Incentives matter - speculators versus builders.

An interesting point from Meg McArdle in Here's Why Silicon Valley Loves Big Government. She starts with:

Silicon Valley titans, suggests Farhad Manjoo of the New York Times, are really quite liberal. But there is one major exception to their liberalism: They aren’t very fond of regulation. Especially, one might add, regulation aimed at the tech industry.

OK. Probably a fair enough representation. What is interesting is her hypothesis for why this might be.

At the turn of the 20th century, the people at the apex of America’s capitalist peaks were the folks opposing the income tax and all of the rest of the progressive ideas about larger government; come 1933, they were the folks who damned Franklin Delano Roosevelt in round and luxuriant terms whenever the president’s name was mentioned. Today the greatest wealth-generating dynamo in the American economy is Silicon Valley. That is also the place where support for a universal basic income seems to be highest, along with single-payer health care and various other progressive ideas.

Why is the tech-industry so government-friendly? And why, if they think that government would do such a splendid job at regulating the distribution of wealth in society, do they not think that it would do an equally splendid job regulating them?

One reason that Silicon Valley moguls may be more redistribution-friendly than the old robber-barons has to do with a fundamental difference between their industries. The Gilded Age tycoons had largely come up in businesses that had considerable variable cost to their operations. If you wanted to make more steel, you had to hire more workers, buy more iron ore and coal, and pay railroads to ship all those raw materials in, and your finished product out.

Heavy taxation would thus considerably cut into your production. You couldn’t buy so many raw materials; you couldn’t afford so many workers; you would not be able to ship as much finished product to your customers. Taxation, in other words, had very high costs, not just to your personal wealth, but to the means by which you produced more of it. It’s true that if everyone had to pay the tax, your relative position among your fellow millionaires probably wouldn’t slip much. But the absolute amount you could produce would fall.

Silicon Valley, on the other hand, is among a growing number of industries where the variable cost approaches zero. Once you’ve written the software, you can sell a thousand copies or a million with barely any difference in the amount of money you have to spend on operations. A friend recently pointed out the curious dilemma that Google has: it has a core business that throws off enormous sums of cash and needs relatively little investment to keep doing so, and at the same time, it’s hard to imagine that anything they invested that cash in could generate a similarly massive income stream. The same could be said of Facebook.

(This is, of course, not true of every single tech firm. Apple has quite a lot of variable costs for producing an iPhone. But then, Apple outsources that production to foreign firms whose variable costs are not affected by U.S. tax rates.)

Silicon Valley is a strange world where you can invent a money machine that will churn out dollars, perhaps indefinitely, with a relatively small input of labor and raw materials. Enormous work and genius goes into creating those money machines, of course. But that initial investment can produce enormously outsized returns, and network effects can lock them in, so that many companies can in effect live off an investment made years or decades earlier. Moreover, because luck plays such a large role in who wins the race to a lucrative quasi-monopoly, you may be beset by the guilty feeling that all that money doesn’t quite belong to you.

If you’re in that position, redistribution may sound only fair. The folks who were unlucky get their needs taken care of; the folks who won the race get to keep running the money machine that makes everyone richer. (And happily, at least some of the money you hand out will be redeposited in the money machine, so the taxation won’t even cost you that much.)

Regulation, on the other hand, threatens to break the money machine, or at least, make it spit out fewer dollars. Also, it will require people in Silicon Valley to spend a lot of time and bother dealing with regulators. No wonder they’re less liberal on this point.

It's plausible though I am not sure that redistributive guilt plays all that much a role. Perhaps.

But the central point is that there are two different models in play, each responding to different incentives.

In sales, it is common to characterize the process as either 'hunter' or 'farmer.' Hunters are your commissioned salespeople making transactional sales. "You eat what you kill" is the rallying cry. They cut to the chase and what time they spend on banter is 100% focused on swaying your emotional inclination to buying what they are selling. Farmers are your account managers who focus on understanding the clients needs, selling for the long haul, going after the strategic sale at the expense occasionally of the smaller transactional deal. They focus on understanding your problem and developing a responsive solution.

McArdle's description leads to a similar bifurcation: Speculators vs. Builders. Speculators are gamblers and deal in risk - the merchant bankers, the property speculators, the wild-caters. They make once off bets that either pay-out huge or are lost. Builders, in contrast, focus on the process and efficiency and effectiveness. They improve quality and reduce costs in increments, making more in the long haul but by a thousand small actions instead of one big bet.

The incentives for speculators are different from those of builders. What works, in taxation or public policy, for the one may not for the other. When trying to understand motivations, which is what McArdle is attempting, it always critical to understand incentives, how they differ, and how they drive behaviors.