Patrick McKenzie on Navigating Complex Systems

Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real-world problems. Learn more at mercatus.org. For a full transcript of every conversation enhanced with helpful links, visit conversationswithtyler.com. Hello everyone and welcome back to Conversations with Tyler. Today I'm honored to be talking with Patrick McKinsey. Here is Patrick's own description of himself, and I quote: The broad throughline of my work is systems thinking applied to businesses. I think the social organization of the internet and its impact on the world are underestimated by almost everyone, including Silicon Valley. Everything important to you in the world sits atop several infrastructure layers, I am a storyteller for some of those layers and the people who build them. An alternative description of Patrick that I might give you is he's a guy who moved to Japan for no legible reason at all and became famous by writing on the internet, and now everyone looks to him as a person who knows a lot about everything. His Substack is called Bits About Money, and on Twitter you can find him @paddyo11. Many people in fact call him Patio11. Patrick, welcome.

Thanks very much for having me.

Why is it you still have to sign the back of your credit card?

So like many answers, the true thing is that that is a bit of a misconception. You actually don't have to sign the back of your credit card in the legal realism sense, in that you can fail to sign the back of your credit card and go throughout your life untroubled by that fact. And most people who do that will be untroubled. The original reason for signing the back of the credit card was rather than authentication or authorization, meaning that the store clerk would thoroughly apply their forensic judgment in determining that the person signing the receipt and the person signing the credit card was the same person. It was about solemnization. You are making a, a solemn legally binding promise to the bank when you receive your card that you are good for charges made using that payment instrument. And that was the reason for having the signature field. That is also the reason for having the signature field on credit credit card receipts, that you are promising to the merchant that you will pay them under the agreement that you have with your bank. Now that everyone understands that when you hand over your credit card, that is a binding promise, we don't really have that much social need for that solemnization anymore. And so it is this vestigial feature that is honored in the breach in a lot of places. The vast majority of clerks won't even check signatures these days, which people are sometimes annoyed by. They put on the back of the card, "Ask to see my ID." That has no legal effect. The clerk is not a forensic investigator, and the clerk also probably has far less knowledge of the credit card infrastructure than you do if you are writing "ask to see my ID." Although if you're writing "ask to see my ID," you have a sort of bounded amount of knowledge about the credit card infrastructure. So one of these little idiosyncrasies about the world that's probably somewhat anachronistic in a couple of years.

And you're giving them your signature, right? By signing the back of the card, if someone stole it, they now have your card and your signature.

Yeah, a lot of what we would call pre-modern thinking about security in terms of payments was not, I won't say not all that well thought out. There are choices that were made back then that were good in the era they were made that are disastrously bad right now. For example, if I had, let's say, a bank account and I have a secret controlling that bank account, and that secret would allow me to take all of the money out of that bank account, you might think, like, how should I protect this secret? And the answer you would come up in 2023 is not, I want to print it in machine-readable type on every check that I give to everyone. But in fact, that is what we did back in the day. And many, many tens of billions of dollars of check fraud happened over the years because of that issue. And we sort of just took the punches and developed a vast shadow infrastructure to defang this fundamental irreducible security hole in the heart of the checking system. So yeah, putting your signatures, like the handwritten physical signature, has very terrible security properties. Anyone who has seen it can reproduce it. They are very easily reproducible by computers. They are is easily reproducible by humans. Checking them for correctness or consistency is terrible. There are the forensic analysts who go to court and try to compare signatures against each other. If I were to say they were practicing witchcraft, I think that would be an uncouth thing to say. I don't think it is necessarily untrue. Not a technology we would use in 2023 and going forward to secure anything that we actually care about.

Whom do you trust more, your bank teller or the waitress to whom you hand your credit card?

Bank teller by a country mile, although it is ultimately irrelevant. The reason to trust your bank teller versus your waitress is that while those appear in, say, the United States context to be like jobs that are relatively similar on the social ladder, they in fact are not for all of the reasons that correlate with class, et cetera, et cetera, on whether someone is likely to engage in malfeasance and also the built environment around bank tellers versus waitresses. You are far less likely to get taken advantage of by a bank teller than a waitress. But it is ultimately irrelevant because in the case you are taken advantage of by either a bank teller or a waitress, we have an extremely effective public-private regulatory state machine which will make you whole for that. It will be annoying, but you won't actually lose money. And so I go through my life spending very few cycles worried about either individuals in the financial industry or individuals in the restaurant industry taking advantage of my payment methods.

If I try to use my credit card and it's a false decline, that is, they won't take it when they should, what's the most likely reason for that?

Gremlins. And it sounds like a joke, but I say that everything I say is in my own opinions, and Stripe as a corporation does not actually endorse the existence of fiscal gremlins. I'm not sure I don't. Many people in the payments industry have spent a lot of time looking at the true source of false declines, and Eventually, the best you can do is reduce it to some sort of error term where you don't know specifically what system is at fault. The credit card ecosystem, while it might present to you as a single pane of glass that you interact with just like you interact with a single pane of glass on your iPhone, is actually a stitched-together patchwork collection of systems that have existed for the last several decades. Somewhere in that stitched-together patchwork, someone had a hiccup and then your credit card gets what we call a spurious decline. The rate of spurious declines is something of a trade secret, but it is much higher than any rational human being would expect is a tolerable rate of spurious false activity within a system. That has persisted for so many decades is an interesting sort of collective action problem because it's a stitched-together patchwork of systems. There's no unitary authority saying, uh, you must, you know, commit to decreasing your rate of false declines by 50 basis points within the next 2 quarters or there will be consequences. There is limited visibility into what is actually causing the problem. 'Credit cards are an enormously lucrative business.' And for the longest time, all players were like, 'Yeah, gremlins, I don't know what to tell you.' So I know a little bit more to tell you than gremlins, but unfortunately some of it is trade secrets. A thing that is not exactly a trade secret is that it is not the fact that— in fact, the case that problems are not solvable in the world. You actually can move the false decline rate by having the right people in the right places actually work on the false decline rate. Strike has a number of things, you can read it from various PR announcements. Somewhat shockingly, longstanding multi-decade problems frequently have the rough form where if one executive anywhere cared about this and did the bare minimum of effort, you would have somewhat surprising results on them relatively quickly. The thing that most surprised me on that score outside of the payments industry was when I had this long-running assumption that we're doing about as good as we can with rockets. The laws of physics are a thing. We've dumped billions of dollars into this problem and the smartest, you know, literal rocket scientists in the world at it. And then Elon Musk came around and said, actually, you know, I think we can cheat like the costs of getting things up to orbit by, oh, 3 orders of magnitude. And then if you had told me that in 1990, I, well, I would have been very young to opine about in 1990, maybe like 2005. If you had said that was like possible in 2005, I'd say I'd bet against that. Seems like a priori extremely unlikely to happen. And now we have, you know, an existence proof of it happening. And I'm reevaluating what I think about the world and how tractable various problems are in it.

If I buy a gelato for $7, they make me sign with my finger on the screen, and all I do is run my finger on the screen and it has nothing to do with my signature. Why doesn't the Coase theorem eliminate this practice?

Can you refresh my memory on what the Coase theorem is?

Well, just gains from trade are reaped. People don't do pointless things that benefit no one. They would agree to take my payment without running my finger on the screen, and I wouldn't run my finger on the screen.

So ultimately, that comes down to a choice of various firms involved in the interaction. It is the case that you can make a lot of credit card payments without doing any finger on the screen or signing receipt. Small dollar, small yen transactions in Japan, for example. There are various POS systems, point of sale systems in the United States that won't ask you to sign it. If you're asking to rationalize this on why does a smart team like I assume exists at Toast make a signature input thing anyway, there are anchors in our social practice about doing things and sometimes things persist in those anchors for far longer than they're actually required or produce any sort of value, would be my dominant hypothesis. But I also think it is probably the case that Toast could build a flag to turn that off tomorrow. Many people would not choose to turn it off for basically irrational reasons.

In a country of near full employment, why would anyone work in the debt collection sector? It's ugly work. You feel bad. You have to abuse people. Maybe you try to intimidate them. You might even make implied threats that, if not illegal, they're in some gray area. Why do it? Is the wage so high?

So the wage is certainly not so high as it background information for people. I used to work in the other side of debt collection. I was this random internet nobody that ghostwriting letters to debt collectors who attempt to get low sophistication individuals to assert their rights under various US consumer legislation. The typical debt collector is a high school graduate. They make plus or minus $15 an hour. Perhaps that has shifted a little bit as inflation has hit hard the last couple of years, but broadly speaking, it's that. You have a pay scale that is not too different from McDonald's for a much, much worse working environment, et cetera, et cetera. One reason, and I think this is over-advanced in the world but is partially explanatory in this case, is that the existence of— I'm about to use the word evil and I don't want to use the word evil.

You're allowed to use the word evil on this podcast.

I'm allowed to use the word evil. The existence of evil is an actual thing in the world and our models of the world must include evil to be accurate models of the world. There are some people who enjoy inflicting suffering on others. And if you enjoy inflicting suffering, a debt collection is a wonderful gig for you. Some people who enjoy inflicting suffering going to the police, for example. It's not the fact that all members of the police enjoy inflicting suffering, but that is a major source of utility for at least some people who get that job. Another thing for debt collection is that in the places where debt collectors actually live, the economy as a whole can be near full employment, but in rural New York, that might not be great. It might not be quite so full employment and for office jobs that are available, a a debt collection call center or a more salubrious call center might be the only office job available. And so relative to the choices that are actually presented to you, that might be the most rational thing, even if you hate the environment and churn out in a year. And indeed, the turnover rate for debt collectors is astounding. It's on the order of— oh, I hate making up numbers to sound like I know what I'm doing— it is higher than it is for fast food restaurants, which is already close to 100% a year, meaning in the expectation they expect to, to turn over the typical employee in less than a year.

And you think they leave because they don't like it, or they leave because they're bad at it and they're fired?

Overwhelmingly, they leave because they don't like it. There is a production function for debt collectors in a way that there is far less of a production function for McDonald's employees. Certainly there are ways to be a bad McDonald's employee, but if considering like just the, you know, are you physically capable of like making a burger or not, almost everyone who McDonald's hires is actually like physically capable of making a burger. There's probably at least an order of magnitude difference, perhaps more, in terms of productivity of the amount of dollars collected per hour by debt collectors. It is possible to be a net negative productive debt collector, and since your activity is tracked, your employer will eventually come to understand that about you. But most people who leave don't leave because this is a job that is beyond their intellectual capability or because the script they are given doesn't work, etc., etc. They leave because the job is soul-destroying.

How did the maple syrup heists change your overall view of the world and of humanity? Huh. What's the model update?

So going back to evil is an actual thing in the world, I often assume that large, well-regarded, professionalized industries have a rate of crime associated with them which rounds to zero. And so I would assume like, okay, agriculture is relatively heavily regulated. Maple syrup is an agricultural product. The only buyers of maple syrup by the container full are quote-unquote real companies. And therefore I would expect round to zero supply chain fraud in maple syrup. And it turns out that the amount of supply chain fraud in maple syrup is actually quite higher than zero. And the chain of custody for like cars of maple syrup is much less regimented than you would expect that chain of custody to be. And there are smaller buyers of maple syrup, not on the scale of you or me, but on the scale of like a boutique maple syrup refinery who just don't do as many checks as the large producers or suppliers, etc., do. And so it is possible to steal millions of dollars of maple syrup and sell it on the black market, which kind of blew my mind. This sort of rhymes with how Tide, the well-known detergent in the United States, is used as a commodity on the criminal and semi-criminal slash System D less criminal undergrounds. In that Tide can be resold online, marketplaces are getting a lot of the attention, but like the traditional way to use Tide is a as a currency for people who had less access to dollars was to resell the Tide to a corner bodega. And since the corner bodega can easily verify that the Tide hasn't been tampered with because the Tide seal is on it and has basically unlimited willingness to do small dollar transactions that make money, that was a way to recycle Tide which had been stolen or which had been acquired in means that were not stealing, but also not exactly the official way of getting Tide, and recycle it into the more or less legitimate economy insofar as we think that the corner bodega is more or less legitimate, which I think is a complicated story.

Do you ever encounter sectors where there's less fraud than what you had been expecting, or is there just more evil all around and you were naive and now you're wiser?

I broadly think people overpredict evil and underpredict competence. And then I thought I was sophisticated for believing this and then got to my adult life and realized, oh wait, evil actually exists. I need to increased my prediction, but maybe not to the level that society generally predicts it. Places where there is much less fraud than I expect there to be. One place where we detect much less fraud than I would expect us to detect is in insider trading and other forms of obviously illegal market manipulation. I'm undecided on whether that is truly, truly rare relative to the size of all market participation, or we are just abominably bad at detecting people that do it with a B+ student level of execution ability. Because when the SEC announces like, hey, we got this person for insider trading, here is the evidence, they did it on their work computer at Goldman Sachs after Googling, how do I get away with insider trading on their work computer at Goldman Sachs? And that is barely an exaggeration, by the way. Then they left a huge paper trail. This repeats in all the SEC's press releases. And so I'm wondering, am I getting a biased look at the world, or are we only detecting the dumbest possible criminals? Or is it that No one does insider trading after they achieve some level of competence because there are easier ways to make money that don't involve going to prison. For a while, and continuing, I thought that crypto was sort of drawing a lot of the fraud out of the more traditional sectors of the economy because if you do it in crypto, that wasn't fraud, but it was fraud that you would get away with and make a substantial amount of money doing, and you could do it in broad daylight and still get invited to the best parties. But I don't think that is fully explanatory. And my model is that there should be much, much more fraud happening in the legitimate parts of the economy than there is in crypto. And yet we see like the obvious frauds in crypto and the investigation of those obvious frauds. And we don't have nearly that level of visibility into the— it and the real economy. And so I continue to be conflicted by this.

As we're speaking in October 2023, Elon Musk has suggested that he will take X, formerly Twitter, and turn it into some kind of universal payments app. What's the chance he can succeed with this? And if you're bearish on it, what's the fundamental problem?

If he hypothetically does that, he will likely hypothetically be attempting commercial negotiations with a company that I previously worked for. And so I'm absolutely not speaking for them in the following. As a neutral market observer, it seems extremely unlikely that you will successfully embed patents into the Twitter experience, the X experience these days. I feel journalists feel some sort of obligation to call it X now that the official name is X. Twitter will always be Twitter for me. Twitter. The thing that users expect to get out of Twitter doesn't involve payments, doesn't typically involve interaction with businesses or even generally with individuals that they're on a repeated interactive basis. They get an entirely different basket of goods out of it. And simply grafting payments onto that basket of goods will not make people adopt the payments. I understand from a product management perspective how you could believe that that would be fantastically valuable if you got it to work, because the super apps that exist in large portions of Asia are fantastically valuable businesses and they have figured out loops that get users to adopt it for one feature and then adopt all the other features because it's already on your phone and the biz dev to get it pre-installed on all the phones and et cetera, et cetera, et cetera. This is much harder than that gloss I've just given of it. But yeah, the fundamental reason why I'm extremely bearish on it happening for Twitter, and I would put the percentage at below 1%, far below 1%, is that this is very, very hard. It feels unlikely to me that the organization that is Twitter is resourced or competent enough to make this happen.— which I will say, I'm an enormous fan of Twitter. I think it is actually one of the, descriptively, one of the most important products that exists on the internet because it has not solved but ameliorated a lot of cross-organization coordination problems that happen in very important places. It is broadly underappreciated how Twitter is the message bus, the sort of sub rosa coordination mechanism for the United States federal government, for every counterparty that the United States federal government or any agency or individual faces. For the media, for everything. And so people like see Twitter and they see celebrities posting and, you know, the phenomenon that is shitposting and et cetera, et cetera. And to a very real degree, it is like an integrated part of the operating system that is the world. But that doesn't mean that you can graft payments onto it and succeed just because you want to.

If I go to Western Union and send money to Mexico, why are the fees and transfer costs so high? It doesn't seem like it should be that hard.

So this is an enormously frustrating thing for me because the crypto industry has been saying, why are Western Union fees so high? And yet very few people in the crypto industry seem to do, like, the college undergraduate level thing that one would do to answer that question, which is why don't you read their annual report and see what they spend all the money on? What they spend all the money on is retail points of presence by the customer in both countries. 50% of all revenue taken in by Western Union goes to have a physical point of presence by you sending it and by without loss of generality, Abuela en México. Do those have to exist? Could you do them cheaper? Eh, you might be able to, but the problem such as it is, is like most of the cost or most of the complexity is by Abuela en México. And there's not one single, like Abuela en México where you just replace this one branch. You have to coordinate this worldwide change in behaviors to like materially compress that fee. That is why the why the fees are so high. Another reason why the fees are so high is regulation. And this one is, we as a society could choose to do things better and have not chosen these yet, and I wish we would. Due to anti-money laundering and know your customer requirements, the amount of compliance drag on small transfers of value in the world is very, very large. The rationale for it, such that there exists a rationale, is that, well, if you can do small transfers of value easily without proving your identity, then you could do large transfers of value by breaking it up into small transfers of value that are unsurveilled. Then that would enable crime and terrorism and tax evasion. So even if you are sending— a typical transfer might be $200 to Mexico— you have to go through this song and dance about proving your identity to the transfer agent. They have to be regulated, yada, yada, yada. That entire edifice imposes a lot of costs and a lot of things that are undesirable from a user experience perspective. Both in terms of people will tell you that they don't enjoy them and in terms of if you were to implement two parallel procedures, the one that didn't require that level of regulatory hoop jumping would have a higher success rate by equivalently motivated people. I'm a longtime crypto skeptic and one of the things that I think I see eye to eye on with the crypto folks is that AML and KYC impose enormous costs on society. Where we differ is they think, oh, I will make a technological solution to this and just ignore all the laws. And I think, well, to the extent that we believe this is true, we should probably work on changing the laws and regulations and/or changing how we implement them in products that are actually valuable.

Why are bank parking lots usually so empty?

Ooh, so this is a straightforward result from queuing theory, if you can believe it. Queuing theory slash operations science, by the way, tremendously under-understood by many people to whom it is professionally relevant. Be that as it may, when you think of your typical stop at a bank, you go in, perhaps you deposit a check, perhaps you talk to the teller. You probably think I will have like 3 minutes of dwell time. So you expect to be in and out. But the thing that the bank really wants to optimize for is new account opening. New account opening requires 30 to 60 minutes plus plus of dwell time, depending on what type of account you're opening. And then when you like back out that variability, it turns out that that gratuitously overprovisioning the parking space almost all of the time maximizes for not losing new account opening at a few, like, very limited windows per year. And those very limited windows can make or break the branch's ability to contribute to their larger financial institution. The number of accounts a bank actually opens per year in terms of checking accounts per branch is like— that is a number that one can have access to in various places. And depending on the bank and the locality, et cetera, it's between 200 and 500. And so if you turn away like a single customer or two customers in a row to open accounts because you had 3 parking spaces where you could have had 7, you've done a very outsized amount of damage to your financial institution and thus overprovision the parking in all the places.

So I should infer that I shouldn't keep much money in my checking account. That's a correct inference from that. The margin for the bank must be fairly high, which means my return all things considered, is relatively low.

I don't think you even need any inside knowledge about banks to know that one should not keep much money in a checking account.

Or a CD.

Or one does for the bank.

Anything one might do with the bank. To ask you the Willie Sutton question, why do people try to rob banks? It seems like a low-return activity, the form of crime where you're most likely to be caught.

It largely is a low-return activity. The FBI, so they publish stats on this, and the median haul that a bank robber gets is about $8,000, and it is the worst possible way to earn $8,000 because a career bank thief— the other word for that is a long-term guest of the United States government. It is impossible to get away with for over an extended period of time. Not to give people advice on becoming criminals, but if one wanted to describe like a criminal that was using their faculties to the best of their abilities, credit card fraud is so amazingly more lucrative than robbing banks. You can do it without ever threatening anyone. You can do it with only about as much sophistication about how the system works as the typical bank thief has. Indeed, you do see casual fraud by unsophisticated, let's say, non-professional criminals, high school students, etc., who earn or gain access to value through that casual fraud much more than they would if they stuck up a bank. Therefore, the people that actually do stick up banks are overwhelmingly drug-addicted. They're overwhelmingly, well, disproportionately struggling with mental illness, etc., etc., it is not that big of a risk. That, by the way, is also a reason why banks— part of a few reasons why banks are not optimized to defeat people doing bank robbery, which is surprising to many non-specialists. If you join a bank, one of the first things they say in the event of a bank robbery, don't be a hero. This does not matter to us at all. Comply with all demands, get them out of the bank as quickly as possible, do not fight. Do not chase, etc., etc. Partly that is due to the liability risk. The way the U.S. system views these things, the net present value of a young bank employee is worth a lot more than $8,000. And if they get shot on their way out the door, the bank might be liable for millions of dollars of a settlement to that individual. Whereas if the person walks away with $8,000, yay. But the other part of it is that the banks truly aren't at material risk from losing cash in robberies.

How old were you when you moved to Japan, and why did you do it?

Moved to Japan almost right after university, so I suppose I would have been 20. The original reason— and I wish I had a copy of this article, I should post it on my wall somewhere— I had gone to university, uh, Washington University in St. Louis, to study computer science and was worried because the Wall Street Journal said the dot-com bust means that engineering employment will cease in the United States of America. All future engineers will be hired in China or India at a fraction of U.S. prevailing wages. And I thought, I thought, oh shucks, the Wall Street Journal is never wrong, but I really wanted to be an engineer. Clearly, successful engineers in the future will be playing a Venn diagram game where they do one hard thing that is engineering and one hard thing that is speaking a foreign language. I thought speaking foreign languages is hard because it's the only class in high school that I did not get an A in for showing up, Spanish. But I thought, well, there's very little advantage for an American in my position to speak Spanish because there are many Americans who speak Spanish better than I ever will. The amount of trade in software between the United States and with Spanish-speaking countries is presumably lower than it is with other countries. So I made a spreadsheet trying to quantify things like what's the population of a country, what percentage of their professional adults are capable of doing business English, what's the size of their software industry, how much software does Microsoft sell there, etc., etc., etc. Sort by column H descending and Japan was at the top of the list. So I thought, okay, I'm going to learn Japanese and then I'm going to go to Japan after university for just a few years to get better at business Japanese. Then I'm going to come back to America, get a job at Microsoft in a Japan-facing role and I will have a nice safe I can get a job in the tech industry despite what the Wall Street Journal says about the tech industry ceasing to hire Americans for the positions that I actually want to do. And it turns out that there was a great deal of rigor there chasing a conclusion that had absolutely no basis in fact. It is not the case that the tech industry stopped hiring Americans in the last 20 years, but it also led to what was ultimately one of the most important decisions in my life. I went over to Japan. I lived there for 20 Happy asterisk years, met my wife over there, et cetera, et cetera. So I often mention this to people as an example of you can have great reasons for doing something and have that utterly not matter. And also that I tried to tell sophisticated people that other people who they have a high degree of regard for, like some sophisticated people for whatever reason have a high degree of regard for me. Even people you have a high degree of regard for sometimes make very large decisions based on very small amounts of data or very small amounts of consideration with regards to that decision. Therefore, you should update your world model about that and be very careful about saying things like, "Oh, the tech industry is so over, haha," as a joke, because it is quite possible that someone would listen to that and just perceive the surface-level meaning of it, and then the tech industry would lose the services of someone who, in expectation, it might very much want to have had the services of in 20 years.

How hard was it learning how to read Japanese?

It continues to be a project.

So, and this is after 20 years, right?

Yep. Granted, my feelings on this are partly filtered through the lens of I'm something of a writer in English, and so I'm not benchmarking myself against the typical student of the Japanese language, but I'm benchmarking myself against my own proficiency in reading and writing English. So I feel an enormous gap when my proficiency in reading and writing Japanese relative to my proficiency in English and that weighs on me. If you step out of the me view of the world, the point at which I was an effective professional at reading and writing Japanese was maybe 2 to 3 years after I got to Japan, so after a total of 6 years of study, and I was not the most diligent student during those 6 years. If you're not a heritage reader of Japanese or Chinese, you should benchmark it at least 3 years to be professionally capable at it.

If you're doing a startup, how is that evaluated in the Japanese marriage market?

Extremely poorly historically, both in the United States and in Japan. One of the most influential works of fiction ever is The Social Network. I bang the drum on this a lot, that The Social Network raised the status of entrepreneurship for proto-entrepreneurs worldwide. And thus we can see it in the data. There was a wave of applications to places like Y Combinator that will disclose that data, but also see it in the actual narratives of people who went on to found companies that that became worthwhile. Unfortunately, that gets expunged out of the public narrative because you don't want to tell serious people, "Oh yeah, I totally started doing a startup versus going to Google because The Social Network gave me social permission to do so." But that is a real thing. Anyhow, to Japan. I was once walking around Tokyo and there was a group of preschoolers being led around by their caretaker. One of them asked me in Japanese, "Hey mister, what's your job?" This is at about 10:30 in the morning for context. And I said, I am an entrepreneur and preschooler, mind you, said, "Yappari mushoku ka," which means just as I thought, he is unemployed. That is the form of too perfect anecdote to encapsulate a broader societal zeitgeist with respect to entrepreneurship. Like many things about Japan, there's all sorts of asterisks you can put on that too. Japan loves entrepreneurs in the same fashion that Catholicism loves saints, but they all happened a while ago. These are things that are changing over time, et cetera, et cetera. But broadly speaking, entrepreneurs are extremely undervalued in the Japanese dating market.

You once cited the following idea on your blog, and I quote, "Most people want to become wealthy so they can consume social status. Japanese employers believe this is inefficient and simply award social status directly." That's not you writing, but it's you citing. Can you explain?

Sure. People in the professional managerial class devote an extreme amount of care into their career and time. By their revealed preferences, this matters to them exceptionally. In the United States, it's often said that this is because you want to earn a lot of money and buy the big house so you can bring your friends over to the big house and show them that you're successful. You have indicia of respected institutions endorsing you, which which is the sort of like more gets-it feel of the world. The analogs of the US professional managerial class in Japan are similarly overworked, treated even more terribly to a substantial degree. There is an ingrained culture of abuse in Japanese labor/employer relations where that culture, there are parts of it in the United States, but not to nearly the same degree. The thing that you are trying to do if you are a salaryman is not to get the promotion so that you earn more money because you will not earn appreciably more money. And indeed, you will not earn appreciably more money than the false course of just taking social promotions through your entire life. The thing you are trying to do is get a higher— both true and sounds too good to be true. There was a chart of engineers at the company that I worked at back in the day when I was a salaryman. And there was a young man, I'll call him Tanaka-san, which is not his actual name, Tanaka-san had a couple weeks of seniority versus me in my role at the company. And so in the default ordering of the social hierarchy at a Japanese company, he would be above me on this chart that is pasted on the wall. And it's pasted on the wall for an actual business purpose because if someone's out of the office that day, you write they are absent or they are at a customer site or et cetera, et cetera. But the order matters and everyone knows the order matters. And one day I watched two young OLs office ladies, the coinage in Japan, going up to the chart and they had Tanaka-san's name in one hand and my name in the other hand. And one of them asked the other, which of these goes first? The first one said, well, Tanaka-san has seniority, it should be him. And the second one said, yeah, but Tanaka-san really screwed the pooch on that last project. And the other one said, oh yeah, good point. And there was like a literal moving hands up and down and a significant glance between each other and Yes, that is the correct ordering with Bakhurkhan versus Dakhasan. Tiny little anecdote that shows much more about the shape of the world. A huge amount of the effort involved in the culture that is Japanese salaryman is convincing the people that matter to you, who are most of your social network at work, who will be there at your wedding, who your boss will give a speech at your wedding because that is the culture that we operate in, that you have made it. If you are ambitious, et cetera, et cetera, et cetera. There are people who decline to participate in this in the same fashion as people decline to participate in the United States, but that is the broad accepted outline of the culture.

And how is it that your ambitions grow steadily in this environment? You weren't beaten down, you weren't discouraged, you didn't just fly home either, right? But you kept on setting your sights on something higher. What was that like inside you?

Interestingly, from having the perspective of being around people who are incredibly ambitious the last couple of years and whose ambitious had positive social purpose. One of the great regrets of my life is that in my 20s, I had so little ambition and was so beaten down and didn't take more aggressive actions to exit out of the situation I found myself in. I remember, so after I quit the salaryman job, which by the way, salaryman is a full-time employee of a Japanese company. The company owns your body and soul and return it to credibly promises to, at least historically credibly promises you to insulate you from all all risk. I worked at jobs that are described as that for about 6 years, burned out terribly, made a socially appropriate excuse to quit, which is the one thing that you as a salaryman are not allowed to do. And I remember April 1st, 2010, thinking I could get on a plane right now with nothing but the clothes on my back, close the Japanese chapter of my life entirely, and walk into Jeff Lawson's office in San Francisco, uh, who was the CEO of Twilio. He doesn't know me, but I think after walking into his office, I can beg, borrow, or steal a job there and just do something much more impactful, important, personally fulfilling, et cetera, over the next couple of years than the thing that I've been doing the last couple of years. But I'm not willing to call it quits on this Japan adventure yet. I do enjoy living here. Working here is terrible. I will try to carve out some semblance of living from my tiny internet software publishing operation that I was running at the time. And see what happens. And then indeed, the thing that happened 3 months later is that I met the young lady who eventually became my wife. And so we were off to the races.

Wasn't it efficient in some regards that you had so many years out there in the wilderness, so to speak, because you learned so many things? You're still young, right? You have a whole big long career ahead of you. And by avoiding becoming famous too early, you had this super hyped-up learning curve that you're now still benefiting from. Is that true or false?

I want it to be true. I think that it is falser than most people who would say that would give credit for. I know many people liked the musical Hamilton. I also like the musical Hamilton, but the thing about the character where he feels like he's running out of time despite that maybe not being rational is a struggle I've often had. I know rationally speaking I have at least 20+ years in my career left. I also know there is a level of energy and health that I had access to in my 20s that I no longer have access to. So I feel some counterfactual regret as to the things that I actually spent that energy and health on, which was running a World of Warcraft raid guild and being a Japanese salaryman for many years. I do not think that 6 years as a Japanese salaryman optimized for me learning all the things. I think I could have extracted most of the signal from that experience in 6 weeks to 6 months and then left, but felt myself socially constrained from doing so. I definitely don't regret moving to Japan because of the other non-professional knock-on effects on my life, but the degree to which my career/impact on the world, ex-personal life, ex-family, ex-raising two wonderful children and being married to a wonderful wife, the degree to which that is enhanced by my level of understanding of business Japanese or ability to function in a Japanese office environment, etc. Seems to be rather limited versus my ability to write well in English. I will say one thing about the experience is that having a lot of free time on your hands in the evenings and no outlet for English was a great push in the right direction of writing more than most people do in their 20s. The compounding effects of writing more are responsible for both a lot of the good stuff that has happened to me and a lot of the good stuff that I've been able to accomplish in the world.

Crypto questions. Why hasn't Tether collapsed yet? Right. People have run at it many times. Not too long ago, I think the price fell even to $0.93, which is dangerously low. It bounced back. It seems they can always redeem. What if it isn't a fraud?

I pre-commit that if it is not a fraud, I should have enormous egg on my face. On the other hand, there exists sufficient evidence on the public record in the CFTC case and etc. that at times in the past it has been an out-and-out fraud that had essentially no no backing and that they had done forensic accounting on it. Their examination period was about 18 months and said that it was less than that in more than 75 days in the examination period. From one sense, I can claim victory. It's a fraud. I was saying it was a fraud before it was cool. The government now acknowledges that they did fraud things at some points in the past. But I think it should also collapse. It is not just a tinkering around the margins fraud, but there is there's a huge amount of actual criminal activity there. The naive answer is, do we expect frauds to collapse quickly? Probably no. Madoff was active for 17 or 18 years. The only thing that actually brought his fraud to light— well, various cognoscenti knew about it. The thing that made it undeniable was being unable to meet redemption requests in the wake of the global financial crisis. And Madoff importantly Bernie did not cause the global financial crisis. Of all the crimes in the world, he was innocent of that one. But people said, Bernie, you have all this money for me. You alone among all the people I invest my money with have avoided this crisis, which is great because now I need money. Can you wire it to me? He did not have the money to wire, and that's how his crimes came to light. So to a certain extent, it not collapsing is like the thing that we expect to happen every day until it collapses catastrophically. The thing that we would expect the collapse to happen with is My dominant narrative is like some form of government action against their reserves that are custodied in some financial institution in New York, followed by the public disclosure of that action, which might not be a total freezing but enough to start the domino, and then a classic run on the bank, and then the pipes get overwhelmed, yada yada yada, and price goes down substantially below $93. In a famous interview on Bloomberg, Tether's character witness, one Sam Bankman-Fried, said that he believes that that it is astoundingly unlikely that Tether is worth in a true sense like 30, but you could quibble to whether it's worth like 99 cents or a dollar and a penny. I think there is a material chance that it's like truly worth something like 30, potentially negative after you've, you know, had government fines and other actions on top of it. So I continue to expect that to happen.

Circa late October 2023, Bitcoin is priced as high as $33K. Why is that? Surely it's good for many things then, right? It's been through a lot of price knocks, right? It's not a bubble in the sense that no one has ever asked, why is the price so high? It's been crushed, what, 5, 6 times since its origin, and it keeps on coming back. Is it a proven asset class?

Some things have a price and have liquidity at the moment, and you can trade them. On one hand, that is evidence, right? And on the other hand, that is not necessarily dispositive. I feel intellectually obligated to say I was saying that Bitcoin was overpriced at $17. I still believe that to be true in a lot of senses, meaning if counterfactually it was $17 today, I would say it was overpriced at $17. Do I believe it is overpriced at $33K relative to the amount of actual utility that's demonstrated in the world and the tens of billions of dollars that have been injected into creating infrastructure for it? Absolutely, yes. But some sense of epistemic humility, I have been watching that ticker for over a decade now and the ticker and market participants keep voting against my view. Question, why? Is it because of manipulation? Surely yes, but that is not a full explanation. Is it because of some amount of utility? I think the amount of realized utility by Bitcoin and I'm a great crypto skeptic, but if you were to say, okay, hold your nose for a moment and, and steelman the case for crypto utility, tell me about your favorite projects, etc., I would point at a lot of things that weren't Bitcoin that involve some sort of intellectual dissent and community crossover with Bitcoin. But Bitcoin as itself is clearly not the best product that crypto has come up with. And yet, the market says it is by a comfortable margin the most valuable product that crypto has come up with. I don't know how to square that circle.

100 years from now, if we were all to look back as historians and say, oh, the internet, that was in fact a big mistake, what's the most likely scenario that could bring about such a judgment?

I do not have a super developed point of view, uh, with respect to the, like, whether AI is going to end the world. I think relative to most well-educated people, I think that can't be be dismissed out of hand. People who've spent a long time thinking about it have spent a long time thinking about it, and the arguments advanced against them by people who dismiss it out of hand are clearly less than powerful arguments. But I wouldn't put a very high percentage chance on it, which I say to excuse the following. If the human race does not exist in 100 years, it is almost definitionally because of some knock-on consequence of the invention of the internet. And if the human race ceases to exist and the internet was necessary in the causal path to get to there, then I would regret the internet. In every other case, I would not regret the internet. I have an ebullience and love for it in a way that people in our social class in the United States are aggressively socialized out of having ebullience and true love for anything. I think that the internet is the capital G, capital W, great work of the human race in a lot of respects. It is magical It is an encapsulation of the best things about our society that is also tremendously instrumentally useful in making all the good things better and ameliorating all the problems over sufficiently long timescales. It seems naturally to me that this is extremely important, this is extremely valuable, and it seems extremely underrated by almost everyone, including people who would consider themselves great fans of the internet but say, "Oh, I'm a great fan of the internet, but I'm a great fan of penicillin too." I think in aggregate, the internet is obviously more important than penicillin by many orders of magnitude. Is it more important than medicine? I will bite that bullet. The internet is more important than medicine, like the entire institution of medicine from time immemorial to reasonable extrapolations of what we can do right now. Is it more important than writing? You couldn't have the internet without writing. Writing was very important to get to the development of the internet. That might be one of the most important things about writing, was that writing got us to the internet. That sounds like a little bit of— I know people will take that pull quote and say, oh, this crazy non-intellectual person, but I think that there is a reasonable case for it.

When you ran Vaccinate CA, which helped people in California get access to COVID vaccines, what is it you learned about talent?

What is it I learned about talent?

Yeah, because you had to run it with other people, right? What did you learn dealing with the people, getting them to cooperate with you? What was the surprise? It was a lot of non-traditional talent, right?

It was a lot of non-traditional talent. Word learn is funny because there's some embedded expectation of surprise, like you didn't know something and then you came to know something. There's a thing that I would have put a high probability on prior to VaccinateCA that VaccinateCA increased my credence on, which is that relative to credentialed talent in institutions like, uh, throw a dart at the dartboard about it, let's say county health departments, for example. And they are heavily educated in their field, they are credentialed, there's a democratic process that ultimately backstops the decision of county health department. J-Rando person on the internet, can they be better at like important facets of pandemic preparedness given 2 to 6 weeks versus a county health department that is prepared for exactly this problem for their entire professional career? Yes, straightforwardly yes. And that is the thing I would have believed in 2018, but now I have an existence proof of. And now the work of county health departments continues to be important, etc., etc. I do want to eventually be able to make coalitions with people who are necessary to achieve impact in the world. Part of being able to make coalitions implies not throwing them under the bus all the time. But it is extensively underrated how effective non-specialists can quickly become to be and how sort of spiky talent is distributed and how the internet can act as a force for bringing together the right spikes of that in a very fast fashion and creating leverage good with it.

If you had to explain or express in its most basic fundamental terms why people are afraid to negotiate more and negotiate harder. What's that explanation?

There is a societal script against being greedy, and it is such a fundamental script in so many societies for so long that I have a strong suspicion it might literally be baked into the operating system that is being a human. The notion of negotiating for salary or negotiating for anything else is something that you have to kind of like go against that cultural and possibly even biological programming to be able to do. Now humans go against their cultural and biological programming all of the time in many important ways, but it requires an immense amount of effort and most people don't devote that effort or don't perceive themselves as being allowed to do that in ways about salary negotiation. This creates crazy inefficiencies in the world. Until quite recently, I wrote one blog post about salary negotiation back in 2012. I wouldn't call it a blog post, But between you and me and the internet, it's a blog post. And hundreds of thousands of people read that every year. And many of them choose to write me an email and say, hey, I used the advice that you wrote in this I Can't Believe It's Not Blog post and resulted in a plus $25,000 to $125,000 delta in the salary I got. And I keep a folder in Gmail of the aggregate impact of that and stopped counting sometime after it was like $10 million plus a year for economic impact from one blog post. What do I come to believe about this? One, I clearly under-optimized my selection of picking things to write about because that was the shining star in my portfolio for so long, and yet I never attempted to take the knowledge that it was the shining star and do more stuff like that in the future. Two, society was hideously under-optimized in that it took one guy of no special skill in this field writing for one day on the topic to unlock tens of millions of dollars of value. And that's just the stuff we know about. Presumably there are people who get a salary upgrade and do not email me about that. And then 3, this implies that there are a lot of sophisticated actors who are making huge, huge mistakes that could probably be ameliorated for about as much effort as that blog post took to write, but who have not taken that effort.

You've left Japan, you've returned to the United States, you chose Chicago. Why Chicago?

Straightforward reasons on this one. My parents live in Chicago and my family grew up here. I feel a little bit of pain at the phrase, "I left Japan." I'm an American who, who lived in Japan for many years, and I expect in the future to at some point be an American living in Japan. But at the moment, I'm an American living in the United States, mostly for family reasons.

What has most surprised you about returning to Chicago?

I am having more difficulty with dealing with culture shock than my children, who have never known a nation other than Japan, or my wife, who has not materially spent time outside of Japan. And the shock is coming in little ways and big ways at the same time. As those of you who have been present in the United States for the last 20 years know, the United States is a different country in 2023 than it was when I kind of sort of left in 2004. Even though I'm someone who followed much of the news about this on the internet, a lot of it is hitting me quite hard in the face all at once. But there are some things that creep up over time that are not that noticed that are really obvious if you only experience living in America in once every 20-year increments. One of those things is portion sizes are so much larger than they were when I was growing up to a degree where there are many restaurants that attempt to serve me things that are— the act of attempting to serve that would put me off the notion of eating because it does not seem to be designed to be an amount of food edible by a normal person with my anchor for what normal people ate. The late 1990s. This is not just me saying this, by the way. You can look at pictures of McDonald's portion sizes over time and track them as they go up into the red. There are a lot of little things that Japan does right. It seems to— I call it the will to have nice things. And the United States in many places lacks the will to have nice things and suffers the consequences of that. These are just a million little paper-cut annoyances, like the delivery company deciding to deliver my bed to the middle of the front yard because they I couldn't get into the house. You're a rich and powerful nation that puts up with such obviously suboptimal things like that. And I'm hitting a lot of them all at once, and it is causing a degree of culture shock— reverse culture shock, rather.

Last question: what is it you plan to learn about next?

Hmm, I have an answer to this question. It is, uh, more of the engineering reality of geothermal heat and electricity extraction between 6 and 10 kilometers below the surface of the Earth, because I'm going to doing a tiny bit of pro bono work on behalf of a nonprofit organization that is attempting to popularize that technology as part of the energy mix over the next couple of years.

And you're bullish on it, I take it?

I think I'm bullish on it. Met Jamie, who's the founder of this organization, uh, 2 years ago, and it was the— if you ever had that idea that just sticks with you and like torments you in your dreams, and it's the thing that you can't get out of your head even as you go through many other things in life, like this is free little professional connection to all the things that I've ever done, but it is the idea that will not let me alone in my quiet moments. And so I will have to excise it by learning about this and seeing if the field deserves to have its current hold on me. And if not, I will find something else to raffle on. But if yes, then I should probably do something with that knowledge.

Patrick McKenzie, thank you very much.

Thank you very much.

Thanks for listening to Conversations with Tyler. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other listeners find the show. On Twitter, I'm @TylerCowen and the show is @CowenConvos. Until next time, please keep listening and learning.