Peter Thiel’s Contrarian Manifesto

zero_to_one_180x270Editor’s Note: The Independent Institute is hosting a sold-out event, “Developing the Developed World: Entrepreneurship, Liberty, and the Future,” with Peter Thiel on Tuesday, January 27, 2015.

Every moment in business happens only once. The next Bill Gates will not build an operating system. The next Larry Page or Sergey Brin won’t make a search engine. And the next Mark Zuckerberg won’t create a social network. If you are copying these guys, you aren’t learning from them.” —Peter Thiel

With this opening paragraph, legendary investor and entrepreneur Peter Thiel immediately launches into the central lesson of his new book Zero to One. Creating new things in the form of truly “fresh and strange” technology is what will propel the economies of the future, not minute tinkering or copying of existing practices. This is what he describes as going from 0 to 1. To get to the future, startups are the key.

Having launched or played critical roles in supporting multiple successful companies including PayPal, Facebook, Palantir, SpaceX, and LinkedIn, Mr. Thiel’s views on technology, innovation and entrepreneurship were of particular interest to me. Zero to One has proven to be a delightful read full of insights for students, young professionals, and as well as seasoned industry insiders. Each chapter contains ideas that are provocative and original.

Thiel’s emphasis on “singular creation” leads to him to make a number of related corollaries:

  • New technology matters more than globalization. In Thiel’s terms, globalization “is taking things that work and making them work everywhere” (going from 1 to n). Without creating new ways of harnessing scarce resources, unsustainability and environmental devastation are inevitable especially as countries such as China seek to model current U.S. living standards for its immense population. New technology is what enables people to do more with less.
  • Acts of singular creation often result in monopolies, and monopolies should be actively sought and embraced by entrepreneurs. Thiel, however, is careful to distinguish what he means by his controversial assertion “Monopoly is the condition of every successful business.” Thiel has no love for monopolies propped up and enforced through government (e.g., the U.S. Postal Service) but “the kind of monopoly that’s so good at what it does that no other firm can offer a close substitute.” Google, for instance, dominates online searches because it is simply better than the alternatives. The same goes for Facebook in social networking.
  • On the opposite end, Thiel denounces competition as “an ideology... that pervades our society and distorts our thinking.” He explains that under the state of “perfect competition” idealized by neoclassical Economics 101, no company in the long run can make any profit. Thiel highlights the lesson for entrepreneurs: “if you want to create and capture lasting value, don’t build an undifferentiated commodity business.” Under “perfect competition,” businesses become so absorbed in focusing on today’s margins that they won’t be able to plan for a long-term future.
  • Monopolies are the drivers of innovation and progress because a lock on years or decades of profits “provides a powerful incentive to innovate.” Monopoly profits allow for companies to “make long-term plans and to finance ambitious research projects that firms locked in competition can’t dream of.” For instance, Google had the time and resources to research and develop self-driving cars, Android smartphones, and wearable computers thanks to its dominance in online searches.

The rest of Zero to One builds upon these fundamental ideas and brings in other parts of Thiel’s contrarian thinking that seems to have brought him much success.

In one chapter explaining why it’s better to be the last mover in a market, Thiel offers a list of characteristics for building any company into a monopoly. I felt this outline was particularly useful and can be applied to any organization that is looking to make itself endurable for the long-term.

  1. Develop proprietary technology that is at least 10x better than its closet substitute; e.g., Amazon offers a massive book inventory that is beyond that of any brick-and-mortar bookstore.
  2. Take advantage of network effects but the product must offer value to its first users when the network is small: e.g., Facebook was initially limited to Harvard students, followed by the rest of the Ivy League, then all U.S. college students, and finally everyone else on the planet.
  3. Create economies of scale: e.g., Twitter can continually add new users without spending too much time creating more custom features.
  4. Build a strong brand: e.g., Apple is distinguished for its sleek, minimalist designs, positioning as a maker of premium products, omnipresent advertising campaigns, control of the customer experience, and lingering influence of Steve Jobs.

My favorite chapter is when Thiel discusses the relevance of secrets and exploration. He usually asks a job applicant the contrarian question: “What important truth do very few people agree with you on?,” in hopes people give and look for answers that apply different ways in seeing the present. In Thiel’s view:

If we already understand as much of the natural world as we ever will—if all of today’s conventional ideas are already enlightened, and if everything has already been done—then there are no good answers. Contrarian thinking doesn’t make any sense unless the world still has secrets left to give up.

Unfortunately, conventional schooling aims to impart (if not flat-out indoctrinate) established views and political correctness, kills creativity, and directly promotes submission to authority. Thiel blames our educational system as well as other social trends that encourage risk aversion and complacency. Explorers that “take the hidden paths” are the least likely to emerge from this kind of environment. However, these are the types of people who are best suited to become budding entrepreneurs that build innovative companies that drive progress. In order to build a successful company that creates value, one must do something that no one has done before. For that to happen, the seeker must tap into secrets that aren’t already universally understood and look where no one else is looking.

Thiel also devotes a substantial number of pages on the art of hiring and bringing together the “right team” especially when it comes to the foundations of a company. It is crucial to get the beginning right because “a startup messed up at its foundation cannot be fixed.” Not only do founders need to be able to work harmoniously together, everyone else in the company needs to be composed of like-minded individuals with diverse talents and be “bound together by a sense of mission.” Small groups fulfilling this description, whether it be the Founding Fathers of America or Fairchild Semiconductors’ “traitorous eight,” ended up “chang[ing] the world for the better.” Thiel reiterates that “only at the start do you have the opportunity to set the rules that will align people toward the creation of value in the future.” It is even possible to extend the founding indefinitely provided that the organization maintains an “openness to invention” and keeps creating new things.

A major underlying theme I perceived throughout Zero to One is a belief in individualism (perhaps reflecting Thiel’s ideological leanings) and commitment towards a definite goal. Thiel believes “indefinite attitudes to the future explain what’s most dysfunctional in the world today.” He asks “how can the future get better if no one plans for it?” In a world where most people see events as random and hazy, “a business with a good definite plan will always be underrated.” For an entrepreneur:

A startup is the largest endeavor over which you can have definite mastery. You can have agency not just over your own life, but over a small and important part of the world. It begins by rejecting the unjust tyranny of Chance. You are not a lottery ticket.

Should one believe otherwise, there is no reason to even read this book.

These lessons on how to think, not just what to think, and how to actively make use of talent are what have made Zero to One so enjoyable for me to read. All in all, I wholeheartedly recommend this book to any aspiring entrepreneur. As we go further into the twenty-first century and confront new challenges, we will need many more original thinkers and even more people who will put their ideas into practice. Thiel’s book provides one blueprint. The explorers now need to come in.

Are Falling Prices a Bad Thing?

Falling PricesPopular opinion seems to be that falling prices–or even stable prices–are bad for the economy, but I’ve never seen any good arguments about why. I’ve just read another article about this, that gives six clearly numbered reasons, so let’s look at what the article says to see if they hold up.


No U.S. Weapons for Countries with Child Soldiers (Oh, You Have a Waiver?)

As the world observes conflicts in Iraq, Syria, the Ukraine, and elsewhere, the impact on human life is undeniably tragic. Nowhere is this tragedy more pronounced than the impact of these conflicts on children.

According to the Syrian Observatory for Human Rights director Rami Abdel, more than 10,000 children have died in the Syrian conflict. In addition to these immediate threats against life and limb, war has other consequences for children. Conflict disrupts a child’s education and grinds economic activity around the conflict zone to a halt. This delay in education and stunted economic activity perversely impacts young lives both now and in the future. It is estimated that some 40 million children are out of school in conflict-affected countries throughout the world.

As if this damage were not enough, some children bear an even greater burden. They are soldiers.

There are an estimated 250,000 child soldiers in world today. These children, often abducted from their homes by armed forces, are desirable as soldiers because they are easier to control than adults, have an underdeveloped sense of danger, and use fewer resources than a comparable adult. Children are often sent into battle as infantry in order to draw fire away from adult combatants.

child soldiers

In response to this problem, members of the international community have taken steps to curtail the practice throughout the globe. In the United State, the Child Soldiers Prevention Act of 2008 (CSPA) was meant to assist the goal of ending child soldiering by banning the U.S. from sending military assistance to countries with, “governmental armed forces or government—supported armed groups, including paramilitaries, militias, or civil defense forces, that recruit and use child soldiers.”

In 2010, President Obama signed into law an additional bill, the Lord’s Resistance Disarmament and Northern Uganda Recovery Act, and pledged the U.S. would help end the “killing, raping....and brutalizing [of] children” in Joseph Kony’s army of “Invisible Children.”

So did the U.S. government fulfill its supposed goal of snuffing out child soldiering by withholding aid? Not by a long shot. Just five months after his 2010 pledge, Obama granted several waivers to the Child Soldier Prevention Act, allowing funding to continue to four countries known to use child soldiers. Chad, Congo, Sudan, and Yemen each received a reprieve for a variety of reasons including their assistance in fighting terrorism. Congo was exempted because of American programs in the country aimed at training the military to “be more professional.” During the Obama administration, Congo, Yemen and Chad would each receive millions in weapons despite their humanitarian records and the known use of child soldiers.

The consequences of such actions are tragic. As I’ve discussed in other posts, there are a variety of problems with using weapons as aid. Even if we assume that the military equipment given to these countries is initially sent for legitimate purposes, it is practically impossible to control the flow of these weapons after they reach foreign soil. These weapons allow conflicts to grow, perpetuate, and provide the arsenal for future conflicts. These arms fuel the very humanitarian crises the U.S. government supposedly wants to combat. Those who pay the highest price for these policies may be the most innocent.

Employers Who Dump Workers onto Medicaid: The New Corporate Welfare Queens?

medicare 230There have been a lot of predictions about the future of employer-based health benefits under Obamacare. Reports suggest that increasing numbers of small businesses are dropping health benefits and sending their employees to Obamacare’s insurance exchanges, where they are partially subsidized.

Other businesses have found a bigger cost-shifting approach. BeneStream, a new benefits advisor, advises employers how to make their workers dependent on Medicaid, a welfare program fully funded by taxpayers. And businesses are taking advantage of its advice.

So: Are these employers corporate welfare queens?


The State of the Disunion

Top stories in world news last week:

According to top secret documents from the archive of NSA whistleblower Edward Snowden seen exclusively by SPIEGEL, they are planning for wars of the future in which the Internet will play a critical role, with the aim of being able to use the net to paralyze computer networks and, by doing so, potentially all the infrastructure they control, including power and water supplies, factories, airports or the flow of money.

Meanwhile, Mr. Obama’s top concerns of the week:

  • Obama Proposes “Free” Community College for All
    With the federal K-12 educational system a fraud perpetrated on students, and community college now primarily remedial education for the resulting uneducated, President Obama offers the usual response to government failure: tax and spend more.

Not exactly an agenda that screams “greatness.”

recarving_2nd_180x270Adhering to the methodology of our Recarving Rushmore, I of course agree that the sole legitimate role of the Presidency is defined by the Constitution, and the sole metric for greatness is the level of peace, prosperity, and liberty afforded Americans under any given administration.

It’s thus high time for disunion: Having abandoned any pretense of protecting Americans’ liberties, and exercising increasing tyranny over every aspect of our lives, the presidency must be returned to strict constraints.

Let’s just say No, keep saying No, and tell our friends to say No.

The Moral Argument Governor Brown’s Inaugural Speech Left Out

California Governor Jerry Brown

California Governor Jerry Brown

As a teenager, Jerry Brown left Santa Clara University to attend a Jesuit seminary, intent on becoming a Catholic priest. Moral arguments in the context of public-policy debates have always been important to him. So during his inaugural address on January 5, as he became California’s governor for an historic fourth term, Brown quoted biologist Edward O. Wilson regarding climate change: “Surely one moral precept we can agree on is to stop destroying our birthplace, the only home humanity will ever have. . . . [W]e are needlessly turning the gold we inherited from our forebears into straw, and for that we will be despised by our descendants.”

Unfortunately, Governor Brown chose to focus moral outrage on the climate issue alone, and he failed to make the moral argument against California’s public pension system, which represents the state’s greatest financial challenge since the Great Depression and is a severe threat to future generations.

In his speech, Governor Brown said: “[W]e must not lose sight of our long-term liabilities. We have to face honestly the enormous and ever growing burden of the many commitments we have already made. Among these are the costs of pensions and retiree health care . . .”

He said further: “My plan has been to take them on one at a time. We have now taken steps to deal with the unfunded teachers’ pensions and those of the [state] public employees.”


Individual Liberties and the Right to Die

About three months ago, 29-year-old Brittany Maynard ended her life. Diagnosed with a rare form of cancer, her prognosis was less than grim, with the average life expectancy of similar patients about 14 months.

Upon receiving her diagnosis, Maynard and her husband moved to Oregon, where the state’s “Death with Dignity” law would allow her to end her own life using a high dose of sedatives prescribed by her doctor.

Brittany’s story received nationwide attention. Now Brittany’s husband, Dan Diaz, is sparking further debate by discussing his wife’s decision in an interview with Meredith Vieria. In particular, people debate, does someone have the right to die? What unintended consequences may occur as a result?

Let’s begin with a thought experiment. Suppose you were diagnosed, like Brittany, with some incurable, painful, ultimately fatal disease. Armed with the knowledge and ability to painlessly end your life, would you consider it? To be honest, I don’t know that I could do it (I’m not sure I can square it with my moral compass). But even if I wouldn’t, I cannot say that I would deny that choice for another person.


No Jobs Bump from Obamacare

Last Friday’s employment report demonstrated once again that Obamacare is not having the effect that the health services industry overall hoped for: Employment in health care is increasing at pretty much the same pace as in the rest of the economy. There is no evidence of an Obamacare jobs bump.


Self Censorship

self-censorshipOne by-product of the Paris terrorist attack on Charlie Hebdo was an outpouring of support for freedom of speech. While there was general agreement that the magazine’s content has been, beyond a doubt, offensive to some (and not only Muslims), almost everyone agreed that freedom of speech is a fundamental right that should be protected, regardless of who is offended by the speech.

While nobody has proposed limiting freedom of speech, some commentators feared that the attack might result in self-censorship. People would be afraid to speak out if they thought they would be targeted for what they said.


Agonizing over Sports Teams’ Mascot Names

WashingtonRedskinsLogoI have written several columns on current controversies involving the apparent offensiveness of the Washington Redskins’ nickname, the most recent of which was published by the Washington Times. A later contribution to the same debate, by Hayley Manugia at FiveThirtyEight, finds 2,128 such American monikers, all of which should be equally offensive to people who don’t like references to “Braves”, “Warriors”, or “Seminoles” to characterize the athletic teams that compete on football fields, basketball courts, or any other sports venue. Most of the Indian nicknames in question have been adopted by high schools.

As a matter of fact, the women gymnasts who represent the University of Utah prefer to call themselves the “Red Rocks” rather than be associated with the “Utes”, which is the school’s nickname in football, basketball, and other male sports. It is my understanding that the University of Utah has entered into an agreement with current representatives of the Ute tribe to continue using that nickname in return for promises of scholarships earmarked for members in good standing of that Native American tribe.