegal. By sending such messages, you can offend many people, and it is possible to get MIT in serious trouble with the government agencies which manage the ARPAnet.”

This doesn’t have to happen to drones. Instead of delaying the introduction of drones while the FAA writes tons of safety regulations, we should use the existing tort system to enforce safe operation of drones. Regulatory agencies are not well suited to managing highly dynamic sectors of the economy. The tort system, on the other hand, because it addresses cases and controversies after the fact, would be more capable of setting efficient safety guidelines for drone operators. And if we adopted a common law approach rather than a regulatory approach to drone safety, we could have our TacoCopters now, not several years down the road.

To my knowledge, no one has asked the candidates about this important issue. But I hope someone will. The American people deserve to know which one is more committed to opening up urban airspace to commercial use.

Technologies of Control and Resistance: Making Sense of our Stagnant Dynamism

I’ve just read Race Against The Machine, a new Kindle Single by Erik Brynjolfsson and Andrew McAfee, which argues contra Tyler Cowen’s The Great Stagnation that we are witnessing not a slowdown, but a positive acceleration of technological change. Brynjolfsson and McAfee argue that the fast pace of innovation is creating mismatches between humans and new technology, which has resulted in a lot of technological unemployment. The jargon is skill-biased technical change (SBTC). All recessions bring unemployment, but recent recessions have resulted in “jobless recoveries” that are the result not of cyclical forces but of deep structural change in the economy.

Brynjolfsson and McAfee are not wrong, but I think a better picture emerges if we attempt to reconcile their argument with Cowen’s rather than viewing them as contradictory. As Tyler argues, we have not had the kind of growth we might have expected 40 years ago if we had extrapolated based on the prior 40 years. See this chart on total factor productivity by David Beckworth. I think McJolfsson’s view and Cowen’s view are complementary if viewed from a sufficiently “big picture” perspective; the slowdown in TFP and the speedup in SBTC are, after all, decades-long trends.

Here’s my model. First we need to differentiate between two kinds of innovation and think about their effects. The first kind of innovation is geared toward brute maximization of production. It is typically centralized and makes use of economies of scale. Examples might include an assembly line factory or a big, coal-fired power plant. Because these innovations tend to be centralized, they introduce points of control. The capital is typically fixed and therefore easy to tax and regulate. It’s well known in the development literature that it’s really hard for governments to control rural peasants who live off the grid. Once they move to the cities and plug into centralized services, it is easier to require them to send their children to school, for instance. Because these innovations introduce points of control, I will call them technologies of control.

On the other hand, not all innovations are about brute maximization of production. Some are about producing things that we already know how to produce in ways that have ancillary benefits. An important ancillary benefit is evading control. Examples of these innovations include 3D printers and solar power. The evasion of control that is possible with 3D printers is the subject of Cory Doctorow’s short story Printcrime. And portable solar power cells can make people harder to control by supplying electricity without the need to register an address, have a bank account, stay put, and so on. These are obvious examples, but control can be evaded through more subtle innovations as well. I will call innovations that circumvent points of control that can be used by governments or monopolies to exploit, tax, or regulate technologies of resistance.

Now, postulate some background rate of innovation. How many resources will be devoted to technologies of control and how many to technologies or resistance? The answer is that it depends on how invasive the state (or other monopolies) are. When the state is invasive, at the margin the incentive is to find ways to circumvent the points of control; a greater proportion of resources will go into technologies of resistance. When the state is non-invasive, at the margin the incentive is a purer maximization of production; a greater proportion of resources will go into technologies of control, which results in higher growth.

What determines how invasive the state will be? Call me a cynic, but I think it correlates strongly with the availability of points of control. When factors of production are fixed, when demand for government supplied public goods is inelastic, when there are lots of points of control, the government will exercise more control. When the opposite is true, when there are few points of control, the government is unable to act invasively.

As you can see, there is a system of feedback. But the countervailing forces need not push outcomes to a stationary equilibrium. As we all know, time-to-build can result in cycles. Since technologies take time to change direction and develop, and since politics is slow to adapt, we should expect a non-stationary equilibrium. I think this is consistent with the broad facts. A hundred years ago, at least as it concerns white males living in the US, the government was relatively non-invasive. As a result, they developed centralized technologies that created a lot of growth, technologies of control. As new points of control were introduced, the government became more invasive. The modern state was born. At some point, innovation gradually increased toward technologies of resistance. The low-hanging fruit from the prior era eventually petered out, and sometime around 1974 we began to see lower TFP growth. As technologies of resistance improve relative to technologies of control, I can’t say exactly what will happen. A lot depends on whether government becomes gradually less invasive as points of control disappear or whether it continues to overreach; if the latter, we could observe some kind of interesting political turmoil.

So far, I’ve been pretty general about technologies of resistance, but I want to tie it back into McJolfsson’s story about rapid skill-biased technical change. The key point is that labor is extremely regulated; firms that use labor are subject to intense government control. In part this is because policies that give labor a “bigger piece of the pie” are popular with voters, and in part it is because labor can complain and enforce its rights in a way that machines cannot. If you own a business and you are subject to intense government control, you are going to invest resources in circumventing the points of control. In our economy, that means getting rid of lots of labor as cheaply as possible, which means skill-biased technical change. As Arnold Kling has said, “if a job can be defined, it can be automated or outsourced.” But it’s because there is so much control exercised in the labor market that the incentive to automate and outsource is so high.

On the other side of the labor market, I wonder if post-materialism is not also part of an attempt to evade control. A lot of talented people are scaling back their labor efforts, and while surely not all of this is due to taxes and regulations, some of it may be. And other innovations which seem truly new, such as the development of autonomous vehicles, are the result of control of which we may not even be aware; for instance, how profitable would it be to develop autonomous vehicles if Pareto-improving trade with immigrant drivers were not made impossible by immigration and labor restrictions?

The Internet has been somewhat insulated from the kind of political control that I am claiming leads to the cycle of control and resistance. As a consequence, I think we observe an epicycle there. Internet technologies can be centralized at the company level or standardized at the protocol level. Email is an example of a technology that is standardized at the protocol level, and it was developed in the early days of the Internet, when market power was a serious concern. Today, there are so many competitors in the online messaging field that market power is not a real problem. Consequently, we observe services like Facebook and Twitter, which are centralized and can provide “higher production” by reducing spam, for instance. If Facebook and Twitter ever abuse their market power too much, that is when distributed, protocol-based substitutes such as Diaspora and Status.net will take over. And when the government starts exerting more control over the Internet, we’ll observe the adoption of new technologies to circumvent that control, such as encryption and mesh networking.

In a strange way, this theory is a partial vindication of Ayn Rand; the only problem is that she was too literal. The productive people do not go on strike when they are over-controlled. Instead, they innovate around the points of control. They go on strike at the margin. And it doesn’t take a big, dramatic exit. A little bit cumulatively over decades is sufficient to both be noticeable in the data and to reduce the amount of control that can be exercised.

At the risk of being accused of now-more-than-everism, I’ll point out that the problems associated with a greater focus on technologies of resistance and with skill-biased technical change could be much ameliorated by a government that dramatically reduced its control over its citizens. Stick to supplying public goods and providing a small safety net. It won’t fix everything overnight—technology has momentum—but it will make things better than it otherwise would be. However, I think there is little chance of this happening. It requires out-of-equilibrium political play. Instead, if my theory is correct, we will find out what happens when large, invasive governments overextend and are forced to shrink.