Are we grappling with problems beyond our conceptual means? [counterfeit capitalism][#Progress_Studies, NOT]

I take the question from the final chapter, of David Hays,  The Evolution of Technology Through Four Cognitive Ranks (1993). In section 8.4, “The Rise and Fall of Civilizations” Hays observes:

For the fall of empires, there have been many explanations, all too specific for me. Do I care whether it was disease, depletion of the soil, restlessness of the proletarians, intrusion of barbarians, corruption of the elite? Not much. The level of abstraction appropriate to this question seems to me to be this: Every empire has grown too large for its cultural rank. Specifically, every empire has grown until it created for itself problems too complex for it to solve with the means of thought available to it. The substance of the problems may be unique to each empire, but the increasing complexity of problems with size of political unit is universal.

Don’t let the word “empire” mislead you. It by no means excludes the current American imperium, though Hays would not have used that term. He was, we both were, and I remain, concerned about the future.

The issue seems particularly acute during the current pandemic. While some/much of the inadequacy of America's response can be attributed to the flailings of the Trump administration, I don't think all of in can. And, in any event, we have the fact, after all, that Donald Trump was elected in the first place – see, e.g. the podcast by Robert Wright and Ezra Klein I embedded here. Is America's political system failing?

Pizza Aribtrage

Tyler Cowen has just linked to a much narrower and more specific example involving "pizza arbitrage." Ranjan Roy tells a story of a friend who runs a pizza business. Friend wasn't offering delivering services but a startup, Doordash, was not only offering to deliver Friend's pizzas, but was charging less than cost for those pizzas:

Doordash was causing him real problems. The most common was, Doordash delivery drivers didn't have the proper bags for pizza so it inevitably would arrive cold. It led to his employees wasting time responding to complaints and even some bad Yelp reviews.

But he brought up another problem - the prices were off. He was frustrated that customers were seeing incorrectly low prices. A pizza that he charged $24 for was listed as $16 by Doordash.

My first thought: I wondered if Doordash is artificially lowering prices for customer acquisition purposes.

My second thought: I knew Doordash scraped restaurant websites. After we discussed it more, it was clear that the way his menu was set up on his website, Doordash had mistakenly taken the price for a plain cheese pizza and applied it to a 'specialty' pizza with a bunch of toppings.

My third thought: Cue the Wall Street trader in me…..ARBITRAGE!!!!

They decided to try an experiment:

[Friend] called in and placed an order for 10 pizzas to a friend's house and charged $160 to his personal credit card. A Doordash call center then called into his restaurant and put in the order for those 10 pizzas. A Doordash driver showed up with a credit card and paid $240 for the pizzas.

It worked.

Trade 1

We went over the actual costs. Each pizza cost him approximately $7 ($6.50 in ingredients, $0.50 for the box). So if he paid $160 out of pocket plus $70 in expenses to net $240 from Doordash, he just made $10 in pure arbitrage profit. For all that trouble, it wasn't really worth it, but that first experiment did work.

My mind, as a combination trader and startup person, instantly had the though - just run this arbitrage over and over. You could massively even grow your top-line revenue while netting riskless profit, and maybe even get acquired at an inflated valuation :) He told me to chill out. Maybe this is why he runs an "actual business" while I trade options while doing brand consulting and writing newsletters. [...]

So over a few weeks, almost to humor me, we did a few of these "trades". I was genuinely curious if Doordash would catch on but they didn't. I had visions of building a network of restauranteurs all executing this strategy in tandem, all drinking from the Softbank teat before the money ran dry, but went back to work doing content strategy stuff.

Ranjan goes on to point out that this sort of fakery isn't unique to Doordash; Grubhub and UberEats have been doing such things as well. He goes on to conclude:

You have insanely large pools of capital creating an incredibly inefficient money-losing business model. It's used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition, while this week’s Uber-Grubhub news reminds us, the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?

Counterfeit capitalism

Matt Stoller has written a post in which he analyzes the WeWork debacle, funded by Softbank:

Generally speaking, Softbank’s model is to manipulate private capital markets as a way of drowning out competitors with cash. For instance, there were several ‘rounds’ of WeWork investment where Softbank was buying more shares at higher valuations. WeWork ostensibly became more valuable because Son said it was more valuable, and bought shares for higher prices. And since there was no public market for these shares, the pricing of the shares was totally arbitrary. WeWork then used this cash to underprice competitors in the co-working space market, hoping to be able to profit later once it had a strong market position in real estate subletting or ancillary businesses.

Stoller goes on to note:

This is of course Amazon’s model, which underpriced competitors in retail and eventually came to control the whole market. And Amazon has spawned a host of imitators, including WeWork. It has also reshaped venture investing. The goal of Son [of Softbank], and increasingly most large financiers in private equity and venture capital, is to find big markets and then dump capital into one player in such a market who can underprice until he becomes the dominant remaining actor. In this manner, financiers can help kill all competition, with the idea of profiting later on via the surviving monopoly.

Engaging in such a strategy used to be illegal, and was known as predatory pricing. There are laws, like Robinson-Patman and the Clayton Act, which, if read properly and enforced, prohibit such conduct. The reason is very basic to capitalism. Capitalism works because companies that thrive take a bunch of inputs and create a product that is more valuable than the sum of its parts. That creates additional value, and in such a model companies have to compete by making better goods and services.

What predatory pricing does is to enable competition purely based on access to capital. Someone like Neumann, and Son’s entire model with his Vision Fund, is to take inputs, combine them into products worth less than their cost, and plug up the deficit through the capital markets in hopes of acquiring market power later or of just self-dealing so the losses are placed onto someone else. This model has spread. Bird, the scooter company, is not making money. Uber and Lyft are similarly and systemically unprofitable. This model is catastrophic not just for individual companies, but for their competitors who have to *make* money. I’ve written about this problem before. Amazon has created a much less competitive and brittle retail sector. Netflix’s money-losing business is ruining Hollywood.

Endless money-losing is a variant of counterfeiting, and counterfeiting has dangerous economic consequences.

And so it goes:

This kind of counterfeit capitalism is terrible for society as a whole. At first, with companies like Walmart and Amazon, predatory pricing can seem smart. The entire retail sector might be decimated and communities across America might be harmed, but two day shipping is convenient and Walmart and Amazon do have positive cash flow. But increasingly with cheap capital and a narrow slice of financiers who want to copy the winners, there is a second or third generation of companies asking Wall Street to just ‘trust me.’

As euphoria in capital markets takes hold, predatory pricing scheme come to entirely wastes capital on money losing enterprises, and eventually these companies become Soviet-style generators of white elephants and self-dealing. The men and women who run them have to be charlatans, because they are storytellers justifying losses.

Stoller goes on and on. At the moment it looks like capitalism is busted, or very nearly so.

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On the general problem, of civilization collapse, see my earlier post: Transcendent cognition, the rise and fall of civilizations [#Progress_Studies].