Reading Roundup - October 2024
A monthly roundup of random readings from around the web.
Agricultural automation, seaport unions, ChatGPT, the Wordpress fiasco, HVAC rollups, mobile apps, deepfakes, and the parable of the cheap space heater. Enjoy!
(1) Why Did Agriculture Mechanize and Not Construction?
From 1964 to 2012, agriculture has quadrupled productivity in terms of output per unit labor, while construction has lagged GDP. This trend goes back centuries (who could forget the three field system?). Agriculture’s most recent productivity gains came from mechanization, e.g., replicating the labor-intensive wheat (and other) cultivation activities of reaping, threshing, and winnowing with the mechanical combine harvester. Construction has struggled to mechanize idiosyncratic labor-intensive activities. Why? Because of higher complexity of information processing from the external environment. Agriculture relies on filtering (literally!) to simplify inputs in statistical fashion, whereas construction has more irreducible inputs.“The difficulty of mechanizing construction is analogous to replacing a 400 acre farm containing a single crop with a 1 acre farm containing 400 different crops.” I’m sure ChatGPT solves this.
(2) A Ports Strike Shows the Stranglehold One Union Has On Trade
Speaking of automation, US maritime ports ground to a halt this month during the strike over automation and wage increases from the Dockers’ Union, which represents longshoremen. This was the first nationwide dockworkers’ strike since 1977, which also fought automation in the context of containerization. Dockworkers are among the best paid blue collar US workers, with more than one-third earning over $200,000 per year, but they’re demanding a 80% wage increase. Their high wages and a lack of port automation, protected by the union, is why “the cost to lift a container off a ship is higher in America than anywhere else in the world.” If the goal is preserving jobs, let’s require construction workers to replace shovels with spoons.
OpenAI’s o1 model has improved its reasoning through “inference time” (analogous to “thinking time,” with all of the usual AI caveats about the definition of “thinking”). As AI improves, invest more in automating services: “The AI transition is service-as-a-software. Software companies turn labor into software. That means the addressable market is not the software market, but the services market measured in the trillions of dollars. […] The opportunity for startups is not to replace incumbent software companies—it is to [automate] pools of work. […] Apps [are] the most interesting layer for VC investors. 20 application layer companies with $1Bn+ in revenue were created during the cloud transition, and another 20 were created during the mobile transition. We think the same will be true here.”
(4) Matt Mullenweg: ‘WordPress.org Just Belongs To Me’
OpenAI is not the only hot startup creating a murky mess out of overlapping non-profit vs. for-profit operations. Automattic is the parent company of WordPress.com (for profit with outside investors), which hosts websites built on the WordPress CMS (an open source service), which is managed by WordPress.org (a non-profit controlled by Automattic CEO Matt Mullenweg). Even more confusing, WordPress.org licenses its trademarks and monetization rights for WordPress back to Automattic (through WordPress.com). Confused? So is WP Engine, a competitor of various WordPress.com for-profit hosting services. Automattic is suing WP Engine (and vice versa) for alleged trademark infringement and failing to contribute to the open source development of WordPress. But it doesn’t look great for Automattic based on these brutal anecdotes.
(5) 50 Years of Broccoli (and Mockery): A Co-op Co-Founder Calls It Quits
Joe Holtz started the Park Slope Food Co-Op (in Brooklyn) in 1973. The grocery store is an experiment in the pure “cooperative” model of corporate organization—to be a customer, one must be an employee, and almost 20,000 locals sign up for for part-time shifts in exchange for the ability to shop there. The Park Slope Food Co-Op is notable for surviving with a cooperative model despite its classic co-op problems: indecision in a consensus-driven culture, slacking employees, and competition from capitalists (the horror). As with Yugoslav market socialism, co-ops are just another method of allocating factors of production (labor and capital). Employees trade pay (as unpaid labor) for lower prices, and lower prices today for higher prices tomorrow (by not retaining or reinvesting earnings into productivity-enhancing capital goods).
(6) America’s New Millionaire Class: Plumbers and HVAC Entrepreneurs
It looks like HVAC rollups at HBS have jumped the shark. From the WSJ: “Private-equity investors have purchased nearly 800 HVAC, plumbing and electrical companies since 2022.” A repeated model: “For private-equity investors, the rollup strategy is one that has been put to use in industries as varied as carwashes and nursing homes: Rollup businesses to create larger players and improve their margins by adding managerial know-how, back-office efficiency and beefed-up marketing and recruiting budgets. Critics of the PE model say that it can mean higher prices for consumers and less competition, but others say that it can improve service quality and boost the bottom line.”
(7) Private Equity Hipsters Are Coming For Your Favorite Apps
Bending Spoons is an Italian startup that acquires distressed consumer subscription businesses: “Investors valued the company at $2.6 billion this year, making it one of Europe’s most valuable technology startups.” Their playbook is to “push the limits of what subscribers will pay [and] fire the employees.” After acquiring Evernote in 2023, they raised prices by 63% and fired 95% of the staff. “A lesson Bending Spoons learned from that experience was it should fire people even more quickly.” One observer compares their business model to a dairy farm: “They’re doing [a] high-quality milking.” It sounds more like a slaughterhouse.
The deepfake fraud problem is getting worse: “It seemed like just another video call. [On his] screen, he saw several colleagues, including the [CFO], who [asked] him to transfer $26 million to five different bank accounts. He complied. But the [CFO was] actually a deepfake. [Deepfake crimes are] rapidly being adopted by transnational criminals based in South-East Asia, [which is] the epicenter of online scams […] Cambodia’s online scam industry generates over $12.5 billion per year, equivalent to half of the country’s formal GDP. [Technologies] like generative AI and machine learning are making online scams even more effective. [The] rise of cryptocurrencies and social media have decentralized and democratized transnational crime.”
“So many people have trouble writing [because] it is fundamentally difficult. To write well, you have to think clearly, and thinking clearly is hard. [But] AI has blown this world open. Almost all pressure to write has dissipated. You can have AI [write] for you in school and at work. [But this] is bad [because] writing is thinking. [There is] a kind of thinking that can only be done by writing. If you're thinking without writing, you only think that you're thinking. [This] situation isn’t unprecedented. In preindustrial times, most people's jobs made them strong. If you want to be strong now, you work out. There are still strong people, but only those who choose to be.”
“When the world’s richest man dies, he leaves his entire fortune to a foundation for the benefit of his cheap space heater. He says the space heater actually improved his life, while everyone else was backbiting and ungracious. The foundation trustees are stuck [with] figuring out how to use his hundreds of billions of dollars to benefit a space heater that doesn’t technically have any preferences. They decide to add AI to the heater [and] uplift it to sentience. Gradually the space heater becomes super-intelligent, maybe even divine. [What if] the AI-augmented space heater had refused uplifting? What if it asked to be disconnected from the AI so that it could remain a space heater? Would it have been ethical for the trustees to refuse? […] It sure was a strange story.” A parable about utopia? Or about The Ghost of Christmas Yet to Come?
(0) Miscellaneous
Romania’s 1990s Caritas Ponzi scheme. The Civil Aeronautics Board (CAB) is the sole exception to the bureaucratic ratchet. The messy liquidation of Chicken Soup for the Soul. Why toilet paper keeps getting smaller. Costco has hacked the American psyche. The University of Pennsylvania dominates the list of Fortune 500 CEOs. Portrait of a Somali-American community in Minnesota. The most important room in a restaurant is the bathroom. The tragedy of Bill Clinton. China slows down VPNs. Taking better notes with Readwise. Most climate change policies have no measurable impact. Most tech unicorns cannot live up to their valuations. Tim Walz is the most popular person on either ticket. Ozempic and social dynamics of skinniness. Too old for Fiddlesticks.