Full transcript of the epic Scott / Vinay conversation:

Camera Crew: Speed. Make your statement. Roll out please.

Vinay: So, Scott, introduce yourself a little. Tell us who you are, and where you came from.

Scott: So, Scott Nelson. I spent my career in supply chain in technology and finance. Started a business called Trax Technologies in 1993. Started as a contract software firm, turned it into a SaaS business, and then, eventually, a big data business. Sold it two and a half years ago. It was in the supply chain space, doing settlements of transportation logistics invoices for some of the largest corporations in the world.

Vinay: When you say settlements of invoices, it was, basically, acting almost like a financial house?

Scott: We would do the audit and validation, cost allocation of the information that would come from the invoices for the transactions these companies would do, and some of these companies would do millions and millions of transactions a year. We would automate the contracts to actually check to see that the invoice was actually done according to contractual terms, and validate them to make sure they were correct, as well as allocate the cost to the cost centers involved.

Vinay: So, already, we’re going to zoom into all kinds of super interesting areas, so let’s go back and talk about what supply chain is, and then go down the rabbit hole around automation of contract. So, I want to go and talk a little bit about what supply chain is, and what the supply chain space looks like, because I’ve learned, over the last a year or so, a little bit about it from talking to blockchain startups that were doing supply chain stuff, and it’s kind of like, every time I learn a little bit more about it, the thing is ten times bigger, weirder, and more complicated.

Scott: It’s really big.

Vinay: It’s really big, right? So, we both do a bit of work with these guys, Binkabi, and they’ve been talking about the rice supply chain, and you sort of think, “Well, how hard can it be to take rice from one place, take it to another place, put it in a pot, and boil it?” And it turns out to be a 16-stage process, and these guys have tracks, and this all happens at the same time, and it’s just this-

Scott: There are all these intermediaries.

Vinay: Endless fractal complexity.

Scott: Yeah.

Vinay: So, tell me a bit about the supply chain space. What does it really look like? How does it really work? What is a supply chain, when people use it?

Scott: Well, first, let’s talk about the size of it. It’s $54 trillion of GDP globally, which … it’s two-thirds of the world’s global economy. Employees, the largest portion of people on the planet.

Vinay: So, this won’t be funny, but that would explain why it’s kind of large and complicated! Well, it’s two-thirds of the entire global economy! No wonder it’s complicated to explain!

Scott: Well, it’s just varied, and it’s called a supply chain, because there’s things that move from one party to another party to another party that are adding value, supposedly. Now, there are a lot of intermediaries that a lot of people would suggest don’t add value, but that add value in a chain. In practice, it’s more like a network. In fact, if you looked at the topology of it, it would look very similar to the topology of the internet.

Vinay: Yeah.

Scott: If you took all of the supply chains of the world and mapped them out, it would look very similar to the topology of the internet.

Vinay: Yeah, because you’re going to buy your bolts from A, or B, or C, depending on conditions, and you’re going to modify your products for D, E, or F, and it’s all kind of interlinked.

Scott: And, to buy bolts, you need lots of other things that, basically, come from the same supplier that builds iPhones, or that makes the product that you buy in the supermarket in the little package, and stuff.

Vinay: It’s all woven together.

Scott: Well, it’s all very woven together, and it’s all interdependent, in many ways, and it’s far more organic than people think it is. The supply chain is like the world’s largest DAO. A supply chain for some companies, economically, is larger than many nations. They’re mid-sized countries.

Vinay: Absolutely.

Scott: So, you’re dealing with things that are just absolutely, amazingly sophisticated, amazingly complicated, and supply chain management and supply chain activity really goes back to centuries, with trade, and really was the original distributed autonomous organizational structures-

Vinay: Markets, right?

Scott: Yeah. Well, exactly.

Vinay: Self-regulating, homeostatic, they maintained-

Scott: So, all the markets in the world come from some … in one way or another, have their roots. Banking has its roots, insurance has its roots in commerce, and supply chain management is the science of managing commerce.

Vinay: Ah, interesting. How many people are involved in supply chain globally?

Scott: I don’t know the exact number. I tried to actually find it, but it’s got to be close to at least three billion.

Vinay: So, if it’s two-thirds GDP-

Scott: Yeah.

Vinay: So, we’re-

Scott: So, all agriculture.

Vinay: Yeah.

Scott: Okay, all mining-

Vinay: Anything you don’t eat in the field goes into a supply chain [inaudible 00:05:27].

Scott: Yeah. Basically, if Mother Nature-

Vinay: Manufacturing.

Scott: Yeah, absolutely. If Mother Nature didn’t grow it there, or it wasn’t created there, it came through a supply chain, was processed by a supply chain, or was stored in a supply chain.

Vinay: So, anything you use that you didn’t take out your back yard and came across one of these things-

Scott: Yeah! Everything you wear, everything you consume, yeah.

Vinay: Yeah. So, what we’re really talking about is, more or less, the sort of organizing principles for roughly half of the entire world’s activities.

Scott: A little more than half.

Vinay: A little more than half.

Scott: … entire activities.

Vinay: Okay. So, that gives a sense of the scope.

Scott: Let me put it in a frame of reference, for example, particularly for those on the blockchain. Financial services, which has received so much attention related to the blockchain, is only 13 trillion.

Vinay: Okay. So, four times the size of all financial services.

Scott: Yes.

Vinay: And financial services includes very dull things, like mortgages, which are just same-in, same-out.

Scott: Exactly.

Vinay: So, by the time you take all that stuff out-

Scott: Yeah.

Vinay: Okay. So, supply chain kind of, in that context, you’ve been thinking, it must be almost infinitely varied. There’ll be a whole bunch of stuff which is food logistics, or things which are frozen, or bulk commodities, like coal, or oil-

Scott: High-tech, and …

Vinay: So, lots of different things within these, all with their own kinds of ways of doing things, their own customization, their own structures, and languages, and ways of thinking.

Scott: Absolutely, but they share some very common fundamentals.

Vinay: Like boxes-in, boxes-out, invoicing.

Scott: Invoice-in, invoice-out, and the big thing that’s different between inside of commerce and inside of a supply chain than in our commercial experience as consumers is that it’s actually quite rare to get paid at the point that you actually receive something.

Vinay: Right, right.

Scott: So, there’s this gap between the time an order goes to somebody to make something, for it to be made and shipped, received, and then paid for, and that means there’s just absolutely tons of money. There’s lots of different figures out there.

Vinay: This would explain what it’s like when you’re a small … I used to be a small web designer.

Scott: Yeah.

Vinay: Back in the nineties, and there’s always that thing of, you’re waiting for the invoice.

Scott: Yeah.

Vinay: When are these guys going to pay?

Scott: Yeah, where are they going to pay? When are they-

Vinay: The idea of half of the world is made up of people waiting for somebody, saying, “Hey, when are they going to pay?”

Scott: Yeah!

Vinay: It’s like, that actually sounds a bit like … that speaks to life as it is.

Scott: And it’s far worse than that, because the larger corporations that have low-cost access to capital are the ones who, basically, are pushing on their suppliers to extend out their payment terms.

Vinay: Yeah! I can read about this. Every time there’s an economic downturn, they get slower, and slower, and slower to pay-

Scott: Get paid, exactly.

Vinay: [crosstalk 00:08:03] go bankrupt.

Scott: And so, they’re, basically, trying to make their receivables match their payables and their inventory. It’s kind of a magical financial formula. If you could have the amount of money that you have tied up in people you owe be equal to the amount of money tied up in people that owe you, then you have a zero-working capital requirement, and-

Vinay: So, I get paid, and then I pay all the people that I owe money to, and everything’s fine, but if I have to pay them before I get paid, now I’ve got a hole, which is the size of my total invoice.

Scott: Right, or inventory, too, because you might have actually paid for something you’re storing in warehouses, or on your floor. So, as-

Vinay: So timing becomes critical.

Scott: Well, it becomes critical, but, as you go down the supply chain to get in the second, third, fourth, fifth tiers, closer to the root of the supply chain, which is where things begin, these people are smaller and smaller firms that have less and less access to capital, and they’re more likely to be in countries that have very high cost of capital, or have no capital availability.

Vinay: So, you’re growing coffee in Ethiopia. Nobody’s going to lend you any money. You’ve got-

Scott: No one’s going to lend you any money-

Vinay: … 10-acre farm.

Scott: And you’re staking Starbucks.

Vinay: Yeah.

Scott: So, it’s really quite unfair-

Vinay: And, as you get to the edges of the network, the pressure gets more and more intense.

Scott: And it gets more and more intense, and so, this adds cost through the whole system, and it places the burden of financing … and this is why the World Bank has identified this as the number one problem to solve, related to getting global economic growth.

Vinay: Oh, that’s interesting!

Scott: So, small- and medium-sized businesses’ access to capital-

Vinay: So, access to credit for small- and medium-sized businesses, World Bank says, is the number one problem.

Scott: Yeah, for economic growth in these countries that are developing environments that have these high cost of capital, have lots of poverty. It’s the number one problem.

Vinay: That’s amazing. And these are existing, running businesses that are just under-capitalized, so they can’t invest in tools, they can’t do-

Scott: Well, and it makes it very difficult to open up a new business, and so, what it does is it creates these environments where the rich, who have capital, have a disproportionate advantage, and the companies that they own, the big companies that are owned … the simple way of understanding this is that, if your cost of money is 20%, and that’s not outrageous in some parts of the world.

Vinay: Sure.

Scott: That’s a 20% interest rate. And somebody else has a ton of money, and they’re competing with you, and their cost of capital is, say, 1%-

Vinay: So they could borrow for vastly less than you could borrow for.

Scott: Well, it’s worse. They can borrow for vastly less, which means they can compete with me in ways I can’t, but it’s worse than that. They can be 19% less efficient-

Vinay: And still beat me to price in the market.

Scott: And I am just at equality, and I don’t have access to the capital!

Vinay: Wow!

Scott: I can’t even get investment!

Vinay: Wow!

Scott: I have to invest my own money!

Vinay: Yep, yep.

Scott: I can’t borrow somebody else’s money to invest it.

Vinay: Yep.

Scott: So I have this growth inhibitor, plus … and so, this happens all through supply chains. The really efficient people can’t compete with these giant organizations that are inefficient-

Vinay: Oh, because of lower cost of borrowing!

Scott: Because of the lower cost of borrowing, which subsidizes their inefficiency.

Vinay: Wow, wow.

Scott: So they can be, basically, worse at what they’re doing-

Vinay: So this is the enormous kind of-

Scott: It’s a double tax!

Vinay: … boat-like quality that you get of large institutions, where they just never seem to die. Doesn’t matter how bad the store is, it just never goes away, because anything that wants to compete with it has to push against that borrowing cost.

Scott: Well, it’s that they have this unfair advantage, in that their borrowing cost means that they can be less efficient, less effective, deliver things that are more expensive. That’s edge one. The other edge is that you have … they’re able to get cash, they can get credit, which means they can make investments, so they can out-compete you, in terms of new products, new services, new facilities, new, you know, whatever, and they can maintain more inventory, more choice, other kinds of things. So, they can be both less efficient and more competitive.

Vinay: Yes.

Scott: And that’s something that people just don’t get, and this is true everywhere through the supply chain. This is not an isolated problem. It’s true everywhere-

Vinay: It sounds like it, basically, anchors mediocrity on scale.

Scott: It does.

Vinay: It’s like a general theory of why we tend to be surrounded by kind of crap larger organizations.

Scott: Correct, and so, this is … and it’s not that all large organizations are inefficient. There are some very efficient large organizations-

Vinay: But large organizations which are inefficient are hard to kill in the-

Scott: They’re hard to, basically, displace, because they have this unfair advantage of cost to capital.

Vinay: Yeah.

Scott: The other thing that’s going on is that, in supply chain systems, and this is a statistic that comes out of all the strange places as the Federal Reserve of the United States, is that the global utilization of assets in supply chain, factories, warehouses, trucks, boats-

Vinay: So, the degree to which these things are used fully?

Scott: Yes.

Vinay: Okay.

Scott: Yeah, that means, if a truck’s driving down the street, is the thing full, or is it only got one box in it?

Vinay: Yeah. Yeah.

Scott: It costs the same amount to drive down the street. If it has a full truck as a single box, pretty much. I mean, there’s a little bit more gas, but it’s not significant. So, how much are these assets utilized? Well, 50 years ago, the average supply chain asset was utilized 90%.

Vinay: Which sounds pretty efficient. I mean, 90%-

Scott: It was, it was pretty efficient. It’s now down below 75%.

Vinay: So it’s become two and a half times less efficient?

Scott: Correct.

Vinay: Wow.

Scott: And that trend is continuing. There’s nothing that’s stopping that, and that’s happening through hyper-competition, and through the … As our environments become more complex, we have broken things up into these different silos; and, as things have been broken up into these different silos, these silos, basically, become locking information about what’s going on with their assets, because they don’t want to share that information, because they’re afraid competitors or customers will take advantage of it.

Vinay: Like, Uber isn’t going to tell Lyft where its cars are.

Scott: Correct.

Vinay: Yup. Yup.

Scott: Yeah, same concept, or who their drivers are.

Vinay: Yeah.

Scott: And so, what’s happening is that, the more complicated things get, the more we, basically, break things up, and the more competition we inject in the environment. When you’re dealing with assets, you, basically, continually sub-optimize them; and so, not only have we made things less optimal because of these massive differences in cost to capital, we’re also making them sub-optimal, because we have all this underutilized capacity, which could be used-

Vinay: Oh, wait, hold on. So, it’s 25% of all of the infrastructure that’s supporting the supply chain-

Scott: Is underutilized.

Vinay: Which is, roughly, half of all the stuff in the world, which turns out to be, kind of, like an eighth of the entire capital base of humanity.

Scott: Yes.

Vinay: I’m beginning to understand what we’re playing for here.

Scott: It’s really, really big.

Vinay: It’s quite large.

Scott: It’s quite large problem. And then, the final thing is that we’re in a world where the pace of change is accelerating, and we all kind of feel this.

Vinay: Disorienting.

Scott: Yeah, I was watching on the BBC last night, and the iPhone was introduced 10 years ago.

Vinay: Oh, yeah, yeah, iPhone X! Yeah!

Scott: We take it for granted!

Vinay: Ten years!

Scott: The smart phone, right?

Vinay: Ooh, yeah.

Scott: And it was only 10 years old.

Vinay: Ooh, yeah.

Scott: So, the pace of change is accelerating, and the other thing that’s happening is the explosion of choices is increasing, and so, the opportunities to do new things to make changes in the networks that are supply chains are increasing at an ever, ever, ever-greater rate.

Vinay: Okay.

Scott: But companies-

Vinay: So, the diversity of what’s on offer is going up, and up, and up, and up.

Scott: Is going up, and up, and up. But what’s happening is that companies are reaching a point where they can’t afford to optimize themselves fully, because the change management that they have to go through, and the project management cost, the investment they have to make in personnel, consultants, systems changes, and other things, to change their systems to make themselves more efficient are happening now so fast-

Vinay: So, the external world is changing so rapidly that, for me to keep-

Scott: You can’t keep pace. You can’t.

Vinay: So, I kind of-

Scott: You can’t afford it, and you don’t have the change management ability to manage all the change.

Vinay: So, you kind of start a two-year project, overhaul something, and then, eight months into that project, you need to start another one, and-

Scott: The whole premise-

Vinay: Four months into that, another one-

Scott: And you might’ve cost-justified this change on the idea that this will save me money over a three- or four-year period of time, and, three or four years from now, your entire business model has changed, because some competitor came in, and completely-

Vinay: You can’t kind of do the internal investment, build systems that actually work better, because the situation’s so unstable, you can’t make it pay for itself?

Scott: Yes; and, so, what’s happening is companies are becoming less and less and less willing to invest in long-time investments-

Vinay: Oh, so we can’t do deep optimization-

Scott: We can’t do deep optimization.

Vinay: So, you wind up basically doing quarter-by-quarter-by-quarter micromanagement. You don’t get the big investment, or long-term change.

Scott: Yes. And then, that creates instabilities in the market, so that people can’t respond effectively to major changes, like Alibaba or Amazon. These-

Vinay: So, I mean, it sounds like this is almost like a resilience argument; that, 50 years ago, change is slower, you kind of figure out how you want things to be, you do the heavy engineering, it takes you 10 years, you get it run around, and then you live with it for the next 20. And as that shortens, and shortens, and shortens, and shortens, making the changes is expensive, but you still don’t get a long enough stable period afterwards to get the real benefit, and then things stop changing, so they get more and more out of sync with the reality; and then, eventually, presumably, they break.

Scott: And so, this has a massive human cost, because it used to be, 50 years ago, you might-

Vinay: Wait! I mean, this is like the electric car, right? The existing companies are unable to deploy electric cars. They can’t develop them, they can’t build the tooling, they can’t bring the market, and then, Tesla comes along, and suddenly you realize that all the big, old car companies are in sudden death danger.

Scott: Yes.

Vinay: That kind of phenomena, but everywhere-

Scott: It is that kind of phenomena.

Vinay: Okay.

Scott: And the pace of that, and the likelihood of that happening, are occurring greater and greater, and what happens to humans, as this happens is that companies that we work for have a greater and greater need of just generalists, who can, basically, adapt to things, and the specialists who are, in many cases, extremely experienced, highly educated, and whatnot, start to become marginalized more, and more, and more, and more, and the maximum about of time that you can, basically, expect to be in any career is shrinking.

Vinay: Oh, because specialization takes time to master.

Scott: Specialization takes time to-

Vinay: This is the whole tenet of 10,000 hours! So, there’s less and less economy-

Scott: There’s less and less economic benefit for companies investing in 10,000 hours-

Vinay: So you don’t get their same depth of expertise.

Scott: That’s exactly correct, and so, this also sub-optimizes the systems.

Vinay: So, this is, basically, an argument that things are moving so quickly that everything is mediocre.

Scott: Yes.

Vinay: That does seem to fit the kind of lived experience right now!

Scott: Yes!

Vinay: That everything seems to be a little bit gray, and a bit difficult to get working properly, because nothing seems to be able to keep track.

Scott: And this is happening, because of the way we’ve decided to run the economic system. So, we sell people that they can work for a business, and they’ll get a salary; and, in exchange, they transfer all of their intellectual property, all their skill, to the business who utilizes it, and they make money from that, okay? So, the problem is that the people that have deep skill, even when they’re inside the big companies that have developed it, are increasingly spending less and less and less of their time using that deep skill for what they’re supposed to do, because they’re in these roles that are these more general roles, where they have to show up at meetings, and do all these other things that aren’t really in the-

Vinay: So, you’re a surgeon who’s spent half their time managing department rosters, and this kind of stuff.

Scott: Yes, that kind of thing, and, in business, it’s far worse. And so, … and, in a company’s ability to commit to people that have expertise for any kind of period of time is becoming shorter.

Vinay: Right, because the shadow of the future is increasingly uncertain-

Scott: It’s becoming uncertain, right?

Vinay: Right, right, okay.

Scott: And so, it is not that there’s a bunch of bad companies out there that don’t care about their people anymore. It’s that, to survive, the environment the company is working in is changing so fast that it can’t actually predict the future well enough to actually anticipate what it’s going to need.

Vinay: … can’t invest. So, what we’re seeing is this pervasive short-term-ism, based on uncertainty about the future. So, this is like a kind of bow shock of the singularity, that the rate of change goes up, and up, and up, and existing structures begin to break down.

Scott: And this is why you get things like the proposal for a minimum-level livable wage, and that kind of stuff, which is a governmental solution to this problem. There is-

Vinay: You just put bulk buffering into the system, so, when things go wrong, they don’t go all the way wrong.

Scott: But that just, basically, just keeps supporting this. It’s not that I’m against that, it’s just that it doesn’t really fix anything, because it doesn’t really attack the problem, which is that we have talent locked up inside of companies that is mismanaging the talent, because it can’t do anything else.

Vinay: Right, so inefficient systems are locked into place by rate of change.

Scott: Yes.

Vinay: So, all we need to do is reduce the rate of change by saying-

Scott: No, that’s not the right

Vinay: We could just slow everything down, and we can get back to doing this stuff right, right? That’s what you’re going to propose?

Scott: No, no, that’s not what I’m proposing!

Vinay: Okay, well, that was-

Scott: Because I don’t think you can go back! It’s like-

Vinay: So you’re on a ranch?

Scott: Well, no, it’s kind of like, anytime you invent something, you can’t un-invent it.

Vinay: Yeah, yeah, yeah.

Scott: If you don’t adapt, and you don’t, basically, learn to respond to it, somebody’s going to take that thing, and use it as an advantage-

Vinay: Oh, somebody else will, sure, but-

Scott: Somebody else will.

Vinay: But this is a hamster wheel, right? I mean, the faster we go around the wheel, the faster the wheel spins.

Scott: But maybe not. Maybe the problem is the model is, basically, broken, because it’s based on a set of assumptions that come from an era that doesn’t exist anymore.

Vinay: Right. It worked well 100 years ago. Doesn’t work now.

Scott: Correct, and the fundamental thing that’s happening is we’re in post-industrial era, and we’re entering it, and but people don’t really recognize this.

Vinay: 20%, 30% of the economy is post-industrial.

Scott: Yes.

Vinay: And most of the culture.

Scott: Yes, but, more importantly, supply chains in commerce have to become liquid. They have to become able to adapt faster, and to be more autonomous, and to get liquidity in the sense of capital, liquidity in the sense of assets, and liquidity in the sense of talent.

Vinay: So, let me summarize where we are so far, because we’re covering an enormous amount of ground. So, we started at the beginning. Roughly half of the world’s stuff is wrapped up in supply chains, both people and assets.

Scott: Probably more of that in assets, but.

Vinay: And the supply chains are part of a system which is going faster, and faster, and faster, and faster, because of technological change, maybe political change, ICT, whatever it is-

Scott: And it’s about to just kick out of … People don’t even get what 3D printing is going to do to supply chains. People are talking about AIs, but the bigger impact is going to be in 3D printing, and-

Vinay: You can … I mean, all of that stuff about mass customization that was talked about 20 years ago that never happened, and it’s about to happen, all of that. I used to live in Iceland, and I helped them get Fablab started, because the argument we made to the government was that 3D printing for manufacturing within Iceland will be economic five years before it’ll be anywhere else, because they have to import everything, and they’ve got such a small population that, if you’ve got size 14 feet, you could wait a year for a pair of shoes. So, if you begin to build that stuff in the areas where you’ve got a structural subsidy because they’re just so far away from the rest of the world, the idea was that they could then export their expertise. Once it begin, you can all be in other places, and, for them, that was a realistic possibility five years ago; and, five years from now, they might start to see dividends from it.

Scott: Well, what really blew my mind about 3D printing was when I was visiting a company that makes garden equipment, like ride-on lawn mowers, and other things, and they took me to their lab, and I was expecting to see robots.

Vinay: Yeah?

Scott: There were no robots. There were 3D printing machines, and they were 3D printing the engine components in their lab-

Vinay: The engine components?

Scott: The engine components.

Vinay: Steel?

Scott: That’s when the light went on.

Vinay: Steel.

Scott: No, they’re actually using a combination of ceramic and-

Vinay: Wow.

Scott: Different alloys.

Vinay: Okay. Wow, that’s amazing.

Scott: Yeah. Well so when you -

Vinay: If you 3D print the engine, I mean, you can do anything, at that point.

Scott: Well, when that light bulb went on, believe me, it was like, “Okay!”

Vinay: So, half of the world, or a bit more than half, rapid rate of change, driven partly by technology, partly by society. As a result, the efficiency with which we’re using the assets in the system drops, and drops, and drops. So, it’s like the friction, the waste is increasing as the rate of change makes it harder, and harder, and harder to make good, long-term decisions.

Scott: Correct.

Vinay: So, it’s almost like you’re driving faster, and faster, and faster at night, and the headlights provide you less, and less, and less warning about what’s happening.

Scott: Yep.

Vinay: And so, you wind up just-

Scott: It gets more and more dangerous.

Vinay: Yeah.

Scott: Well, the solution to this is not to slow down, because that’s going to be impossible. You’re not going to be able to do that.

Vinay: It’s a simple answer!

Scott: It’s not that you can’t slow down some things, and that isn’t a good idea. It’s just that you can’t slow down commerce, because it’s competitive environment, right?

Vinay: Right, so the evolutionary pressure constantly follows those people to optimize-

Scott: Constantly follows it.

Vinay: And, as we’ve seen, you can get environments where an ecosystem winds up dominated with kind of dumb, annoying animals, rather than pretty ones.

Scott: Yes.

Vinay: Just because the pressure is so tight.

Scott: Now, so, let’s say-

Vinay: Like sheep.

Scott: So, let’s say, instead of saying, “Oh, my god, this is horrible! This is terrible! What do we do?” If we step back and say, “Well, why is this happening, and why is it hard?”

Vinay: Yeah.

Scott: Because-

Vinay: It’s not just rate of change that makes it hard?

Scott: No, it’s not rate of change. It’s centralization of production.

Vinay: Okay.

Scott: So, the industrial era started with centralizing production.

Vinay: Right. Ford-ism, right? The taking a production process, break-

Scott: Creating assembly line, doing-

Vinay: Specialization of each role.

Scott: Yeah, specialization of each role.

Vinay: Yeah.

Scott: Having one plant that built everything, that kind of thing. It then moved to centralization of capital.

Vinay: Okay.

Scott: This was-

Vinay: Banks, trusts.

Scott: Well, banks and other things, but also big corporations that realized, “Oh, I’m not only centralizing production. I can be this giant gravity well for money.”

Vinay: Yes. I mean, this is the era in which all corporations, basically, become banks that lend money internally to the various business units who want to do stuff.

Scott: Yes, and it’s not just that they become banks. It’s that they recognize that they had the power to sell stock, that they could raise bonds, and other kinds of things at very little cost. This wasn’t something you did pre-World War II.

Vinay: So, this is large corporation, it’s financial institution, not just a shop.

Scott: Not just a shop; and, as a financial entity that was financially managed, not just for central production, but for centralized finance. So, I could have these divisions, and do these other things out here, and I can compete in the world, not because I centralized production and made things more effective, but because I centralized my ability to get cheap capital, and then give it out to places in the world, where cost of capital was really high, like some developing nations, or-

Vinay: So, this is like a bridge.

Scott: Yes.

Vinay: So, I take capital in where it’s cheap in the first world, then I move the capital into poor countries, and there it has this enormous leverage, because they have such a high cost of borrowing.

Scott: Yeah, and, even in the first world, I have this capital that smaller businesses can’t access, which opened up opportunities for me to compete that they don’t have.

Vinay: Fascinating.

Scott: The third-

Vinay: So, this is one of the fundamental … big things get bigger drivers.

Scott: Yes.

Vinay: This is one of the things that keeps the winners on the table.

Scott: And this is the whole theory about economy of scale. It’s one of the things that people realized is, well, it’s not just the scale of the production that we can do. We can do scaling of capital.

Vinay: Right, right.

Scott: The third thing was, then, the era of centralization of risk, and we’re just moving out of the impact that that had on the global economy. The 2008 crash was, in many ways, a result of trying to centralize risk.

Vinay: So, we start with centralization of production, which is economies of scale.

Scott: Yup.

Vinay: Then, you get this low-cost access to capital; but, in the process, you’ve taken in the capital, and you’re now spending it on things which have inherent risk? And this is the centralization risk?

Scott: Well, it’s not just that you’re spending it on things of risk. People realized, “Well, you could not only centralize the management of capital, and do it cheaper. You could centralize the management of risk, and hedge your risks, so that-

Vinay: Culturally.

Scott: So, this was the argument, that I could, basically, have no risk.

Vinay: Yes.

Scott: Because I’ve so effectively … and I have almost no cost of capital, which mean I can use all the money I basically can dream of using-

Vinay: So, I borrowed the money, basically, for free, and then I can make sure I never lose anything-

Scott: And I never lose any of it!

Vinay: Because it’s all spread across this hedge.

Scott: Exactly.

Vinay: So, this is hedge fund thinking.

Scott: It is, and it’s where derivatives come out of, and all other kind of stuff. So, this is all a part of this idea of industrialization, but it’s the end of the chain. There’s nowhere to go after this.

Vinay: Because once you’ve managed the risk stuff, there’s just nothing obvious to do after that?

Scott: Well, it’s because all of the systems there are based on stable environments. Long-running stable … So, think about centralization, the production. I’m going to build this giant factory, invest a whole bunch of money-

Vinay: Economies of scale.

Scott: Create a product, and I’m going to crank that product out for years, right?

Vinay: You print a million of them, and that’s why it pays for itself.

Scott: Yeah, right, exactly.

Vinay: Yup.

Scott: That’s gone! That doesn’t exist anymore, except in some very small edge cases. Then, the centralization of capital is the same thing. I can bring all this capital in. I can then invest it, and use it in ways that, basically, give me an advantage. In the fast-paced changing environment-

Vinay: Harder to identify the advantages.

Scott: And less likely … because I’m using heuristics, and using all the things that-

Vinay: And you get less carrying capacity, because, when the window does open up, it’s not going to be there for 20 years, but it’ll only be profitable for three.

Scott: Then you layer on top of that the attempt, and the belief, that I can, basically, centralize the management of risk, and I get massive instability.

Vinay: Right, right.

Scott: Massive instability will become more, and more, and more unstable.

Vinay: So, everything starts nicely-hedged, and then, the environment changes, but we still think we’re nicely-hedged? And, boom.

Scott: The assumptions on which all of that was based, you get 2008.

Vinay: And the contamination is that everybody’s buying everybody else’s risk, because the assumption is that the risk in the system as a whole cancels out-

Scott: That’s it.

Vinay: And, in fact, it doesn’t.

Scott: And it doesn’t. And we’ve tried to make that somewhat marginally better, because it’s kind of like, what happened in the centralization of risk is kind of similar to what happened in manufacturing, where we polluted the rivers, and we realized, “Oh, that’s a bad idea, so we need to do some clean-up,” and we had to pass some legislation, and we had to put some effort into making that something people didn’t do. We’ve tried to do the same thing to the centralization of risk, but the fundamental problem is that we are centralizing things that now don’t actually have economies of scale.

Vinay: Ah!

Scott: So, in rapid-changing environments, small things are more flexible.

Vinay: They’re adaptive.

Scott: They’re adaptive!

Vinay: And they can die, and then-

Scott: And have much lower impact, and whatnot.

Vinay: So, at the worst, you’ve got an evolutionary pruning; at the best, you get rapid learning.

Scott: Correct. And so, in small teams, small environments, what you want is the reduction of friction, and the ability for them to do things. Now, what they need is the same things that the centralization provided. So, what centralization provided was the ability to do massive, coordinative activity for creating things, okay? Well, supply chain, particularly in the last 20 years, has evolved so the really large companies, like Hewlett-Packard, or Apple Computer, or many product companies, they’re just engineering firms, or product design firms. They basically send-

Vinay: Yeah, the whole thing.

Scott: Everything’s out.

Vinay: It all goes to chains and then they —

Scott: It all goes to different places, right?

Vinay: Yeah, yeah.

Scott: And they use supply chains to manage that. So, supply chains are the way in which you can take very complicated, very sophisticated product, and break them up, and distribute them over an ecosystem’s suppliers. We might have 10,000 people building stuff, instead of one giant plant.

Vinay: Ah, okay.

Scott: This is already happening.

Vinay: So, let me break that down. So, I remember hearing that the Ford Motor Plant, back in the day, took in coal, steel, and rubber, and out the other end came cars.

Scott: Yes.

Vinay: That they did everything from raw materials on a single site.

Scott: Yes.

Vinay: So, supply chain in form that you’re talking about it is, basically, an industrial ecology. Millions, tens of millions of products, all woven together so, when you want to assemble something, you pull on suppliers, you pull on suppliers, you pull on suppliers.

Scott: Yes.

Vinay: So, it’s kind of systolic. You just kind of pull out what you want, and everything’s connected to everything else.

Scott: That’s right.

Vinay: So, onto that frame, you then load ideas that, then, pull things out of the supply chain into these kind of patterns.

Scott: Yeah.

Vinay: But the underlying supply chain architecture is hundreds, and hundreds, and hundreds of millions of different decision-makers who do different things, as part of their own autonomous economic units.

Scott: Yes.

Vinay: Okay. So, this-

Scott: So, this is really the promise of the blockchain, right?

Vinay: Well, this reminds me of the big three economists of decentralization, Kotz, Nash, and Banker.

Scott: Yeah.

Vinay: So, Kotz talks about what happens as you get increasingly cheap information, is that the unit of information decision-making becomes smaller, and smaller, and smaller, because the reason that large companies are large is because it amortizes the cost of decision-making across the entire company, and, as the cost of decision-making comes down, the companies shrink. So, we haven’t seen that happen in developed countries for information services. Amazon, eBay, et cetera, are all enormous, for reasons I don’t understand, but it has happened that way for supply chain? The physical world-

Scott: It is happening that way for supply chain, and it happened in the big companies, too, but what has happened is they, basically, have done it … they’ve masked that it’s happening through acquisition, so they, basically, buy up all the other companies, and they’re able to do this, because they’re low cost of capital.

Vinay: Right.

Scott: Okay? So, we all get back to the fact that liquidity is actually at the root of … This is the root core problem, and this is actually-

Vinay: Winners stay on the table, because of their access to capital, and this is the liquidity trap.

Scott: That, and the fact that the entire structure of this economic system of innovation is built around a stock model of ownership of companies that is no longer really very effective, and it … I’m not saying it doesn’t work, it’s just that it’s getting to its end of its useful life, in certain cases, and-

Vinay: Because, even what you’re buying with stock is risk, right?

Scott: Well, you are buying risk, but-

Vinay: But it’s a whole pack of different risks all wrapped around each other. You can’t just buy a slice of the iPhone; you have to buy Apple.

Scott: Well, the big problem is that management, or owners of businesses, don’t have a way of becoming liquid without going through either a sale, or a initial public offering, and we’ve made it so dang hard for people to do an initial public offering, and so, frankly, risky for the people involved, and so expensive, that that’s becoming less, and less, and less the choice that people want to make.

Vinay: Yes. They’re going to private equity more, and more, and more.

Scott: More, and more, and more to private equity, but they have to actually sell.

Vinay: Yes. Oh, so you take the brains off the productive capacity-

Scott: Yes!

Vinay: And you have no idea that it still works.

Scott: Well, and it frequently doesn’t! I mean, history of private equity is somewhat-

Vinay: So, it’s become harder, and harder, and harder to keep the innovation on top of the capital.

Scott: Well, and we have this artificial approach to the problem. So, we’ve said that you need to work to build up this business, and then you can have an exit, or somebody creates a business, and grows it for 20, 30 years, and then they can’t … In the years gone by, if you had a farm or something, you passed it onto your kids, or you had that kind of situation. That doesn’t work anymore; and so, we have all these models for how value gets created, and value gets transferred, that still favor this aggregation of capital that’s at cheap cost, and the capital is looking for ways to make money, because the fact that it’s cheap and accessible … what’s happened is that, if you’ve got money in a savings account, you can’t make anything off of it, so you have to find better ways of investing it.

Vinay: Yup.

Scott: And so, your choices are, you can enter the stock market or bond market, or you can, basically, if you’ve got large sums of money, you can put your money in funds, like PE funds, VC funds, and you’re going to do that for some portion that you’re expecting to make a high return. All of this happens, because money is scarce, and there’s a fundamental model of money that does not need to be true anymore, and that fundamental model of money-

Vinay: Hang on, before we go down that rabbit hole. Let’s just make sure we’ve got the argument reprised to date. So, we have this winner stage, winning property, but the problem is that we’re making it harder, and harder, and harder for entrepreneurs to realize some of the returns while continuing to use their skills in a business that they created.

Scott: Yes.

Vinay: Because the IPO thing is harder, and harder, and harder, and private equity sales tend to deprive them of control.

Scott: Yes.

Vinay: Okay. So, that sends another innovation bottleneck, where you can’t get the good stuff done, because the system, basically, drives a wedge between capital and talent.

Scott: And talent, and there’s no place this has been more abused than in some egregious examples of places like Silicon Valley, which kind of created this stuff, and the problem is is that, in an attempt to de-risk risk investment, because, as a VC fund, or PE firm, you have to get money from other people, and you have to convince them that you’re a better place to put that money than something else.

Vinay: And means you don’t have to promise them that you’ll never lose their money. You’ll only invest it in-

Scott: And you’ll have this great returns. You know-

Vinay: Incredibly high risk businesses that never fail!

Scott: Yes, exactly, and so, in order to manage that, what they do is they’ve created all sorts of legal art that are things like blocking rights, and preferences, and other things that give them an ability to renegotiate the terms of the deal whenever something is not an utter bust, or a supernova success, to give-

Vinay: To give that kind of 90% middle ground, where it didn’t explode, and if-

Scott: It’s far more than 90% of it. They’d like to say that it’s 90%, but, in that middle ground area, they have a disproportionate advantage with the people that are actually working there, and in an environment that’s becoming increasingly risky.

Vinay: Yes.

Scott: I mean, think of the-

Vinay: Rate of change, right?

Scott: The rate of change.

Vinay: If only rate of change!

Scott: And so, you get this idea that disruption and all this is going to, basically, change everything, and make everything new, but the pace of this is making even the disruptive things have effect for less time.

Vinay: Oh, yeah, absolutely. I mean, the half life of companies in the Fortune 1000 used to be, what, 15, 25 years, or something, and now, it’s down to less than seven?

Scott: Yeah.

Vinay: So, if that’s what’s happening even at the Fortune 1000 scale, the start-ups are getting crushed, and crushed, and crushed on shorter and shorter cycle times.

Scott: Look at the backlash for companies like Uber, who, I mean, just didn’t exist a few years ago, right? And became this wonderfully-big success overnight; and then, all the sudden, now there’s a giant social backlash against them.

Vinay: And aren’t they still hemorrhaging red ink?

Scott: Exactly.

Vinay: I mean, three billion a year or something, was it?

Scott: Crazy. So, you …

Vinay: Good, cheap cab fares, though. Three billion a year subsidies, it ought to be cheap.

Scott: So, the whole system is trying to, basically, do … The problem is how we treat money. So, those who have it want to protect it from deflation, and want to make more from it, because they don’t want to use their principal. They want to live off of the interest.

Vinay: Yes.

Scott: And we have a system where money has got a limited supply, so there’s the 60 or 70 trillion-

Vinay: So, when we say money, we’re talking about fiat currencies issued by nation states?

Scott: That’s right. And you have maybe as many as $700 trillion worth of valued assets in the world, okay?

Vinay: So, there’s way more valued assets than there is cash to buy the assets with.

Scott: That’s right, and there’s other things you can buy it with. Stocks, and bonds, and other things; but if you add even all that stuff up, it’s still only maybe about 120 trillion, or so. And so, you have these two problems. Actually, it’d be more than that. More like 150 or 160 trillion, but it’s still way less-

Vinay: It’s still a third of the assets-

Scott: It’s still way, way less than all the valued assets. So, the problem is there’s not enough money to go to buy everything, and money is in a limited supply, so people who have money want to keep it, and the people who don’t have money are trying to get it; and, to get it, they have to rent it from someone who has it, who could use the money in some other way.

Vinay: So, you’re going to the bank, and you’re saying, “Could I please have some of your money to go do this thing?”

Scott: Or to a PE firm, or a corporation, or whatever.

Vinay: And they say, “Well, there are 37 other people that want this money, so I’m going to give this money to the highest bidder.”

So, we were talking about fee at currency, on the order of 70 trillion available, but 700 trillion in priced assets.

Scott: Yup.

Vinay: So, why is there less money than there is stuff to spend the money on?

Scott: Well, there always has been.

Vinay: Okay.

Scott: Monetary systems were, basically, started in the world as kind of two different systems that grew up kind of in parallel. One was some kind of local market system, which was used to actually conduct trade locally.

Vinay: Okay, so this is the kind of farmer’s market in pre-history, where people would turn up with their goats, and their sheep, and their chickens, and their kale, and all that?

Scott: Yeah. I mean, it goes back to 5,500 years ago. The Egyptians had clay tablets that they would take goods into a pharaoh-run, official, governmental-run warehouse, and they would get a cuneiform tablet, and the pharaoh would seal it, and whatnot. You can go see these things in the Cairo museum, and they were kind of a moniker for some set of goods; and, instead of … That everything was bartered, it was a myth. I mean, that didn’t really happen-

Vinay: And this is what Graeber’s talking about in Debt; that, basically, it was all done with debt, and the barter thing was just like accidental commerce.

Scott: Well, and it happened during wars, or around the edges of economies during distressed situations. Then, the way you went between systems is you used something economists called specie, and specie was gold, silver, or precious metals-

Vinay: Yeah, the hard currencies. Do you know of Bernard Lietaer?

Scott: No.

Vinay: So, he was an economist who designed the convergence mechanism for the European Central Bank that turned into the Euro.

Scott: Ah.

Vinay: And then he kind of went off the rails in the 1990s and left mainstream economics, and started writing, specifically, about systems which had dual currencies from history, pointing out that you, basically, had a hard currency and a soft currency, and the soft currencies were what provided the liquidity, and the hard currencies were what provided the fungibility.

Scott: That’s exactly correct, and so, it was really in the late 1800s that we collapsed these two currencies into one.

Vinay: So, we just wound up with hard currency.

Scott: Well, we just wound up with one, which is a national currency, and most industrial nations outlawed, in one way or another, the ability to use any other currency, and some of this had happened hundreds of years earlier, with the Chinese and stuff-

Vinay: This is the whole thing of legal tender, right?

Scott: Yes, legal tender.

Vinay: Everything else gets made illegal.

Scott: Yeah, exactly, and that’s how the United States, for example, ended up with the gold standard, and the gold certificate, and whatnot.

Vinay: Let’s drill a little-

Scott: What happened-

Vinay: Let’s drill a little more down into that. So, you have this kind of history with the clay tablets, and people were writing down what they’ve got, and then, it kind of rolls forward. Is there a period where everything is being done in gold and silver?

Scott: No.

Vinay: No.

Scott: Never.

Vinay: So, it goes from that initial trading system to just printed bank notes, with nothing in-between, or-

Scott: No, well the different … So, you had marketplaces that emerged in the Middle Ages that had where would have two or three anchor merchants, who would have script that they would issue that everybody trusted to issue a common script.

Vinay: So, a kind of promissory note, like-

Scott: Yeah, but it was, typically, related to some kind of commodity, like shoes, or bread, or-

Vinay: So, I’m the guy that turns up with cotton every week, and I say, “This is worth three rolls of cotton. Come back next week,” and then, people are passing that around like bank notes.

Scott: Yes, and then, you had the asset-based landing that banks started, okay? So, this is what a bank note means. A bank note goes from, people would bring in an asset to the bank, like the title to their property, or promise for next year’s crop, later on, shares of capital, and would withdraw bank notes, and then, the bank notes would be traded within a local ecosystem, in order to provide, buy goods or services within that local ecosystem.

Vinay: I see.

Scott: And then, this was good, because it created local area networks, where the liquidity was great. It wasn’t so good, because governments, aristocracy and others, when they started getting stressed, they said, “hey, these people are conducting all this trade, and it happens outside of a mechanism I can tax,” because they were taxing the specie, and-

Vinay: Ah!

Scott: And so-

Vinay: So, this is the yardstick thing; that, if it isn’t priced relative to the specie, you don’t know how to tax it. As a result It’s hard to tax, and it’ll be-

Scott: It’s hard to tax? Yeah, exactly.

Vinay: So, the measurement problem that forces us down that track.

Scott: Right. Well, that’s one of the things, but that’s a big one, because people … Being the ruler started costing a lot of money. You have these lavish parties, with incredible lifestyles. You had to, basically, subsidize, and you had a higher cost as there was more and more-

Vinay: It’s good to be the king, but it’s expensive to be the king.

Scott: But it’s expensive! That’s right! And so, that led to the single system. Prior to all this, though, there were lots of assets that weren’t really valued. So, property. When you were a lord, you won property, not by buying it, but by doing some favor for some ruler, or by-

Vinay: You go off to battle, and you come back, and they give you a castle-

Scott: And, yeah, they’ll give you a castle, and all the lands, and you can, basically, have that, so-

Vinay: So, it never winds up as part of the cash economy, so it’s unpriced.

Scott: It’s unpriced, and then, you have all these new asset classes that have been created, that we’ve created stocks, and bonds, and all these other kinds of things, for which there never really was currency in the first place; and so, what’s happened … and then you have appreciation of value, too, in these assets that is disproportionate to currency. So, you have assets that were never bought by anybody that end up having them like assets that were like in the United States, where we gave away plots of land all over the United States. If you just would go and, basically, build a house there, and live there, you would homestead it, and then, you would just get given it, so-

Vinay: Oh, and it never passed an evaluation step!

Scott: There’s no evaluation step. So, it never really had to have money originally in order to get it.

Vinay: Wow. Okay.

Scott: And so, what you were doing, when you were doing this, is you’re actually creating money, in a sense, because you’re creating value, right? So, you’re creating value, but for which there’s not enough money.

Vinay: Okay, so you’re adding value to the system-

Scott: Into the economy, but there’s-

Vinay: Without-

Scott: Without increasing the money in circulation to do it, right?

Vinay: Right, got it.

Scott: And so, that’s just wider than it has ever been right now, and governments know this, and, I mean, this is the primary reason Nixon disconnected the dollar from the gold standard, and thank god he did, because there wouldn’t have been enough gold to back the dollars that we need in circulation today to-

Vinay: So, let’s stop at the gold standard, because it’s a term that people use without really understanding it.

Scott: Yeah.

Vinay: So, my understanding of the gold standard is that, for a chunk of time, and I’m not sure when it begins, but, for-

Scott: 1880.

Vinay: 1880. So, there’s about a hundred-year period, what, 1880 to 1970?

Scott: No, that’s 1880 to 1917.

Vinay: Huh? 27 years?

Scott: Yeah, that’s it.

Vinay: I thought it was Nixon that ended the gold standard.

Scott: Well, he did. He ended the gold standard, but the currency entirely being backed by gold certificates ended in 1917.

Vinay: Okay, so, for that window, every U.S. dollar was backed by a certain amount of gold, and you could literally go to a bank, hand them your currency, and walk about with, literally, coins.

Scott: Yeah, that’s what they said. Yeah.

Vinay: Yeah. Same thing was here. A pound was said to be a pound of gold, and that ran for a while.

Scott: Right.

Vinay: So, prior to that, you just didn’t have bank notes that were issued by a central bank?

Scott: Yeah. Well, you might’ve had … There was continental currency in the United States, and whatnot, but you didn’t have … That wasn’t specie. That was just kind of like a different bank note. It was kind of like the governmental version of a bank note, and it was backed by tax, versus being backed by specie.

Vinay: So, the paper currency was kind of softer, at that point. Then, it goes onto this gold period, then it come back off the gold period.

Scott: Right, and that was an attempt to solve problems.

Vinay: So, the gold standard was an experiment.

Scott: It was an experiment, and it was an experiment that I think many economists consider to have been a failure.

Vinay: Yeah. Well, I mean, if we only lost 30 years in that form, you get the feeling it wasn’t working too well.

Scott: Yeah, and I mean, when I say that, I’m being kind of really technical, because, from what the average person understands … and I didn’t even know this; it wasn’t until I started talking to one of our economists on our advisory committee that I actually learned this stuff. So, if we hadn’t disconnected the currency from the gold standard in the United States, what would’ve happened is it would’ve continued to, basically, create a damper on the economic growth in the United States, and there wouldn’t have been enough liquidity-

Vinay: Just because of lack of liquidity.

Scott: Just because of lack of liquidity.

Vinay: So, there wasn’t enough currency.

Scott: There wasn’t.

Vinay: The economy is growing. Everything is being continually repriced, because there isn’t enough currency to go around.

Scott: That’s correct.

Vinay: Deflation.

Scott: Well, and what that did is it, basically, means that … The problem with a currency being pegged to something like an asset is that, if the asset’s appreciating, that means the currency, itself, is appreciating, and that means that I don’t want to spend it, because it might be worth more next year than it is now.

Vinay: Bitcoin, right?

Scott: Bitcoin. Perfect example.

Vinay: Bitcoin is only literally exchangeable for Bitcoin, because, at the end of the day, nobody wants to take it out for anything.

Scott: Yeah. I mean, I own Bitcoin, and I don’t ever want to sell it, so the idea of wanting to go places and buy stuff in Bitcoin … I don’t ever want to do it, even though I visit places that won’t accept Bitcoin, and I even have … and I’m tempted, sometimes, to buy stuff with Bitcoin, and I don’t do it, because I think, “Well, it might go up more.” Typically goes down the next day, but, in general, it’s gone up!

Vinay: Yeah, yeah, yeah!

Scott: So, that’s the problem, and so, what you want in a liquidity mechanism inside a society is you want as much possible liquidity, and the reason is it’s something that people just don’t get about economics, and it’s really a fascinating thing. I didn’t get it about economics! So, if I give you this five-pound note, okay?

Vinay: Thank you very much.

Scott: How much did you just get?

Vinay: Ah, well, five pounds.

Scott: Right. Now, if you give it back to me-

Vinay: Mm-hmm (affirmative).

Scott: How much money circulated in the economy?

Vinay: Well, five pounds each way. 10 pounds?

Scott: 10 pounds.

Vinay: Okay.

Scott: So, what you want in economy is you want velocity of circulation with the currency-

Vinay: Right, so, when you need money, there is money, and you pass it, and you pass it-

Scott: And you pass it, exactly. And you don’t want people holding onto it, because they think, “Oh, my gosh, this five pounds might be worth 10 pounds tomorrow!”

Vinay: Right, right, right.

Scott: So, I-

Vinay: Because they’d need more, and more, and more money to maintain the same amount of liquidity?

Scott: Correct. Well, and then people don’t buy.

Vinay: Right.

Scott: And, because they don’t buy, then there’s not a turn, and so, the things that grow economies are the number of turns that happen of the currency within the economy, and increases in true efficiency. So, the of something actually decreases for the same thing. Those are the two things that grow economies, reality.

Vinay: So, what was the first?

Scott: The number of turns.

Vinay: Okay, the velocity of the-

Scott: If we could make the velocity of the money move faster-

Vinay: So, velocity of the economy, and a drop in the price of fundamental services.

Scott: Increase in efficiency. Prices kind of can be manipulated, so-

Vinay: Okay, so, efficiency goes up, or velocity goes-

Scott: The velocity goes up, the economy grows.

Vinay: So, more stuff happens faster, or stuff happens more efficiently?

Scott: No, that’s what makes GDP grow.

Vinay: This is the actual … okay. So, that’s the real basis of growth.

Scott: That’s the real basis of growth. So, what you want is you want the economy to turn as much as possible, and what happens in situations where money is scarce, where it’s difficult to get money, is people hoard it, because they’re afraid they won’t be able to get it again.

Vinay: Right.

Scott: So, they don’t trust that they’ll get some more tomorrow. We don’t feel that way in industrialized environments, where we’re professionals and we make a bunch of money, or we go out to the pub, and we-

Vinay: But Japan has crazy-high savings rates, because it’s been a hard-luck culture for a long time.

Scott: Exactly.

Vinay: It’s been very hard to make a living, because it’s this tiny island, and a lot of people.

Scott: That’s right, and so, those kinds of things drive this behavior. So, in global trade, where this is an issue is that the money has to go from the big company down to the mid-size company, down, to down, to down, down, in this thing we call the supply chain, and eventually get to some farmer in Vietnam, or something, who actually raised the rice.

Vinay: And if the money is-

Scott: That I’m eating here.

Vinay: Deflationary, it wouldn’t make it all the way down the supply chain, because everybody had more friction before they’re willing to spend it.

Scott: Yeah, and so, most industrial nations today actually want to see a little bit more money added to the money supply every year, because it devalues the currency a little bit, like 2%.

Vinay: So, it just encourages people to spend a little.

Scott: Well, that’s enough, they feel, that it, basically, encourages spending, and you don’t want spending to be careless. You don’t want it to be just crazy, because that can then create inflation; and so, you’re trying to balance that, but you’re trying to balance it with one currency, and, if you have two currencies, you can balance the currency used for assets separate from the currency used for liquidity. And this is what the world did, mostly, for most of the global history, and we, basically, went away from for a while, which was an experiment, and it’s just not as good as people now recognizing, I think, in general … well, the average person doesn’t, maybe, but many economists do, that it’d be better if we could, basically, go back to a two-currency system.

Vinay: Yeah, and this was Lietaer’s whole thing about future money; just pointing out the old, most productive economies in history that had a hard currency and a soft currency operating as pairs.

Scott: Correct.

Vinay: And that was the historical norm for efficient economies.

Scott: So, the blockchain introduces an ability to now disconnect these things in a very credible and real way-

Vinay: Because you can just make currencies that will operate correctly-

Scott: From watts.

Vinay: Right.

Scott: You can create currency just out of a little bit of electricity.

Vinay: Yeah, well, but mine and boom, there’s your currency.

Scott: That’s it! And now, the other thing that it does is it can enforce rigorous rules about the creation of currency.

Vinay: Yes.

Scott: And, oddly enough, you can go back to asset-backed currencies that are backed by lots of different kinds of assets, not just by, say, gold, or something.

Vinay: So, the rigorous rules is easy, right? I mean, you have a blockchain. It’s a decentralized network. Everybody’s running the same software. Then, you have to make a coordinated change; otherwise, the thing doesn’t correctly register. So, that’s your framework for the rules.

Scott: Yes.

Vinay: That part makes sense, but how do you use that to issue currency that isn’t just mind tokens that are coming out of cyber space?

Scott: So, what you have to do is you have to take some kind of asset, and do what bank notes used to be, or what marketplace script used to be, which is some kind of asset or commodity, which is a type of asset that you put into the bank.

Vinay: So, I come to you with a case of whiskey.

Scott: Yes.

Vinay: So, in the oldest, most archaic system, you’d write me a note that says, “This is worth a case of whiskey,” and you’d give it to me.

Scott: Yes, or it would be, I would put some value on that whiskey, in terms of my local system, and say, “That whiskey is worth so many loaves of bread,” or whatever the local trade mechanism was.

Vinay: So, you could’ve been an economy that was priced in fish, so I would bring you whiskey, and you’d price it in fish.

Scott: Yes, exactly.

Vinay: So, whatever we produce locally is what we’d use as yard-

Scott: These are pawn shops, right?

Vinay: Okay.

Scott: Right? It’d be just … but-

Vinay: Simple enough.

Scott: But that’s kind of one way to think of it. So, you get the asset put into a safekeeping, and you get this script, which you can then use, and you have to bring back the same quantity of that script when you come back after all the exchanges you’ve done to get it back.

Vinay: So, managing all the script end of this, all the things which people were issuing each other, the promissory notes, perfect fit for blockchain.

Scott: Yes, perfect fit.

Vinay: Right? Because you’ve got tons, and tons, and tons, of funny-looking pieces of paper, and, if you lose them, we lose your money. Well, let’s still all of those in a wallet, and everything will be much more peaceful.

Scott: That’s right.

Vinay: Okay. So, that part of the mechanism makes perfect sense. So, who, then, is the entity that I bring my case of whiskey to, in return for a bunch of this funny money?

Scott: So, you, obviously can’t take a bunch of whiskey and put it on the blockchain. You have to take a …

Vinay: True. Unfortunate, but true.

Scott: But what you can do is you can take and lock that whiskey up in a legal document that passes title of the whiskey in a storage location that is trusted, like a bonded warehouse, or something-

Vinay: So, I write a piece of paper that says, “You hold onto this whiskey for me, and you don’t give it back until Bob says so,” and I hand it to you by putting it in a physical, bonded warehouse.

Scott: Yes. I’ll give you one example.

Vinay: So, I’ve got a whiskey-backed currency for my 12 bottles.

Scott: Now you have your whiskey-backed currency, but you don’t really need bonded warehouses for lots of things, and you can do this in the real world, because banks and other things have learned how to do this over time, so-

Vinay: Well, I only need a bonded warehouse if it’s a low-trust environment. If I promise you that I’m not going to drink the whiskey, I might as well keep it in my bedroom.

Scott: Well, except we can’t trust you. See, that’s the problem. So, for certain assets, like, say, real estate. It’s easy to understand for people. It’s pretty easy to do, because there’s all sorts of systems in much of the world to identify the title, and whatnot. There are certain countries where that’s not true, but-

Vinay: But, in the places where you’ve got strong land rights-

Scott: Where you have strong land rights, and you have a history of title, there’s usually a title registry, and whatnot-

Vinay: So, I own my house. I can prove the fact that I own my house. It’s on the title registry. I come to you and say, “Take these deeds, and, in return, you will issue me a chunk of promissory notes.”

Scott: Yes, and the promissory notes, now, can be something which, once the house is put into a place where the title can be placed on the blockchain with the proper legal structure to allow it to have titles transferred if you don’t pay back your debt, you can actually now allow you to borrow from you off the blockchain by minting the currency-

Vinay: Wait, hang on. Me to borrow from me?

Scott: Yes.

Vinay: Okay. I did not understand that.

Scott: Okay, and this is the crazy bit about the blockchain, is that I don’t now need a bank or separate intermediary. I needed one to, basically, secure the title, but that was just to get it on the blockchain.

Vinay: Okay.

Scott: Now that the title is on the blockchain, though, the blockchain infrastructure, itself, means that I can actually put that title in a smart contract, which says I can’t get it back unless I pay back the exact amount of currency, of tokens, that I get when I put it in.

Vinay: Oh! Okay, hang on. Let me take this real slow. So, I take my house title, I put it in some kind of legal structure that means that I can’t use-

Scott: Can’t sell it.

Vinay: Can’t sell it, until I’ve put the tokens back.

Scott: Yes.

Vinay: And so, the smart contract takes back the tokens that it issued. After all of the tokens have been put back into the smart contract-

Scott: Once you put them all back.

Vinay: My house pops back out.

Scott: That’s exactly right. You get the title unlocked-

Vinay: So, it’s banking without a bank.

Scott: It’s banking without a bank, and you’re using … So, almost all forms of asset-based lending can be done this way.

Vinay: So, something peculiar happens here, and I think this is actually a fundamental mystery of the way the world works. So, I take an asset. I put the asset into this legal container. From this, then, are emitted a set of tokens, which represent the value of the asset.

Scott: Yup. Well, represent the collateral value, which is not necessarily its market value. It would always be something less than that. It’s why you don’t get a mortgage on your flat that’s equal to the price you had to pay for it.

Vinay: So, this is the secured loan kind of value.

Scott: Yeah, yeah.

Vinay: But, in this instance, the currency which is being issued is not fee at currency that was originally issued by the state against tax revenue. It’s new currency that’s being issued against the value of the house.

Scott: That’s correct.

Vinay: So, rather than backing the currency against gold, or backing the currency against future tax revenue, or backing the currency against the artificial scarcity of Bitcoin, either, we’re now issuing a crypto-currency, which is backed against the physical assets of a society.

Scott: Yes.

Vinay: And the physical assets of the society are 10 times the size of the financial assets?

Scott: Well, not all financial assets. Just the currency, yeah.

Vinay: Okay. So, what we’re talking about is being able to use all of the assets of a society as ways of backing currency to provide liquidity, so that the economy can go faster.

Scott: Yes, and you didn’t have to rent the money from somebody else.

Vinay: So, you’re not paying interest, but you might pay-

Scott: You don’t need to pay interest for that-

Vinay: Because you’re borrowing the money from yourself.

Scott: That’s correct.

Vinay: Or, at least you’re printing your own money relative to the backing.

Scott: Yeah, and you’ll lose your asset if you don’t repay it.

Vinay: Hang on, hang on. So, this sounds a lot like we kind of start with two goats, and then, we get five goats, and we didn’t have to pay for three goats. Are you sure this is okay?

Scott: So, this is actually how banking was done for 5,500 years.

Vinay: Yeah?

Scott: So, the only difference is that, in these bank systems where bank notes were created, they would charge fees; and we have to charge fees, as well, but the way we handle that is we have two classes of individuals. We have individuals that are kind of members of this new economic system, and individuals who are just guests; and, if you’re a member of the economic system, you buy a membership, and that membership allows you access to things where the fees are covered and paid for. They’re basically-

Vinay: So, you’re KYC’ed, you’re AML’ed, you’re checked into the system, you’ve had your background checks done, whatever it happens to be.

Scott: Whatever it happens to be.

Vinay: I come with assets, and so, how do I know how many coins, whatever it is, I’m going to be issued in exchange for the thing that I bring into the shop?

Scott: Well, the system actually uses markets for whatever the class of asset is to value the asset.

Vinay: Okay. So, you look the price of the houses that are similar to mine.

Scott: Yeah. Houses need to work differently in different legal jurisdictions. So, let’s do something that’s easier to understand for people easily-

Vinay: Okay, so I’ve got a bucket of gold bars.

Scott: Let’s use gold, because gold is traded in commodity exchanges, or any commodities-

Vinay: So, I come with a bucket of gold, and I make a credible promise that I’m not going to sell it.

Scott: Well, you would have to actually put the gold into some kind of custodial vault that would actually store the gold, okay?

Vinay: From that, I then receive a set of tokens, which are related, in value, to the price of gold at that point, minus some custodial fee, and all this kind of stuff?

Scott: Yup, unless you’re a member, in which case, the custodial fee is waived.

Vinay: And then I have this set of tokens, and those are exchangeable for anybody who will accept them who knows that they’re backed by my need to get my gold back.

Scott: Correct.

Vinay: Okay.

Scott: And that means that the people that get it could, basically … Anyone who will accept it, and that’s how bank notes worked in environments, but not only does it work for anyone who accepts it, so you don’t have to just stay by trading with these tokens. You can actually exchange those tokens on exchanges to convert them into some other token, or fiat, or some other commodity.

Vinay: Okay, so, I’ve got a bunch of steel in my warehouse, and I need to buy paint to cover the steel before I can sell the steel to the guy that I’m selling the steel to. I borrow money on the basis of the steel that I own to buy the paint. I paint the things. I sell them to the guy. I then go and get my tokens back out of hock.

Scott: Yup. Well, in fact, you can’t conclude the sale until you do.

Vinay: Right.

Scott: And so, what you’re enabling now is for commerce to happen without a need for people to actually have possession of fiat currency for it to start.

Vinay: Okay, so, let’s go back up a step to this world of the 90-day invoices.

Scott: Yup.

Vinay: So, you talked about the situation where A was going to pay B, was going to pay C, was going to pay D; and, if it all happens in the right sequence, everyone is happy. But, if it happens in the wrong sequence, and C needs to get paid by B before B has gotten paid by A, B has to go to the bank, borrow a bunch of money, out 20%, because they live in a poorer country; and, as a result, the whole thing breaks down, and the bank winds up beating the system.

Scott: That’s right.

Vinay: So, in those instances, where I’ve got outgoings that are going out before my incomings, but I have assets in the middle, this is where I borrow.

Scott: That’s it. In fact, don’t even think of it as borrowing, in the classic sense, because you’re just getting the ability to get liquidity from your invoice, or from the order-

Vinay: The assets I have.

Scott: Yeah, which are earlier than you would if you waited until the customer paid for it.

Vinay: Right.

Scott: So, when the customer actually does pay for it, I don’t actually get the money; I get the money earlier.

Vinay: Yup, yup.

Scott: And I get it in these tokens; which, if I’m in a supply chain, being anchored by some mega corp, let’s say, I can then pass down to my suppliers, who pass down to their suppliers, and the entire system is anchored by some large entity.

Vinay: So, you’re selling me coffee beans, knowing that I am then roasting those beans, and selling them to McDonald’s, or Starbucks, or Nero, or whatever.

Scott: Correct.

Vinay: So, you know that they’re going to pay me eventually?

Scott: Well, you don’t need to know that. The blockchain can actually just be the entity that knows that.

Vinay: Yeah. Sure, sure. The proof that I’ve been paid by these guys every month for five years is on the blockchain-

Scott: Yes.

Vinay: And you’re, basically, lending me money against that proof.

Scott: Well, it’s not just the proof. It’s the fact that the order actually comes from this entity, Starbucks-

Vinay: Oh! So, you can see all the way through-

Scott: All the way through, down to the farmer.

Vinay: Ah!

Scott: So, now, what happens is-

Vinay: So, the transparency along the blockchain is used to de-risk the lending that happens in the context.

Scott: Precisely right. So, let me put … So, remember, we said that commerce is 54 trillion of GDP, so GDP is profit. That’s what it is. It’s that increase in economic value, okay? So, it’s profit. So, the actual dollar value of all the transactions is larger than that, okay? So, this is profit. There’s $54 trillion of profit. That’s far more than enough, after all the failures, all the disasters, all the hurricanes, all the volcanoes, all the destabilized nations, all the failed businesses, after-

Vinay: So, when it’s all netted out, there’s-

Scott: It’s all netted out, there’s still 54 trillion-

Vinay: Left over, right? So, you could absorb-

Scott: You can manage all the counterparty risk in global commerce by global commerce, without any assets!

Vinay: So, even if it all goes horribly wrong, there’s still 54 trillion left over-

Scott: That’s it!

Vinay: And, at that point, it ought to be enough to carry itself over any little bumps.

Scott: That’s exactly right.

Vinay: That’s completely insane. Wait a minute. So, what-

Scott: It is insane.

Vinay: Why are we not doing it this way already?

Scott: Because we never had an ability to do this at a global scale, first, and we never actually had the ability to actually know what all the different ins and outs of the revenue, and the expenses, or increases in liabilities do.

Vinay: Yeah, okay. Have you heard of the term “economies of omniscience?”

Scott: Yes.

Vinay: So, what it sounds like you’re basically talking about here is economies of omniscience. Because we know so much about the profit, and the loss of all the entities involved in the supply chain, that allows us to lend money at very low risk, because we know that they’ve got outstanding invoices to entities that we know are going to pay them.

Scott: Yes, exactly; and so, since I know that-

Vinay: And the loans are full of security against assets.

Scott: What it means is you don’t need to secure them as much by assets as you grow a network that actually understands … So, this means I can use the assets for-

Vinay: Oh, wait, wait! This is what banks used to do when banks actually understood their customers!

Scott: That’s it.

Vinay: There was a bank manager, who knew things about you, and knew the basic shape of your business, and you do your business with [inaudible 01:11:44], so we’ll lend on the basis. Then, they take all the brains out of the branches, and the whole thing is done at HQ, and then, they stop lending.

Scott: Yes.

Vinay: So, what you’re saying is that, basically, if you’ve got enough access to the actual transactional data, because it’s all on chain, you can then lend against that.

Scott: And it’s not just the information. If the chain is actually conducting the settlement, then-

Vinay: Then you can see the incoming payments, locked up in a smart contract, waiting to be dropped!

Scott: Right, and you can re-route them around bad actors or failures to the parties that they’re defrauding.

Vinay: Oh!

Scott: Now, what this allows you to do is isolate risk. So, today, another reason there’s interest in the system-

Vinay: Because nobody can run off with the money!

Scott: Nobody can run off with the money.

Vinay: It’s all locked onto the chain, so something controlling you-

Scott: It’s all locked into the chain. That’s exactly right.

Vinay: Wow.

Scott: They have money-

Vinay: This is like the operating system for Star Trek. I mean, this is, fundamentally, some kind of new economic thing-

Scott: So, some of the writers that were part of Star Trek, I think, actually were influenced by some economists who have actually written about the possibility of doing this for a long time. I mean-

Vinay: So, what do those economists call this? Like, what are we actually looking at here?

Scott: Well, it’s called lots of different things. I think the way it’s been envisioned by a lot of different economists isn’t exactly what I think we’re going into, just like a lot of futurists predict things that-

Vinay: Yeah, you just kind of-

Scott: Dick Tracy on the phone, and that kind of thing-

Vinay: Then it turns out-

Scott: And it turns out, it’s this little bigger box, because …

Vinay: Watches are too small. You kind of-

Scott: It’s too small-

Vinay: Bad ergonomics!

Scott: Yeah, exactly! It’s not really convenient to hold it up to your ear!

So, some of the things that we envision when we realize the implications of technology, or that there’s a better way, don’t end up actually coming out quite the way we envision them, and I think that the blockchain implication is that we can do some things that would’ve been kind of difficult for people to actually believe would be doable, because you didn’t have this ubiquitous accounting system.

Vinay: I mean, we’re on a branch of history that’s totally outside anything that I read in the science fiction when I was growing up.

Scott: Yes.

Vinay: Like, people think we’re kind of in cyberpunk world; but, actually, the anonymous digital cash stuff was never understood in cyberpunk. That was not part of the mythology.

Scott: Exactly.

Vinay: It’s a totally different branch.

Scott: It’s a totally different branch, and so-

Vinay: So, if people are interested in the underlying economics, what kind of stuff should they be reading? I mean, is this resource-based economics? Who are the economists that people ought to be thinking about taking a look at?

Scott: So, there’s lots, okay? There’s the economists that have talked about gift-based systems. There’s LETs, which are local exchange token systems. There’s things like the WerBank in Switzerland, that’s been around for 60-something years that’s a mix of tokenized currencies-

Vinay: Like token-lending stuff.

Scott: Yeah, there’s lots of token-lending stuff. There’s distributive economics out of the U.K. here. There’s lots of different stuff out there, but none of it has been developed in light of the knowledge of what the blockchain means and applies.

Vinay: Right, because, if you don’t have a blockchain, you don’t have the kind of underlying systolic systems moving the money around.

Scott: Correct; and so, you end up with a lot more artificial mechanisms that people try to use. Kind of social engineering, or government to try to solve problems that you don’t need.

Vinay: Right. So, what we’re looking at is a collapsing complexity, because the map of the system is now identical with the system.

Scott: Correct.

Vinay: So, you can do symbolic operations on the map, and it directly changes the territory.

Scott: That’s exactly right.

Vinay: And the whole thing just collapses-

Scott: One layer just collapses, right.

Vinay: And all of your complexity from binding the two levels together using law and enforcement, police and all the rest of that, just goes “voomp!”

Scott: And this has lots of side effects that we think will benefit even governments and whatnot, because-

Vinay: I mean, if you were running an economy that didn’t want manufacturing, suddenly, the manufacturers are no longer bottle-necked by their access to capital.

Scott: That’s it. And-

Vinay: Oh, wait, hang on! Let me see if I can get the next bit myself!

Scott: Okay.

Vinay: So, we’ve got these assets, which are only 75% utilized, and the assumption is that, if they’ve got a lot more access to capital, they could go from being 75% busy to being 95% busy.

Scott: Well, not just because of that, but because you also end up, when you do the accounting to actually know how much these things are used-

Vinay: Because you can see exactly-

Scott: You can see what’s actually underutilized.

Vinay: So, you could, basically, map all the underutilized assets, and then provide liquidity to actually get them back into production, and then, you give them time.

Scott: Well, you can actually do something quite astonishing, which is you can actually switch from-

Vinay: Wait, this wasn’t astonishing already?

Scott: Well, so you can do what you just said, but that’s kind of an unnatural state of a system that has this level of transparency. Let me explain it with a story. Sales, okay? We take sales and marketing for granted, but it didn’t exist until the 1880s.

Vinay: What?

Scott: So, sales only-

Vinay: What? What are you talking about?

Scott: So, sales, as a company organization, didn’t exist until the 1880s, and I don’t remember the name of the company. You can look it up online, but there’s an obscure company that did it for the first time, and it was a side effect of centralizing production. So, when we centralize production, and we’re not making stuff in the local village, you now have to actually tell people about what you are making.

Vinay: Because they don’t know any-

Scott: Because they don’t know. Exactly.

Vinay: Right.

Scott: So, you have to actually get the message out, right?

Vinay: Yeah, yeah. This is like looking at stuff … I mean, going back to our archetypal, medieval village, you know the guy who’s making shoes; so, when you need shoes, you go over, talk to the guy who makes shoes.

Scott: Right, because you know he’s the guy who makes shoes.

Vinay: Right, but now, you type random search terms into eBay, you’ll see stuff manufactured in Shenzhen, and you don’t even know what the object you’re looking at is.

Scott: Yes.

Vinay: “What is that?”

Scott: So, we needed sales to tell people about stuff at different geographies. We need marketing to tell people about stuff that didn’t know about it, okay?

Vinay: Okay.

Scott: So, when you have ubiquitous information-

Vinay: So, sales and specialization go together.

Scott: Well, sales and centralization of production go together.

Vinay: Yeah.

Scott: So … As well as non-localized things. You need sales to, basically, communicate, or marketing.

Vinay: Yeah.

Scott: And so, when you can now find stuff easily, because it’s all transparent, the problem changes. So, instead of the problem being, “I don’t know which stuff to use,” the problem is now, “I’m overwhelmed with all of the choices I could use.”

Vinay: Okay, so the discovery problem goes from “I didn’t know they were making it, because I hadn’t heard the news,” to “Now my inbox is 750 million items. I have no idea what’s out there, because I can’t-”

Scott: Right. So, you can imagine what would happen if everybody start broadcasting out all the information about all these underutilized assets. People would just be overwhelmed.

Vinay: Right, because you’d have 25% of the economy demanding attention.

Scott: Yes! The signal-

Vinay: “Hey! I have this great new and everybody…!”

Scott: The noise level would just be impossible to absorb.

Vinay: Yeah, because it’s a quarter of the assets in the economy that are squeaking to be used.

Scott: Exactly right.

Vinay: Which is bonkers! This is insane!

Scott: So, that won’t work, right? So, what has to work instead is, instead of, today, the company that has the asset tries to find the business, you make it so the business tries to find the asset.

Vinay: So, I say, “I need this service,” and then, I can index, somehow or another, to find it.

Scott: Well, you can index to find it; but, where the equivalent of sales now becomes a role that actually works for you, the consumer, not for the producer.

Vinay: So, this is what they call VRM, vendor relationship management-

Scott: That’s exactly right.

Vinay: Which involves the idea that, instead of I advertise my needs, and the people who want to meet those needs come and find me, and the whole thing is coordinated through software, which operates under my will.

Scott: And, if it’s on a blockchain, this is now publicly available, right? So, it’s now-

Vinay: So, I publish what I’m looking for, and your software finds out that I’m looking for it, and then tells me that you’ve got it available.

Scott: Well, and you’ll still need experts to figure out whether or not that’s actually the right thing to do.

Vinay: Yeah, yeah, yeah.

Scott: So, you might not be able to get all the warehouse space you need in downtown London in one place, because the utilization of the warehouse is going to be split across three separate places, and you might not have the expertise to know, “What’s the best way for me to do this?” No, but somebody else does; and so, you have somebody else who does that for you on your benefit, and that actually makes things work better.

Vinay: Thin-sliced expertise as a service to act as a buffer all the way through.

Scott: Correct; and so, as you end up having this information, what happens is sales … The thing that’s inefficient about sales now is that, if there are three companies trying to sell you, and they each spend 20% on sales, there …

Vinay: Oh.

Scott: That’s a 60%-

Vinay: So, the number of failures-

Scott: So, two companies spending 20% on sales make no sale. One is spending 25% on two. Makes no sales. It’s just waste.

Vinay: And it’s a dead loss for the economy.

Scott: It’s a dead loss for the economy.

Vinay: So, to reduce the effort being used to make sales, it, then, again, fundamentally increases baseline economic efficiency.

Scott: And you get rid of this artificial need to try to sell you things that you don’t really need-

Vinay: You know, we’ve been talking about this stuff, off and on, for a month, and I think this might be the first time I actually understood it. So, what you’re talking about is a set of optimizations, which might be worth 30% of GDP, globally.

Scott: Yes.

Vinay: Whoa.

Scott: Yes.

Vinay: Right. Yeah, that would explain why I’m a little light-headed. I kind of feel like we should have two red armchairs, and you’re like, “Now do you see the matrix? The matrix is made of waste!”

Scott: “What pill do you want?”

Vinay: “The red pill!” Right!

Okay. So, we’re going to go and kind of pull back 30% of the GDP from underutilized assets, and unnecessary borrowing, and-

Scott: It’s not going to happen like that overnight, and-

Vinay: No, no, no.

Scott: And you’re never going to optimize all assets, because you need waste in a system, just like your body needs fat. So, when you can have excess inventory in the system, you don’t have to over-optimize the actual things, so you can put things in places that would be, maybe, more costly, if you had to pay for cost of capital, or things like inventory, and you can make better choices in things like transportation.

Vinay: Yup.

Scott: So, this is very important for things like carbon footprint, for finding ways to reduce waste in the system; and, if we don’t have to move everything in a rush, which it costs more, burns more energy, and whatnot, we can actually do things more efficiently.

Vinay: Yup.

Scott: So, a little excess inventory, like a little extra fat, in the system-

Vinay: Right, right, it’s economically optimal to have a bit of slack.

Scott: Economically valuable, to be able to do that.

Vinay: Yeah, that makes sense.

Scott: And the cost of energy, the cost of holding inventory, the penalties companies get from analysts and whatnot from having a lot of inventory in their balance sheet has forced us into an environment where we, basically, ignore some of these things, and we end up burning up more energy, and we end up burning up more cost related to the logistics-

Vinay: Iatrogenic medicine. They try to push for efficiency, but they, ultimately, create inefficiency.

Scott: Yes, yes.

Vinay: Interesting. So, the overall thing that I’m seeing here is, basically, a restructuring of the economy based on better access to information.

Scott: Yes.

Vinay: Right, and what you’re talking about is, basically, an economically-productive path for that restructuring to take place.

Scott: Yes.

Vinay: So, we might say that there’s a kind of an inevitable end-state, where all the stuff is instrument, and all the stuff is documented, and everything is produced where and when it’s needed, but the path between the current economic equilibrium and that path, there could be 50 different tracks to get there, and what you’re proposing is a path which is, basically, driven by liquidity provision inside of existing supply chains.

Scott: Yes.

Vinay: So, you take an existing supply chain. You instrument the supply chain, using the blockchain. You then provide a bunch of additional financial services along that supply chain, which make it more liquid. Reduce the capital cost, reduce your dependence on external borrowing. It becomes more efficient; and, as a result, the competitors then have to adopt the same practices?

Scott: Yes.

Vinay: So, this is kind of the dyke, which you’ve figured out, exactly, which brick you pull out?

Scott: Yup.

Vinay: And, from there, we get kind of lifted into this new equilibrium condition.

Scott: Right. So, this giant kind of change we’re talking about can happen, and be powered, by very small changes that occur in ways that are very self-interested. People of tremendous … “I want to make more. I want to have a higher profit. I want to spend less.”

Vinay: And it doesn’t rely on complex, multi-party coordination to do that.

Scott: It can happen a party at a time.

Vinay: Yeah, yeah.

Scott: And the thing that gets people to make the change, and to adopt the new system, is free loans.

Vinay: Right.

Scott: So, if I can get money for free-

Vinay: Yeah, you could pay 7%, or you could have it for nothing. What are you going to pick?

Scott: Which would you pick?

Vinay: Okay.

Scott: And that starts the snowball rolling; and, as a condition for getting this is to adopt a settlement process where the expenses, revenue, changes in balance are recorded in a ledger on the blockchain, and the changes in liabilities and assets also are recorded there as a prerequisite-

Vinay: So, this is the instrumentation step.

Scott: This is the instrumentation.

Vinay: You have to instrument it before you can optimize it.

Scott: Well, the first thing you do is provide free liquidity. Then, as a pre-condition, you ask people to adopt the-

Vinay: So, if you instrument your economy, you can have some free loans.

Scott: Yes.

Vinay: Okay. So, that incentive is the center to instrument.

Scott: Yeah, without as much assets.

Vinay: Yeah?

Scott: So, I can now reduce the amount of assets I had to tie up for using to get liquidity for my supply chain, and I can take the same assets, and I can use the money now for investing in R and D-

Vinay: Because, the more information you have, the easier it is to make a free loan.

Scott: Well, it’s not just that I can make the free loan. It’s that we can actually now manage the counter-party risks that you were managing with assets against the other counter-parties in your supply chain network.

Vinay: You can be a big buffer, because you control exactly how far the car … This reminds me of road trains. They talk about self-driving cars? You’ll be able to drive them, bumper-to-bumpered around freeways for super-efficiency.

Scott: Yes.

Vinay: Because it’s, basically, fly by wire.

Scott: Right.

Vinay: Same kind of-

Scott: Same kind of thing.

Vinay: For supply chains, basically, everything is coordinated and dovetailed.

Scott: What happens is that people that adopt this end up becoming more competitive.

Vinay: Yeah, yeah, yeah.

Scott: And, oddly enough, it’s actually a system of cooperation.

Vinay: Yes, absolutely.

Scott: So, it’s a system where all the parties in the chain actually win by cooperating better, and more tightly.

Vinay: Yeah. You know, this thing that I wrote a couple years ago, “Dog Atheism?”

Scott: Yes.

Vinay: So, “Dog Atheism” is this entire thing written in crayons by somebody that had never seen an actual supply chain; so I’ve had this kind of dim intuition that you could take everybody in the supply chain, you could line them up, and you could interconnect them, and they could share profit down it; but it doesn’t have any of the actual nuance. So, I’ve recognized what I’m seeing, but I could never have created it. But, it’s amazing to actually see what it looks like in the fully-rendered form.

Scott: And so, what we’re seeing now, and this is what I don’t think many of the enthusiasts in the blockchain community actually have seen, is that we’re seeing that we’re now joining economics with code, and with law, in a way that allows us to actually change the rules under which we actually do things, and we can make substantial improvements in society now without requiring political will to do it; and, in fact, we can actually help finance the process of doing it in ways that cost governments nothing, but increase their ability to generate revenue and income for themselves.

Vinay: I mean, this is the better mousetrap, right? You’ve found a way of taking some of the stupidity out of the economy. Everybody benefits from it, but it’s not a political change, even if it solves political problems.

Scott: That’s right. And, in fact, we don’t need to overthrow the whole system, and try to kick all the people out, and whatnot. We don’t need to do that. All we need to do is, basically, work within the existing frameworks and just do a better job of it.

Vinay: Well, I mean, this is the free lunch part, right? So, the free lunch part is that there are some problems you can solve without requiring political change. It’d be nice if we solved those problems. There are other problems which will require political change, but, maybe that’s tomorrow’s problem.

Scott: Well, and maybe the way of looking at it is that we now have an opportunity to do … So, we primarily needed government’s help, because we needed people to be regulators who would pass laws that say you have to do things these ways, and we create the policing to make sure that happened. We don’t need that. The blockchain can do that, and the contracts entered into can use the existing legal system to help enforce it. And so, we do this commercially. It can happen far faster, you don’t need to worry about the differences in factions, and what they think politically-

Vinay: Yeah, well, because this isn’t a political change.

Scott: It’s not.

Vinay: I mean, it’s like electrification, right? Electrification might have required a bit of political support in some places, it might have wound up as a political priority; but, at the end of the day, it was not a political process.

Scott: Yeah, and I’m not saying there aren’t things that politics could bring to the party that would help improve it. It’s that we don’t need to wait for that, and we don’t need to depend upon that.

Vinay: A lot of problems go away if your economy gets 20% more efficient. That pays for your national health service, it pays for your education-

Scott: If your party’s in charge when that happens, you get a lot of credit for it, even though you had nothing to do with it!

Vinay: Yeah.

Scott: It’s very popular. Nobody likes killing golden gooses.

Vinay: So, we’ve tal