Charter Cities Podcast Episode 15: A City in the Cloud with Balaji Srinivasan
Digital technology has evolved to the point that by hitting keys and tapping mice buttons, you can literally build a city in the cloud. This viral idea was started by angel investor Balaji Srinivasan, who believes in creating cities with crowd-funded territories and governed by smart contracts. In our conversation with Balaji, we touch on many intricate topics that link to two concepts — using tech to design ideal cities and how innovation is driven by exit strategies.
Early in the episode, we dive into the future of America, and the rest of the world, as we explore the country’s politics, geography, military, and intellectual power. After discussing why it’s so difficult to get anything done in the US, Balaji talks about why people might soon begin emigrating from America. From cryptocurrency to Indians recognizing the success of Indian immigrants, Balaji shares his insights on how exits and alternative strategies can be the leading force behind change. Following this, we begin unpacking the ideas behind Balaji’s cloud city, the reasons that cities have historically been founded, and the many benefits of designing a city according to your group identity. Reflecting Balaji’s ‘digital first’ mindset, we chat about how innovations in the physical world can be driven through digital simulation before discussing why risk-aversion is the enemy of progress.
An episode filled with carefully considered arguments and counter-arguments, tune in to hear more about Balaji Srinivasan’s incredible vision of the future.
Transcript (edited for clarity):
Mark: Hello and welcome to the Charter Cities Podcast. I’m your host, Mark Lutter, the Founder and Executive Director of the Charter Cities Institute. On the Charter Cities Podcast, we illuminate the various aspects of building a charter city from governance to urban planning, politics to finance. We hope listeners to the Charter Cities Podcast will come away with a deep understanding of charter cities, as well as the steps necessary to build them. You can subscribe and learn more about charter cities at chartercitiesinstitute.org. Follow us on social media, @CCIdotcity on Twitter and Charter Cities Institute on Facebook. Thank you for listening.
Thanks for coming on the show, Balaji.
Balaji: Good to be here.
Mark: We actually started this conversation just before we started recording and decided to continue it while recording. I mentioned that I was cautiously optimistic about the US over the next few decades, but not over the next decade. The next decade I think is going to be hard, but the next few decades, and you asked why. Let me quickly rattle off the reasons why I am cautiously optimistic about the US, and let’s go into that.
The basic case I think for the US. First, obviously, the negative case, our politics are completely messed up. We have extreme polarization. Neither parties are particularly, I think, open to markets, to enterprise, at this point. The political class is almost entirely wrecked. But that being said, what are the positive points? Positive points are that almost every other region has it worse. Europe is a retirement community. Most of Europe is backwards-looking and isn't seriously embracing the future. The demographics are terrible. The one European country I’d be relatively optimistic about is probably the UK.
China also, it’s also going to be a Chinese decade, not the Chinese century. China, their working age population peaked a few years ago. It's already in decline and it’s going to start declining more severely. They’re a net food and energy importer. So while they do have all this organizational capacity and they’re riding high on the last few decades, I suspect that there is a lot of weakness underlying that.
Then you have countries like Japan, which also faces severe demographic challenges, South Korea as well. But the US still attracts a lot of people. We have good geography. We’re surrounded on both coasts by two giant moats. Neither of our neighbors are serious threats. We are a net food and energy exporter. We have a very good internal geography in terms of lots of navigable waterways, in terms of the American heartland. It’s still highly productive. We still attract a lot of talent. We still have a lot of scientific and engineering talent.
If I'm going to bet in the next 30 years — “Where are most of the major scientific and technological innovations going to come from?” I would probably say the US. Maybe not as high a percentage as what has come over the last 30 years, but I would still say the US is going to be number one. So I think that's my short case for bullishness in the US. It’s definitely going to be a rough decade, 15 years, 20 years maybe. But overall, I think I'd rather ride this out in the US than almost any other place in the world.
Balaji: Okay. So let me go through those one by one because I disagree with almost all of them, as I mentioned to you offline. Now we’re having that conversation online. Europe, it's interesting. I think Europe will fracture and break up. It’s already breaking up with the UK breaking off from it. I look at the UK breaking off from the EU as similar to the fall of the Berlin Wall. The chief Eastern European satellite of the USSR broke away, and so Germany got reunited, and a wall that had been separating them went away.
History doesn't repeat but it rhymes. So America has a set of Western European satellites that we don’t usually call them that. It’s called NATO.
Mark: Client states.
Balaji: Client states, exactly. They’re client states because they outsource their defense to the USA. And very much in the same way, that Russia was the big daddy of the Warsaw Pact for the Eastern European satellites. So they’re satellite states of the USA as proven by, for example, who would give Snowden asylum? When push really came to shove, those native allies would not give Snowden asylum. That's why he had to seek it in China or Russia.
The thing about Europe is some of the countries are quite competent, like Estonia. Switzerland is still fairly competent. Others are not. With the UK leaving the EU, it’s similar to the Berlin Wall thing where the biggest Western European satellite. We call Tony Blair “Bush’s poodle” or something because people felt the UK status, in the UK, that is — they felt that the UK status had been diminished. That it was just now like a special relationship that’s very one-sided. Now, doing this thing with Brexit, whether it's well-advised or ill-advised or what have you, history will tell. But it’s definitely charting its own course now, and Europe is becoming countries again.
So Macron’s recent declaration, he sees in US weakness, the fact that the US is no longer a world leader, and doesn’t want to just be a US satellite or a Chinese satellite. And wants Europe to be its own thing. Now, whether it’s going to be Europe, or it’s going to be returned to the UK and France and Germany and these independent states, we’ll see.
Europe, I don’t know. I think that there's pockets of good things happening there. It is overall not somewhere where I’d look for technological leadership, except for places like Estonia. But I’m actually in some ways more bullish on pieces of Europe than pieces of the US. Because at least they’ve got a bunch of different governments and we’ll have more as more countries leave EU. Hungary is like quasi-living and so, we’re going to get more.
Number two, on China, I think it will be a Chinese decade and not a Chinese century. But that’s only because I think the internet will eventually up and beat China. I think some of these arguments that you — so Chinese decade I think comes from Douthat. I like that. Some of these arguments here that you’ve made are somewhat echoing of like Zeihan, like The Accidental Superpower. I could not — that book, there’s maybe 20% of it I agree with. It’s — here’s why. First, like, all of the stuff on working; population, like demographics and so on. I mean, look at autonomous robotics. Look at how good that is getting. If you're following the space, grasping, packing, every subroutine is getting really good. Go to vicarious.com and just take a look at what the hands can do nowadays or look at the Boston Dynamic spot robot. It’s really getting there. I mean, it’s already been there within warehouses. Like, diapers.com has had it for a while. I led the build out of a robotic genomics lab a decade ago, so I know something about this. You can look at my like TR35 talk from 2013 on this. And it was pretty good a decade ago for industrial applications.
But now, the autonomy, meaning the ability to work in unpredictable environments, is radically improved, and so it’s all robots. It’s all going to switch over to a robotic workforce, and so the entire 20th century model of quantity gives way to quality. It’s the strength of your programmers more than the size of your population.
Mark: Let me summarize your argument that the traditional Zeihan argument — and this is also made by a lot of other people — that demographics tend to have a very large impact on long-term outcomes, is not going to be particularly relevant in the 21st century. Because robotics and mass production of what might be called substitute robot labor is going to play a much larger role in national outcomes.
Balaji: Yeah. Well, that’s part of it. It’s not even a future thing. It’s a past thing. WhatsApp had 55 people and got to 500 million people. Instagram had 12 people. Minecraft had one guy. Satoshi was one guy. So the leverage that technology gives you, we’ve already got those robots on the internet. In fact, if you go to any major website and you go, for example, WSJ.com/robots.txt, it basically refers to the spiders, the web crawlers as robots, in a sense of virtual robots that are doing things.
The virtual robots have enabled us to scale. When you hit enter, a bunch of virtual robots go and do thousands of tasks for you, and now we’re just going to get physical robots. So the proof point is already there. Did I care about the demographics of the US when you’re talking about 12 people? No. You just need 12 really smart people. You don’t need 300 million people. In fact, those 12 smart people were able to disrupt Kodak, which had way more than 12 people. They’re maybe more like 12,000. I don’t remember the exact number, but something in that range.
So, it's very rearward looking thing. Look, I’m not saying demographics have no impact, but I think it mostly has a negative impact. In the sense of lots of people to manage is more like a liability than an asset. Lots of people — you get the stuff like Moisés Naím’s book, The End of Power, or Martin Gurri’s book, The Revolt of the Public, right? 30 years ago, it was not that easy to know the thoughts of the people in your community. It really wasn't. I grew up in the US. You did too. You probably remember a time before social media. And certainly before everybody posting on social, and it just wasn't that easy to, like, just figure out what everybody else was thinking. If you've read somebody else's thoughts, it was either, A, it was a friend or a family member. Or more likely it’s a newscaster or is like a periodical. There really weren’t that many people who were broadcasting.
Now, because everybody's broadcasting, everybody knows what everybody else is thinking, and they can’t stand it. So rather than the sort of 20th century environment, where many people were sort of ignorantly blissful, at least the second half of the 20th century. The first half was very bad. Right in that environment, you have something where the more people you have, the more dis-alignment you have. Because when you have N people, you have two of the N possible outcomes. For example, one person can win or lose. With two people, you can have win-win, win-lose, lose-win, and lose-lose. With three people, you have two to the third outcomes. With four people, you have two to the fourth and so on.
This is when startup people and VCs talk about alignment. What they mean is the upper right quadrant of the 2x2x2x2 hypercube is a place where everybody wins. But the payoff from that is so large that it overwhelms all the off diagonals where half the group gangs up another half of the group to take their resources. That’s what it means to align people. The more people you have, the harder it is to align them. I think the demographic stuff is very rearward-looking. What matters is really quality and not quantity. This fits a very different filter.
Then the net food and energy importer thing on China, I don’t think that's an issue either really because China can build nuclear power plants. China can actually build stuff. They can build a train station in nine hours. Last year, before everybody became very political to talk about anything related to China, I posted a bunch of videos of the Chinese building not just — You see the skyscraper in like 12 days. But they’ve done a lot of that stuff. There’s just some of the stuff that’s made it to the internet.
Bill Gates had this thing about how they poured more concrete in three years than the US did in a century, and the thing is just one thing. If they built out their country and they’ve gone into lots of debt. Or they’ve built out their country and they had saved money but they were an importer. The thing is they did all three. They have built up huge capital reserves. They have become the largest exporter in the world. And they’ve built it in their own country, which means this enormous amount of productive capacity was unlocked when they switched from communism to capitalism.
I think it’s just — if you hear the term cope, C-O-P-E. I think it’s just cope, frankly. Cope and ignorance because unless you — you can use Chrome still. And you can surf the Chinese web and you can actually read about what’s going on there. You actually get a lot more signal out of that than just surfing. I mean, you pretty much know what’s going on with the US, right? Missing three days of, like, Trump COVID stuff or whatever. You don't learn anything from that. It’s really like paging into a soap opera where you know the characters. You know the good and bad guys. It’s like, “Oh, what did they do next?” That’s what it means, like narrative journalism. It’s like your extra facts. You don’t really get too many. You know who the good and bad guys are.
But if you go and just surf the Chinese web and use translations to see that, and especially focus on what they’re doing technologically, it’s, like far ahead in some ways. Net energy importer, I don’t even think that’s an issue because you build nuclear plants. You have basically unlimited energy. Then you can with more energy input, you can grow more food. You can do all that.
All right. Now, let’s go to the US and then let’s go to our other questions. It’s not just the politics in the US. You said, for example, that the US is still attracting talent. That’s actually not true. If you look at the F-1 visas, you look at H-1Bs, you look at, the inbound foreign students, that’s just gotten crushed. We’re talking like 90, 95% declines this year. And it’s not going to come back, at least not all the way, for several reasons. First is the US physically is simply no longer as attractive a place to come to. It’s not just COVID, though that’s a big thing. It is civil unrest, which may only grow. It is the fires in the West Coast. It is like just the general — I mean, the craziness, the shootings, and stuff on the streets. It is something where, over the last 20 years, a big part of the value proposition of being physically in America has been uploaded to the cloud.
If you actually think of the partition between physical America and digital America, much of the value proposition of being physically in the United States is now in the cloud. So that, you think about, again, like four possibilities; being physically in the US and having the internet, being physically in the US and not having the internet, being outside the US and having internet, and being outside the US and not having the internet. 30 years ago, the internet was a nonissue in terms of the value add. Everybody picked physically being in America.
Up to 2019, I think you can make a case that physically in America, with the internet, was better than outside America with the internet. Today, I don’t think you can make that case. I think being physically in the United States is a net negative relative to the alternative. Being in a country that has COVID under control is just one example. So I don't think it's true that almost every other region has it worse. I think once you've got the internet, you have an American life. Because Uber exists everywhere and email exists everywhere. All this stuff is being homogenized. Starbucks is everywhere, and so on.
The US is basically like a black hole now where you just don't want to enter it because you don't want to get shot or have your business set on fire or have crazy people yell at you and whatnot. I think it’s just going to get worse. The free-fall that the US has had this year, one of the things people are not paying attention to as much are the economic stats. It’s going to be in recession for a while until a vaccine comes through, I think. Because lockdown continues in different ways in different places, and that means less money, and less money means more scarcity. Everybody was angry at each other, even when the economy was booming up until January. Now, they’re just going crazy. So I think it gets worse on the other things.
You mentioned giant moats. Well, the thing is that those moats and the US military I think of as a Maginot Line. Because it’s built to fight the last war. What came over those two moats of the Atlantic and the Pacific was COVID-19. And that bypassed every defense. That bypassed every aircraft carrier. In fact, it sidelined aircraft carriers. I’m not sure if you saw that episode from earlier this year where these guys called in and they said, “Oh, everybody’s got COVID. We have to sideline, and so on.”
Look, I understand why they did that, but now everybody knows, “Okay, all the stuff in WMD,” where everybody was talking about N, B, and C — nuclear biological and chemical weapons. So we had nuclear, which was supposedly why Iraq was invaded. Chemical weapons came up with Assad, ostensibly, though people don’t know if he — what actually happened there. I mean, at least I’ve seen it disputed. I don’t know the details of that. But the biological weapons are the dog that hasn’t barked.
Every country in the world, including bad actors, has seen, “Well, guess what, the US can be brought to its knees by COVID.” COVID, we’re fortunate, is not the virus from Contagion. The virus from Contagion is really actually very different. So we hope this doesn't happen but it’s very possible that you get something where there’s like a worse virus. If the US can be this messed up by one biological virus, it could be messed up by worse stuff. Whether that’s intentional or something else that comes or a muted version of COVID like what happened with the Spanish Flu and so on.
The geography — basically, the US has been invaded by a virus. It’s pillaging it. It’s killing people. Then to the cons of the US military itself, I think the US military is probably a paper tiger. And what I mean by that is not that obviously it has real guns and has real bombs and all that stuff. But I think in a confrontation over Taiwan, one of the things — the Washington Post reported on this not like a secret or anything — but there's a lot of war games that the US military, as well as folks who work in the US military do, and it keeps losing these confrontations to China. In the war games, that is.
But that's just a war game. What’s a better proof point? A better proof point is that every American institution failed during COVID. Moreover, and this is less obvious to people, the military failed because if you Google “2018 pandemic response” or “bio defense,” the US military had this whole bio defense strategy. If you recall, remember anthrax in 2001 after 9/11. There’s a big anthrax scare because senders sent envelopes with the anthrax, of course. People thought that was just the next penny to drop, and the US is going to be hit by a bunch of terrorist attacks. There was 9/11 and anthrax and who knows what next, the Beltway snipers — it was a disturbing time.
Didn’t happen. However, what did happen was after anthrax, the US military had this huge budget for bio defense. And there are other things. There was SARS in 2003. There was the swine flu. Which wasn't that serious, but it was definitely something. There was Ebola in 2014. There were quite a few scares, and there was all this budget appropriated, all these plans running down these, all these plans for a pandemic. Then when it actually happens, MIA. The most they could do was basically the Javits Center thing which is fine, but setting up some folding chairs as a mitigating effort is not the same thing as having some secret plan out of movies to save the country from this deadly virus.
The military also failed in COVID. It’s not just that the FDA and CDC and state governments and the US government failed. In a confrontation with China, this military has been attacking basically unfortunate people in the Middle East. Guys who frankly can't fight back as much. These are, for example, to impose a no-fly zone, you have total air supremacy. People don't have an Air Force in Iraq. So I’m not saying like ISIS is a good guy, okay? They have their drones or whatever, but they’re simply not industrial powder. They’re not something that's on the same size or scale that can actually be a threat.
The giant moats thing, the giant military, I’m actually – then there’s other signals as well. If you look at the recent fighter planes, they’ve been massively over budget. If you look at the fact that Intel has missed a cycle and so it's now behind, and TSMC has pulled ahead. I think the US has been coasting for a long, long time, and that's all catching up with us. And it’s actually much farther behind where it thinks it is. Another way of thinking about it is, when I mentioned the stuff about building, a lot of people will say, “but the US could do that. It’s just regulations. It’s just this. It’s just that.” My answer to that is, “Yeah, okay. Clearly, China could have built all this infrastructure and what was just holding them back was communism.”
But from that standing start in 1978, it took them 40 years to get where they are, right? The US is like this really out of shape guy who's saying things. They’re still the USA of 1950, and they can rock over the bench press and knock out 225 for reps, and they haven’t lifted weights in like 30 years, 50 years. It’s not going to happen that easily. Finally, like the scientific and engineering talent, there's a graph which you can see which shows that the majority of technology companies now, like unicorns, are now outside the US. Where that crossing point I think happened in 2018. Now with remote, you don’t have to be there. You’re organized by time zone.
Then we haven’t even gotten yet to the fact that we’re going to have, I think, a wave of municipal bankruptcies in the US. And even more craziness to come. So let me pause there. That was a huge download.
Mark: I agree with most of your analysis of the US. Most of our institutions basically failed, right? I think we’re in for a very rough 10 to 20 years. What I would put as the key distinctions, one, I think the moats are useful just in terms of territorial integrity. We don’t need a military for territorial integrity. Our military is for global hegemony. But most of our trade is internal. The US total GDP I think is only 8% international trade. Which is very low compared to most other countries, which basically gives us an advantage that we are basically subsidizing a global trade network that we’re not particularly benefiting from.
China builds things. They’re at the peak of their strength. They have that advantage. To me, I think the key maybe, what might be the crux of our disagreement, is the idea of, “What is the value of demography?” Where, if I understand your argument, is that engineering and robotics talent can overcome what might've been determined by demography historically, but now there is a step change in that function.
Then, two is the internet. “How does the internet play into this?” Maybe you have a more optimistic view of the internet than I do in the sense that China has their great firewall. Most of the Arab Spring, when things got bad, they realized, “Okay, let’s just shut down the internet.” So I see the world coming into an increasingly bifurcated internet where we already have the US and China. We’re increasingly seeing Europe have its own separate internet with GDPR. Or if you have a European website, you have all these pop-up ads and you have all of these restricting requirements.
Then you have Russia which is sort of beginning to carve out their own sphere of internet. And the advantage of the US, why the US has historically been able to attract a large amount of talent, is our internal market. If you are very capable and very ambitious, you come to the US because the upside is much higher. They’ve done studies looking at Sweden. In Sweden, you can find the kids who got the highest grades move to the US and the kids who got mediocre grades stayed in Sweden.
It probably has somewhat diminished over the last decade or so, and I suspect it might continue to diminish over the next decade. But I don’t know. I see those fundamental strengths as still relatively strong.
Balaji: I wanted to push back on just two things there, and let’s move on to the other questions. So this is percentage of world GDP has been declining, and this year the crash in economic activity I think — we’ll see what happens — but I feel it’s like 2020 was a sickening descent. It’s something where lots of stuff is broken, and now basic functions of government like police and fire don't work locally, basic functions. Public health does not work. The politicians at all levels, whether state, local, or certainly federal. Just the military did not defend Americans, right? Even basic factual information is difficult to come by. These are really fundamental issues that a rearward-looking thing which I don't think captures what that dynamic actually results in.
Mark: Let me clarify because I don't see myself as particularly rearward-looking. When I'm looking at, “What are kind of historical instances of this situation we’re in now?” it’s basically the end of the Qing Dynasty, Q-I-N-G. Where that took 150 years or so for them to have some kind of national rebirth. Or the transition from the Roman Republic into the Roman Empire. These were very chaotic social transformations. And I think we’re in maybe not as chaotic, but a quite chaotic social transformation in the US over the next 20 years, where we should be looking for those as guides for how to rebuild a national consensus, some functioning institutions. I'm assuming that the timeline is going to be much shorter just because I think with modernity, we have accelerated a lot of timelines that historically would've taken like high decades. Now, they might take low decades.
Maybe this is my optimism. I feel we’re on similar pages with the level of social dysfunction. But I think that this can be come out of. We’re going to see demographic transition with the boomers going out of power, and I think that can be, with a little bit of luck, coupled with an institutional revival that hopefully can at least correct some of these deep flaws that we currently have.
Balaji: A few thoughts on that. One is, I’m not so sure that the boomers leaving the stage will actually be good for American management. I know people put a lot of blame on the boomers but I'm not sure that the younger generation, like, knows what capitalism is, for example.
Mark: That’s probably true.
Balaji: Yeah, that’s right. If you look at polls and so on, you’re talking about 20 or 30-point gaps there. There are certainly millennials who are extremely competent managers of businesses and so on, and there’s those who are very much not. But the question of whether there will be a national rebirth, there wasn’t for Argentina. It was a rich country that then became poor. It’s just become a basket case since then and just gone through currency crisis from currency crisis. They had plenty. Still has great lands and all those types of stuff. It’s just law of supply, right?
The American Republic became the American Empire 75 years ago, so there already is an empire in the sense of it has military bases in countries where those people don't have a vote in American elections. If you’ve outsourced your military to another power, even if ostensibly consensually, unless you yourself voted for that, you have to be said to not fully be a citizen. If you don't have a sovereign military over your state, you’re not actually a citizen.
So the number of people under the American umbrella is we have more than 300 million “citizens,” just kind of already an empire. Now, this is the question where it’s falling apart. My thinking on this to a positive note for a second, so people sometimes mistake this pessimist or an optimist. I think I'm a realist. I may be wrong but just stating assumptions. To strike a positive note, though, I think of the US today as actually being most analogous to the India of my youth. One of the weirdest things to me is how the US media have sort of in a way I would’ve thought impossible in the ‘80s, start to almost trade places. Where the India of my youth had lots and lots of smart people but just couldn't get it together as a country. Everybody who was smart could try to leave, and they went and set up in various places, but especially the US, UK, Canada, Australia, and did quite well there overall. Then that provides an example for the people back home.
Then when the time is right, then you kind of had the bilateral — it’s not brain drain really. It’s brain circulation. “Oh, IT! that’s a thing that Indians can do that actually we’re really good at. It’s a new sector. There's no discrimination against us. It’s not an old boys’ network or whatever. And tada! We can do this.” And that led to — during Y2K there was some of the first outsourcing stuff, we’re off-shoring. I know it gets a bad name in the US and I get that. In India, it was like this huge manna from heaven.
Now, today, the US has become like that where there’s still plenty of smart people in the physical United States. They just cannot align on anything. They can’t get anything together beyond company scale. You can’t even build a small building in California. So anything beyond private property, it's impossible to get consensus on to do something good. Forget federal level or state level. What fixed India, or at least partially, was people leaving. I’ll give you another example which is, “What reformed China?” It was actually the fact that Taiwan, Hong Kong, and Singapore existed, where you could see the people of the same ethnicity and the same culture and all of the same values. So you couldn’t say that it was something totally foreign to you or anything like that, and were flourishing under a different operating system.
In fact, it was you Lee Kuan Yew who helped Deng Xiaoping reform China. Certainly, Hong Kong was critical to that as well because Shenzhen was put across the causeway. So I think that whether you think the US can be reformed or whether you think the US can't be, the next step is actually to exit in some sense, whether virtually or physically, to start building something better. In that example, maybe the 2040 or 2030 US will reform itself. There’ll be, like, a Satya Nadella type who comes to power, and that person — Satya Nudella was able to point to Google and point to Facebook and say, “Look, Microsoft. Hey, guys.” I mean, he’s a lifer at Microsoft, so he had the credibility and insight to be like, “Look, Steve Ballmer got it wrong. Open source was actually really important. We’ve missed a whole decade on this. We need to catch up. We need to go to SaaS. We need to do all of the stuff.”
Something was able to take those external proof points and change culture within Microsoft in a way they couldn’t have done internally by itself. That’s a better case scenario. That’s a case where there are some people who can revive the US who point to the example of Americans, either abroad, or who have expatriated, or who have done things via this internet model that I’ve been mentioning. You don’t have to be fully expatiated by the way. They would just be overseas. “Hey, other Americans did that. Why can’t we copy that and emulate that? They’ve got the proof points.”
Alternatively, if the US doesn't get it together, well, guess what? You went and controlled your own destiny. Either way, the best strategy is to exit and to figure out a way to do something where you have total root control over it. And that is both a reform strategy and it’s a head strategy. It’s the same with crypto actually. In crypto, you disagreed with monetary policy. For many, many years, people would throw their remotes at the TV, “Oh, my god. I can't believe what so-and-so is doing and the whole Bernanke thing in 2008 printing all that money.” It seems quaint now to be concerned at printing only $787 billion. I’m not sure how many trillions we’ve printed this year. There’s not being too much on that. There’s a lot of stuff on memes in the New York Times but not so much of the trillions of dollars that was printed. And where it went to the even nearest building. Does anybody know?
But the thing is that that doesn't get people as upset anymore because they can opt out. They can buy the eggs with those bitcoin, and that gives them both a way to profit directly and a way to profit indirectly. Because hopefully, what that does, is it serves as an example for governments to get their act together, which it has done because in China they’re actually doing a blockchain-based currency. Every government in the world is studying crypto. Every bank in the world is doing crypto. That exit provoked reform, a 40, 50-year-old banking technology, as well as more importantly banking culture, that would’ve been possible had you just gone and yelled at banks or protest banks. Occupy Wall Street did not do that. Cryptocurrency did that.
Even though I’m sympathetic, by the way, in some ways with the Occupy Wall Street people, I don't believe student loans are good. I think they’re usurious in many ways. I think a lot of the problems they point to are right, I think their solutions are often incorrect. Half a cheer or one cheer for what they did but not for their actual solutions.
Mark: In your previous argument, you're making this point that crypto is a little bit of an exit from central banking. And that previously people had no choice whether to follow the central bank’s rules, and now crypto has provided an alternative for that. I think you kind of hinted but didn’t really go into depth into how exit via the internet or physically could create some degree of pressure on broader governance reforms. And this is like how Taiwan, Singapore, and Hong Kong led to pressure on China because they realized, “Hey, this is working. They’re Chinese. We’re Chinese, and they’re getting rich, and we’re still dirt poor in fields.”
To me, I think this has two layers. One on the city level or particularly with some cities like New York or San Francisco, also the state of California, they are very top-heavy. Their revenue streams are extremely dependent on high-income earners. You’re already seeing this in both New York and in San Francisco, the exodus of these high income earners, and whether they might not return post-COVID or return in lower numbers, it will put severe constraints on their budget, which could see this competition at least on the city and/or state level.
Then at least on the national level, what does this exit look like and what is that dynamic that plays out? What are the time frames?
Balaji: I think there’s going to be an exit in a lot of different ways. I do think that in 1960, America was a country everybody wanted to come to. But 2020, certainly by 2030, America's the country everybody wants to get out of. I expect on the order of a million or more people to leave the US over the next 10 years. I think this is going to be totally exponential. It will go up from a few people a year to suppose in like before the year 2000 to hundreds of thousands of people a year, maybe more. I think that’s a serious departure.
Mark: What types of people are leaving? Is it Mexicans going back to Mexico, Indians going back to India? Is it high-income earners? Is it medium? If there is this mass exodus, what type of people is it?
Balaji: It’s a great question. So I would actually expect both. Essentially, immigrants themselves are the most likely to emigrate because they came. And they came for a job or something, and they decided to go back. The thing is when you look, and a lot of other folks said not to come in the first place. The drama of American politics or what have you, whether people think it's entertaining or something within the US, it’s entertaining/horrifying when you're outside. It takes on a very different cast. It's like a family fighting amongst themselves in public. You just kind of want no piece of that. You just don’t want to get near that.
Mark: And especially when they’re fighting with a howitzer that's going off occasionally and blowing down houses.
Balaji: Exactly. That’s right. I mean, like it’s American. Everybody has guns, right? People are crazy. Look, I’m not taking a position on guns. I’m just saying there’s millions and millions and millions of guns in the US. When tempers fray, the consequence can be worse. So all these folks overseas, they’re thinking twice about coming in the first place. Who are the folks who’d leave? Well, first, immigrants themselves will re-emigrate. But one thing I want to say is the most American thing in the world is leaving your country in search of a better life.
Now, there has been the presumption on both left and right that everybody wants to come to the US, and the left’s position has been, “let everybody in,” and the right’s position is being, “Not so fast. We don’t want to let everybody in.” But both of that presumed that America's the country everybody wants to be in. Once America is a country everybody wants to get out of, I think all that changes dramatically, and the people who leave, they’re going to be called unpatriotic. They’re going to be said, “Oh, they’re shirking their duty.” Blah, blah, blah. It will flip on itself very quickly. It may already have been doing so that there’s reason to leave that are not simply economic.
For example, all else being equal, many people, many Indian immigrants, for example, would prefer in India where their children can grow up speaking the language, if it had first-world conveniences. What they want is — even if this is contradictory. Maybe it’s not. What they want is iPhone and Starbucks and paved roads, but they also want Hinduism and they want that culture, just for example. If you can get that in India, you don’t have to leave, and everybody speaks the language. They can pronounce your name. Why did you come in the first place or why did you stray? Why don’t you just go back?
So one group is immigrants. Second group are remote workers. Who’ve already — many of them have decamped already. During COVID, huge flight of this. This is a ‘whoosh’ because you can be in the Bahamas. You literally can be in the Bahamas. Why the F- would you decide to sit in your office when you could be there. Or wherever you want in the world. It’s not actually that expensive. You can go to nomadlist.iu or teleport.org. It’s cheaper often to live overseas, sometimes by like 70 or 80% than it is to live in San Francisco or New York. These are some of the most expensive places in the world. So people are like, “Oh, only the rich will emigrate.” No. actually, you emigrate because you’re not rich, because you want to save money. You’re actually, like, smart. There’s a whole backpacker thing. There’s the digital nomad thing, and so on.
The second group; remote workers, digital nomads, backpacker types and so on. People who want to save money, some of the FIRE people like the Financial Independence, Retire Early. I think those are the two big groups in the beginning. Then depending on how things go, I think you might see a third group. Which are political refugees of one stripe or another. All that sounds really, “Oh, my god dystopian” — or whatever. But we should also remember — where did all those immigrants to the US come from? Why did Iranians come here? Why did the Persians come here? Why did so many people from China come here? Or India, Vietnam, Eastern Europe, Russia, South America, Latin America, the Middle East? Because those countries were dysfunctional. Because they had communism or they had the Islamic Revolution in Iran or they had socialism in India. Or they had narco-terrorists or they had just bad government. All those folks came here, and so there’s a big chunk of the US that, within living memory knows that, “Hey, we had to just get out.” That’s like on the order of 20% of the US. And that’s totally legitimate to do that.
We never say to a Polish immigrant or an Mexican immigrant or an Indian immigrant, “Why didn’t you stay at home and fix your country?” That’s not actually a frame of reference at all. It’s interesting to think about that because the cameras never put on where they came from. The question is, where does your obligation begin and end at a certain point? When you can’t fix something within your lifetime, or at least under the current circumstances, there’s no obligation to do that which cannot be done. In my view.
Mark: Moving to a slightly related topic. You got a tweet recently, a few months ago about how to build a city. And it’s how to build a city, build a community in the cloud, organize the economy around remote work, enforce laws with smart contracts, practice in person norms of civility, simulate architecture in VR, crowd-fund territory, and materialize the city into the real world. Explain the thinking behind that tweet and then go into a little bit more depth as to — what that looks like?
Balaji: That’s interesting. That’s a pure text tweet that got like almost 5,000 likes. No image or anything like that. Just the pure concept. So just the thinking there is it is a blueprint for starting a city with zero dollars. That’s actually very important to me, is, I think all the time about how to hyper-deflate costs for lots of reasons. But one of them is when you hyper-deflate the cost, and you get a lot more of it. Another is it's less risky, so more people will try it. You get more talent. The third is you can get talent from around the world because not everybody has a million bucks or $100,000 or even $10,000 and so on and so forth.
The idea here is to recognize the extent to which a number of digital technologies have evolved to the point that literally by clicking keys, by hitting keys and tapping mice buttons, you can build a city in the cloud. It’s actually insane to think of that but just a sequence of keystrokes and mouse presses. You can — I mean, that’s what Autodesk is. That’s what CAD is. You’re literally building. I mean, you may import some data sets and so on. You may import textures. I’m not saying that everything is just generated purely by keystrokes. But fundamentally, you can do this.
Then you remember the scene from Fight Club where they panned around the room, and IKEA price tags popped out of every chair. Remember that?
Balaji: You can imagine like that, a visual where now you pan around the city, and price tags pop out for how much it would cost construction crew to materialize that object in the physical world. It’s a really cool thing to think about, right? Crucially, every price tag there has tremendous variation based on whether it’s being built in, say, South Korea or Dubai or Nigeria or São Paulo or Kansas or San Francisco. Massive variation but the variation is much larger than people think because normally people don’t think in this way.
It’s kind of like when Google News first came out. You could, for the first time, compare the headlines of many, many different news organizations and see how they were framing the same concept. I don't think people realize the fact that there is like a 10 or 100X difference in the construction cost for the same building in different places, and being able to actually have contractors bid on it would be quite interesting. Moreover, once you start thinking digital first for everything. That’s just generally my ideology, by the way.
For example, documents. This is so trivial to point out, but I’ll just make a point of it. Documents are one of the first things to go digital first because before you literally had to write on a piece of paper or hit the keys on a typewriter to generate a document. Even photocopying was a big thing, Xerox was a huge breakthrough, actually. It’s like a big thing to copy something. Now, we don’t really think like, “Oh, wow. Copy. We’ve got copy and paste.” That’s Xerox. There’s still photocopiers. You still use them. But when you think about authoring a document, you should think about a digital first.
Now, I like pen and paper for doing math and for learning things. I still use pen and paper. I think pen and paper is actually pretty important. But in the same way, once you go to any area and you start thinking about a digital first, in biology, digital first is let me start with the genome. Let me start with the genome of this organism that I'm studying. Let me design RNA probes or DNA probes from things. Look at the list of proteins. Okay, that's digital first. I go to currency. Well, I start with the APIs. It’s block chain APIs.
Now, you apply that to each area and areas where you can't do that yet, or there is where you start thinking about how to do a digital first. So starting the city digital first is really, really important. Because then everything can be built in the cloud. You can simulate everything in VR and AR, and it’s almost like you’ve got this spectral thing that exists out there. Then you put on the glasses and you could see the building next to you before it actually exists, which is very powerful.
Mark: I want to push back a little bit. I like to joke that there’s three ways to build a city. One is you’re a government. If you’re a government, you have two advantages. You have no budgetary constraints, so you can spend a lot more money. Then, two, you can basically force people to live there because you just tell the bureaucrats, “If you want to get promoted, you gotta have to go live in the new city.” That city is like Brasília. That’s Abuja. That’s Astana, which was recently renamed the Kazakhstani capital. Two, there is an economic reason, and typically the economic reason is there's a natural port, where there is a mine, that people move to. And they initially start mining the resource or they start using the port to trade. Then if people start living there, there's this agglomeration that sustains itself and is no longer dependent on that original resource.
Then the third reason is religious. It doesn't have to be religion per se. It just needs to be a strong sense of identity, and that identity needs to be paired with persecution. What that is — that’s the Jews founding Israel, being persecuted in the Middle East where they have a shared religious identity that stretches back thousands of years. That’s the Mormons going to Utah, to found Salt Lake City, because they have this new religion that has a very strong sense of in group. And they’re basically persecuted first in New England, then in I think Missouri before striking out on their own.
There’s this recent Netflix documentary, Wild Wild Country, which is another example of this religion serving as the binding force. And while this turns out poorly, it’s obviously Jonestown in Guyana, where they managed to found a city. It’s only 1,000 people but it’s a community, and obviously that ends very, very poorly. So you need this kind of strong in group combined with this sense of persecution, and what I guess don't rightfully see with this kind of cloud city is, okay, let's say, what if you can do all of your remote work online. Then what is the advantage of being in person?
It’s not clear to me that being in-person for your personal life is necessarily better than being in-person for your work life. If you want to be in person for your work life but you want to be remote for your personal life, with the obvious exception of marriage and cohabitation. Let’s say that you do want to amongst like-minded people. Is that enough to justify? Because even if you're going to a region that has a relatively low build cost, is that enough to justify the new construction cost? Let me stop there and get your feedback.
Balaji: Well, first is, I do think you can get far with digital but I do think it ultimately comes back to this goal. Because there are some things that you can only do in person. For example, it's hard to reproduce over the internet so far. But I also think that if you ask people what community — many people say college was the best. College was the best lesson. Why is that? It’s because college actually has selective admissions to form a somewhat culturally-aligned community. It’s actually a really deep point. You’re basically around people of like mind. And so you have got an open-door policy and you go and hang out with people and so on.
Whereas in any city, there’s no application process for an apartment building, so you don't have anything really in common with people in your building. You may live near. You may even work near. You may have paid the same price. But you may not share the same values. And there’s certainly no invitation to go and check with them or hang out with them. Many people don't even know who's next door to them, right? There’s a huge amount of dead space surrounding you, and that dead space is actually super valuable. To give an analogy in computers, there's different kinds of cache, C-A-C-H-E. There’s actual registers within the CPU. There’s the L2 cache. Then there’s RAM. Then you hit the hard disk and then you hit a remote server on the internet. That takes a lot longer than anything else.
Point being, it’s in the same way you’ve got something on your desk. You’ve got something in the next room. Then you’ve got something downstairs. You’ve got different kinds of storage. What happens is once all the space around you becomes unusable and unoptimized, you have to travel and spend much more energy to go much further to do things, and a huge amount of your life is actually wasted because your physical environment is not actually configured to give you maximum health, maximum fitness, maximum productivity, best nutrition, all that type of stuff. There’s so much you can do if you have a clean slate.
For example, just to give you one small example, if you get a new job, and across the street happens to be a donut shop, people will tend to pack on weight due to that. If it was a salad place, they’re going to do that less so because the proximity actually does matter. If you actually have a community that has been selected online because they share common values and they build a city together, they’re going to customize it in thousands of different ways, such that it’ll be pretty awesome. For example, a vegan city, a CrossFit city, a town, by the way. It doesn’t have to be a full city. A CrossFit town, a vegan town, a town of Chinese speakers, a town of people who practice a particular religion, a town of people who are artists.
There's a reason that college campuses have departments. You group a bunch of people physically together who share the same interests and magical things happen. I actually am a big believer in that. What I think is going to happen is software is reorganizing the world on the basis of ideological alignment and interests and values as opposed to geography. By the way, I think your points there were good; government-directed cities, resource-structured cities, religious identity and persecution-based cities.
There’s a fourth there which are university-based cities, and I think that's also — some combination of university and identity will have this form where essentially you take groups of people who are aligned off of communities like Twitter. You pull them together in a community of knowledge workers online with selective admissions, and that becomes a core for this. I’m going to do something on this, so let’s see if maybe I'm wrong. Maybe I’m right. We’ll see if it works.
Mark: One way to test that hypothesis is previous times where there were step functions in communication technology, the printing press and then maybe mass mailing. Were there similar moves towards what might be described as the intentional communities or kind of identity-based communities?
Balaji: Yeah. Well, the printing press caused the 30 Years’ War and the split of Europe into Protestant and Catholic, so that's a good example. A violent one but a real one. In the US, in the 1800s, there were all these communes that arose. Communism had a different meaning prior to it happening in Europe. It meant living together voluntarily in a commune like the Oneida commune or so on. There's a great book called Communistic Societies of the United States by Charles Nordhoff. It’s on Google Books. It’s free. When you look at that, you’re like, “Oh, so you’re opting voluntary communities?” Kind of like kibbutzes. A lot of kibbutzes have become profitable.
A lot of the communes actually did as well. They specialize in something like woodworking, and they practice their particular religious beliefs. It is all opt-in and voluntary. Because it’s often involuntary, some of them were like kind of crazy like the Shakers, where they said like, “Nobody can have kids or what have you. So they didn’t reproduce.”
Mark: Surprisingly they didn’t conquer the world.
Balaji: Yeah, they didn’t conquer the world. Exactly. But others did quite well, so I think that we’re sort of back to the future there. There was a time with a weaker federal government in many ways. You could basically ignore the federal government for most of what you were doing. And I think we’re going to go back to that future over the next 10, 20, 30 years.
Mark: Let’s play this out. What does this look like? In five years, are we going to see one of these communities of 10,000 people? In 10 years? 15 years?
Balaji: Absolutely. I bet five years by 2025, we will have the first 10,000-person cloud city. I would definitely be betting on that.
Mark: Okay. Not materialized yet, in the cloud.
Balaji: At least in the cloud.
Mark: But what does it look like in the cloud because there are already online communities that have way more than 10,000 people. There are reddit forums. If we’re talking about this kind of cloud community — the thing I actually think of most closely is kind of Anna Gat’s Interintellect where it has this very specific intellectual vibe that has attracted a lot of people from different places. And it is a curated intentional community that’s not a forum — that I see it as kind of most analogous to what you're describing. Is that fair or are you envisioning something different? I assume you know her.
Balaji: Yeah, I know her. I like Interintellect. I think that’s good. I might even invest in it or something. So a few thoughts. One is, going back to your early comment on quality versus quantity. In 2004, 2005, 2006, the whole name of the game was getting people online.
Get people online. Get people online. Viral growth hacks. The iPhone and Facebook, both mobile and social networks brought hundreds of millions of people online. What’s remarkable is that today the issue is not getting lots of people online. It's actually something where if you have any distribution on social media and you start something new, it is actually about filtering such that that huge community becomes a manageable group of aligned people because there's a lot of people who will, for example, hate-follow you on Twitter. They’re not actually aligned with you. They just dislike you and want to keep tabs on you or something. Not my style but there’s definitely people who do that. The thing about this is you don't need to be super viral. You want to have an aligned community. Again, quality over quantity. So, this stage of things I think is pairing things down and after blowing them up.
Mark: Maybe that's like Kanye West having a big audience and now figuring out who wants to move with him to this town in Wyoming.
Balaji: Yeah, exactly. That’s right. Maybe 1 out of 100 people, or whatever, does it, but that's enough for something legit. Work out the math on it. You have to make sure that, like, the economics work for the scale of the thing he’s building. But I absolutely do believe that influencers will found towns. Because that's what they do. They’re basically community leaders and they’ll become the mayor by acclamation of that town because everybody knows and respects them.
Now, not every kind of influencer is respected, of course. But there's a certain kind of influencer who is not just, like, a memer or whatever but has at least some degree of thoughts or some degree of leadership. They have to figure that out on a per community basis.
Mark: Well, one more piece of pushback, before I move into the next topic. When I think about, one, people — people have multiple identities and the people aren’t just CrossFitters or people aren't just — I don’t know what other things people do, like restaurateurs or runners. People tend to have a variety of identities that, in a particular social circumstance, they might express as one identity versus expressing as other. For example, go to a pride parade and act in very different ways than they might go to at the office. Or they might go out to drink with friends or when they go home to see their family. Everybody has different sets of identities that express themselves at different times within different sets of relationships.
To me, the advantage of a city is that it allows for this multitude of identities. When you think of the small town oppression, the young guy escapes a small town, it’s almost always about this yearning for something else. Yearning to express yourself, to be free. You don’t want to be held down by these seemingly oppressive social norms of the small town. So if we’re thinking about a new set of intentional communities that allow people to have these particular identities, to me it has to be something of an all-encompassing identity. And it can't be this, like, being, I guess, a CrossFitter or something that we see as a partial identity. It really has to be relatively whole and sufficient to justify like substantial, not necessarily total immersion, but at least substantial immersion within this particular like fixed environment, physical environment.
Balaji: Well, so the ones that I mentioned, like vegans or CrossFitters, are those that make substantial daily demands of people’s time. Vegan, for example, that is a lifestyle. Every single meal you're thinking about it. It affects your food preparation. It affects your purchases. It affects who you can socialize with. It often comes from a place of deeply held values. Maybe sometimes nutritional but often it's a values thing, like to eat meat, or religious things, or both. Same with the CrossFitters actually, like they’re really into it. And it’s a daily thing. They’re doing it every day, and it’s something where — just for example, if you have a CrossFit town, you’re going to have the gym nearer to the office. And people will work out every single day, and they’ll be peer pressured to work out — in a good way.
So I think your point on identity is interesting and important. I actually mentioned something similar. I’ve been thinking about this a lot. I’m trying to think, why are there some people who get so offended when you point out the issues with San Francisco or New York? I’ve realized, “Oh, some people are nationalistic about their countries. Some people are nationalistic about their cities, others about their companies, and some other about their cryptocurrencies.” Once you kind of see it like that, you’re like, “Oh, okay. There’s people who love San Francisco and the tech community they work in is just a job.” That’s completely the opposite of how I think about it, like, in a sense of — I'm looking at this stuff as the thing that I care about the most; science, technology, mathematics, building the future.
The city is very much a parameter. I need an internet connection. I need a desk. I need some quiet. Okay, that’s great. The outdoors is great. Go someplace for a run. Wonderful. In other words, the space gets parameterized. The unique aspects of the terrain just don’t matter as much. I mean, it’s fine. I never identify myself as a San Franciscan, but there are people who do. Thus, when you criticize it, it's like criticizing the top level stack of their identity. Then, of course, you can have a different top level of the stack. I’m an American. That’s the thing you’re most proud of. Or there’s the crypto stack. I’m a bitcoiner, and that’s number one.
I think what’s interesting about this is if you asked somebody for their identity stack, that tells you a lot about them. Because the thing at the top is a nonnegotiable. And the things below that are negotiable. I think this is a big values clash that’s often unarticulated, and it’s not just identity politics. It's an identity stack. So then going to your question, those people who put CrossFitter or vegan at the top of their identity stack as a thing that they identify with, literally they put in their bio, a limited space on Twitter. Those are the folks who would be the community leaders in such a community. There's other people who might come, right? It’s the number two or number three item in their identity stack. They’re probably not those who are their number five item. Does that make sense?
Balaji: Even if, by the way, this folk’s first and number four or five item might visit the community sometimes online.
Mark: It’s funny. I wrote a bunch of questions before this conversation, and I’ve ignored most of the questions. But let me ignore another one because I had another thought. When talking to you, to a certain extent you're not really the anti-Tyler Cowen but like some antithesis of it. Tyler’s entire thesis is — this isn’t just Tyler, it’s also Peter Thiel, where he always focuses — “We were promised flying cars. We got 140 characters.” It’s heavily focused on innovation in the physical world. We’ve innovated a lot in bytes, and we’re not really innovating in atoms anymore. While I’m sure you have opinions on innovating in atoms — at least most of your discussion, most of your focus is really on innovating in bytes.
Balaji: It’s innovating in bytes in order to innovate in atoms.
Mark: Okay. Let me finish this thought and then you speak. Tyler, he’s not really a standing athwart and saying, “Stop innovating in bytes.” But he’s really telling, “Start innovating in atoms.” You seem to be standing athwart history and yelling, “Much faster in bytes.” But I guess you have this argument that I don't fully comprehend at this point of how this gets around to atoms. So explain with more clarity.
Balaji: Once you can build a startup town and a startup city, eventually you can build a startup country that isn’t harmonized. Harmonization is a word that everybody should know. Basically, it refers to a country adopting the US government's regulatory policies. Essentially outsources its regulation, rights. A small country of Slovakia, say, may decide, often decides, “Hey, we’re going to outsource our aviation policies to the FAA and our monetary policy, we’re going to copy the Fed. And our biotech policy, we’re going to copy the FDA and so on and so forth.” You will essentially hear often people refer to the Slovakian FDA or to the Chinese SEC or something like that.
What that does, by the way, is it steals a ton of bases because it presumes that the American form is the correct form, that there should be such agency. That is how things should be done, number one. Then number two is just like a variation of that regulator that exists in that country. But in point of fact, what often happens is a group of people in DC who are generally anonymous, who are not elected, can’t be fired. They’re the tenured employees of the FDA or the SEC or FAA or what have you. They’re tenured because you get career tenure after a few years in the federal government as long as you didn’t do anything crazy.
Non-elected, can’t be fired. Anonymous. Not usually covered in the press and yet write the rules for the US and the whole world by extension via harmonization. This is what I mean by, like, the American Empire. For a country to be truly sovereign, they need to throw off harmonization and be able to take a different course. It's hard to say that the US FDA covered itself in glory with its policy on COVID testing, for example, which basically held a COVID test during the critical month of February. In fact, that’s a calamitous disaster for them on par with thalidomide. It's something that led to like a containable thing being turned into a pandemic because the tests weren’t approved fast enough.
These agencies, I think the only way around them is to get a social consensus in a large enough territory to go a different route. By the way, this exists to some extent already. You can get stem cell treatments in Germany that you can't in the US. You can get surgeries overseas that are cheaper or more advanced than you can in the US. It does exist to some extent. It’s medical tourism not just for price but for procedures. I think we can push this much, much, much farther. And we can use the startup cities. It starts with the vegan and CrossFitter towns and so on. But eventually, we get self-driving car zones. We get stem cell zones. We get zones that can do all kinds of things in a physical world because the limitations of what we can do in the physical world correspond to the alignment of the people in those zones to say this is worth doing.The risk is worth the reward. We’re trying to push forward the future.
After 1969, the US basically lost that. It just lost the ability to push it in a bit. Look, that's fine. It’s a relay race in history. Not every country — it’s a great country. It will be in history books, what it was, but you don't have to take it all the way to infinity. The Greeks didn’t. The Spaniards didn’t. The British didn’t. The Romans didn’t. The Chinese didn’t. The Indians didn’t. Everybody had a role to play and then they popped up later on in the story. They have returned. So I think getting back physical innovation is going to mean doubling and tripling down on digital to simulate everything digitally, to build the community digitally, and then hit enter. Materialize the physical world and then restart history.
Mark: Okay, that's interesting. Let me break that down because I'm sympathetic to certain parts of that. But I haven't fully bought in. One is, why has physical innovation slowed? One of the arguments is regulatory. The other is that there were low-hanging fruit, so some innovation was just easier than others. Now, we’re kind of reaching, hopefully, another stage of easiness.
Balaji: The critical piece is we have to tolerate a period of anarchy, and let me explain what I mean by that. So for a while, and still today, there's a problem with spam on the internet. But in the early 2000s, it was really bad, and there were lots and lots and lots of different models that were proposed to control this. But eventually, the one — for example, vigilantism going after spammers or charging fees or some sort — but eventually, what turned out to work was Bayesian spam filtering, which is a decentralized version. That got spam mostly under control, and Gmail implemented that. I think the most second cut on it with crypto but messaging has also helped because most people can message you, it’s not publicly known, so they can’t scrape your inbox or scrape your phone number and get to your messaging inbox.
A second example is something where the tolerating a period of anarchy was actually the right thing to do, arguably.
Mark: I would I think phrase it a little bit differently. What you need is to allow for an early degree of high-uncertainty to allow an iterative process that can rapidly improve.
Mark: For example, if you had looked at the first airplanes and it’s like, “This shit is crazy. Who would ever get in one?” And they had relatively high death rates. But you had to accept that, “Oh, wait. Flying is pretty cool.” So if people want to choose to get in an airplane or to test this out, that is their decision, and this wasn’t even a quick iterative process. It took decades for it to really fully play out.
Balaji: What, aviation? It was pretty fast, I think, for the Wright Brothers to a jet aircraft was a generation.
Mark: Yeah. But that’s decades. It depends on how you’re defining fast. It wasn’t instant. It wasn’t like, “All right, 3 years later this is like 100% safe.” No. It took decades for it to build up to that level of safety, that level of corrective capacity to ensure that all the screws are tightened right — that had everything there. And so you need to tolerate this period of initial uncertainty, initial risk, to allow for this iterative process that will work. I’m not sure it will work in all cases, but it will work in most cases. And that is, I think, necessary for the emergence of a lot of new technologies. And our risk profile has just gotten so conservative. That we’re not willing to tolerate this initial piece of uncertainty.
Balaji: So what’s happened is you get so risk-averse. Risk-aversion is the greatest risk, or rather excessive risk-aversion is the greatest risk. For example, if the fact that the FDA went and stopped Apple from putting diagnostics into its Apple watch many years ago in 2015, meant that the Apple watch wasn’t as featureful. And it meant that it couldn’t scale to tens of millions of units. And it meant that by 2020, you didn’t have distributed diagnostics that could have diagnosed COVID without requiring a test send out.
Mark: Let me just state this even stronger than you’re stating it. I’m not sure people realize how fully horrifying this is. But wearables basically allow you to detect COVID outbreaks two to three days before everything else happens. So if we had allowed for diagnostic wearables now, even if we had an incompetent government, we could still have had a semi-competent response. Just because you just set a program where it’s like, “Okay, if 5% of the population is seeing a — like, I don’t know, 1 degree increase in their temperature.” I have no idea what the metric is. But it’s easily detectable. You can see the outbreaks. And you can just send out mass text messages, like, “Everybody stay home the next week,” and cut it down frequently.
Balaji: Absolutely. I think, basically, that’s just like one dimension of it, but it’s an important dimension that shows — people talk about the risk premium in finance. You pay a premium for risk. This is the risk-averse premium. The premium we’re paying for not taking enough risk. And we’re not taking calculated risks along the way. Then you just pay all of your risk in one big lump sum. It’s what Bezos talks about, it’s like, “Any time you’re doing a bet, the company bet, you haven’t made enough failures along the way.” You need to actually take those individual calculated risks. Because if you don’t and you’re too conservative, and especially if you’re too conservative on status. I made this point the other day, more people are willing to take capital risk than reputational risk. Reputational risk, lots of people are like, “Ooh! They’re too occupied with what people think of them at cocktail parties or something like that.” And actually that’s not necessarily doing the right thing. That’s just doing the popular thing.
I’d say something else, which is, in addition to the risk-averse premium and things like that, the key thing with all of these is you need a zone that people can opt into, where they can be test pilots. If you’re in a self-driving car zone and you’ve chosen to enter that self-drive car zone for a live fire test of self-driving cars, you have chosen to live in the future and take some risk. And here’s the thing, we allow bungee jumping, we allow skydiving, we allow joining the military and getting shot at in the Middle East. Suicide is actually legal. I mean, not that you could really punish somebody after they kill themselves. But euthanasia is legal.
We allow people to take arbitrary risks for no reason or for enjoyment. So if that’s legal, why is it not legal to take an experimental drug? Why is it not legal to go and fly an experimental plane? Why is it not legal to do something with your own body? Why don’t you have sovereignty over yourself? It should be your body, your choice, but for everything. And I think that that’s something which it’s hard to argue that really. You can give casuistic arguments. You could say, “Oh, somebody would cheat you,” or something like that. But ultimately you’re talking about saying that you know better for somebody else and that you want to control their decisions as an adult.
So that concept of individual choice and volition will win the day, but we just need to do is coordinate those individual choices. So you mentioned the Free State Project, by the way, in some of these notes. That was a good project. It was somewhat successful. It managed to get a bunch of people to move to New Hampshire to try to change the government there. But it started in the mid to early 2000s before the iPhone, Facebook, modern social networks. I mean, Facebook was just around then, but I remember the Free State Project. I believe it antedated that. I remember seeing them in the very early 2000s.
It’s before the iPhone, before modern social networks, certainly before billions of people on social networks, before cryptocurrencies, to align people, restore contracts, to like structure their agreements for virtual reality for many other tools. Lots of ideas popped before the technology to be ready.
So the key question is can you get people who are pragmatic and pro-liberty and to filter it somehow, right? You have to screen. You need to screen. You get them together in a group. And think I think you might be able to do amazing things.
Mark: Thank you for listening to the Charter Cities podcast. For more information about this episode and our guest, to subscribe to the show or to connect with the Charter Cities Institute, please visit chartercitiesinstitute.org. Follow us on social media, @CCIdotCity on Twitter, and Charter Cities Institute on Facebook. I’m your host, Mark Lutter, and thank you for listening to the Charter Cities Podcast.
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