Truth is tough. It will not break, like a bubble, at a touch. Nay, you may kick it about all day, and it will be round and full at evening.
Oliver Wendell Holmes
Built by geniuses, both coasts’ products end up being deceptively cheap, morally corrupting, and of questionable long-term economic utility. We’d be wise to be just as critical of opaque, data-driven tech companies as we are of opaque, debt-driven financial institutions.
It’s cool to hate finance, you know, because ‘fat-cat’ and ‘main-street’ and ‘bonus’. It’s also cool to love technology, you know, because ‘passion’ and ‘disruptive’ and ‘big data’.
But wait—technology isn’t so innocent. Both industries derive much of their value from questionable sources: banks from demand-deposits they shouldn’t be lending, and technology companies from data they shouldn’t be collecting. For centuries, banks have failed when their customers lost trust in them. Will the latest data-driven digital services follow?
Much of the banking business model is evil. Much of banks’ profits come from devious lending. Although lending demand-deposits is generally accepted, it shouldn’t be, because it’s morally repugnant. It wasn’t always this way, but once we started descending down the slippery slope, all bets were off.1
After all, think about the bankers, in charge of mountains of money just sitting in peoples’ accounts. There’s got to be some way to harness those assets, right? Hence cheap loans; the underlying assets to back them are essentially free.
‘Affordability’ is probably the most misleading term thrown around in consumer finance. “Just 3 easy payments of $19.95!” “I can afford that!” More easy payments of varying magnitudes pile up, gradually enslaving the consumer in a mountain of debt. Drink a few too many shots of easy $19.95 payments and you’re drunk with debt. Your freedom is zapped away by an insurmountable commitment to banks.
Excessive debt is serfdom.
But this isn’t a bash-the-banks post. Many of banks’ core services are useful.2 While I hate trusting banks to protect my money knowing they’re only going to lend >90% of it away, there’s a deeper problem: excessive debt has repeatedly been at the root of bank instability. The folks at your local bank branch don’t really care about your banking ‘experience’ (customer service, etc.)—in most cases, bank customer service does the bare minimum merely so the bank can get more of your deposits to make more loans. That’s why most banks make their basic accounts free.
Most of the internet’s business model is evil. Much of the perceived value in today’s data-driven digital services comes from devious data-collection. Although this collection is accepted, it shouldn’t be, because it’s morally repugnant. It wasn’t always this way, but once we started descending down the slippery slope, all bets were off.
After all, think about the technologists, in charge of deluges of data just passing by for them to grab. There’s got to be some way to harness that data, right? Hence free web services; the underlying data powering them is essentially free.
Most ‘big data’ is surveillance.
But this isn’t a privacy post. Many web services are useful. While I HATE SACRIFICING MY PRIVACY TO USE THE INTERNET, there’s a deeper problem: the real purpose of data collection itself has become an economic phenomenon.3 The folks at pick-your-favorite-tech-company don’t really care about what your dog had for breakfast—they merely want to collect that data to ‘monetize’ their services.4 That’s why so much of their services are free.
Collecting data isn’t fundamentally bad. Lending isn’t fundamentally bad. At the same time, I think it’s crystal clear that that both sectors have gone way too far.
Throughout history, bank lending has been a hallmark cause of financial ruin. It’s the same song with a different tune every time: markets innovate, governments set rules for moderation, bankers commit slight violations, governments find the errant practices useful, bad becomes good, markets go crazy, and then mania leads to ruin as greed trumps sound judgment.5
Let’s look at the most recent financial crisis through the lens of this post’s thesis. Is modern banking deceptively cheap? Yes: most banking services are free, provided you allow banks to lend your money away. Morally corrupting? Yes: mania leads lending to get increasingly aggressive and internal banking practices to become increasingly questionable. Questionable long-term utility? Yes, well, let’s flip the question: how much better off are we as a society after this most recent bout of binge-borrowing?
In technology, we haven’t really experienced data-driven ruin just yet, but I think we’re on our way there. Bruce Schneier said it best: on the web, data is currency. It’s become the default medium of exchange for goods and services on the internet.
That’s the tragedy: data is not currency. Data is not inherently valuable. It’s not even a viable medium of exchange. You can’t go to the store and pay for a jar of milk with a stack of data. It cannot buy real assets—only higher and higher valuations backed by (what else?) other high valuations.6
Debt is nothing but a promise for value transfer in the future. Data is exactly the same thing.
Yet, markets insist on treating data as units of real value. Companies insist data helps them give ‘better experiences’ for their users to “make the world more open and connected” and “share and grow the world’s knowledge.” That’s bullshit. Those companies simply have no idea how to make money.7 All their grandstanding ‘visions’ are corporate double-speak their companies must give to exist: it’s how they can attract top talent to build a product, attract dollars from investors, justify their existence to society.
So, modern web services are deceptively cheap? Yes: content is ‘free’ if you trade your most intimate personal data. Morally corrupting? Yes: mania has caused markets to value data as a standalone source of value, and so companies collect as much of it as deviously as they can without regard to privacy, morality, or integrity. Questionable long-term utility? Yes: haven’t you debated closing your Facebook account?8
Bankruptcy is the ultimate verdict in the marketplace. Lending too much directly leads to bankruptcy. Collecting data, however, cannot lead to bankruptcy because it’s not a practice that impacts the balance sheet. So what could happen?
I’m not sure. But I can say one thing with absolute certainty: this data-driven paradigm of today’s consumer technology services will not last. It cannot last. It’s going to die. Information is available much more freely than it has been in the past, and costs to obtain and deliver it are lower than ever before, but that doesn’t actually make the information free.
I’ll stop here, short of posing potential solutions. Anything I could suggest is untested by the rigors of the marketplace and is therefore meaningless. My hope here is that more people realize the profundity of this problem.
How profound is it? Well, without a doubt, the internet is the most powerful tool we have today. It’s an indispensable tool to make income, power the food supply, distribute energy, etc. Beyond the necessities, it’s an indispensable force in informing and educating. The internet is the bedrock of modern progress. Its freedom has enabled more innovation to take place in the past 20 years than in the 200 years before it. So if the internet is in trouble, it’s big trouble.9
So let’s not forget the power of this tool we use everyday and take for granted. It would be a shame to see the internet’s power and potential curbed by something as basic as a bad business model.
1 Read the first couple of chapters in this book on the history of banking. They’re fascinating. And the book was written by Jesus.
2 Lending deposits itself isn’t always bad. If I set aside some money and tell my bank I won’t be needing it for 6 months (e.g., a CD) and the bank decides to lend it, fine. But if I put money in a checking account, I expect for the entire account to be available to me whenever I want it. Lending these deposits is wrong.
3 They say writing online in all caps denotes yelling. I’m yelling. Data-collection-for-content with no alternative is such a ridiculous model. It’s like posting your origin and destination on your car in big bold letters every time you go out instead of paying tolls & taxes to maintain the road infrastructure. Or mandating see-through walls in your home for free housing. Or exchanging your medical records at restaurants for free food. What the hell?
4 I put ‘monetize’ in quotes because it’s usually not true monetization. ‘Boost paper valuation’ is a more accurate way of putting it.
5 Online privacy wonks, don’t parts of that story sound familiar?
6 Relevant: definition of an economic bubble.
7 There are many exceptions, I’m sure, but the old Google (i.e., before Google+) is the only notable one I can think of.
8 Several times?
9 Notice that I haven’t even mentioned the elephants in the room: surveillance and neutrality. The economic issue is incredibly significant on its own.