The Sovereign Individual, The Billion Dollar Whale, The Great Demographic Reversal

March 31, 2021

“Other things being equal, the more widely dispersed key technologies are, the more widely dispersed power will be, and the smaller the optimum scale of government.”

“Governments will ultimately have little choice but to treat populations in territories they serve more like customers, and less in the easy that organised criminals treat the victims of a shakedown racket.”

“With the speed of change outracing the moral and economic capacity of many in living generations to adapt, you can expect to see a fierce and indignant resistance to the Information Revolution, notwithstanding its great promise to liberate the future.”

- James Dale Davidson, The Sovereign Individual: Mastering the Transition to the Information Age


A. The Sovereign Individual

One of the most interesting books I’ve read over the last ten years is “The Sovereign Individual: Mastering the Transition to the Information Age” by James Dale Davidson, Lord William Rees-Moog.

The core thesis of the 1997 book was that:

Due to technology, we would see a powerful shift from a world defined by industry and large corporations to an information-based society that empowers the individual. The new revolution of power would liberate individuals at the expense of the twentieth-century nation-state.

Don’t take my word for it, in 2014 when Peter Thiel was interviewed by Forbes magazine, and asked:

What's the most important or influential book you've read?

The Sovereign Individual…is an unusual book that I read at a singular moment, just before starting PayPal. A lot of thinking about technology oscillates between two extremes: It's either a big historical force acting over the long term or it's a matter of short-term trends to bet on. The Sovereign Individual is different because it takes foresight seriously: If you think hard, you can understand and make plans for a future lasting 10, 20 years or more--and that's how you have to think to be successful.

But why does 23 year old book matter today?

It matters because it has taken two decades for some of the underlying technologies to get to a point where we are seeing real inflection in the power of the individual.

We are on an inexorable march towards individuals mattering more than institutions. Within two decades, we will have multiple trillion-plus dollar publicly traded entities with just one full-time employee, the founder.

That sounds bold, but it’s kind of already happened: Bitcoin, which has no employees, crossed the $1 trillion mark.

Why does it matter that one person will be able to launch companies that rival corporations in scope, scale, and innovation?

For that we have to understand why corporations came to be, and why they are now shrinking.

Why Do Firms Exist?

In 1937, economist Ronald Coase wrote a relatively short paper that would ultimately win him the Nobel Prize: The Nature of the Firm. That paper remains fundamental to the way we think about why firms, or companies, exist, when they should or should not, and how big they should be.

In the paper, Coase wrestled with the apparent contradiction between the idea that free markets, or economic systems, should be able to direct resources to the right places without central planning, by using the price mechanism alone. Supply and demand curves and all that. The prevailing economic theory pre-Coase said that because markets are efficient, it should always be cheaper to contract out work than to build a firm. But that was very clearly not happening in practice. 

Coase wondered, do firms exist instead of a multitude of self-employed people who contract with each other on an as-needed basis? What causes an entrepreneur to start hiring people instead of contracting?

Coase uncovered two competing forces: 

A. Transaction costs lead to the creation of the firm;

B. Overhead and bureaucracy costs limit the firm’s size. 

Transaction costs like search and information costsbargaining costs, and keeping and enforcing trade secrets meant that the cost of obtaining a good or service is higher than just the price. That’s why entrepreneurs hire people: employing a trusted CMO, for example, meant that the entrepreneur didn’t need to start each marketing campaign with a recruiting process, information dumps, and goal-setting, and didn’t need to worry that the marketer would bring all of her company’s information and goals to a competitor at the end of the campaign. 

Overhead and bureaucracy costs include wasted organisational time -- think of all of recurring meetings you have on your calendar -- and the propensity for an overwhelmed manager to make mistakes in resource allocation.

Those two sets of costs are in a constant, dynamic tension and determine the ideal size for a firm at a given time. So if we’re thinking through how to get a firm size back down to one, and to let the free market do it’s thing, what we’re looking for is a dramatic decrease in transaction costs, a dramatic increase in overhead and bureaucracy costs, or both combined. 

Thanks to new tools and technologies, we are nearing the point at which the costs of carrying out a transaction through the market are getting so low that firms are less necessary.

This makes Solo Corporations possible - coined by Packy McCormick.

If you’d like to go deeper into all this, check out this amazing essay by Packy McCormick: Power to the Person, from which some of the above was borrowed.

People like People

In a world of abundance, we want to follow the people we trust.

Technology has already unleashed a wave of people who are world-class storytellers, authentic, and relatable. Just look at the blogs, podcasts, newsletters you consume for example.

Across media, entertainment, education, e-commerce, and now finance, the power is shifting to individuals. One person, backed by improving tools and their own personal influence, can genuinely compete with established institutions for eyeballs and dollars.

Converting individual influence and existing social channels into sales gives smaller businesses a huge advantage in customer acquisition, particularly when trusted creators form collectives and experiment with new ways of sharing upside with each other and with supporters. 

This brings forward two powerful & connected ideas:

A. Metcalfe’s Law: the value of a network is proportional to the square of the number of connected users in the system (n2). Think Facebook, Twitter, Bitcoin.

B. Ownership Economy: Rather than corporations owning the business or platform, the business is owned by its users, who then benefit from its growth. The below are some example of this.

Great article on that here.

While the idea of a trillion-dollar businesses run by a handful of people seems crazy from where we sit today, it’s not only possible but inevitable and will simply be a continuation of an idea my friend Dror Poleg has been talking about which is Nonscalable vs Scalable Occupations.

This is a classic example of Taleb’s Extremistan.

Once we realise that we are in a non-linear fat-tail world in terms of people and outcomes. Technology by reducing friction in the system not only allows far more scalable occupations, but things like smart contracts and NFTs change the entire nature of work, how it’s measured and how we get compensated.

To quote my friend Dror Poleg’s latest:

Technology is on the cusp of enabling us to keep track of every person's economic contribution at a granular level and of compensating each person for that contribution and all instances at which it ends up being useful.

If you can compensate each person for their exact contribution, you don't need to pay everyone the same salary. And if every person gets paid for their contribution, those who are particularly productive or innovative will get paid more than ever. And those who aren't will no longer have a stable salary.

A lot of these ideas were also discussed in the latest Tim Ferriss podcast with Balaji Srinivasan on The Future of Bitcoin and Ethereum, How to Become Noncancelable, the Path to Personal Freedom and Wealth in a New World, the Changing Landscape of Warfare.

How will where and how we work be different in five years, and how will our contribution be measured?


B. Billion Dollar Whale

How easy is it to steal $4.5 bn and get away with it?

Reporters Bradley Hope and Justin Scheck discussed global corruption in Blood and Oil, the story of MBS and the House of Saud, which we discussed a few months ago.

The prequel to that book was the popular Billion Dollar Whale by Tom Wright and Bradley Hope, which I finally read last week.

Every one has seen the headlines across the newspapers and heard about the fines, but it’s a different thing to put the pieces together, to understand how and why this was put together.

It’s an amazing story of corruption at an extraordinary breadth and scale. Unlike the stories portrayed in the papers this wasn’t just about Jho Low and PM Najib Razak acting on their own, but about full institutional approval and enablement.

Here’s a great FT summary video of just one of the pieces.

Jho Low, the mastermind behind the scheme went on the run in 2015, under the Malaysian Prime Minister’s protection, and ended up with his family in China where he began to look for ways to use the Belt and Road programme to funnel money into 1MDB.

China will not release him for trial.

Here’s a recent Al Jazeera documentary on Jho Low, that was released November 2020.


C. A Few Things Worth Checking Out

1. Inflation is the talk of the day. Every client is talking about how inflation could come roaring back given both fiscal and monetary spending. A number of them read and recommended “The Great Demographic Reversal: Ageing Societies, Waning Inequality and an Inflation Revival”.

It’s a well written and argued +200 page textbook that makes the case that inflation is inevitable because of changing demographics combined with de-globalisation, and this 5 min blog post by the authors summarises the main points. I believe most of it, but a) it ignores the deflationary nature of technology and b) as with all demographically based ideas, this could take a long time to play out.

2. Cade Metz of the New York Times, has written the latest book explaining how AI is being used, titled: Genius Makers: The Mavericks who brought AI to Google, Facebook, and the World. I haven’t started the book yet, but am listening to this AI podcast where he discusses his book.

3. Josh Wolfe of Lux Capital was on the Infinite Loops podcast discussing Inventing The Future.

4. Dawn Fitzpatrick, the CIO of Soros Fund Management was on Bloomberg Front Row for a long form discussion on their views and outlook.