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Optimizing Our WTF Economy for the Long-Term (Full Transcript)

The full interview transcript of the conversation between Tim O’Reilly and Peter Leyden is available below. The transcript has been edited lightly for clarity.

Peter Leyden: Welcome to The Future of Sharing, the series where we’re looking very hard at how we make the Sharing Economy work for everyone. I’m Pete Leyden, I’m the founder of Reinvent, and today we’ve got a really special conversation. We’ve got Tim O’Reilly. Tim is technically the founder and CEO of O’Reilly Media, but Tim is way more than that. Tim is, I think, one of the bona fide kind of leading thinkers of kind of the Tech Intelligientsia in the Bay Area for the last several decades.

He’s been instrumental in opening up the world up to open source software and kind of open kinds of systems. He was great at rebooting the kind of frame off the dotcom crash into the Web 2.0 kind of concept. He’s been introducing tech into government, in the Government 2.0 kind of framing and the most recent thing he has been focusing on is Next: Economy Summit. He had one last year and he’s going to have one this fall, that’s really fundamentally rethinking the future of work and the economy going forward. So it’s really great to have you here.

Tim O’Reilly: Well, thank you very much. I like to say, my reputation exceeds me; but I am passionate about thinking through this next economy.

Well, so let’s start with that. You are one of the few people who could actually start at the big picture and move it down. There’s a ton of anxiety out there that we’re seeing surfacing in politics, with the rise of Trump and Brexit. We’re also seeing it happening in terms of people… folks are worried about the rise of AI and robotics, and displacement around the economy. Tell us what you see going on in the big picture and what’s happening in the economy right now?

It’s pretty clear that we’ve made some big mistakes. But it’s also clear to me that if we play our cards right, we have a fundamentally optimistic set of possibilities in front of us.
One of things that I’ve been focused on lately is Keynes’ wonderful 1930 essay ‘Economic Possibilities for our Grandchildren.’ This is something that he’s writing at the outset of the Great Depression and he’s predicting that there’s going to be so much productivity that people won’t even have to work anymore. Now we didn’t do that, but if you had talked to somebody in 1930 and explained to them what it was going to look like in the 50s, in the 60s, in the 70s, they would have been astonished.

Going back further, you think about the Luddite rebellion of 1811 to 1813, and these guys were smashing looms. Did they imagine that their descendants would have infinitely more clothing made by these mechanical looms than even the richest aristocrats? Did they imagine that the descendants of those machines would take us to the moon, would fly us across around the world in a heartbeat? Something that would take years.

So the whole point is that technology lets us do things that were previously impossible, and yet there’s a narrative that we’re facing today that technology is destroying jobs. There are two things to note about that. Technology is destroying jobs, but only because we have told it to do so. We have told it that people are a cost. We have told it that people should be eliminated from the system. There are a set of choices, and we have actually built incentives into our economy to encourage those choices. My friend, Rana Foroohar, wrote a book recently called ‘Makers and Takers’; the subtitle is ‘The Rise of Finance and the Decline of American Business.’ It really focuses on the fact that we’ve optimized our economy over the last 40 years for the stock market.

When you say ‘we’, in that context, what do you mean by that?

Really it’s true globally, but it’s true in the United States in general, and it’s true in Silicon Valley as well. We made a series of moves to align CEO pay with stock performance, and stock performance, over the long-term, would be a really interesting measure perhaps; but over the short-term, it’s a terrible measure. Not only that, it overweighs one of the many factors that goes into having a successful economy.

Just as a thought experiment, I’d like to talk about the Walmart problem. So, just to kind of understand the tradeoffs that we make in our economy, Walmart heirs are among the richest people on the planet. In fact, it’s kind of funny because they talk about Bill Gates as the richest man, but actually if you look at the four Walmart heirs, each of them is not that far behind Gates. Sam Walton made an ungodly amount of money, and yet Walmart workers are paid so little that when they apply for work there, they’re also given an application for government food assistance; and it turns out that the government food assistance dollars that is spent on Walmart workers, which is then spent at Walmart, is roughly equivalent to the difference between Walmart workers wages and the $15 minimum wage. So effectively, what we’ve said is, it’s okay to cram down the workers in order to pump up the stock value and we’re going to subsidize this with tax payer dollars taken from the public, and then we’re also going to give back a chunk of economic value to society in the form of the cost of goods going down, the cost below what they could be, what you could charge for them.

So, there are really four factors and yet we’re really optimizing just for one of them. All the incentives in our system say, like if you are the CEO of Walmart, cram down those workers, offload the cost to society, onto the tax payers so that we can get the stock price up; and give benefit to consumers in the form of lower prices because that will actually help to drive our market dominance.

This is a game. This is a strategy, and a lot of people, I think, assume that the way the economy that’s revealed in that discussion is sort of like the natural law of the economy. Rather than realizing that it’s a product of a set of rules. We have a particular tax rate on capital. We have a different tax system for labor. We have rules about what kind of social safety net is required, for example, things like 30 hours a week, you have to be paid benefits. So that’s led to a lot of low-wage employers saying well great, we’ll just make sure that more people can’t work more than 30 hours a week so we don’t have to pay them any benefits. This was something I talked about last year in this whole discussion of what’s wrong with low-wage work. People are focused so much on the on-demand economy, but they haven’t realized that if you’re a low-wage worker in America, you’re managed by an algorithm that’s trying to make sure you don’t get too many hours. At least on the side of on-demand companies like Uber, you can work as many hours as you want to try to make the amount of money that you want.

Now, of course, it’s an utter failure of the system that we’re still not actually solving for, “Hey, how do we make this work for people?” I think that there’s a really interesting awareness that’s starting to grow. Nick Hanauer I think, to his credit, is one of the first people to articulate this really forcefully. The way he said it to me the first time we met was, ‘Only one thing makes a business successful and that’s customers.’
We’ve been screwing our workers for so long that they can’t afford to be our customers anymore. You see this recently in Jamie Dimon at JP Morgan saying we’ve gotta raise the wages for our lowest paid workers.

There’s starting to be an awareness of this. For a long time, businesses just outsourced that problem to government. Well we’ll just pay people not enough to live on, but the government will take care of them; but we don’t want to pay taxes.

Well now that’s interesting. So you are kind of describing, just to schematically think about this, the economy we’ve seen these last 30 years, or however you want to do it; but there’s also this new, this next economy that’s happening, which the Sharing Economy is a part of. So, talk to me about what’s happening under the surface. We can get deeper into the Sharing Economy but there’s something bigger that’s —

Well, yeah, when I think about what’s the design pattern that we should be optimizing for? What does that look like? I call the current economy the WTF economy. WTF is this great expression because it can be an expression of wonder or it can be expression of dismay, and in today’s economy we see both. The WTF ‘Oh my gosh, that’s possible,’ with self-driving cars, with drones, with AI, there’s amazing new stuff happening. Then, you really don’t pay people enough to live on. WTF, you know? So, the next economy has a design pattern, I think which is, rather than using technology to cut costs and simply to drive down the cost of labor and other things that in fact do make a company more productive, we actually ask ourselves, what does technology let us do that was previously impossible?

So often technology consists in augmenting people so they can do new things. You even see this with Uber, for example. We had Connected Taxi Cabs for years, but all they did was put a credit card reader in the back and a little TV screen where they can show you ads, and nobody really said, “What could we do differently? How can we do this differently with technology?” Then, Uber came along and said, “Wow! Everybody has a smart phone that’s identifying where they are in real time. We could match up drivers and passengers in real time. Not only that, there’s all this mapping technology so drivers who aren’t that experienced can help find their way around. Not only that, we can build an online backend that will multiply all this possible world of passengers and drivers.” This is technology augmenting people so they could do something that was previously impossible. Of course, that actually grew the market. The market for on-demand transportation is way bigger than it was before that. So that’s great. The downside is that Uber didn’t throw off the notion that workers are a cost to be eliminated if at all possible. They started out with ‘Well, we’re going to produce really high wages’ and then they started cutting, cutting, cutting, cutting. The question is, what’s the right balance between paying workers and paying stockholders?

Going back to my Walmart analogy, it’s pretty clear to me that we have that balance way off. Let me give you not just the Walmart example, but the Apple example. Apple paying people so little to make iPhones. We had suicides at the factories. Apple had the notion that somehow if you don’t cram wages down to the lowest possible level, you are not going to survive as a business. Are you serious, Apple, with your huge cash shorts, you’re the most profitable company ever, and you end up saying, “Well, we have so much cash, we have to give some of it, billions of dollars to Carl Icahn because he’s a stock market player.” Again, this whole acceptance of this bizarro world where we don’t have enough money to give to workers, but we have billions of dollars to spend on stock buy-backs to improve the stock price for Wall Street managers.

Do you think we’re in the moment of a fundamental rebalancing that’s potentially going on here in the next five or ten years?

Yes. I think the political and economic situation is starting to get critical enough that we are going to see either some very bad things, or we’re going to see some very good things. I think, looking back at the lessons going back again to the Great Depression and what followed from that, a couple things I think. First off, the government did put in place a safety net. That’s what most people think about; but the government also made massive investments in the future. Louis Hyman, a friend of mine, wrote a new book about the history of debt, and he’s also written quite a bit about the Great Depression. He just talked about this the other day. America went from being 10% electrified to 60% electrified in 10 years. That happened in the Great Depression. I always think about that too. The Golden Gate Bridge was built in the Great Depression.

I was just on it today.

The Empire State Building was built in the Great Depression. More than that, when World War II came around, we completely reinvented American business, where resources were diverted over a period of five years from industries that were struggling nto new areas that didn’t exist. That’s when aluminum smelting got off the ground. That’s when aerospace got off the ground. The aerospace industry became this huge industry as a result of that. I sometimes think that actually it’s going to be climate change that’s going to rescue us from our current economy — a big challenge where we go, “Holy shit, we can’t keep on going with business as usual. It could also be that we end up in a terrible situation like we did with World War II, with pretty serious kinds of conflicts that lead to us having to completely redo our economy. I sure as hell would like to get ahead of that. I think anybody with any sense should like to get ahead of that.

Couldn’t those damn folks, those nobles in the French revolution, see what was coming? Couldn’t those people who kind of crammed down Europe after the first World War, see what the consequences would be? Yet, we’re kind of running like half way together and sliding right down the same kinds of crazy paths. So, I’m kind of saying no, we need to get on a different path, and that different path starts with thinking about things that need doing. Thinking about how technology can help us do those things. Reinventing the economy so that it works for everyone. That really requires some really deep thinking. On the order of what we did in the New Deal, it requires thinking that is bold and investment that is bold.

Anyway, back to my event. What I’m really focusing on are these two stories. One is, ‘How do we use technology to do things that were previously impossible?’ Then, secondly, let’s assume that we get to a world where the machines get better and better at doing what humans do today. What will happen to all of us? In one dystopian vision, we have a class of wealthy people who are living these beautiful lives surrounded by vast slums of people in a global underclass. In another world, we have the 21st-century equivalent of a prosperous middle class, and what are they doing? It strikes me that we actually see signs of this in our cities and it’s really around the creative economy and —

What do you mean by ‘the creative economy?’

Well, I mean it much more broadly than the arts, which is what people usually take it to mean. Think about what makes a city great. There are great places to go eat. Every restaurant is part of the creative economy, and the fact that a great restaurant charges more than a little hole in the wall, is a kind of creative premium that says, “Oh yeah, of course we pay more for that human touch, that skill, that art.”

Why are we paying more? You can get very cheap clothing at The Gap or Old Navy or wherever, but people go to these expensive boutiques. Again, it’s the creative economy. It’s the creative premium. Then of course, it’s also evolving into what we would traditionally call the creative economy, which is becoming much more of a pure economy, where there are people who are spending a huge amount of their media consumption time on pure produced media, whether it’s social media, or YouTube, or so many other forms. We’re slowly building an economy there. There’s more and more money starting to flow through the creators in that economy. I think we can see even more of that.

Let’s assume that we were to reallocate some of the profits of the economy from the market to society as a whole. What is the best strategy? I think we would find that it is, ‘Yes, continue giving rewards to capital. Yes, continue giving rewards to consumers,’ but it would also say, ‘Oh, but you also have to give rewards to people working, and you either have to pay taxes to do that redistribution or you have to have it come out in some other way.’ Because if you don’t, you are going to end up in this bad end game with only some people able to afford products and everybody else is living a pretty miserable life.

The Sharing Economy, I’m assuming, there is an overlap there with what you think of as the creative economy; but again, thinking of our audience, how would you explain the rise and the current situation of the sharing economy in that broader context which you so masterfully laid out?

First of all, there are several drivers of the Sharing Economy. There are some good ones and some bad ones. This is why it’s this WTF economy that you hear again and again. There are so many wonderful reasons why people participate in the sharing economy, and one of my favorites is a story that my wife heard somewhere in the Midwest. A guy who was, I believe, a chemical engineer or an aerospace engineer, who didn’t feel like he got enough human contact at work. So he would leave early in the morning, two or three hours early for work, and be a Lyft driver, and donated the money to charity. He didn’t need the money, but he wanted the human contact. You hear stories of how people who are between jobs. It’s a wonderful aspect of it. People saying, “Hey, I had a lousy job and this is better for me.”

In the home-sharing context, is there…What’s the motivation there?

Certainly there are people who do it again purely because they have to. They can’t make ends meet. But there are other people who, for example, may have a second home that they want to share, or they’re travelling. I think of my brother actually, who has found what he can get for his home in Palo Alto, it’s so great, that it’s an incentive for him and his wife to travel a lot, because they actually can pay for the trips on the rents they’re making.

Why not just go, be away from home? There are a whole lot of wonderful interesting stories there, but there’s also a profound sense that some of this is rooted in the fact that people don’t have enough to get by on. I also see some interesting hopeful signs. For example, if you look at the competition between Lyft and Uber, one of the focuses of the competition is increasingly on who’s better to drive for. That’s a good thing.

And Lyft has played that card very well. I think they’re a more fundamentally idealistic company, but I also think that that’s really a good sign that there’s going to be a little bit more power for labor. The churn of these companies is 60% a year. You might say, ‘there are always going to be new drivers’. Well, until there aren’t or until the quality of the drivers goes down. And I like to think that one of the really interesting loci of competition here needs to be figuring out how to take driver retention, driver satisfaction into account, as well as consumer satisfaction.

Into the algorithm?

Into the algorithm. Yeah, right now the algorithms are set up to optimize for pickup time.

Consumer?

Yeah, consumer pickup time, but just as Google started out with just a simple search algorithm and they added more and more factors, and it got better and better for a variety of reasons.
I think that Uber could be going, ‘We’d actually be better if we optimized the algorithm for drivers as well.’ I think the question though is, whether the companies will do that themselves or whether there is a role for government, which has traditionally been kind of the backstop for this kind of thing. Or for that matter, I mean what are the vehicles by which workers get a voice and a seat at the table? I love this line from David Rolf at the SEIU. We were talking and he said to me, “God did not make being an auto worker a good job.” There are jobs that we look back at in the 60s, where there probably was a lot of blood, sweat and tears by people who amassed worker power and then used it to get a seat at the table. It’s funny because I grew up in an era where the corruption of unions was their dominant face; but I’ve come to have a great deal more respect for unions in today’s world because for all the things that are still wrong with them, hey, there’s a lot wrong with business too.

It’s pretty clear we need a counterbalance because it is a multi-player game, and we need advocates for workers. We need advocates for capital. They’re pretty good advocates for themselves; and we need advocates for society as a whole. We also kind of need a moral revolution in business. A moral revolution that isn’t about ‘do goodism’. It’s a moral revolution that’s about the right way to do things. This really kind of goes back to ancient philosophy. Tertullian and Aristotle described virtue as the control of the appetites by right reason.

It means, you’ve kind of thought this thing through, and you’ve actually figured out what is the thing that will make you the happiest. We actually need to go back to that and realize, ‘Oh no. Simply satisfying “the market” is not the right answer.’ It’s not the right answer for a really important reason. The invisible hand market that everybody likes to think they’re describing is the market of real goods and services where I do something for you, and I trade it for something that you do, and that I want; but so much of what we think of as the market today are financial markets, which are a betting pool about what people might want.

They’re all about perception and the manipulation of perception, rather than meeting the real needs of society. So, because those two markets have been increasingly diverged, even if you’re a ‘free market fundamentalist,’ you have to realize that the market we are living in is distorted by government intervention. It’s distorted by the rules which then corporations play against government, against people. So, when I say a moral revolution, I mean a revolution in which we are trying to figure out what really works for sustainability, for the long-term.

We had John Battelle in another forum, this What’s Now forum, and he laid out his kind of NewCo vision, but it’s very of similar —

Oh yeah. Absolutely. We’re travelling on parallel paths. Yeah.

I think there’s something there, which is why there’s something bigger going on here. So, let’s talk about those three stakeholders. Let’s say, government, workers and business. One thing I’d like to push back to you on the —

Well, there’s government, there’s business, there’s workers, there’s consumers, and then there’s actually, probably the fifth one, which really need to be distinguished, is financial markets. It’s super important to remember, if you could drill one thing into everybody’s head. I first got this from my friend Bill Janeway. He actually was talking about what he called a three player game between government, business and financial capital. He was the first one who, to my knowledge, made the point that real business of goods and services and financial capital are not the same thing, and that we made this huge mistake by using this one term, the market, for two things, which are so very different, with very, very, very different incentives. Carl Icahn is doing nothing for the market of real goods and services when he buys a bunch of Apple stock. Apple does not need any capital from Carl Icahn whatsoever, and yet somehow he has managed to extort Apple into doing share buy-backs, rather than lowering prices or giving more to workers; because we’ve bought into this mythology that feeding the market is somehow what keeps everything going.

Well you’re a player in the tech circles and business circles. What is the mentality in those two? Do you think there’s an opening in those two sectors for saying, “You know what, this isn’t right. We want to do something different. We want to pay enough for our share.” Maybe some magnanimous gestures of like, “You know what? Let’s help drive this rather than just kind of react to the rules that are essentially…”

I want to stay away from the idea that it’s magnanimous. There still are companies that operate this way. One of the rules of business was ‘charge as much as you can.’ Right? This acts in the sense of the demand curve. There’s a magic point at which the price and the demand are in balance. But there are companies that are charging way, way, more than they should for services. I think of one conversation I had with a city official who was knowledgeable about technology describing a negotiation with Oracle, where Oracle came in saying, well, 17 million dollars. He knew what it should really cost and he said that his offer was a million, and they settled at a million and a half. The fact that Oracle was asking 17 million for something they were willing to sell a million and a half for, is a sign of that old mindset; that you charge as much as possible.

Yet, along came a class of companies that said, ‘Oh, actually, the way to get business advantage is actually to have prices as low as possible.’ So, Walmart, Amazon, who have kind of pushed always for lower prices to increase market share. Then of course, there’s a whole market of people that said, well, we can actually do better than that. We’ll give away our services for zero and we’ll charge someone else to support our business. We shifted from a model that said the only way to get ahead is to charge some kind of monopoly rent higher than market price, that’s how you get really successful, to one which said, “No, charge less. That’s how you become really successful.” I think we could have a similar point of view that said, “Oh, you know how you get really successful? You pay people enough to afford your products.” That actually makes society as a whole richer and people have more to spend, and there’s starting to be a recognition of that. It’s not magnanimity, it’s common sense.

Yeah. I like that.

You look around at all the things that are going wrong in society because, we say, oh, we’re paying too much taxes, but so often the people who are complaining the most are paying the least in taxes. Actually, I had a very funny interaction with one tech magnate who has never spoken to me since. I won’t mention any names, but he was ranting about taxes — and I kind of just, on impulse I went to Yahoo finance and I kind of looked at his financials and I looked at his competitors’ financials, and I went “Wow!” They’re all paying an average tax rate of high 20s or 30%. He’s paying 12%. So the guy who is paying the least is complaining the most. I think that’s often the pattern.

People’s feeling is that, oh the tech folks, they won’t shift or the VCs won’t let go of these insane 10X returns. But you’re feeling that there is a shift in mentality happening and there will be kind of a sense of…

When I criticize Wall Street, I criticize the financial players of Silicon Valley just as much. Anytime someone has a startup for which the principal goal is an exit, I don’t see them as that different from the Wall Street guys who are trying to package up bad loans and hope that somebody bought them before they blow up. There’s way more of that in Silicon Valley than we admit. To me, the great companies are the ones where somebody says, “I want to do this. I want to do it for a long time. I want to make something happen.” You see this with a company like Google or Facebook, where people who are billionaires are still working away at this thing because they weren’t trying to get an exit, they were trying to make something happen.

And I think Silicon Valley needs to look in the mirror, particularly in these bubble times. There are a lot of people who never set out to do anything other than raise money from venture capital, and then hopefully at some point flip the company and then do it again. That’s basically playing, again, in the financial roulette markets rather than the real market. Now there’s obviously a lot of grey areas in between, because it can be a useful technique to bootstrap a company to get something that you later figure out what the real business model is. But I like to encourage people to really think about what makes a real business.

That’s really why we are in the VC approach at OATV, my venture fund with Bryce Roberts. We’re really focused on companies that are looking to achieve positive cash flow because they’re actually selling real stuff to real people. Sure, maybe they’re going to have an exit, but they don’t depend on an exit, they don’t depend on just getting another round of financing; selling this company on to some future bidder. They’re building something that should exist. There’s a great line I saw from Sir Martin Sorrel, who started WPP, the world’s largest ad agency. I hadn’t realized WPP stands for Wire and Plastic Products. It’s a shell company that he bought and he put $375,000 of his own money into the buy originally, and he’s built this thing up to be this huge multi-billion-dollar business. He had this great line. He said, “Being an entrepreneur means risking your own money, not someone else’s.”

That’s correct. True enough.

Yeah.

Okay, so focus a little bit on the tech and business crew. What would you say about government, folks in government, particularly people in city government, which is a lot of what we’re talking about. What’s your analysis essentially of the receptivity to change, and what is the kind of sense of what advice you might give in terms of, particularly around the sharing economy, but in general this whole transition?

Well, the first thing I would say is, when we’re thinking about regulation and public policy, the first thing to think about should be what are the legitimate social goals of any regulation. What are you trying to do? Let’s be really transparent about that. For example, I recently landed at Newark Airport. I took a Lyft into New York City and I asked the driver, “When you do this, do you pick up in New York?” He said, “Oh no, I can’t do that. I have to go back to New Jersey.” Now you go, “What?” They’ve effectively recreated some of the same territoriality that they had for taxi companies. What’s the public policy goal there? It’s protectionism. That should be super clear. Let’s lay out there and say, “Okay. We as a city have decided that we want to protect our industry. Does everybody agree that this is the best public policy outcome? What are some of the other alternatives?” So, for example, you would look at, reducing congestion.

We want to protect consumers. We want to get the best prices for consumers. We want to improve the income of drivers. If you think about that particular example, none of those other objectives, which are far more legitimate, are being met. So, that’s the first thing. Be clear about what your objectives are.

There’s actually a really wonderful new tool I’ve been investigating called pol.is. Basically it’s a public policy debate tool put together by Colin Megill, Chris Small and Mike Bjorkegren. Actually in Taiwan, they ran a process where everybody from the cities, through Uber, all kind of participated in a public debate about what the legitimate goals of public policy were and they came to a set of solutions that I think everybody was quite happy with. I think there are some new tools for having open, informed, debates about public policy. I think on the one hand you have the cities who have to be really clear about what are they trying to accomplish, and also we need to realize that one size doesn’t fit all. There may be some cities, for example, where they say, “Okay, we could use a lot more housing, you know, in certain neighborhoods, for people coming in because it will improve our tourist industry.” It’s a great example for Airbnb.

When I think about the benefits of Airbnb, I don’t just want to stay in a hotel, I may want to stay in a different part of the city. I go up to the Yuba River and I can stay in an Airbnb in Nevada City. There’s a cheap motel, a couple of old school B&Bs, but Airbnb gives these wide range of wonderful new opportunities. So, in a city like that you go, yeah, we want some more Airbnb because it will bring more people in.

Clear public policy objective. You want to support this. There are other places where you go, well, we don’t have enough housing for our residents. People being gentrified out and people buying second homes and turning them over for Airbnb rentals is actually contrary to that public policy objective. So, if you’re clear about what the objectives are, then I think you’re going to have a much more informed discussion. Then the second piece is how do we use data on both sides more effectively?

Tell me about that.

Some years back I wrote a piece called “Open Data and Algorithmic Regulation.” In it I made the point that regulation has become a bugaboo. Everybody says, “ugh, regulation.” But that’s because regulation is interpreted as a set of rules. But in fact, we live with all kinds of regulatory systems that we love. Just try driving a car without the regulatory system of your carburetor or your fuel injection system. Think about the regulatory system that we call the “autopilot” that flies us around. I was on a flight recently where I was talking with the pilot, and he’s like yeah, in a busy airspace like San Francisco, we can’t actually fly manually in and out of the airport. You’ve got to do it on autopilot. You know what I mean? Crazy! You think, oh well, don’t you do at least the takeoffs and landings on autopilot? No, actually, that’s sometimes the place where they most use the autopilot now. But the point is, here’s a regulatory system. It works, we accepted it because it works. Credit card fraud detection. Right? We’re being monitored and we accept it because it’s protecting us.

Anti-spam, a regulatory system. Google Search Quality, a regulatory system. So what do all of these regulatory systems have in common? They actually have a clear objective, kind of what I was talking about earlier, that everybody’s agreed on. And it can be imposed unilaterally. Google says “Here’s our regulatory system. We want to have the best search results. We want people to click on the top result and go away happy.” Right?

Yeah.

At least that’s the theory of it. Uber has a regulatory system. They say they want people to be picked up in three minutes. Right? The question is, are there other factors that we could take into account? My sense is that if we could get, first of all, the clear statement of here are the outcomes we’re going for, then you start measuring are we achieving those outcomes. I love Google Search Quality as a model, because it’s something they’ve written a lot about, they’ve talked about. Things like short clicks and long clicks. This idea that if somebody clicks and goes away, and doesn’t come back, it’s a long click. If they click on the result and they come right back, then click on the next one. That’s a short click. A short click means that they weren’t happy with the results. So it gets demoted.

So they built this wonderful feedback loop and that kind of feedback loop dynamic, which we’ve really mastered in Silicon Valley… It’s what drives Google, what drives Facebook, what drives any of these modern apps. We have the data that’s feeding back to making the service get better and better as people use it. It is so largely absent from the way that government does regulation. What I would love to see is, I’d love to see a partnership between cities and the services they want to regulate, where there is real shared data, shared visibility, clear objectives.

Oh, and by the way, credit card fraud detection is another really good model of a regulatory system in which government actually doesn’t micromanage. It simply said, “Hey, guess what guys, you only get to charge the consumers for 50 bucks of bad debt, and all of a sudden, it becomes the credit card company’s duty to regulate. So, the question I have, and I don’t know what the right answers are, but if you were thinking about how would I regulate Airbnb, how would I regulate Uber and Lyft, how would I regulate any of these companies, I would be asking myself what are those interventions that will squarely put the shoe on their foot? If cities wanted to come down on the side of labor and say, “Okay, we’re not going to tell you how much you can charge, but we’re going to tell you that you can’t go below this amount.”

This came to me one day, reading an article about Uber’s rates in Detroit. Travis does a lot of hand-waving about the perpetual ride and how great it is. At one point, they were offering drivers $0.30 a mile in Detroit. Just a simple thought experiment to me said, “Okay, well, let’s assume that with the perpetual ride, I get $0.30 a mile, maybe I’m going 30 miles an hour, that’s $9.00 an hour before expenses. The city could say, your rates have got to add up for the perpetual ride at the very least or whatever; for some percentage utilization, to this amount. You can’t go lower than that.

We have ideas like minimum wage, and we go, well we don’t know how to apply these in a world where it’s on demand and people work for multiple people. Sure you can. You say we want to know what your typical utilization rate is. You could do some math and come up with some rules. Then you go, “Okay, we’re going to periodically audit those rules and if you’re not paying enough, you’re going to have to pay back the drivers.” There area bunch of ways to intervene much more creatively than, “Oh you can’t pick up in New York City if you’re from New Jersey.” That’s just stupid.

Yeah. Really what we’re talking about is the difference between pushing these square pegs into these round, old holes, from the old system; or getting creative and really thinking about how to innovate.

Yeah. What is it that we’re trying to accomplish? Also, really trying to get to a meeting of minds. I do think that there are real challenges. One of the things I think really muddies the water is the lack of financial literacy on the part of so many people, where they confuse market value with profit and loss. How many times have you seen Uber’s worth $60 billion dollars? They’re so rich, you don’t know what their actual profitability is. They’re losing billions of dollars a month in some markets. So, the question is, what’s the actual profit and loss there? How would we kind of back off a little bit of the notion of Uber’s screwing its drivers because they’re worth so much.

That’s a totally different system of money. It has nothing to do with whether they’re succeeding as a business. At some point, if the stock market stops giving them money, they could be out of business. We don’t know that though. It’s harder right now in a world where so many of these companies are private so late. That’s why again, you go back to Walmart, where it becomes very clear that Walmart is shoving cost off onto society and capturing it for its shareholders. Would somebody say, “I wouldn’t want to own Walmart if they were only making 15 billion dollars a year instead of 20?” That’s silly. If you think, what it would do, it would depress the stock price and who does that actually affect? All the shareholders will go, well how much of that is pension funds. Well it turns out, a lot of the pension funds… They’re making all their money churning stuff anyway. It’s like if they were in Vanguard or some other Index Fund, they’d be doing a lot better for people.

As we’re winding down here, you spent a lot of time with people in government. You ran these whole government 2.0 conferences. When you look at the next couple years here around city government, state government, even federal government, do you see some kind of potential big shifts happening in terms of regulation or categorization of workers? Are we in a window here, a kind of fluid window that some stuff could happen quickly, or are we in the early days of experimenting and it could be five years more?

Boy, you know… “Government” and “quickly” are terms that don’t usually go together. Which is a shame, because government can play such an enormous role; and I do think that while it’s very easy and popular to rag on government, it does an enormous amount of good in our society. Even the most staunch libertarian who thinks that government should be out of there and everything, they’re quite happy to use the roads, they’re quite happy to have regulated airways. We have an education system. You can go to a country without government in it and it doesn’t look very good. I would just say government is us.

It’s a mechanism for collective action. So the question is, how do we make it more responsive? How do we make it more effective? That’s a lot of what we work on at Code for America. It’s like okay, you have policies, do they work? How do you make them work? What we all saw on display was the failure of healthcare.gov; it was that you can have the best policy in the world, but if you can’t implement it, it doesn’t do you any good. The fact that the government couldn’t actually build a website, even though they threw a billion dollars at it, is criminal. I think what we really have to do is we have to get better at government. We don’t need less government.

We just need more effective government. Taxes as a share of GDP is pretty constant over decades. This notion that government has been growing, growing, growing, is wrong. What is the case is that government collects way more money than it should, and doesn’t do as much with it as it could. One of the things the private sector is good at is being efficient with things, because there’s creative destruction, whereas government doesn’t really have that. So there needs to be a discipline of government getting better at what it does. Technology has taught us some amazing lessons about how to build services at scale that get better as people use them. I think we need to take some of those lessons from technology, about how you instrument services, how you measure, how you constantly improve; and take those into government. That’s again what we’re doing at Code for America.

Okay, so I see what you’re saying. I totally get the long-term on that, but some people we’ve been talking to in this series, they’ve been talking about a couple-year window. A lot of stuff could go wrong in the next few years that would set this back. On the other hand, if we did it right, it could actually propel positive things forward. Is that your — ?

Absolutely. I think it ranges from movements like portable benefits, which are a different approach to the safety net. I was just talking with a guy from the UK. He was also talking about how we build better marketplaces for connecting people to work that’s effectively occasional work. Apparently, they’ve built a system in the UK. The U.S. has this great workforce training system they spend a huge amount of money on; but it’s really only for “jobs.” Again, that sort of pivot we need is from jobs to work. What work needs doing. It’s one of those crucial next economy pivots that I see. How do we stop talking about jobs, start talking about work? How do we stop talking about getting rid of people, and start talking about how to augment people?

How do we start talking about the legitimate aims of public policy, rather than just sort of having people do these things, which are really not in the interest of society as a whole? How do we have a robust discussion about what those goals ought to be? I think there’s a certain role for that kind of antagonism. We have a society that values the butting of heads to get to truth. Whether it’s through the legal system, or whether it’s through just public policy lobbying and so on. But we also could do a lot better at creative engagement. I think there are some really wonderful opportunities.

Think about Airbnb. What kind of city do we want to build, and what makes it a great place to live? What can we learn? There should be massive amounts of data sharing. Nobody should be writing rules yet. They should be writing the smallest possible rule set while they are figuring out what’s going on, and be focusing on what’s really happening and how does it relate to what we wish was happening. Think about drones and all that’s possible there. You think about self-driving cars. You think about just employment and the nature of employment. All these things are going through these massive technological transformations, and if we have regulations that are only backward looking, that try to make things look like they used to look, that don’t actually say let’s take a fresh look at what we’re trying to accomplish as a society, we’re really missing a huge opportunity.

You said you’re an optimist in the beginning there. How optimistic are you that this will play out with a backdrop of the conventions, and polarization in the country, and all the different things we know here? Are you optimistic that this is going to move ahead?

There was a wonderful piece in The Atlantic recently called “In Praise of Short-Term Thinking.” You can believe in the long-term, but you still have to worry about disruption in the short-term, and that we have to proactive at looking for that disruption. So I guess I would say I’m incredibly optimistic about the long-term.

Going back to what I said earlier, those people in the Luddite Rebellion couldn’t have imagined what the descendants of those machines would do for our society, in making us all so much richer than even the richest aristocrats of their day. We should be thinking the same way about our future. Oh my God, these new technologies! What will they make possible? What could we do if we took all this technology and said,“Wow, let’s go reinvent everything.” I keep going back to Uber. They had this brilliant insight on how they could use technology to do this thing that was previously impossible.

They built this great company, and then they start talking about, well now we’re just going to get rid of the drivers. Why aren’t they talking about their flu shot experiment? In 2014, they gave flu shots on-demand. These self-driving cars, think about all the other things that could be on demand. Yeah, sure the drivers won’t be there anymore, but there’ll be all kinds of other new kinds of services that could be on-demand. What an amazing future! Let’s get all freaking optimistic about all these things that are possible. Zip line in Rwanda. There’s no roads, there’s no hospitals, but guess what? We can use drones to deliver blood on-demand to women who are dying. Postpartum hemorrhage is one of the leading causes of death; but we can get blood there, anywhere, in the country. Drop it with a parachute from a drone.

Let’s rethink the world using today’s technology. That fundamental optimism of how much possibility there is. What will AIs help us to do? What kinds of creative worlds will we see in virtual reality? Just like we’re in the age of Hollywood. What’s that going to look like when we’ll be able to make this world spanning visions with virtual reality?

Let’s stop optimizing for the short term, let’s start optimizing for the long term. Let’s think about how to make the society that we want. Let’s harness technology to do the impossible. I guess I would say one of the things that history teaches us is that government plays an enormous role in that process. Our current distaste for, and distrust of government is part of the problem. We have to get rid of that. We have to actually understand how to make government work again, because when government works, it really becomes a governor for society.

It helps moderate the excesses. It helps deal with market failure both on the upside and on the downside. We’re going to need everything we’ve got. We’re going to need government; we’re going to need technology. We’re going to need everybody on this planet to pull together to solve some of the challenges we’ve got in the years ahead.

Perfect place to end — on an optimistic note, and I loved your theme of reinvention, which is something that obviously at Reinvent we’re totally into. So, a fantastic interview. You really laid it out, from the big picture to the granular. I didn’t expect anything less from Tim O’Reilly and I really appreciate you coming here.

All right. Thank you. All right. This was fun.