Dave Morin and the Future of the Internet

One of the great benefits of being a student is the wide variety of people you get to interact with. In particular, universities go to great lengths to get empowering graduation speakers at their commencement ceremonies. Harvard, for example, has had many powerful speakers including Madeleine Albright, Bill Gates, and (perhaps the most influential) J.K. Rowling. My institution, or as of last Friday alma mater, The University of Colorado, does not have as much money to spend on graduation speakers. The primary commencements ceremony had the founder and CEO of Chipotle, a burrito joint - needless to say, I did not attend that event. The economics department had a much more interesting speaker: Dave Morin, a co-developer of Facebook, and entrepreneur. Currently, he is developing his own creation, Path, a social network devoted to your closest friends.


Students were invited to a more private conversation with Mr. Morin the day before graduation which I was fortunate enough to attend. His conversation was very intriguing from both an economic and investment point-of-view.


Entrepreneurs
One of the most hard hitting points that Mr. Morin made was that there weren't enough entrepreneurs in the world. In essence, in fact, almost by definition, entrepreneurs are the driving force of the economy. In this day and age, I believe it has become to easy to be complacent with the system: you go to college, you graduate, you find a cookie-cutter job for a big company, you work your way up, you retire. Unfortunately, subjecting yourself to the system like that can only get you so far; the people in the world that really go far are those that invent, take risks, and create real gains for the economy. For example: Bill Gates, Mark Zuckerburg, Steve Jobs - three technology giants who have transformed the world as we know it. They didn't get where they were by joining big corporations; instead, they created their own.

So why aren't there more entrepreneurs? The easy scapegoat is risk. But why? We take on risk all the time, with investing, driving, relationships...everything! Why would the risk involved with starting a business be so high? One reason is that the fixed costs (i.e.: college) are so high. The Economist recently did a few blog posts about higher education being the next big bubble, something I have been saying for years! According to N+1, since 1978, tuition has risen 650 percentage-points above inflation. And since you really can't start a great business without at least a college education (there are a few exceptions, I'm sure), that means that there is an increasing disincentive to become an entrepreneur. The average student graduates with $20,000 in loans, making it nearly impossible to invest in a good idea. Instead, most graduates take the route of working for a big corporation and paying their dues to society.

Keeping on the Facebook theme, there is an excellent quote in The Social Network that I might have mentioned before: "Here at Harvard, we don't teach our students to find jobs, but to invent their own jobs" (paraphrased). This mentality, I feel, is the exception in higher education. Instead, universities are caught in a divide between being academic institutions versus being professional academies. This issue could drag on for pages, but the main point is clear: our colleges and universities are failing at providing the entrepreneurs that would otherwise power the economy of the future.

The Internet
Another point that Mr. Morin made was that there aren't enough internet companies. Here I have to disagree; however, he did make a strong argument. According to him, there are so many uses of the internet that haven't been taken on yet. For exampled, he mentioned a company that was scheduling reservations for restaurants without the need for expensive equipment. Apparently, it is relatively easy to get start up money from angel investors and investment banks for internet projects.

I find this surprising because I question the economic benefit from internet firms. Yes, the reservations company is making restaurants more efficient and helping allocate capital to newer developments, but that is not usually the benefit from internet firms. Facebook is the ultimate example of a company that should be worth nothing: it adds nothing to the economy. Some would make efficiency claims but I content that any added efficiency gotten from Facebook is negated by the loss of time spent on Farmville. So where is the benefit? Most social networks and internet entrepreneurial companies amount to nothing more than toys. They may be a hit now, but the economy should be focusing on real growth: physical technology, medicine, defense, etc... I'm not saying there is no benefit to social networks and the like, but definitely not billions worth.

I get the impression that somehow people have forgotten what being a value to society is. It may be possible to make good money selling your stuff on Etsy, but really that doesn't add anything. The world needs more engineers and inventors and entrepreneurs. But my advice to those is to avoid gimmicks and stick to hard capital. Invent machines and medicines, not internet toys. As a country, if we want to maintain our status, we have a lot of work to do. For me it's too late, I'm going to law school. But for those still studying as undergraduates: don't just make something of yourselves, make something of the world.

Book Review: Fault Lines

Recently, The Economist ranked Raghu Rajan as the top economist of the post-financial crisis era (second was Robert Shiller, who I saw speak at the AEA conference in Denver). Having never read any of his academic papers, it’s hard to say whether I agree completely with that verdict, but if his book is any suggestion then it is quite possible I would.

Fault Lines is somewhat revolutionary because it does not attempt to place all the blame for the housing bubble and recession on just one issue. Instead, it is wise enough to address the various “fault lines” in the US economy that led to the crisis. A friend of mine’s conservative father argues that the source of the housing bubble was solely the liberal credit push on low-income families; this book does a great job of proving him wrong. Not only was it subsidized lending to poor families, but deregulated financial arms and international pressure led to the financial crisis.

I think this book is a necessity for anyone who wants to understand the future needs of the world economy. There is a lot that needs to be done to clean up the system. I’ve always been a proponent of cutting bureaucracy - wasted money - and reforming the political system in the US. In addition to some of his recommendations, here are some of mine:

1. Eliminate the Dept. of Education - kind of
   

The Department of Education is a big waste of money as far as I’m concerned. If I could have one wish it would be for a nationalized charter school system. The DOE needs to exist (much to the chagrin of Ken Buck and a bunch of Tea-Partyers), however, it needs a face lift. Rather than set standards and build up a bureaucracy, the DOE should find ways to bring competition and results from a dying system. Every child in America should have a voucher for 13 years of schooling (K-12) that they can use anywhere and in any increments. Schools would have to compete for this funding if we place restrictions on other sources of revenue: you can make additional money directly from alumni and sports revenue, but nowhere else. As a result, schools will be built where there are students and principles will be held responsible for outcomes.

Teachers also need incentives. The teacher’s unions are incredibly strong and as a result the future generations of this nation are in jeopardy. Tests should be written to test outcomes but they should not come from the government; private firms can write better and less inane tests so that teaching to the test doesn’t occur. They can hand out rankings accordingly and base grades on a normal scale.

2. End Farm Subsidies
   

Why do these still exists? Because of a strong farm lobby. Why do they need to leave? Because it is a waste of money and it diverts attention away from where it can do a lot more good. In 2009, over $180 billion were spent on farm subsidies from all forms of government - billion with a b. Some may argue that these subsidies (or bailouts) are necessary to maintain production and stabilize income. However, any good trade theory says that if we can’t make it cheap enough, we shouldn’t be making it. Additionally, if farms want to stabilize incomes they should invest in futures with all that subsidy money they have lying around already. Let’s be honest, this whole thing is just a political fund that needs to be rid of.

3. Reverse grade inflation
   

Grade inflation makes college worth less. Students graduate and are not ready to compete in the world economy because they have been taught to believe that a C-average is okay. This is a bad idea since a C-average today is the D-average yesterday and probably the F-average of China (at least for universities). Students need to stop going to frat parties and realize that their kind is decline. We’d all love to be driving a BMW to the rec center but nobody will be able to afford that luxury for their spoiled child if we keep this pace.

Another thing about college: we need to change our perceptions. I just watched The Social Network and one of my favorite quotes (loosely) is, “at Harvard, we teach that the best job is one you create, not one you find.” I’ve never heard this philosophy at my state school. Why not? Why are we teaching our students that our ambitions are to work for a company that visits for a career day rather than a company run out of our own basement? The companies of tomorrow don’t exist today. Period.

Rajan offers a lot more insight, definitely check out Fault Lines. It’s always important to stay up to date on current economics and this is one of the leading scholars.

ASSA Conference Review

I was fortunate enough to participate in this year’s Allied Social Science Associations meeting; not quite yet as a speaker but rather an attendee. Although I was only able to make two sessions due to some conflicting events this weekend, I made the most of them. The first was a session called Bailouts, Incentives, and Regulation as presented by Thomas Philippon of NYU. This presentation was pretty technical and bulky but it had some interesting implications. I won’t bore with the details but rather draw some connections with the more relatable of the two presentations.

History, Crisis, Institutions and Economic Analysis was presented by Oliver Williamson of Berkeley. I would like to share some interesting points given by the speakers, primarily Charles Calomiris of Columbia, Benjamin Friedman of Harvard, and Robert Shiller of Yale.

1. The financial crisis was not all about “too big to fail.” This was also an issue in the other more technical session, and an important one. The math shows that the size of banking institutions is not as important as is their systematic importance. The media got wind of the “too big to fail” cliche in 2007 and hasn’t let it go. Although the concept is still important in the response to the financial crisis, the misallocation of capital and finance was the bigger issue. It didn’t matter who owned bad equity, or bad debt, or bad derivatives in 2007. It could have been thousands of different banks rather than a concentrated few and the bailout would have still been a necessity to restore the market to a “healthier” state.
   
   

2. Economists didn’t predict the banking collapse, but we have done good work to fix the effects. Robert Shiller made a big point of this using the bill on financial regulation passed this last year as evidence. The bill imposes some big changes in financial regulation that have been suggested by economists since 2007. Although the bill does miss big points, it is a step in the right direction.
   
   

3. It is time that economists seriously start questioning whether our financial institutions do the job they are supposed to. Finance is supposed to allocate capital, yet the crisis in 2007 was all about the misallocation of capital - a lot of it. Can we really expect our economy to function properly if financing is more of a gambit than an example of the invisible hand at work? I think not.
   

Over the next year I will probably address some of these issues more in-depth. Be excited.