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Bipartisan consensus led to accelerating progress, with detailed consumer-empowering regulations in industries as diverse as food[239], healthcare, cars[240], banking, insurance[241], taxis[242], and so on. The efforts to maximize the consumer surplus didn’t succeed in every industry: think about housing[243], healthcare[244], or higher education[245], for instance. But overall the trend toward empowering consumers created a lot of value. In some cases, such as Walmart’s, consumer pressure led to lower prices. In other industries, consumer-friendly regulations and greater competitive pressure rewarded the most innovative firms and contributed to improving the quality of products and sustaining ever-higher productivity gains. The case could finally be made, among others by Philippe Aghion, that consumer empowerment and the resulting competitive pressure favored innovation, prosperity, and economic security[246].
But this era is over. Now consumers have coalesced into the powerful multitude. Their empowerment can more and more be seen as a threat for society. Just like Walmart, tech companies such as Amazon and many others prove that in the Entrepreneurial Age, a multitude hungry for quality at scale beats workers and society most of the time, inflicting a continuous pressure on income from labor and corporate margins. This is much to the displeasure of those who wonder if technology really solves more problems than it creates[247]. They express reservations echoing Franklin Foer, who once wrote in the New Republic[248] that “if we don’t engage the new reality of monopoly with the spirit of argumentation and experimentation that carried Brandeis, we’ll drift toward an unsustainable future.”
Today, Walmart is still a formidable player, but it’s suffering. The way it used to treat its employees has backfired. The pressure it exerts on suppliers has alarmed trade organizations, politicians, and the press. To try and solve these problems, Walmart decided to drop its “Lower Prices” tagline[249] in favor of the more society-friendly “Save Money, Live Better”. Even more unexpectedly, it has decided to raise the wages of its many employees, thus contributing to a national debate around the minimum wage[250].
Yet just as Walmart tries to solve problems coming from the excessive power it provides to consumers, the Entrepreneurial Age is reinforcing the power of those consumers even more, creating the need to once again rebalance the corporate contract, especially when it comes to empowering workers against customers. What Amazon and other tech companies reveal is that in the new age, Internet users want to pay ever cheaper prices in exchange for ever better products. As the multitude, they also play a critical role in creating value within the supply chain. To be successful, corporations have no choice but to reward those customers with an unprecedented consumer surplus. As a result, shareholders have to give up short-term profits, suppliers have to trim down their operating margins, and already worn out workers seem to be plunged into a new precariat.
We need to realize that the ‘Greater Wal-Mart Effect’ brought about by Amazon, Uber and other tech companies is a key feature of the Entrepreneurial Age. In the past, large IT-driven players such as Walmart were able to bargain for their customers by relying on the power of critical mass. Nowadays, by harnessing the power of ubiquitous computing and networks and designing business models including what Tim O'Reilly calls an “architecture of participation”[251], tech companies invite the powerful multitude to climb up their value chain, take control of resources and contribute to creating even more value. But in doing so, they have contributed to carving another of the Entrepreneurial Age’s faces: the fundamental instability of multitude-driven consumer markets.
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Instability is the new normal
Like every technological revolution, that of ubiquitous computing and networks was born in a bubble—one that burst almost 20 years ago. Its shadow still looms over the heads of entrepreneurs. Often it inspires the old “here we go again” refrain whenever valuations go higher or the fall of one overhyped tech company like Theranos or Juicero leads to headlines discrediting all the others.
Not everyone in the startup world has clear memories of the “dotcom bubble”. Most entrepreneurs are actually too young to have experienced it in their professional life. Conversely, many veterans worked before, during and right after the bubble, to the point where their vision has been irremediably distorted by how easy it was for them to make money with less-than-average dotcom companies. Should you value the advice of someone who sold their obscure e-commerce startup in June 1999 for eight figures? The answer is no—you should ignore them and focus on your business.
As for myself, I have a vivid memory of the late ‘90s tech bubble as I was a student in computer science at the time. The tech-related craze on financial markets was giving a lift to everyone on campus. It provided me and my fellow students with the firm impression that we were in the place to be, and that whatever we would do after graduating, it would be part of a great adventure!
But then, poof. Right when my classmates and I were about to enter the labor market, it was suddenly all over with startups and tech companies. Overnight our options dropped down to joining a manufacturer, a telco, or an IT services business. Most of us were understandably bored by such perspectives. Some even decided to switch careers. As part of that group, I chose to focus on political science and public administration and soon joined the French government. It was from there — or so I thought — that I could make a difference after all. Little did I know that this bubble was only the first of a long series, for the Entrepreneurial Age is unstable in its very essence.
To be fair, instability has always been the flaw of large markets, especially consumer markets in which the number of participants is the highest. In the early twentieth century, the unprecedented instability of larger consumer markets in the nascent Fordist economy almost led capitalism to its death. Whenever consumer demand went down, businesses had to close factories and fire their workers, fueling unemployment, poverty, and anger in the process. If they did keep their employees on the payroll, the risk was producing too much and only delaying hardship instead of preventing it. As written by Nelson Lichtenstein about the US consumer-oriented industries in the 1920s, “in 1928 and 1929 sales lagged, inventories rose, factories cut their output, and unemployment rose. Even before Wall Street’s crash in October 1929, many executives thought their market saturated”[252].
As explained in Chapter 2, most of the Great Safety Net 1.0 was designed to prevent such instability from recurring. It achieved its goals, albeit in very different manners, in the consecutive phases since World War II, first during the high economic growth of the post-war boom and then during the Great Moderation that the Western world entered when it finally managed to defeat the stagflation of the 1970s. What was left of the Great Safety Net 1.0 even played a key role in alleviating the consequences of the 2008 financial crisis. In France, a broader safety net and higher minimum wage relative to cost of living made it possible to provide economic security to the majority of households. Even if jobs were destroyed following the crisis, those who were still employed even saw their real wages going up in the aftermath of the crisis! Corporate margins took a big hit, but with consumer demand stabilized, France managed to make its way out of the crisis with less suffering than in the US or the UK.
However, in the Entrepreneurial Age, instability is of an even greater magnitude. In a world dominated by multitude-driven increasing returns to scale, companies are forced to aggressively race against each other in the so-called ‘battle zone’, out of which only one will emerge. Victory often depends on contingent factors, but the winner usually kicks most its main competitors out of the market, until the next race begins with a new wave of upstart competitors entering the field. With the utter fragility of strategic positions on markets where the multitude has the upper hand, the Entrepreneurial Age generates, as pointed out by economist W. Brian Arthur, “not equilibrium but instability”[253].
This is in no way restricted to certain segments of the economy. The high level of instability seen in th
e UK following the financial crisis, culminating in the Brexit vote and leading toward an unpredictable future, is a glimpse of what can happen in a global economy primarily powered by digital technology. After all, the financial services industry that forms the core of the British economy has been a pioneer in deploying and taking advantage of ubiquitous computing and networks at a large scale.
Because of the widespread instability, it’s not enough for a business to be the market leader or the most profitable company. Rather the stake is to take the vast majority of the market[254], at (almost) any cost. Those who generate superior increasing returns to scale can crush competition and realize a sizable return on investment over the long term. Conversely, those who put the strategic emphasis on obsolete goals such as lower unit costs or short-term shareholder returns will end up critically weaker in this new competitive regime. The reason why tech companies pull no punches is precisely because winning most of their market is literally a question of their business’s life and death.
Recurring bubbles simply reflect these fundamental economics. In the presence of increasing returns to scale, companies are not competing with more or less equal players to form a lasting oligopoly. Rather, they are engaged in a violent battle for total market domination. The result is that there is usually only one winner (and its happy investors) and many losers (and their very sad investors). No wonder why investors are willing to invest at any price the moment they sense that they may have picked a winner. The competition to be part of the best deals is so fierce that it pushes valuations sky-high. The dynamics of the Entrepreneurial Age look like a perpetual race with financial bubbles as temporary side effects.
In the presence of increasing returns to scale, raising a lot of money is not only a way to finance operations. It is also a signal to all stakeholders (shareholders, customers, employees, analysts) that a company is on track to become the leader and grab most of the market. This is why tech companies advertise their funding rounds so noisily[255]. When customers or prospects, who are mostly regular people, hear that one company raised a lot of money, they don’t reflect on irrational exuberance. Instead, they’re comforted in the feeling that this company seems to be the market leader and that, as a result, the quality is likely better and comes at a cheaper price[256] than that provided by lesser challengers.
A positive aspect of frequent bubbles in the Entrepreneurial Age is that they foster continuous competition. The absence of a bubble would mean that entrenched positions are impregnable. Instead, the abundance of capital enables new entrants and existing challengers to raise a lot of money and attempt to take over a dominant position at the expense of the market leader. Thus bubbles are healthy from an antitrust point of view. Without them, nobody would enter existing markets to challenge the dominant position of giant tech companies. Investors’ irrational exuberance, exacerbated by increasing returns to scale, is part of sustaining a high level of competition on the market (and of redistributing wealth from shareholders to employees, customers, and suppliers).
Entrepreneurial ecosystems reflect the importance of being able to compete in today’s races. A healthy ecosystem is designed to concentrate enough capital in a given area. As a result, the ecosystem is able to fund the occasional, improbable outlier that will then conquer a large global market. Eventually, massive amounts of capital concentrate in a few tech companies that have the potential to become global players. And so massive capital influx, far from being an anomaly, is in fact the mark of a strong ecosystem. It means local startups attract a lot of capital and the balance between supply and demand shifts to the advantage of the most ambitious entrepreneurs[257].
All in all, what Carlota Perez dubs “major technology bubbles” are a good thing because they fuel innovation. It’s only when investors renounce their rationality and stop demanding short-term returns on their investments that they are capable of pouring money into long-shot projects that end up transforming the economy for the better. As once written by J. Bradford Delong, “the irrational exuberance of the late 1800s made the railroads a money-losing industry—and a wealth-creating industry. The more money investors lost through overbuilding, the lower freight rates became, and the more railroads belched out wealth for everybody else”[258]. The likes of Amazon and Google do much the same by empowering networks of individuals and businesses, constructing pathways through which they can develop activities in ways that were unthinkable just a few decades ago.
The capital deployed by tech companies is spent differently than the capital that fueled the big corporations of the age of the automobile and mass production. For dominant corporations in the Entrepreneurial Age, the multitude, instead of oil, is the essential resource that they must harness. The Internet is the infrastructure they need to master if they want to succeed. They operate more digital applications than factories and distribution platforms. Production is about providing an exceptional experience at a large scale rather than mass producing standardized goods. Their organization has to be agile and innovative rather than hierarchical and optimized. Their managers must obsess over increasing returns to scale rather than lowering unit cost of production. Finally, they must see their customers as a multitude instead of as a mass.
It all leads to confusion about the economic nature of the multitude: are individuals consumers or resources? In fact, they’re both, and that’s why the new common sense is all about catering to the turbulent multitude. Because it’s a factor of production and a consuming force at the same time, the multitude maintains an ever tighter grip on both extremities of business value chains—which, by the way, is a real challenge for neoclassical growth theory and its input/output approach to analyzing production. No wonder companies exert such pressure on workers and markets are now ridden with instability as the demanding multitude comes and goes.
At the end of the day, what matters is not what happens during the recurrent bubbles, but what comes next. The price to pay for widespread instability is that some investors regularly lose money because they didn’t pick the winner, whereas many employees eventually lose their jobs because they happened to work for the losers. In this context, the stakes are clear: the economy can keep growing only if it has the institutions to foster resilience in the presence of this instability fueled by the multitude. It’s critical that both impoverished investors and jobless employees are able to rebound throughout the booms and busts of an economy driven by increasing returns to scale.
This is precisely what makes the strength of an ecosystem such as Silicon Valley. After the dotcom bubble burst, most in the Bay Area chose resilience and continued to found startups, to invest in them, and to seek jobs in the tech industry. Meanwhile, other parts of the world were traumatized and relinquished all interest in the nascent digital economy. That post-bubble behavior explains most of Silicon Valley’s competitive edge over other ecosystems.
What is true for the relatively privileged players in Silicon Valley must now be extended to society as a whole. Instability is the new normal at many different levels. In the Entrepreneurial Age, a larger proportion of businesses are struggling to find a profitable business model. Employees may still have long-term contracts, but with employers whose life span is getting shorter and shorter. Workers are employed by companies that either need to take critical risks to conquer a dominant position on the market, or for dominant companies that are in danger of being toppled by challengers at every turn. Even for the winners of the day, a temporarily dominant position on the market doesn’t equal lifelong economic security for the workers.
And for individuals, this unprecedented sense of instability exists at every level of the income ladder. Obviously those at the bottom have genuine and pressing difficulties in making ends meet. But as pointed out by Rachel Sherman, the affluent, too, dread instability because “their single-earner families [are] dependent on work in finance… earnings fluctuate and jobs are impermanent”[259].
And so today's consumer power is a modern-day Janus. Looking in one
direction, it allows consumers to benefit from lower prices and better products in many areas of their lives. But it also looks in the opposite direction as consumers exert pressure and trigger instability on themselves in their guise as workers. As such, consumers fuel an untenable situation, whereby the very thing that they love is the same thing that is destroying them.
With the ‘Greater Wal-Mart Effect’ and the widespread, pervasive instability characteristic of the Entrepreneurial Age, we shouldn’t let individuals drown in the great ocean of evermore critical risks. Instead, if we ever want to live through another Golden Age, we now ought to build an upgraded version of the Great Safety Net and provide greater prosperity and economic security to both households and businesses—what we could call a Greater Safety Net, or a ‘Great Safety Net 2.0’.
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Getting from Great to Greater
Like most of us working in the startup world and venture capital, I see technology as an opportunity to create more wealth and make things better. But I also realize that everything I’ve concentrated on during the past two decades has put me on the winning side of technological change.
I studied at some of my country’s top institutions, which provided me a choice between prestigious government jobs and lucrative positions in the private sector. I had the means to make the most of technology in my day-to-day life, where things have become seamless and often less expensive. And ever since I’ve been working in the startup world (which was still an odd choice in France in 2010), technology has only risen in importance and visibility. All in all, I’m among those who are benefiting from the current paradigm shift. But this is clearly not the case for everyone in the middle class.