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The decade of decentralization

As an engineer who moved to the Bay Area from a developing country, it’s incredible how much my life changed for the better since I moved to the US. However, it pains me to know that I am among a minority who could move thousands of miles away from home, got lucky to get a U.S. visa, got a job in a company that touches billions of people’s lives. I had lots of friends back in Turkey who were smarter than me but didn’t have the luck or opportunities I had. As an efficiency freak, it always bothers me that most of the world’s talent can only operate in a very small fraction of the world’s productivity. 

We have reached the peak centralization

Two things surprised me the most when I first moved to the U.S. First, how much money there is. Second, how little that money buys. Don’t get me wrong, living in the Bay Area, I enjoy all the benefits the tech companies provide. However, don’t you dare to do something in the physical world, the situation here is worse than many developing countries. Construction projects take decades, infrastructure is crumbling, houses are old but expensive, healthcare and education are unaffordable and the list goes on.

You might find those examples anecdotal, Tyler Cowen backs them up with data in his book, The Great Stagnation. His main argument is that the U.S. has been living off low-hanging fruit, but that fruit is mostly gone and technological progress has stalled since the 1970s. It’s not only Cowen, lots of Silicon Valley leaders have been making the same argument over the years 1, 2, 3.

Solving a problem starts with understanding why and I want to share my personal take on that. The problems are manifold, but I believe we can see some common patterns emerging easily. 

First, diseconomies of agglomeration. The term agglomeration is an economic term used to refer to the phenomenon of firms being located close to one another. Since 1950, the world has seen a dramatic rise of urbanization. Urbanization has lots of economic advantages such as low transport costs, accumulation of knowledge and human capital etc. However, it comes with the disadvantages of high land prices, economic inequality, poor infrastructure and corruption. Living in the Bay Area, I can comfortably say that we have collected the low hanging fruit of urbanization, now we are suffering the costs.  

Second, Baumol’s cost disease. Baumol’s cost disease predicts that when there is an industry that is very productive, it causes the other industries to get unproductive and expensive. Last month, I was quoted $450 as the labour cost for a shower head replacement which is supposed to take half an hour. Most engineers in the Bay Area don’t make that much money.

If we extrapolate Baumol’s cost disease, you can see why the innovation is lacking everywhere except the internet. The brightest people end up in FAANG companies and scraping the bottom of ads optimization techniques, where the problems in the physical world lack the talent it desperately needs. 

The common pattern that I blame is centralization. Centralization causes lack of competition, both for my work at Facebook and the repairmen’s work in my house. Centralization creates network effects that allow FAANG companies to pay juicy salaries, tech workers to pay fat rents to landlords, repairmen to charge exorbitant fees, California residents to pay high taxes to the state. It’s all a self perpetuating cycle whose costs far outweigh the benefits at this point. 

This is the the decade of decentralization

As a techno-optimist, I think we are at the end of this phase of centralization. I think this decade will see a rapid advancement of decentralizing technologies which will unlock unforeseen productivity gains. Remote work will challenge the network effects of cities. Open networks (a.k.a DAOs) will challenge businesses that benefit from network effects the most. Cryptocurrencies will challenge the government currencies. Solar energy will challenge the grid. 2020’s will be the year of decentralizing technologies because they will unlock an untapped potential and allow productivity gains that we have never seen in the past.