Why has the tech stagnation persisted? Because most of the technological gains in the last 20 years, aside from Apple and Amazon, have been primarily software based. Yet Software doesn’t eat the world; markets do:
The greatest successes in the first wave of software’s growth were about creating digital versions of real world markets (Amazon, PayPal, Facebook, Google)
The second wave (web 2.0) was about creating digitally native/virtual-first markets (YouTube, Netflix, Twitter, Snapchat, IG). This is when the software eats the world thesis was born; it was a bet that moving up the software stack into digital native services would lead to a Bright New Future™
The third wave (2010-now) is about activating real world markets through software, i.e using software’s scalability, cheap reproducibility and high quality to unlock IRL markets (Uber, Airbnb, Bitcoin, Ethereum). This is the final stage of software, where the gains are accentuated in the real world, not just the digital. This is the true software revolution, which is in fact a software-enabled Market Revolution. It hasn't happened yet.
Much of Thiel's stagnation thesis could be explained by this fact: as American industrial capacity has been outsourced to China, software gains—which have thus far appeared like the only dynamic regions of the economy—are maxing out because, as John Luttig states, "Internet companies have spent the last 20 years capturing opportunities with the highest margins, lowest operational complexity, and strongest market pull: search, social networks, CRMs, ecommerce". As the internet's tail winds flatten, we come to a realization: software is too weak a lever to pull to actually create wealth for people. Indeed software, like much of modern finance, is largely over-optimized. If the coronavirus crisis taught us anything, it is that, as our technological, industrial, and biomedical capacity revealed itself to be severely lacking, software's greatest strength ultimately was only its ability to shrink the world.
Real societal wealth is anything that truly enhances the lives of those in our society, (food, shelter, healthcare, any property a person can own, etc). Real wealth can be eaten, used, shared, and most of all, divided.
Of the FAANG companies which dominate the world economy, only Amazon and Apple can be said to provide real, hard value to people. This is because they are atom-first companies that are optimized through software. Amazon owns gigantic fulfillment centers across the world and logistical supply chains that could rival entire militaries. Similarly, Apple, the only other one of the FAANG to be strictly atoms-first, designs computers which amplify the world's ability to work. But for most people, Facebook and Google being Trillion dollar companies adds nothing to their lives but better ads. Let's not even mention Netflix, who've publicly claimed their goal is to "kill sleep". "Software eating the world" is a wealth creating engine for a few insiders, and a largely value destroying endeavor (disruption) for everyone else.
Software companies make a shit ton of money not because they provide real value, but because they're highly scalable and operate on low margins. That's why SAAS is so hot in the "industry". It's scalable, repeatable, and relatively cheap. But profit and market caps cannot be eaten and do not provide shelter. The over-emphasis on market caps has been substituted with the creation of real societal wealth. Profits and company valuations are an accounting proxy for wealth, not wealth itself. A system where the highest rewards go to those who create little to no real wealth (like modern finance and, increasingly, software) is antithetical to healthy markets. Add up all the above, and it's clear Thiel's stagnation alarm should sound even louder.
What looks like “software eating the world”, or “the tech industry” to most people, is in fact the opening salvo of a much bigger moment: the Second Market Revolution (SMR), with the First Market Revolution (FMR) being the one that turned America into an economic superpower in the early 19th century.
What most people know as the Second Industrial Revolution is known to American historians—and should be known to most of us—as the Market Revolution, a time in which America’s technological and industrial capacity led to an explosion of markets, both domestically and worldwide. The software boom should be more aptly renamed the Second Market Revolution because it has been instrumental in unlocking new markets in both digital and real space (though the latter is merely beginning). But as I've shown, software on its own is an insufficient condition for full SMR, whose potential we haven't even scratched. The real SMR will be led by atoms-first companies which leverage software to fundamentally unlock, scale, accelerate, or improve markets in the real world; the world of atoms.
The reason why Tesla has been one of the biggest recent success stories from SV is because it is a car manufacturer first, and a software company second. Tesla, far from being an aberration, is—like Amazon and Apple—a harbinger for the future of the SMR. We will increasingly see tech companies unlock new markets by utilizing high capex R&D on the frontend which will be offset by software-enabled high scalability and serviceability on the backend
Platforms are key, foundational building blocks of a Market Revolution. The FMR was made possible by the Erie canal, the railroads, and the telegraph; the (early) SMR was made possible by the Internet, websites, and social. The Erie canal was activated through the steam boat. The internet, through the computer/phone.
The early years of the FMR saw increased automation, an acceleration of slave labor, and a drastic reduction in wages for factory workers, who by then did not have unions. Similarly, the first innings of the SMR have seen the increase of automated work, the acceleration of a serf class (80% of Americans are service workers and thousands more are gig economy workers), and a decrease in wages due in part to the above phenomenon of automation. These effects will only increase as industry kicks back up. Just as the welfare state alleviated the effects of the FMR, a renewed, technologically proficient welfare system will likely need to be established to counter the effects of the SMR (that is, giving citizens equity in the surplus value caused by the SMR)
Despite what Jeremy Rifkin says, the Third Industrial Revolution (TIR) hasn’t happened yet. The TIR will be nothing short of a total manufacturing and automation revolution, and will be an accessory to the broad SMR. Where it will begin is hard to say, but regions like Africa are primed for it, for Africa has the highest rate of potential labor in the world (which will be enhanced, not displaced, by automation), is richly endowed with mineral reserves and ranks first or second in quantity of world reserves of bauxite, cobalt, industrial diamond, phosphate rock, platinum-group metals (PGM), vermiculite, and zirconium; it has the greatest impetus to industrialize, as well as the youngest global workforce for the foreseeable rest of the century.
But countries like America, which have outsourced their industrial capacity, have a chance to play a part if they so chose. The alternative is a state of continued decline where the gains of technology and capital from the current, software-only SMR continue to accrue to a minority of software barons.
The SMR has yet to happen because "tech" is still in its infancy (the internet is barely 30 years old, the PC, only 36), dominated as it is by consumer social, AR/VR vaporware, and SAAS; basically intangible wealth producing and escapist tech. Elon Musk is the entrepreneur of the century precisely because he is a symbol of what could be if the SMR was fully underway; what true value could be created if our real, atomic world was supercharged by the agility and scalability of software. The reason why his work hasn’t been a catalyst for the SMR is because none of his companies are platforms. Tesla and SpaceX are vertically integrated silos that (for now) service niches (electric cars and satellite launches/NASA). The SMR will be truly underway when we see the appearance of a high capex, atom-first software company which, crucially, acts as a platform for other atom-first software companies. Only then will the SMR be said to be underway. No longer will the world be beholden to a fake, financialized economy which only seeks to turn $1 into $1.10, or a winner-take-all software economy which only produces West Coast robber barons content with letting us eat cake.