You're listening to the founders Flint. Audible versions of essays from technology's most important leaders selected by the founder community. This is status, wealth, and power. Network effects demand a new social contract written by James Currier, read by NFX. Network effect businesses are reshaping the world.
We spend a lot of time teaching founders how to use network effects to create these giant world changing businesses, Network effects are still the best and most powerful force we know to create persistent value for billions of people. However, We think that too little has been said about how society should adapt these new network effect behemoths were helping create. We need new social contracts or were headed for some nasty conditions.
And we believe it's up to tech founders, VCs, and employees to do something about it. It's up to us. Governments and traditional forms of hierarchical power are ill equipped to understand the network economy and evolve the new social contract. The reason they're ill equipped is that they live different languages, different tools for making positive outcomes happen.
We think that if you're starting or working on a network effect business, it's your responsibility to thoughtfully set up social contracts with your different constituents. You need to have a perspective about what you're giving and getting from the people on the networks platforms, and marketplaces you're building, as well as what you're giving and getting with your employees. By creating network effect businesses, we are the ones with lightning in our hands.
We must make sure we're creating a positive James with the people in and around our networks. So let's get it right. Let's first understand how the network economy works. And how power, wealth, and status all flow on the network. Then we'll look at the implications of this and finally, specific ideas for founders about what these new social contracts could look like. Here we go. The network economy is here. Alvin Toffler predicted the network economy 50 years ago, and now it's here.
He first published future shock in 1970, and it described 3 waves of economic production. The first was the agrarian economy. The second was the industrial scale economy, and the third would be the information economy. I think he was close to Naliant. My one change would be that the 3rd wave is not information, but rather networks. Back in 1970, Beller had only seen computers. He didn't have the benefit of seeing the internet, so he mislabeled what he was seeing.
As it turns out, information in this third wave of networks is just like oil was in the industrial second wave, just an input to the real means of production, and the real means of production in this third wave is the network itself. Certainly, networks have always been in play.
Merchants trading 4000 years ago Pete in a network of boats and bazaars, That network was small, carried a lot of friction, and information moved in months, not seconds, but we can recognize it as a primitive network of people and resources interacting. Then in the industrial age, the network underlying economic activity was a hundred times larger and denser, but the real value was in the mass production assets and processes.
Today, thanks to the internet, the network is a thousand times bigger and denser, and the real value is in the network itself. Real power and wealth emerges in network effect. Toffler predicted this 3rd wave. And by 2020, it has already happened. We've switched from 1 Pete of production to another. To navigate your Currier, to be a world class founder, you have to understand this. The network economy is here. How do we know the network economy is here?
1st, nearly 5,000,000,000 people are now connected to the common network, representing above 90% of the economic on the planet. As futurist George Dyson says, with more than a little awe, quote, at some point in every planet's history, it gets wired up and connected into a hole just once. We have been alive at that time. Unquote. It's a big deal to get wired together primarily because there are new network effects to Beller, lots of them.
And these stack and reinforce each other at ever greater rates. The second way we know we've moved to the network economy from the scale economy is by looking at changes to the world top 12 most valuable companies. Where's Beller, wisdom, power, and status accumulating? In 2004, only one of the top 12 companies by market cap had a network effect in its business model. Today, 8 out of those 12 have a network effect at their core.
These network effect winners, these new big firms, have power in a way we haven't seen before because their power also comes from us using them, not just from something that they do, The more we use them, the more valuable they become to us, and the more pain we would feel if we had to stop using them. We're never gonna stop. Facebook is the perfect example. Their demise has been wished for by some has been predicted in several waves.
In 2018, we published an essay in video simply explaining the structural reasons why Facebook isn't going anywhere. At the time, they had a market cap of about $500,000,000,000. Now it's close to 1,000,000,000,000. Here is the big change we all need to understand. The network itself is now the means of value creation and thus Beller creation. Beller, wisdom, power, and status all flow on the network.
Sure. China, India, and other countries will start adding incremental restrictions but the big pictures that we can see each other and communicate about most things instantly and for zero marginal cost. Those with power in the old scale world, like governments and manufacturing companies, will just get more and more disgruntled by these new powerful network effect players. They don't understand where the power is coming from.
They see these new companies as the Novo powerful to be looked down upon by members of the old club. Certainly, all leaders like Mark Zuckerberg and Jack Dorsey can do Beller, but we all need to accept that their power is coming from network effect economics that would accrue to anyone running those businesses. Those network effects are now all around us and they aren't going away. Further, you're going to see the dominance of networks continue to accelerate as software money replaces money.
Just as money replaced gold, That process has been underway with the computerization of banking and trading over the last 50 years. Crypto is likely a ten times accelerant of that change. Crypto Defy changes the nature of money because unlike gold or paper money, crypto is a native creature to the new global network. It amplifies the belief network effect and produces new wealth from new connections. Again, a network itself becomes the means of production at an accelerating Pete.
Now let's look at what else changes, what problems and opportunities that creates, and what we're going to do about it. What the network economy changes? Now that this new network economy is here, we can already see what's different. 1, transparency in 2 forms. Money transparency. We can now all see each other. We can see what other people have, how much money they're making, and how they are making it. Ranking transparency. We all get numerically ranked.
You don't think you have a number on you? Of course, you do. The substack you're writing is ranked. The website you run shows up below another in Google, Your dog walking business is reviewed on Yelp. Your Instagram photos and Facebook posts are ranked by likes and such. And even your friendly or not so friendly comments on Nextdoor, come with some implicit ranking attached. At all times, we can each see where we are in our rankings compared to all the other people.
While this helps others find the best people and that is helpful to the demand side, make no mistake. This ranking transparency creates psychological suffering for people on the supply side to see they aren't near the best. In the old days before network transparency, we just didn't know. We were heroes in our small worlds. We could fool ourselves. Now We can't.
We've all been raised on television to believe that one day we'd all be millionaires and movie gods and rock stars, but we won't, and we're slowly learning that fact. And we're very, very pissed off. Beller Durden, Fight Club. 2. Power laws now create even more unequal money out comes. The rich get really rich and the poor get poorer by comparison. Unfortunately, this has always been true. It is not an artifact of modern economics.
The power law of society is a mathematical principle that has frustrated people forever. It's mentioned no less than five times in the Beller, They were struggling with it. Even back then, it was first mentioned in the book of Matthew, and so has been labeled the Matthew effect. Quote, For everyone who has will more be given and he will have abundance, but from him who has not, even what he has will be taken away.
Matthew 2529, unquote, but the network economy puts the power law of unequal outcomes on steroids in three ways. 1, lower and middle performers are exposed. The network reduces by a hundred times the frictions they used to protect people from the natural math of the power law. 2, access to bigger markets. The winners now have instant and 0 marginal cost access to everyone in the world to be a customer so they can make more money.
And 3, regular people get hyperoptimized on the edges of the network. Unless you're popular or beautiful or brilliant, you get pushed out to the edge. The fringes of the network, or the algorithms can optimize your income in real time like a mechanical turquicker of an Uber driver. The Matthew Principle is eating society. And by definition, it doesn't feel good to most people. The mathematical power of central nodes.
The majority of workers for Uber, Airbnb, Amazon Warehouses, YouTube, Patreon, house, Zillow, etcetera, are finding out that they're being danced by the algorithms of those central nodes. Those companies have network effects and thus they empower their labors and supply side with something valuable, and the labor chooses to use them. So it's positive for sure, but those companies also have power over the labor supply on their network.
These people out on the edges of the network get measured in their performance in real time optimize against others on that same network. Further, these network hubs, these companies in a logical attempt to serve the paying customers better show the customers where each person stands in comparison to others on the network. So to win business, now you don't just have to be pretty good in your town. You often have to be one of the best in the world.
Transparency and data provide ruthless meritocracy. Meritocracy and frictionless access is good for the most talented, motivated, or lucky. But for the bottom 90%, everyone can now see that they rank in the bottom 90% in performance. And the distribution of talent and success has never been equal to begin with. Further, that distribution is not even in a bell Currier. A bell curve describes something like human heights.
Very few people are 4 feet tall, very fewer 8 feet, and most are around 5 or 6 Pete, But for attributes like performance, fame, status, and wealth, life reflects a natural power law, not a bell curve like we see with human height. When the workers sees this power law and they see they aren't near the top, it's psychologically painful and demotivating for many. It creates status anxiety and it increases wealth disparity. It lets those ahead get further ahead and those behind get further behind.
The Matthew Principle, as we mentioned before, let's look at 5 examples. The blackjack player versus the casino. Imagine you're a blackjack player in a casino. You are an edge node, and the casino is the house, the central node. Casinos have the players coming in demand, and the dealers dealing, supply. The casinos are geographically clustered in a primitive non digital network effect with other casinos, like a mall of casinos to attract players and dealers.
The casinos make the rules, and the Blackjack player, an edge note, comes into play. Economically, you wanna be the house, but you find yourself at the blackjack table. Sure. You might be the 1% who makes a lot of money, but most likely you lose a little. And you'll probably justify it. Oh, it's just entertainment. I like doing it, so it's fine to lose. Yet the casino ranks it in while you get densed by the primitive algorithms.
48.5% win ratio on blackjack if you play perfectly and as low as 32% win ratio on the slots. You have fun, but the math plays out to the benefit of the central note and the disadvantage of the edge note. YouTubers. A digital example is YouTube. YouTube is amazing and provides value to billions of viewers. It's a revolution in knowledge that is still underestimated. For creators, YouTube has eliminated barriers to publishing videos.
For them, the act of creating and sharing is a joy in and of itself. However, YouTube is also like the house in the casino example. They win no matter who at the edge of their network becomes popular because they have the network effect. Wealth is drawn to the center the densest part of the network. In this case, YouTube's headquarters is in the San Francisco Bay area. Millions of edge people compete to move up the power law to win the game and be the 1% that makes money.
When you win and are in the top 1%, you thrive economically, and hope keeps the rest striving because they can see you winning. But very few people posting on YouTube will make much money. Real estate agents. In my town, we had 38 real estate agents, but no one used to know who the best agents were or who is selling the most. But now you can easily see it on Trulia and Zillow. You can see the power law. 30 years ago, you couldn't see that power law.
That data was either tracked nor displayed effectively. Back then, it seems if you were an agent who ranked near the middle a power loss somewhere when you went to sleep at night, you could feel good about yourself because you were making a good living and doing decent work, and you couldn't easily see the best agent in your town was making seven times more than you.
Now anyone can easily see that 80% of all residential real estate commissions are made by the top 9% of agents and that you aren't one of them. And for 91% of us, it's uglier than we thought. Of course, there are significant benefits to home buyers and sellers from this transparency. They can go straight to the most effective agents to save time and get the best deal.
It makes sense that home buyers and sellers wanna work with the best agents, Why would they trust their most important financial transaction to anyone but the best? There's also some motivating benefit to the agents who now have plenty of data and feedback to learn and grow from. Either way, this Beller transparency is affecting how we think about ourselves.
We humans are not built to get so much information to see where we actually sit in the power law, we are learning how to deal with that new perspective. High school kids. In 1981, US new enroll report first started publishing a hierarchy power law for US colleges. Suddenly, the data was collected. It was displayed effectively, and the network power law was there for all to see. And you knew that other people knew because it was so transparent.
In many ways, this worked to open up a world of colleges that high schoolers never considered before, It gave them permission to move geographically and disperse into new networks, but there's no denying that there are also long term consequences of seeing this power law. We've seen pressured kids committing suicide, Palo Alto, Dallas, and rich parents serving jail time, Varsity Blue's documentary trying to win the game.
This will be repeated in niche after niche as the network makes power laws legible, and people, homo sapien pack animals who are keenly aware of hierarchy and status see where they are in the hierarchy. For some people, it will light a fire in them to go out and do their best and win, but it's likely that 90% won't be happier for it. Agerence is Bliss. We're eating the apple. We are losing our ability to be naive about our real stature. Uber drivers.
If you're driving a car for Uber or doing piece work on mechanical turk, our first thought a few years back was hooray for the gig economy and freedom and flexibility. There's a lot of good to come from it, but you also only have a chance of linearly improving yourself, like being a factory worker in the 1850s. Flexible time, but no ownership, no benefits, no learning, no community, no potential for geometric growth, and always subject to the changes they make at the center of the network.
The tweaks they make to the algorithm and the rules of the game. If you get depressed or hurt or addicted or if your parents or children need you, the network doesn't need to care about you the edge person who will be replaced by another set of hands. You do Pete work for the minimal compensation, building nothing but your rating on their system, accumulating no leverage the more you work, Your first day is similar to your 1000th day.
There's a set of jobs that used to be middle class like architects or doctors, but those will be increasingly sent to the network and the lowest fastest bidder will get that work for less than people in the US have been making. This is hyper globalization. It's the 10 timesing of what we saw in the 19 eighties when the US lost its lead to global competition in many important industries of that time, like steel and autos.
The central companies of the network economy have an even greater impact on their stakeholders than the scaled giants of the past, like standard oil and GM. It's because in the scale economy, you could opt for one product or another if you didn't like it. But now we have to be on the network. We're captive. We weren't captive to GM, but I am captive, for example, to Google and Twitter because that's where everyone in my field is. I can't escape that situation.
We are captive to LinkedIn because that's how we're seen by employers and partners we care about, and we can't opt out like we co with GM. Also unlike GM, Uber drivers have to interact with the Uber network in real time. With Ford, I bought once and used the product for 15 years. They couldn't watch me. Detroit didn't have easy access to my name and financial profile, but these digital networks can optimize our time and income benefit from minute to minute.
They are constant parts of our lives extracting what they can from every note in the network. They know who we are, and they know our family in economic contexts. That's why the edge nodes of the network are at such a disadvantage. Most of us are edge nodes, and we're being densed by the center algorithms. And here's the thing. Those algorithms emerge from a network of employees in the central node companies. It's not one person who's mean or has ill Flint.
It's a network of people who have incentives to perform and get respect within the network of people in which they spend their days to do a good job. To improve the numbers just like all of us do. Here's an important shift. In the network economy, we have a new concept of Beller. A similar shift took place in the industrial revolution when we moved from self sufficiently tilling our own soil to being on the production line and being part of the machine on the loom.
The industrial revolution caused a change of consciousness, and we are having a sweeping change of consciousness now in who we are and what our place in the universe is. The positives of the network economy. This reading so far has probably felt dire, but there are at least 3 positives here. First, the network economy is going to improve the odds and access for people traditionally disadvantaged by gender, race, and geography.
The mathematical network world cares less about those things in many cases. It just cares about performance. It will improve things for people who live disadvantaged geographies like Bangladesh or Somalia because it gives them access to stable trust networks they couldn't access before. It will improve things for people who are traditionally disadvantaged due to racism. It will improve things for people who are new immigrants to a country.
2nd, if you know how to build network effects businesses, you're in the driver's Pete. You can build great businesses that emphasize the good they do for people and work to minimize the potentially negative. 3rd, 90% of people are also lifted higher economically than they were before. It's not some fantasy of trickle down economics. Trickle down doesn't work because it existed in a hierarchical structure based on the scale production technologies of times before 2000.
There was much more friction in that old system. But in a network economy, the means of production have shifted. It's 10 times more fluid, can create wealth at a much higher rate, decrease costs at a much higher rate, and the network can raise all boats. Well, that's great. But won't the central notes figure out how to capture all this margin too? Yes. They will try. It's in their nature.
And won't most people still feel worse because now they'll have to see through network transparency that they are low down on the power law and money, performance, and status? Yes. To that conclusion also, we as a people could still feel bad. And all of this is why we need a new social contract. The network economy needs a new social contract.
A social contract is a mostly unwritten agreement between a company and its stakeholders or between a society and its stakeholders to cooperate for mutual benefit. It's an implicit agreement that most of us buy into so we can pursue the good life. It's an animating story that brings a nation or world together. It's what we can expect from each other, the rules of the game.
For example, the social contract in America after World War 2 between the government and its citizens was one you will probably find familiar. Graduate high school, buy a house, work 40 years for a big sale company or the government, retire at 64, and take up peaceful hobbies. That was the social contract, and every other story was built around that story. And the government's job was to strive to enact laws to make this story come true.
During that same period, the social contract between big scale companies and their employees was that employees would devote 40 years of loyal service, And in return, the company wouldn't fire them and would give them a pension for a peaceful retirement. Clearly, this old version of the social contract has been broken for 20 years already, everyone agrees that that's over, but not everyone agrees on what the new social contracts should be.
Here are some ideas of things that will be different now that we're living in a network economy. Society's social contract with its citizens. What's the story? The narrative we tell ourselves about why we're doing what we're doing. What can we expect from following the implicit agreement with society? 1, you will give up your privacy. The citizen will give up some privacy so they can be better known and so the systems can help optimize their outcome. It's a trade off.
For those who are emotionally aghast at any reduction in privacy, realize this has already happened, we're given the opportunity to share their data to get benefits, the vast majority of people will choose it and already are today. In return, the society will agree that 2, if you're willing and able, you will have a job. In the past, one of the tragedies has been that someone who is willing and able could not get a job.
With the internet, if you're willing and able, you can now do it with minimal costs, getting access to the internet, driving Ubers, building websites, delivering food, If you want a job, you can get a job on the internet, geographically and temporarily flexible, more choices. Unfortunately, the difficult part is the people who aren't able even if they are willing, some people aren't emotionally or intellectually capable.
They're too anxious or depressed or addicted to function at a high enough level to be valuable members of the network, some are physically incapable due to genetic disease or an accident. Remember, The unemployment rate being at 5% doesn't mean that 95% of people in the US have a job. That data comes from asking people if they want a job and are looking for a job but don't have one. 5% of those people who say they want a job don't have a job.
Many more than 5% don't have a job because they've stopped looking given other limitations they might have. Further, the transparency and speed of the network technology will make it harder to compete. The bar will rise for how emotionally and otherwise intelligent you have to be to Pete. The power law will assert itself.
The new technologies are going to leave behind people without emotional fitness, self motivation, or intelligence, The internet shifts returns to people who are smarter and more energetic. That sounds scary. Ground for revolution. So what do we do? The best way forward seems to be to use network solutions to network problems, build systems to augment people and keep them relevant to the network. More training, more support, more niche jobs, more connection through the network.
3, you will have access to training. You already do You can self educate like never before, thanks to a near infinity of content on the internet. Plus, training ais and content are just around the Currier. And already, many job interfaces are becoming like video games that could give you constant feedback as you learn a new job. 4, you'll have freedom to choose your job and how you spend your time.
We're already seeing millions of people choose freedom over their time instead of other traditional benefits. 5. The government should not stand in the way of the growth of the network. Governments are hierarchical thinking structures. They're dinosaurs, and networks are the 1st mammals. Networks are going to reduce the power of the nation's states. International affiliations and connections are going to increase.
The new social contract should be to try not to hold on to people so tightly The networks are coming, and our governments should not fight them on every count. Governments would be best to study Estonia, which enables people to apply to citizenship from all over the world. Estonia is not thinking about their nationhood geographically. They're thinking about it like a network.
Same thing is true for crypto, which is the further networkization of money which should produce new opportunities for citizens and wealth creation. Citizens will embrace the network economy and not cling to the scale effect economy of the industrial world so our governments shouldn't either. The scale economy will not go away, but it's going to become a smaller part of life in the economy, like agriculture did in the industrial era. 6, you will have mobility as a lifestyle choice.
Staying in one place with a white picket fence is not the only acceptable American dream. A company's social contract with its labor supply. When we're talking about labor marketplaces like Uber, mechanical turk, Amazon marketplace, poshmark, DoorDash, Upwork, etcetera, you can have millions of people making their economic livings on your platform. They aren't quite employees, but they are dependent on the platform for income, and the platform is part of their career journey.
When labor stays commoditized It's nearly impossible for those workers to unionize in the network economy. Many of these network effects systems are designed to make people interchangeable. The new jobs are geographically and temporarily displaced, it makes it harder for labor to negotiate because there's always going to be a defector somewhere in the world who wants the income. The old leverage the unions had is gone.
It's also harder to establish an appropriate minimum wage because there's greater dispersion and diffusion of the labor supply. As a founder, Consider these ideas for a new social contract between companies and their labor. For the company, the labor lets themselves be tracked, measured, and optimized and the company gets to keep a copy of that data to run its business and maintain the relationship with the laborer for the long term. This is giving up some privacy for the laborer.
In return, the company will, 1, let people defect, let them have choice, freedom, not indentured servitude, make it easy to vote with their feet, you can't capture and keep the reputation they built on your network. They need to be able to bring it with them their data, their network of Pete. You must allow that to be easily exportable. You will benefit the end because those defections will push your team to get better and stay ahead of the competition. And it will keep the DOJ off your back.
2, be transparent. Transparent about how people are getting paid and when they're getting paid. Don't withhold payment. Pay them every day if you can. It's just software now. We can do that. 3, take care of their psychological needs. Give them ways of feeling like they're human instead of a drone. Add community into the work. This will increase retention and profit for you as the network designer.
Help labor feel belonging as a person to your community of labor or to your mission or to your employees. People generally flourish when they feel like they're part of something bigger, not atomized. Like they're part of a tribe. 4, give workers ways of feeling competent in your interface. When you add creativity and decision making back into work, then you can create the interface so they see when they're smart and making good decisions so they can feel encouraged and uplifted.
This will increase retention and profit for you as the network designer. 5, embed good management of people into the software. This is a huge opportunity. Many people today suffer working for managers who aren't good or worse, they're actively bad, sexually harassing people, demeaning people, being inconsistent and pernicious. You can write software to guide managers, make them better, reduce the bad elements of those bad bosses, your software can model the best practices of the good managers.
6, Give them ways of helping themselves develop their careers. Give them a path to personal improvement. Let them earn education credits to Udemy or other low cost digital enhanced learning modalities. The old companies gave you a ladder to climb, a game to be played that showed progress, and that worked for many people. What ladder can people climb in their more open source network driven careers? 7. Give them ways of helping each other by joining groups that self improve together.
You're only as good as the people you're surrounded by. You're more likely to uplift yourself if you're surrounded by others doing the same. Studies have shown self improvement programs are 2 to 8 times more effective for people when they're put in cohorts of others like them. 8. Give them metrics transparently about their behavior on your network. Apple started doing that with usage statistics for consumers, but it's not yet enough. Facebook, Instagram, and Twitter don't do it yet.
They need to. We have to be shown our own destructive behavior. The network draws us in. We can't escape entirely, but you need to give us the ability to moderate as much as we can. 9, help labor find their highest and best use, potentially by giving them credits to an AI or human career coach. First, we gave health care. Then we gave 401 k's. Now we need to give coaching. That's what we owe Pete.
And the old scale company Employees were coached to move up the ladder, but now we're free nodes floating among networks. We don't get that coaching unless you supply it. There should be an explosion of coaching. There's a greater need now because people can more easily compare with each other. 10 In many cases, labor needs to be has the expectation that labor moves from employer to employer and often Pete tenants their labor supply. 11. Add Ombudsman into the network.
This is a piece of the network which makes the overall network function Beller. Voluntarily add the voices of other stakeholders, namely that of the broader society that your network exists within. The Ombudsman helps inject into the company what is good for that larger network, not just the shareholders. It might require the company to do some things you think aren't good for your network short term. But it will pay off with longevity for you. Long term profits.
Your NPV will be higher because there will be more profits in the out years instead of DOJ action or mass when you go too far. Deciding what's next. Network effect businesses are supremely beneficial to human progress and society in general. It's also the case that they should take responsibility for setting the new social contracts with their different stakeholders.
World class founders running them should have a clear perspective on what they're giving and getting from both their users and employees. And given the increasing role of networks in society, Whatever they decide will set the stage for the new social contracts, and thus, how a society feels for us all to live in. For more of these audio essays from the people who built companies like Instacart, Facebook, Trello, HubSpot, and Dropbox, visit founderslist.nfx.com.
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