plus/minus epsilon

There's no silicon in Silicon Valley

28 Feb 2022

A long time ago, I read (what I think was) a blog post about how war is waged in the modern world that stuck with me. I've tried pretty hard to find it again but haven't been able to, so this blog will be my attempt to remember and think through the same points.

If you had to say what the most valuable thing in the world is, what would you say? Maybe diamonds and gold come to mind, your family, or sophisticated pieces of technology like the International Space Station. One way to answer this question empirically, is to look at what nations fight their wars over. What are people literally willing to kill for?

The answer is overwhelmingly that wars are fought for land – or what land represents, which is control of the scarce natural resources needed to survive and thrive. But since World War II, fighting for land has become increasingly rare and there’s a sense that war is “more expensive” than it used to be. This may be partly because technology has increased the killing capacity of states, particularly with nuclear weapons, which makes the costs of challenging a state’s territory higher than it’s ever been.

But it’s also because land is increasingly no longer the most valuable resource that states control. It’s estimated that all US commercial and residential real estate combined is worth roughly $50 trillion USD. Surprisingly, the market capitalization of US public companies is also roughly $50 trillion USD. Keep in mind that less than 1% of companies are public! And then the bond market for lending to these companies is worth another $50 trillion USD.

Saying that companies are the majority of a country’s economic value, or that a company is more valuable than the land it sits on and the natural resources it controls is counter-intuitive in one sense, but it’s a reality we subconsciously accept. This is especially true in technology. There’s a famous joke, “There’s no silicon in Silicon Valley (though there is plenty of silicone bouncing around)” dating back to 2009 when Intel announced it was closing its last manufacturing plant in Santa Clara – the last chip manufacturing plant in Silicon Valley. It begs the question: if Silicon Valley has no manufacturing and no natural resources, how is it home to literally the most valuable companies in the world?

In the standard sense, companies are valued based on some combination of the expectation of their continuing profitability, and the expectation of their future growth into a more profitable company. The most valuable companies are typically the ones that are the most phenomenally and reliably profitable. The profits of some of these companies, like Saudi Aramco, genuinely is driven by their monopoly on a natural resource, but these sorts of companies are rare. The majority have no particular resource that a competitor couldn’t obtain, and produce no particular product a competitor couldn’t produce.

Instead, what companies truly build is processes and relationships. These processes and relationships allow them to build the correct product and sell it to the correct people, again and again over time. As modern economies develop and become more complex, company valuations reflect the fact that the most valuable things in those economies is no longer the raw natural resources – it’s the understanding of how those resources are best allocated.

So consider for example, a land invasion of Cupertino. While invaders might be able to capture Apple Headquarters, that’s all they would’ve captured: a nice building that might’ve been worth a few billion before they invaded but now is worth nothing because it’s in a warzone. Apple itself would never have remotely been at risk of being captured because companies can’t be stolen like natural resources. While Apple might have $3 trillion worth of processes, relationships, and information, none of that can be stolen any more than you can steal someone’s girlfriend. Much like the property value of Apple HQ, the act of invasion destroyed the context where the value existed in the first place.

So this sort of summarizes the argument against military conflict in three points:

  • The value of land taken by force is often low relative to the value of a positive economic relationship with the people who already inhabit the land.
  • In contrast, the people who already inhabit the land value it very highly, and
  • The people who already inhabit the land often have a significant ability to kill you back.

This also explains why countries with developed economies will fight their wars with economic policy instead of military conflict. If the most valuable thing you provide to another country is access to your companies, the most harm you can cause is to cut off that access! The cost of severing an economic relationship is easily measured, has no risk of casualties, and can be implemented with low overhead. Military conflict on the other hand is expensive and often has dubious results with guaranteed casualties on both sides.

What’s interesting though, is that economic conflicts aren’t considered to be “real wars” in the same way that a military conflict would be, even though both sides may be taking actions designed to hurt the other as effectively as possible out of the whole range of options given to them (including military conflict!). Which means that the degree to which we’re in a Long Peace persists only as long as countries are interconnected enough by trade, that trade wars are the most effective type of war.

Aggressive and frivolous changes in foreign policy end up encouraging exactly the sort of decoupling of economies that would make trade wars ineffective. In the US, the President can raise tariffs, issue sanctions, and investigate foreign nationals with no oversight and these powers are frequently abused:

  • Protectionist trade policies in the 1920s and 1930s were a major cause of the Great Depression.
  • The EU data sovereignty initiative can be traced directly back to US spying revealed in the Snowden leaks.
  • The China-US trade war has resulted in American companies permanently moving their supply chains away from China.

The ability to have effective economic conflicts is a deterrent to physical conflicts, and ultimately a deterrent to nuclear conflicts. But their effectiveness is lost with overuse, which implies a need to conserve them and treat them with the seriousness they deserve, especially since (unlike military conflicts) an economic conflict directly and intentionally harms the civilians of a country.