Peter Thiel | The Tech Curse | NatCon 3 Miami

It's always a little bit hard to know exactly how I would define our movement. I think it is strikingly heterogeneous. The other side are the Imperial Stormtroopers, where it's all sort of in lockstep. And we're not some sort of hippie-dippy Burning Man camp. We're not even some lame, happy-clappy church. You know, we are sort of more like this sort of ragtag Rebel Alliance. And, you know, the diversity is extreme. Maybe it's too much. Maybe it's just right. But, you know, it's everything from, you know, Princess Leia to, you know, the slightly, on-the-spectrum policy wonk, C-3PO person to, you know, perhaps a little bit overrepresented by the various teenage Chewbacca people here. You know, I personally like to identify with Han Solo.

He's, you know, he's sort of the capitalist in the group, but, and then, you know, you can probably extend the analogy in all sorts of ways. President Trump is Obi-Wan, you know. The more they strike him down, the more powerful he becomes. But in this sort of spirit of us not having all the answers, Yoram asked me to talk about all the evil tech companies and how horrible California is and what do we do about China. And I thought I would try to today maybe just frame some of the issues and sort of try to explain how I see the map, what's actually going on. And then once we have a map of what's going on with tech and California, maybe that will suggest some approaches, some answers. So I'm going to try to make this a little bit less polemical, more informational, a little bit context-setting.

And I did these sort of silly slides. Can people see them? Yes, great. And I'll just go through sort of the tech curse and then three variations on it as a problem for California, a problem for the Democrats, and a problem for the Republicans. And so, very straightforward, let's start by defining the tech curse. It is equivalent to the natural resource curse, the oil curse, where if you have a country with sort of an enormous gusher of wealth, it often leads to sort of extraordinary social and political misgovernance. And basically, the nutshell version of it is that we should think of tech as the oil of the 21st century. And you can sort of... You can sort of go into all sorts of accounts of the microeconomics of these businesses.

But if you have sort of computer, internet, software businesses where maybe they're natural monopolies, they have these incredible economies of scale, network effects, moats. But perhaps even more simply, if you have something like software where the marginal cost is zero, and then beyond a certain scale, it just prints enormous amounts of money, it creates enormous amounts of value, and then it is subject to some really crazy politics in terms of who tries to grab the value, how does it get redistributed, and things like this. I want to focus a little bit on the sort of distortions, this kind of superstructure of the computer industry, or maybe the Information Age more generally creates, and then think about the challenges we have in that.

So if we look at a place like California, so just to maybe level-set what's actually worked about tech broadly in the last 50 years or so, if we just evaluate in terms of the market capitalizations of the companies that have been created, you know, almost all of it has been, has been tech in one form or another. I'm using the '73 oil shock—I'll explain why, we'll come back to that in a bit—but if you look at the last 50 years, you know, go with Calvin Coolidge, "The business of America is business," and it has just been overwhelmingly tech: computers, internet, mobile internet. That's where, that's where the value, that's where the value has been created. Something like seven out of the ten top ones were built in California.

You know, two of them have left. Tesla and Oracle have now left California. So there's probably some point where, you know, the tech curse can be so bad, the misgovernance gets so bad that even the tech companies leave. Something like this can happen also with oil, where you have an oil state that gets so misgoverned it can't even produce oil anymore, sort of like Venezuela or something like this. And so there's always a question whether California is somewhere close to that point. But the background is that you've just had this gold rush, this incredible gusher. And then it is striking, if you sort of look at everything else, how little value has been created in everything else. And so it has been this narrow cone of progress around the world of bits, not the world of atoms.

Even most of the companies on this list, even though they're not like computer companies, they're mostly sort of adjacent to it in one way or another. You could say they're products of the Information Age, which would be, you know, the healthcare companies, you know, even the bigger ones like Home Depot, Costco, Walmart should be on this list. It was started a little bit earlier than 50 years ago. But even the giant supermarket retail stores were sort of centralized, figured out you could run Walmart, you could have a set of computers in Bentonville, Arkansas, control how to manage everything. And so you have to think of most of these, and the banks and all these things were mostly these sort of virtual,

Information Age businesses, and then the sort of, kind of, sort of much broader growth that characterized most of the 20th century or 19th century in America has not been represented by this. So it's, again, this narrow cone of progress around the world of bits, whereas, you know, most of the areas of atoms have been more stagnant. You know, the way I always like to tell this is when I was in—when I was an undergraduate at Stanford in the late '80s, it was already the case that there were basically no engineering fields you wanted to go into. You were out of your mind to go into aero-astro engineering or nuclear engineering. People already understood those were bad. But certainly mechanical engineering, chemical engineering, all these sort of things having to do with atoms turned out to be very bad.

I think electrical engineering still had another good decade or so. And then basically, the only field that worked, that really worked, was computer science, which was not even an engineering. It was kind of a dumb sort of field for people who were not very good at math. It's always the things that call themselves science you have to always be skeptical of. It's like political science, climate science, and computer science. But it is sort of this very odd thing where if you do this over a quarter century, this is sort of the one thing that did work. And then—and then, you know, it has, if you sort of look at it from a macroeconomic point of view for California, which, you know, luck or for whatever reason, benefited so much from this gold rush.

We're now at a point where, you know, normally, say, California's the fifth largest economy in the world. It is, at this point, really close to overtaking Germany, which is number four, and Japan, which is number three, and then the only two that would be left would be the U.S. and China. It's probably hard for California to overtake the U.S. And then if you look at it, something like a per capita GDP-type calculation, California, with just under 40 million people, same GDP as Germany with 82 million. The 2022 numbers on the previous slide, it's even stronger there with a strong dollar. You're basically having the same economic output as a country with twice the population. Japan, 125 million people, barely more than California; three times the population, barely more than California.

There is something about it that's worked in quite a powerful way macroeconomically. And then, of course, there are all these things about it that didn't work, that, like a sort of not well-functioning oil state, led to incredible misgovernance on the level of California. And I want to basically sort of suggest two main vectors of misgovernance, where you sort of have these massive gains in GDP that came from the tech industry, from the only game in town, and then that got rerouted into an extremely corrupt, dysfunctional government on the one hand, and into sort of various quasi-governmental real estate rackets on the other. The, you know, the stat here, if you look at every state in the country, the premium that government workers make over private sector workers: California, far and away number one in the country, 53% premium.

You get paid 53% more if you're a government worker in California than if you're a private sector worker. This does not even include the CalSTRS sort of retirement benefits. If you were to do the correct accounting for those, you get paid roughly 100% more, double. You get paid double as a government sector worker than as a private sector worker, which, of course, the deal is you're supposed to, of course, you have zero risk of losing your job. You don't have to work very hard. And so this is, you know, this is just sort of like an extraordinary racket. And then, and then we have, when you have a sort of a state that gets hijacked and gets used, used for where the sort of incredible resources get hijacked by the state actors, you end up with these very weird things where, you know, California ranks pretty high on the

spending per student and pretty low on the scores. And so that's sort of the way it tends to cash out. So, a shockingly failed state relative to this incredible boom. And then, I think sort of there are a lot of other ways you could describe this, but one other dimension, of course, is that so much of the gains got captured into real estate in one form or another, where California had this sort of, you know, there was a California of the '40s and '50s and '60s where you had affordable housing, you built it, you had sort of this mass affluent suburban society, and at some point it ran out. You know, Orange County kept doing it for, for, you know, a few decades at a slowing pace. Marin County, I think, was sort of, was early.

We basically flatlined the growth. I always think Marin County and Orange County are good contrasts because they're roughly the same size. Orange County is about 3 million people. Marin County is about 250,000. Three-quarters of Marin County is sort of set aside as land that can't be developed in any way. And basically, the population flatlined in the early '70s. And probably today we're at a point where you should think of all of California—Orange County, even all of California—is effectively close to Marin County. Virtually impossible to do anything new in real estate. And then you end up with these incredible, incredible windfalls in certain, in real estate as a financial asset, not as a place to live.

And then basically, you know, when you adjust for this, the cost of living in California, something like 40% higher than the rest of the country, cost of real estate roughly double, and you basically have to replace the middle class in one way or another. Carroll Quigley, the Georgetown historian from the '50s and '60s, professor at Georgetown, had this line in 1960 that I still think is very accurate today, which is that the Republicans are the party of the middle class and the Democrats are the party of everybody else. And if you sort of have, so there's sort of a way that the California economy, if you say the only middle class people left are government workers, and then all the rest of the middle class we're sort of evicting to these other states over time, it is no wonder that you get sort of a D+30 state.

That just follows naturally from these super, super distorted real estate and political dynamics. Now, there's probably a lot more one could say about the real estate stuff. I keep thinking that it's obviously very dysfunctional to have mass homelessness, it's very dysfunctional to have no law and order, but if you think of it as a sort of inefficient redistributionist strategy, there's a lot of it that has a certain weird perverse logic. I'll just sort of describe this verbally, but if you have a super-negative supply curve with an elasticity of minus two, where if you add 1% supply to housing and the prices go down 2%, or if you reduce the supply by 1%, the prices go up by 2%. And so the more housing you build, the less it is collectively worth.

The less you have, the more it is collectively worth. If you get to something that's that inelastic, probably from the point of view of housing as a financial asset, all sorts of things that seem like social pathologies just become features. I think even something as crazy as the out-of-control homeless situation in San Francisco where I lived for 15 years, for many years you could think of as—as it was sort of like this controlled thing where, you know, the homeless people were in the lower parts of town, they didn't climb up the hills, and then if you had this sort of plague of homeless people, they were sort of messing up these neighborhoods, and you had this negative, highly negative elasticity of real estate, the value of the houses on the hills went up way more than the value of the houses on the flat parts went down.

And so you have to think of the homeless people as like this feature to increase the value of sort of the higher-end real estate in the city. And that's sort of this cauldron you're stirring. And there's probably some version like this with, you know, defund the police, no law and order. In theory, that's bad for San Francisco, but then it drives up the house prices in Marin way more than it lowers them in San Francisco. So it's, again, in a world where the housing is this dysfunctional, all these weird things become possible. There's a version that's in Palo Alto where you have this sort of eyesore called East Palo Alto. You would think it should have just been razed to the ground and redeveloped 20, 30 years ago, but it has just the effect again of massively driving up the prices where the real estate is basically a very, very inefficient and screwed-up way to redirect the gold-rush profits from tech.

So incredible misgovernance on every level. And then sort of the way I would—the way I would summarize the California framing is that it's not the worst oil country. It's not the best. It's roughly somewhere in between. It's not as good as Norway. We're not as bad as Equatorial Guinea. And you should think of it as basically roughly on par with Saudi Arabia, the Magic Kingdom. There probably are all these different analogies one could develop a lot more. I'm inclined to think that if the reality is this extremely narrow boom that has been sort of politically hijacked and misdirected in a lot of ways, and we should be thinking a lot more about the superstructure. Obviously, there are things one could say that are critical of Google and Apple and Facebook and the other big California tech companies.

You know, that's not the core thing we should be going after. It's just like Saudi Aramco isn't the main problem in Saudi Arabia. It's like the most functioning institution. It's kind of screwed up. All these big companies are kind of screwed up. But it's the superstructure that's really, really deranged. And probably one other Saudi analogy I'll just make is that I suspect that the wokeism and the Wahhabism should also be thought of as roughly the same category. And my mental model is that it's something like—it's confusing because you have some true believers and there's some very crazy people in Saudi Arabia and there's some very crazy people in California. But probably the ratio is something like 20% true and 80%, you know, it's just sort of the Saudi prince, you know, bringing alcohol into the country or Gavin Newsom having dinner at the French Laundry or stuff like that.

And that's actually sort of in some ways reassuring because it shows that you don't really believe the Wahhabi or the woke nonsense, even though it is sort of this part of the ideology. And it probably, again, in some ways gets subsidized by the insane cash flows, but we should not confuse it as the main thing that's going on. So, yeah, so that's sort of the challenge for California. And, you know, you never, the problem for California is you never actually, no oil country ever gets rid of the oil. It might be bad for it, but people don't actually get rid of it. And so, you know, there's always a chance maybe California implodes like Venezuela. There's a risk it just can keep going like Saudi Arabia for decades in this rather suboptimal version.

Now, I think the strange thing is that there sort of are ways that the tech curse on California is also a challenge for the parties more broadly. And let me just say something about both the Democrats and the Republicans. The basic problem is whatever sort of works in California obviously does not scale. Saudi Arabia sort of works for 25 million people. If they had 500 million people, it would not be as prosperous. You wouldn't have as much oil. And in a similar way, you can't actually scale the tech companies by a factor of 10 or 8 from California to the US as a whole. And so it is always... it doesn't actually scale. And so what can work in a completely crazed place like Saudi Arabia or California probably won't work for the Middle East as a whole or for the US as a whole.

But on the Democratic side, my read on the politics is the curse is that there is actually no alternative for them but to somehow pretend that they can make California work for the country as a whole. And so I'm just going to go with the—look at the presidential candidates for 2024 based on the sort of predicted betting markets rankings. I think these are always reasonably, I sort of always tend to believe these numbers as pretty good. And California just has a complete lock on the future. We can come back to Joe Biden. I think he's the only one I would sort of definitely sell at 35 cents. But both Kamala and Gavin Newsom, they don't really stand for anything. I remember running into both of them at my friend Sean Parker's wedding in 2013 at Big Sur.

It was sort of all these liberal people from Silicon Valley. And the two of them were basically assiduously courting the different guests. Kamala was the Attorney General in California, just been elected Attorney General. Gavin had just been elected Lieutenant Governor. And you could, I mean, you could just tell they were the absolute, there was no difference between them at all. They were identical. I mean, they were just the best of frenemies. But that is sort of, and then of course there was a prehistory where they'd been entangled in these crazed San Francisco city politics. Gavin had been the mayor and Kamala had been the DA. And so they've somehow been entangled in this somewhat fake California thing that doesn't scale to the whole country.

People don't really—it's hard to articulate what's wrong, but that's sort of the default that is on offer for 2024. And the only thing that it has going for it, or the one big thing it has going for it, is this kind of historicist argument: it's on the side of the future. It's on the side of the 21st century. We have to make this future work. Maybe it's dystopian, but you don't want to be like Germany or Japan, where they chose sort of social democracy over tech. That doesn't quite work. And then what are the alternatives? And so, just to enumerate the failed 20th-century alternatives, you know, we have the sort of the fake blue-collar alternative which, I don't know, that probably, that probably sailed 50 years ago, quite implausible.

You know, I think there is probably still some fake 20th-century university model, you know, the Rhodes Scholar, the Puritan minister from Harvard. I always think of Elizabeth Warren as this sort of Puritan minister from the 17th century—the less nice part of the 17th century. I mean, you know, she doesn't actually believe in God, but, you know, other than that, it's about as nasty as anything you could have hoped for from the 17th century. But the problem with—the problem with the colleges is they're even more zero-sum, it's even less growth, it's even less positive than all these others. And so somehow the Boston model, if you want to call it that, is going to lose to California anytime. And then we have probably some kind of New York City sort of banking-finance model where we always need banks, there's some room for moving money around in an economy.

It probably got overextended in the financial bubble in the 2000s. It still probably has not corrected fully, but you can sort of think of the contest between, you know, Hillary Clinton as sort of the globalist finance model where Manhattan writes a little piece of paper telling the rest of the world that you owe me money. And then you can think of, you know, Bernie Sanders as the Brooklyn guy and AOC as the Bronx or Queens or wherever she's from. And so the other boroughs saying, 'We need to move some money from Manhattan to the other boroughs. We need to redistribute some of this money.' And this sort of redistribution of financial flows model, again, my thesis is, works even less well than California. You're not gonna fool people with this at all.

And so there is sort of this strange way where the curse for the Democrats is they have no alternative to California. It's these sort of historicist arguments that lock them onto California, and then it doesn't scale. This is the thing, you have to just underscore, you know, Google, Apple, these companies, they're a certain size, they're not gonna be, you know—they're global, so there's no way they get 10 times as big. So whatever works in California will not scale. You're just locked in this very weird thing that it's strong enough to crush everybody else in the Democrat Party. It's probably not strong enough to be sort of a very compelling agenda for the country as a whole. And then, if I want to put this in a somewhat bigger philosophical context—

I think you can think of this entire agenda, the California ideology, as articulated by the Club of Rome in this book, The Limits to Growth, written in 1972. Not a very good book, but somehow, sort of extremely prescient, and it has somehow described in a lot of ways the kind of transformation that we have. We're heading towards a society where there's limited growth in the world of atoms, no population growth, you know, and probably all these ways that the Limits to Growth people underestimated how much, you know, a zero-growth society would derange things. You know, if you sort of think of, let's say, the middle class are the people who think their kids will do better than themselves. In a world of zero growth—

All these sort of cultural institutions have to derange, have to unravel, have to go crazy. And it's always unclear to me how much the people who pushed these ideas in the early '70s knew it. And somehow California was at the very center of this. It's probably a story: Brown Sr., the '50s, '60s Democratic governor who built highways and was suburban and all the suburban sprawl. And then Brown Jr., his first coming, '72 to '82. And it was basically, 'We need to protect the environment and you'll have clean air, but you won't work in a steel factory anymore. And that's going to be the future.' And somehow that's sort of the ideological structure on the Democratic side for which they have no alternative.

And then the California thing offers some limited growth in this world of tech. It's not enough to fix the whole society, but if you don't want California, maybe you can have Greta and everyone can drive a bicycle, something like that. But it's going to be quite limited. Now, let me just end by saying where I think this is also somewhat of a challenge for the Republicans. And probably the temptation on our side is always going to be that we should just—all we have to do is say that we're not California. It's just that if this is just—it's such an ugly picture. It's the homeless people pooping all over the place. It's the ridiculous, rat-infested apartments that don't work anywhere. It's the woke insanities.

There's so much about it that it feels like sort of shooting fish in a barrel. It is so easy, so ridiculous to denounce. But I'll frame this as a question: Should we maybe also have more of a—have more of a positive agenda? And then this is sort of where my intuition is that the sort of nihilistic negation is probably not enough. It might be enough to win in the midterms in '22. It might be enough to win in '24. But we want to have something that's somewhat more of a program, positive vision, something like that, to be credible. And certainly my scoring on the '22 cycle is we're doing even less well than '94 with Contract with America. We're doing less well than 2010—the Tea Party stuff in 2010. And we're leaning way too far into the pure nihilistic negation.

We're not California. We can be Luddites with tech. We don't like tech. We don't like California. We don't like the woke stuff. All of that's true, but it's not necessarily a way that we get back to some form of broad-based growth that is not inflationary and not cancerous and not some kind of narrow real estate racket. And then just to frame this at least as a question where, you know, you can say we have all these different states where we're trying these different things. And I think—I do think DeSantis in Florida is probably the best of the governors in terms of offering a real alternative to California, of trying to tackle California in some ways. And then the cautionary note, in my judgment, would be if we are going to have a high-growth alternative, the real estate version of the test is: Do the real estate prices come down?

Do they stay cheap? And the fact that real estate in Florida or Texas has melted up over the last two, three years is not evidence that you're succeeding in building a better model than California. I worry that that's evidence that you're becoming like California. I bought a place here in Miami in September 2020—$18 million, whatever, it's now, you know, $35 million. It's great as an investment, but it would be so much healthier if this was just a bubble and the prices would collapse and it would all go down 50% again, because unlike California, you could build a lot of things, and it might take a few years. But that's sort of the open question, I would say, about Texas and Florida: Are they still places where you can genuinely have affordable housing?

I always think the thing that's very confusing about housing is it's both a real asset and a virtual asset. Think of a house as a nest, as a place to live, in which case you want a big house that's affordable, not too expensive. And then you can think of a house as a nest egg, as a number on an Excel spreadsheet, where as long as the number goes up, you don't care whether it's a rat-infested apartment in Manhattan or anything like this. And surely the much healthier alternative to California has to be one where it's cheap, it never overshoots, this is not how you're going to make money by housing. It's really just a place for middle-class people to live. Let me—so I think in general, this is sort of a challenge I would pose to all of you, is how does one, how do we do better than California?

And it's—and, you know, we can go with a nihilistic negation. We can denounce it in all these ways. But the question is always, how can we do better? How can we concretely offer a vision for the 21st century that's better than the California alternative? And let me say one last thing on concretizing this with respect to China, of how do we make California—you know, what's the right plan for China? I know this will be the next panel as we discussed at great length at this conference. And then how does one, and what's the California plan? Can you do better than the California plan? So, I don't know, there's sort of a lot of things one could say about China. The rough schematic idea I always have is that you have sort of a, maybe we can be economically hawkish or militarily hawkish or economically dovish or militarily dovish.

So sort of a very simple two-by-two quadrant for how to deal with China. So you have tariffs and you bomb them. That's the econ and military hawk. There's the, 'we trade with them and bomb them.' That's the insane neocon quadrant. Okay, so that one's obviously, that's obviously the very dumb quadrant. And then there is, you know, I think the Trump one that made sense was tariffs, but, you know, we'll try the tariffs first so we don't bomb them right away. So that one kind of makes sense. And then I think there's something like the California quadrant, which is, you know, we don't, to first approximation, we do nothing at all. And we're just going to escape into the internet, the metaverse, artificial reality, virtual reality, and

We're not even going to try to compete with China. They pay their people too little. We can never compete with that. And we're just going to have sort of one escapist fantasy after another. Now, if you were to steel-man the California thing, and say, 'This is really going to work.' Just not engaging with China at all doesn't seem like it should work at all. The steel-man version of California, and I don't know if you could get people to say this on the record, but this is sort of what I imagine some of them would say is, 'Well, we will defeat China with better propaganda. And we will convince them to become like California in one way or another. And they will clean up their whole environment.'

And they will impose something as ridiculous as the California Coastal Commission. And they will impose it on China. And they're going to sort of do a variety of things like this. It seems like a very preposterous plan. In putting the speech together, it was interesting that there was one version of this where I think something like this might have actually worked, where China's one-child policy—again, it's always hard to know the exact history on these things—the policy architect was this guy, Song Jian, who was this Maoist Chinese military scientist. He went to some conference in Finland in 1978, and he got off the shelf—he picked up 'The Limits to Growth' book. He read it, and then he applied it to China, and then he started pitching all these reductions in...

Childbirth and policies, and it was gonna have—China's gonna have three billion people by 2100 unless they got their act together. And then he sort of catalyzed this thing where, uh, where the, uh, the, um, Politburo, indeed, by 1980 had implemented the, uh, the One-Child Policy. And so, uh, perhaps one can score that as, as a victory for the, uh, the, the California propaganda. I, I wouldn't count on us doing that again. I wouldn't count on—you know, this is like a wokeism, Wahhabism version where, you know, the way Saudi Arabia and California compete with the world is we have a really, really insane ideology and we can afford it a little bit better than everybody else, and it's going to screw up everybody else even more.

So perhaps that can work. I tend to think one has to take China more seriously, but the question I would leave to the other panel is, how do you do better than California? How do you actually deal with China in a way that's likely to work? And it's not a high bar, but it's a bar we need to meet. Thank you very much. Please welcome back your host, Chris DeMuth.