Fixing Broken Business Models
by Vince Scafaria, CFA (bio)
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Surveillance capitalism, today’s dominant tech business model, profits by extracting deeply personal information to manipulate and commodify us humans and our experiences. The Social Dilemma on Netflix, whistleblower Frances Haugen, and others have helped raise awareness of the harms of these business models. In its recent report, All Tech Is Human correctly points out that tech companies should adopt a stakeholder perspective, rather than just maximizing shareholder value. Unfortunately, under capitalism as we know it, corporations rarely heed calls that they should work to improve society unless incentives are also aligned.
There are three principal avenues for reform: (i) incumbent tech firms should prioritize ethics, societal impact, transparency, and accountability; (ii) regulatory bodies and courts must enforce consumer protection, allow data portability, promote unbundling of tech services, recognize that antitrust is not just about pricing, and hold tech giants accountable for the “externalities” that people bear in the form of unraveling democracy and violence, and (iii) entrepreneurs can and will disrupt and supersede surveillance capitalism with highly profitable business models that are human-centric and treat the individual and society as customers. Disruptive entrepreneurs will require some help from regulators and in turn from an informed and engaged citizenry. The disruptors’ role has the benefit of not just suggesting that tech execs should do the right thing; it channels capitalist incentives to drive change.
There is reason to believe that new business models could not only improve human experience, but also drive greater economic value than we see today? No single tech giant has full knowledge about the data, experiences, and needs of a person (personal messages, work data, health info, etc.), nor should they. Decentralized alternatives where the individual’s personal data is securely stored, analyzed, and shared with friends for the person’s own benefit could draw upon wider data pools, including private analysis of sensitive information. Even digital advertising need not involve personal data exfiltration, and indeed Google and Apple are disabling key forms of it. Private analysis of personal data to identify exactly the right ad (based on this greater pool of data), coupled with anonymized ad requests so that the human needn’t be known to the advertiser, provides just one example. This would flip the business model from one of pushing deeply personal data out to strangers toward one of pulling just the right ad for the human user – or even better, not just ads but information about interesting and relevant personal or economic opportunities more broadly.
Tim Berners-Lee, creator of the world wide web, envisions a world where each of us has a personal cloud on which to run unbundled apps and algorithms privately against personal data. Handheld devices, which are now thousands of times more powerful than the Apollo computer, could play a role as well. And entrepreneurs can develop hybrid models drawing across these realms, e.g. leveraging Big Tech for its strengths (existing social networks, global search, AI) without private data exfiltration. As communities like Wikipedia have proven, (relatively) decentralized moderation and norm enforcement are possible within such systems.
As I’ve written about at length, I strongly believe in a future that is decentralized, prosocial, and ushered in by appealing to economic incentives. I call this Prosocial Capitalism and it adheres closely to what economic thinkers like John Perkins have called a Life Economy. However, right now there is a lot of momentum to lock in a future where only two of the three aspects come to pass – decentralized and economically-driven but not prosocial. To explore this further, I must first return to the beginning of this essay and the discussion of a “stakeholder perspective”.
Before moving to tech 22 years ago, I studied economics at Wharton and worked in investment banking. I also taught valuation and transaction analysis to thousands of newly hired bankers across Wall Street. These experiences instilled in me the teachings of Nobel laureate Milton Friedman. As he declared in 1970, the social responsibility of business is to maximize shareholder value. By this doctrine, if a business focuses squarely on its bottom line and ignores stakeholder concerns, everything else will work out well for society. After all, in theory society would push back on “externalities” such as pollution, dangerous products, or unsafe work conditions, internalizing those costs into a single metric.
Of course, that’s not how the last 50 years have played out. The year after Friedman’s essay, Lewis Powell published a famous memo telling business leaders they should be driven by shareholder value and should work to bend society to their will. If democratic institutions and citizen collective action could be blunted, externalities could and would be borne by society after all! This worldview is unsurprisingly shared by many of the wealthy and powerful, especially those who extract fossil fuels from the ground or who extract personal information from our life experiences. It embraces the idea that wealth compounds naturally into more wealth and power begets more power. To stand in the way of this exponential driver of inequality would be to impede “economic liberty” (the etymological root of “libertarian”). Famous proponents of “economic liberty” include Milton Friedman, Ayn Rand devotee Alan Greenspan, Charles Koch, and Peter Thiel. Economic liberty is marketed as being about the right to earn what one should, but in practice it involves allowing wealth and power to compound without impediment. (Fun fact: If Charles Koch stacked his wealth in $100 bills, it would reach 36 miles into the sky! If your wealth is measured in inches or feet, your interests are not aligned!) No wonder Peter Thiel wrote, “Most importantly, I no longer believe that freedom and democracy are compatible.” Indeed, they are not if freedom means unbridled “economic liberty”. As supreme court justice Louis Brandeis said, “We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both.”
This brings me to web3, a leading candidate to replace Big Tech via blockchain technologies underlying cryptocurrencies, digital autonomous organizations (DAOs), and NFTs. Since our flawed Big Tech status quo is centralized, perhaps Blockchain, which is (arguably) decentralized, offers the solution? Unfortunately, decentralization does not itself drive prosociality. Sources of power may be less obvious, but they exist in any network structure. In particular, decentralized systems that are also unregulated and opaque can be exploited by bad actors, the wealthy, powerful, or those holding the most information.
Just a few months ago I was indifferent about crypto; it was just another new technology whose success was of no personal concern. Then I learned from Dave Troy the shocking historical context here and here. Indeed, the most powerful use case for crypto (even beyond shielding illicit transactions) seems to be neutering the monetary sovereignty of currency-issuing countries. A country with monetary sovereignty cannot go bankrupt because it repays debts with its own currency. The country most certainly does need to guard against inflation! It needs to avoid driving growth at a rate faster than the economy can support (for example, demanding that all the nation’s roads be repaved within one month would trigger inflation), it needs to diagnose and remedy supply chain disturbances, reign in the pricing power of oligopolists, etc. But as long as its debts are denominated in its own currency, the country cannot go bankrupt. Monetary sovereignty is a threat to “economic liberty” of plutocrats because it grants government (i.e. the people) power of the purse (money supply is not strictly fixed per se) and therefore the ability to allocate resources in ways the society sees fit.
Against that backdrop, I watched this extraordinary video on NFTs and web3 with 5+ million views, read this hilarious account of a crypto expert exposing both the centralization and hackability, researched further, and became a crypto skeptic. I will admit I do hear prosocial use cases pitched for DAOs. But I remain concerned that this is just the next incarnation of rule-by-algorithms (which isn’t going so well; and reading Superintelligence by Nick Bostrom cured me of that particular brand of tech utopianism). Meanwhile, at a time when democracies are struggling to reign in autocrats and when we already have trouble tracking dark money in politics (including foreign influence) and in real estate and private equity (which have money laundering exemptions), it seems dangerous from a national security perspective to further facilitate opaque forms of financialization.
It is important to state risks about heading down the wrong path, to ensure that the cure isn’t worse than the disease. We should ensure we don’t mortgage our futures on a hyper-financialized new Internet while renting out our minds in new and interesting ways. Yet I remain optimistic that decentralized-yet-prosocial business models will emerge that restore agency, dignity, and humanity to our digital lives. If truly successful, new business models can link people together for collective action to stave off autocrats and address the world’s greatest challenges. DMs open @scafaria to collaborate on open source tech to that end.