Hill BJ Teaser

The Startup Illusion

Germany’s chance to better manage the digital age

By Steven Hill

When travelers arrive at Berlin’s Tegel Airport and exit Terminal A with their roll-aways, they are immediately greeted by a monstrously large billboard in the quasi-shape of a giant football goalpost. The signage, which is framed in a kind of Prussian purple, features the names and corporate logos of over 250 marquee German companies. In the midst of all those splashy logos, emblazoned across the face of the massive block, shout the large, red letters: “THERE’S NO BETTER PLACE TO START UP.”

When I saw that, I couldn’t help but chuckle. I had arrived from San Francisco and Silicon Valley, the holy mecca of startup companies and their fervent religion of innovation and “disruption.” I landed nearly 10,000 kilometers away, only to be greeted by a monument to the global reach of my hometown. As if on cue, the lyrics to the Rolling Stone’s “Start Me Up” started jingling through my head: “If you start me up, if you start me up I’ll never stop.”

Start me up, indeed. During a visit to Germany a few months before, as I travelled from the giant Messen of Hannover and Frankfurt to the digital incubators of Berlin, I heard a near-constant refrain from numerous officials, whether in government, business or tech: “Germany needs to be more like Silicon Valley. . . . Where are the German Facebooks, Googles, and Apples?” In a familiar echo of Germany as the “sick man of Europe”—the prevailing talk in the late 1990s and early 2000s—many were now wondering, Why are German companies so stodgy and boring? Why aren’t Germans able to start companies that are more innovative and ‘disruptive’ (to invoke a favorite word of Silicon Valley)? Is Germany losing its competitive edge, which has made it a world-class exporter of high-end products? Where are the German startups that grab the public’s imagination with some sexy new “gotta have it” product that scales quickly into a monster company and becomes an industry leader?

Even before I exited Terminal A, I saw other ads trumpeting this new national obsession. On the network of overhead airport monitors, which dangle as if making pronouncements from the heavens, I saw an ad for “Startup City.” That one showed a rocket ship blasting off overtop the slogans “startup impulse” and “seed accelerator”—techno-jargon from Silicon Valley. Various magazine covers on the newsstands beckoned to the savvy business traveler with headlines about “The Five Things You Should Know About Start-Ups,” and “Startup Guide—Everything You Need to Know to Start and Grow.” In the airport bookstore, one can see titles with names like Lean Startup and Silicon Germany and Das 4-Stunden-Startup: Wie Sie Ihre Träume verwirklichen, ohne zu kündigen.

No question, San Francisco has long been an epicenter of disruption and revolution, whether hippie flower power or the Beat poets, antiwar protests and the free-speech movement, LSD, free love, and psychedelic music, or woman’s lib and gay marriage. Europeans have long viewed San Francisco as one of their favorite international cities, in part because, in trendsetting San Francisco, the future seems like it’s happening right now. Many Germans have looked westward toward California for inspiration and as a creative muse, along with a little vacation and golden sunshine. But today the “revolution” is of a decidedly different nature.

Europeans have long viewed San Francisco as one of their favorite international cities, in part because, in trendsetting San Francisco, the future seems like it’s happening right now.

The historical convergence of three miraculous inventions—ever more sophisticated smart phones, wireless high-speed internet, and Big Data (also known as “The Cloud”)—are changing the social and economic landscape in dramatic ways. Names like Google, Apple, Amazon, and Facebook dominate the accelerating digital techno-space, their companies synonymous with commercial success. Startup companies are viewed as beacons of business innovation and daring, with new bold-name companies like Uber, Airbnb, Twitter, Dropbox, Upwork, TaskRabbit, Instacart, and dozens more being hyped as the new avatars of the way things will be.

Now European startups are being launched, some of them copycats of the American original, including companies with deliciously scrambled names such as Wooga, ZenMate, Zalando, Foodora, Clickworker, and AppJobber, in Germany; Runtastic, Bitmovin, and Crate, in Austria; BlaBlaCar, Dailymotion, and Deezer, in France; Spotify, Skype, and Klarna, in Sweden; Zoopla, Just Eat, Deliveroo, and Hailo, in the UK; TomTom, WeTransfer, and Booking.com, in the Netherlands; Trustpilot, Peakon, and Opbeat, in Denmark; ListMinut.com and Ontoforce, in Belgium; and Rovio, in Finland. Startup fever has broken out all over the continent.

The term “disruption” is often associated with these companies, whether in the US or in Europe, signifying a type of innovation in which entrenched, dominant companies or products are unseated in the marketplace by smaller, lighter rivals that use technology to offer attractive solutions and at less cost than the old guard. “Disruption” involves an attack on traditional business models and their value chains. It is celebrated as being more modern and forward-looking, more twenty-first century, compared with the allegedly old, rigid companies of the dying twentieth century. So says the dominant “California Ideology” that has spread from the pulsing incubators and accelerators of Silicon Valley to the rest of the globe.

Some of the American startups have become what are known as “unicorns”—multibillion-dollar-valued companies—in just a few years. Their rapid success taps into our Enlightenment-based faith in modernity and technology as the pathway to ever-expanding prosperity, and has inspired envy among German techies, clickworkers, and entrepreneurs, young and old alike. The world is watching as these upstarts find new ways to load software and algorithms into just about everything, from automobiles to wristwatches, from drones to home appliances, from music to movies to hospitals, from agriculture to transportation to military operations to the assembly line floor. Robots and automation show potential for boosting labor productivity to unimaginable heights—and possibly human redundancy along with it, as the machines threaten to replace the humans. The spreading fever seeks nothing less than to transform the ways we work, communicate, create, consume, inform, educate, entertain, shop and travel. Tech trendsetter and venture capitalist Marc Andreessen, who became fabulously wealthy from inventing one of the first web browsers, Netscape Navigator (later Internet Explorer), which billions of people use to cruise the internet, says, quite simply, “Software is eating the world.”[1]

In short, the science fiction of yesterday has been spreading outward from its epicenter in San Francisco, sweeping across the US and then across the Atlantic Ocean, now arriving in Germany and Europe. Like the rest of Europe, Germany has been late to the party and now is scrambling to catch up. But the startup economy—also known as the digital economy, the internet economy, platform capitalism, the gig or sharing economy—shows potential for both promise and peril. Computers, algorithms, virtual/augmented reality, and so-called “smart machines” are now miraculously performing tasks that were previously unimaginable: diagnosing illnesses, writing sports stories and stock reports, driving vehicles, filling drug prescriptions, restoring sight to the partially blind, forecasting epidemics, and more. There are many positives to recommend with these technologies. There are also many alarming tendencies.

The startup economy—also known as the digital economy, the internet economy, platform capitalism, the gig or sharing economy—shows potential for both promise and peril.

One of my favorite examples of the pros and cons of these new technologies is autonomous piloted drones. I live near the beach in San Francisco, and, on a frequent basis, I see tech-geek guys flying their own small civilian drones, about the size of an automobile hubcap, up and down the beach. These NASA-lite spaceships are truly a technological marvel: in a matter of seconds they can rise vertically like a helicopter until they are out of sight, and then, just as quickly, descend and reappear. They zip back and forth, guided by an on-board GPS system, nearly silent and completely stealthy. But they also can be intrusive. Most of the guys controlling them have mounted a tiny GoPro video camera on board and are shooting footage of everyone and everything in sight. The unsuspecting women on beach blankets in bikinis and bathing suits have no idea that, hovering four meters above their heads, is a spacecraft recording their every primp and turn. Candid camera, indeed. Can surveillance of neighbors be far behind? Even more disturbing, a crazy Russian man became a minor YouTube sensation by mounting machine guns on his drones, and blowing away a crowd of staged mannequins in graphic gory detail.[2]

Pros and cons, cons and pros. Uber, the popular ridesharing taxi service, provides a new transportation option to consumers who were frustrated by poor service from traditional taxis; but it accomplishes that option by flooding cities with tens of thousands of cars and choking the streets with carbon-belching congestion. Now the taxi-vehicle shows up more quickly, but you spend an extra 25 minutes in traffic to get anywhere. The same with Airbnb: it has produced a popular alternative to traditional hotels that can be cheaper and more convenient for travelers, and it provides some people a way to earn some extra money by renting a spare room. Yet, increasingly, the Airbnb platform has been invaded by professional real-estate operatives, who know they can double their income by evicting tenants and renting entire apartment buildings to tourists. Down goes the city’s housing supply, up go the rents, and up go the profits for the professionals and Airbnb’s young billionaire founders.

Many of these digital technologies propose a future that could be liberating and could lead to social advances; others could well result in a turn down the wrong tunnel, leading toward a future Big Brother Stasi. Instead of simply embracing the startup/digital economy as “American” and therefore “good,” a more critical analysis and posture is needed.

How People Work

I have lived in the epicenter of Silicon Valley for over twenty years. As a resident and a journalist, I have watched tech bubbles come and go, startups rise and fall. Indeed, “Startup National Park” (as I like to call Silicon Valley) has created new products and services, and corralled our private data, in ways that both amaze and alarm us. But the most profound change of all is coming in how people work. Newer platform-capitalism companies like Uber and Airbnb, as well as Upwork, TaskRabbit, Instacart, and dozens more have created products and services that have proven to be attractive to consumers; they also have created digital platforms that provide new ways of working that create opportunities for earning income, especially for those seeking flexible, part-time work or for those who have been “labor-market outsiders” (traditionally, minorities, im­migrants, young people, and, to some degree, women). These platforms also have been attractive to those who want to earn extra income by “monetizing” their personal property, such as renting their private home or car to strangers who they connect with via dozens of available apps and websites.

While there is real income-earning potential in these kinds of constellations, the CEOs of many of these US companies tend to follow an extreme philosophy of economic libertarianism; they resist all regulation and want a labor force they can turn on and off, like a light bulb. They hire vast armies of workers who are contractors, freelancers, temp workers, or what in Germany is called “solo self-employed.” They do this because they want to be able to hire and fire at will. Many of these digital companies pay low wages, with no health care or safety net protections and no allegiance to the social relationship between employers and employees. They can get rid of you without notice by simply shutting you off their digital platform—“fired by algorithm,” as it is now called.

Many of these companies also don’t have much use for paying taxes, and a corps of hired lawyers helps them to find loopholes and circumvent laws. The European Commission recently found that Apple owed $14.5 billion in back taxes, plus interest—about the size of the economies of Iceland and Cyprus—paying an effective tax rate of .005%. Ireland had been granting illegal tax breaks to Apple for years, allowing it to pay substantially less tax than other companies. The Economist estimates that the profits stashed by multinational corporations in overseas tax havens like Ireland is roughly $20 trillion. No one likes to pay taxes, but in a modern society they are necessary to fund a social economy and to make modern civilization possible. By avoiding their tax responsibilities, these companies are redesigning the corporation and its business practices in a way that ultimately undermines the very society that they purport to be leading into the twenty-first century.

Yes, the startup mentality that pervades Silicon Valley can be wonderfully innovative, but it also tends to be blind to its destructive impacts. The state of California and the United States generally are several years ahead of Germany and Europe in how these developments are transforming the social, political, and economic land­scapes. Although still in the formative stages, there is much to learn from US attempts to regulate and tax disruptive companies. But many initial attempts at regulation have also failed, so a lot of what Germans can learn from America as it considers how to guide and regulate the startup economy is precisely what not to do.

Never in Germany?

Many Germans seem to believe that this kind of Wild West capitalism could never happen in Europe’s leading economy. Germany and most of Europe are different, more humanized and civilized, goes the thinking. Certainly there are important transatlantic differences—I wrote about them in one of my previous books, Europe’s Promise: Why the European Way Is the Best Hope in an Insecure Age—but the current differences between the US and Europe might very well prove to be temporary, since the pressures of globalization and market competition tend to homogenize national economies over time.

Certain “American” trends are already evident in Germany. Those include a significant rise in the number of precarious jobs and workers on “short-term contracts”—or, temp, freelancer, and part-time jobs, by another name. Already in the last two decades, particularly in the aftermath of the global financial collapse of 2008, Germany and the rest of Europe have seen core elements of the social economy rolled back. Many of the economic gains of the post-World War II era are standing on shakier ground today. And now there are many more immigrants in Germany, both from EU member states as well as from outside of Europe, who will be quite happy to take a low-paying, precarious job, providing a ready-made surplus labor pool.

Chancellor Angela Merkel has displayed a steadier hand than most leaders during the turmoil of the times. But under her watch the great German ship of state has taken on water. More German workers today are less economically secure, with stagnant wages and higher medical costs. The retirement system has been watered down to the point where an astonishing number of younger Germans I spoke to have little faith that a pension will actually be available to them when they retire. Multi-generational confidence in the German system is wavering.

So, Germany and Europe are currently in a danger zone. The future is lurking on the near-horizon, though it may be hard to see the threat from the security of today’s contented shoreline. It will be a tragedy if, twenty years from now, Germany and Europe look back on this time, when the advance of the startup economy was still in its initial stages, and say, “Wow, we didn’t get that right. We did not put into place the right laws and regulations to harness these powerful technologies in a way that prevented the dangers.” In a very real sense, what’s at stake over the next 15 to 20 years is the future of work, and the future of our societies that have been designed around a particular type of work. For the last several decades, the workers of Germany, the US, France, the UK and others in Europe have been among the most productive and wealthiest in the world. Our political systems were able to harness the economic system to foster a more broadly shared prosperity.

In a very real sense, what’s at stake over the next 15 to 20 years is the future of work, and the future of our societies that have been designed around a particular type of work.

But now that prosperity is being threatened by the arrival of powerful new digital technologies that, in the context of globalization, could upend—or “disrupt,” to use Silicon Valley’s overused buzzword—many of the factors that made our economies such a success by destroying traditional business models and value chains. McKinsey Global Institute, the research wing of one of the largest business consultancies in the world, says that digital platforms in both the US and Europe are transforming how we work, and “the rapid growth of the largest platforms suggest we have only just begun to see their impact.”[3]

The rise of populist candidates, parties and movements like Donald Trump, Brexit, and Alternative for Germany (AfD) reflects the growing anxiety and dissatisfaction on the part of many everyday people. Corporate profits are at an all-time high, as these mighty businesses roam the globe like marauding pirates, cherry picking which laws and regulations to follow, and stashing their treasure in overseas tax havens. So-called “free trade” agreements bestow upon corporations the divine right to file lawsuits against sovereign governments, overturning environmental, health, and safety laws and undermining democratic governance. Labor markets on both sides of the Atlantic are becoming increasingly segmented, with wages stagnant, especially in the middle-income brackets, and jobs more precarious. More and more people observe the world as it is and conclude that it is rigged against them. The result has been a divided landscape of winners and losers that has led to the rise of political populists who angrily denounce the status quo, a constant reminder of the insecurities of our age.

Across the European continent, various member states are experiencing this reality in different ways and to differing degrees. But, as the Greek situation shows, a crisis of even one of the smaller member states can affect all the member states. No member state has been able to escape completely the tidal pull of these forces.

As the leading economic power of the EU, Germany will be challenged like never before to lead Europe forward in the ensuing decades. Like the rest of the EU, already Germany has experienced this segmentation of its labor markets, with wages stagnant and the quality of its jobs deteriorating. While some recovery has been made since the depths of the global and Eurozone crises, the “new normal” has barely crept back to pre-crisis levels; Germany today has fewer permanent, full-time jobs, and several million more employees with fixed-term contracts than it had fifteen years ago. Germany, it appears, is only a few years behind the United States in experiencing a new type of inequality—“job inequality,” in which some types of jobs are “more unequal” than others. Increasing numbers of employers are hiring precarious workers who can be easily dismissed and who are not eligible for health care or other safety net supports through their employer. Hiring such workers allows businesses to drastically reduce labor costs, but this practice comes with a steep price for society, especially since these are some of the fastest growing types of jobs. All of this raises hard questions about the future direction of economic development, whether in Germany, the Eurozone, the EU, as well as in the United States.

The Way Forward for Germany

Germany need not wait for the United States but instead needs to take the lead in shaping the ongoing digitalization of the global economy. I have always been amazed—and thankful—at how much Germans value and respect America—maybe too much. Germans, and Europeans in general, often seem to be plagued by a hyper-self-critical mentality when it comes to Europe, finding fault in every EU decision or European Commission directive. But when it comes to the US, Germans allow much greater indulgence. They still seem to view themselves as the junior Cold War partner, sitting in the backseat while America sits up front driving the vehicle. Sitting in the backseat has its benefits; you don’t have to take much responsibility for the direction of the vehicle, and you can always defer the hard questions to the driver. If something goes wrong, you can blame it on the one with their hands on the steering wheel.

The US has many great assets, but anyone observing American politics can see a country in the throes of a national divide that will not end anytime soon. In the meantime, inequality has grown to alarming levels, action on climate change is barely inching forward, and the federal government now seems incapable of progressive action. As someone who has lived for many years in San Francisco, I can say that, while there is great merit in innovation and entrepreneurship, there are a number of downsides to the “startup model.” The tech companies have accelerated the American march toward a freelance society, where more and more workers have temporary, part-time jobs, multiple employers, stagnant wages, a deteriorating safety net and little job security. The relationship between employers and their employees is in the process of being severed. Too many political leaders in the US are in a thrall to technology, as well as to laissez-faire economic ideology, content to let these powerful digital technologies unfold in the hands of the libertarian CEOs of Silicon Valley. If we are to shape these new technologies in a way that allows their potentially good aspects to manifest, then it will require the right values and philosophy. In the US, I fear these qualities are substantially lacking.

But this is not some isolated US-based phenomenon. The pressures of a neoliberal brand of globalization already have spread to Europe and turned Germany and other member states into much more of a US-style freelance society. In Germany and across Europe, there are more precarious, temporary, self-employed and part-time workers than at any time since the aftermath of World War II. With more workers struggling to find suitable employment, that provides the pre-condition for a digital economy that, like in the US, will result in further troubling developments.

In Germany and across Europe, there are more precarious, temporary, self-employed and part-time workers than at any time since the aftermath of World War II.

How will Germany’s highly successful Mittelstand, with its age-old family-like business culture and strong regional ties, cope with the increasing pressure from globally based digital platforms? Will small and medium enterprises (SMEs) get left behind in the race to embrace the digital economy? How will states adjust their tax policies so that they capture revenue from platform capitalism companies determined to evade taxation? Or preserve the state’s ability to tax workers who are earning hidden wages “under the radar” of the on-demand, labor-for-hire platforms, which allows them to work for a company in one country while residing in another country, none of this commercial activity traceable by authorities using conventional methods? Will this cat-and-mouse game between the regulators and the unregulated undermine financing for the welfare state?

German-style prosperity has been based largely on a degree of solidarity and co-determination between the different economic sectors, and on a largely constructive relationship between employers and employees and between labor unions. But the digital economy, if left unchecked, shows a strong tendency to undermine this social dimension and to lead to what economist David Weil has called a “fissured” work life.[4] Among some leaders, there’s a growing awareness of this reality, but among others, the impacts of these immense forces are being underestimated. German political and business leaders will have to make some difficult and far-reaching decisions in the years ahead.

Fortunately, Germany has a number of advantages that give it a chance to not only preserve its essential character against the avalanche of the digital age, but also to use these technologies for continued prosperity. Indeed, it is possible that this digital economy could work better in a place like Germany than in the US, since the welfare state, a degree of economic democracy, and the “visible hand” of government are more developed. As I detailed in my book Europe’s Promise, in many crucial ways Germany’s “social capitalism” is quite different from the “Silicon Valley–Wall Street capitalism” that dominates in the United States. Germans are still supportive of the notion that government has an important role to play, like a conductor that harmonizes the different players in a symphony, unlike in the United States, which has strong anti-government tendencies. Germany still has a number of business leaders who value their relationship with their employees and the social component of labor markets. Labor unions still have influence and have begun to focus some attention and resources on startups and digital economy workers. The business–labor detente understands the truism that good jobs and decent wages produce happy workers who become happy customers for the businesses, which in turn results in a virtuous circle of profits, reinvestment and a robust middle class.

Germany also has enacted a measure of economic democracy, having recently celebrated the forty-year anniversary of the federal law for codetermination, which requires worker-elected supervisory boards and works councils for businesses, and, more generally, a culture of consultation that could play a key role in stimulating the dialogue necessary to figure out how to preserve a vibrant social capitalism in the digital age. This dialogue already has begun, sponsored by various federal ministries and agencies under initiatives known as Industrie 4.0 and Arbeit 4.0, during which the usual social partners have come together to exchange views on what a new social contract for the digital age should look like.

But Germany also has some antiquated ways that are hobbling it. While Germans talk a lot about the need for more innovation, they are inclined to take their blueprint from Silicon Valley. But Germany cannot create another Silicon Valley, nor should it want to. Instead, Germany needs to seek a new type of innovation that draws from the best practices around the world, and rolls that up inside Germany’s well-known prowess for engineering, application, and implementation. Germany also needs to shed some outdated assumptions about how workers are working, which unfortunately are being obscured by obsolete methodologies used for counting and tracking the labor force. Part-time and so-called “independent” jobs, as much as permanent full-time jobs, are becoming the building blocks of the digital age, and developed economies need to figure out how to turn these from bad jobs into good jobs.

Germany cannot create another Silicon Valley, nor should it want to.

By pushing forward in a different direction, Germany can forge a new “Way of Innovation” that is capable of leading the world into the twenty-first century. Policymakers and labor advocates should not wait until the impacts of the digital economy are so severe that it is too late to design a balanced policy approach. German and European leaders should take advantage of this “incubator moment” to push forward now, to solidify the ground beneath precarious workers and part-time, self-employed work, both as an end in itself but also as a hedge against further erosion of good, full-time jobs. The right policies would build on German strengths in a way that enhances the benevolent multiplier effect and the virtuous circles of social capitalism. The wrong policies, however, will take Germany and Europe further down the precarious road of the Freelance Society.

Germany could be a global leader in ensuring that a more tech-driven economy doesn’t further enlarge the gap between the “haves” and “have-nots.” The right regulations and innovative policies would allow Germany to ensure that technology will enrich all of society, instead of just a handful. Germany’s social capitalism could be the key to figuring out how to erect a new framework that is well suited for the fast-emerging Digital Age.

NOTES

[1] Marc Andreessen, “Why Software Is Eating The World,” Wall Street Journal, August 20, 2011, http://www.wsj.com/articles/SB10001424053111903480904576512250915629460.

[2] FPSRussia, “Quadrotor Drone, with Machine Gun! – PATROLLING AMERICAN SKIES,” https://www.youtube.com/watch?v=MjG1n9FEDb0. Accessed January 10, 2013.

[3] McKinsey Global Institute, “Independent Work: Choice, Necessity, and the Gig Economy,” McKinsey and Company, October 2016, page viii,

[4] David Weil, The Fissured Workplace: Why Work Became So Bad for So Many and What Can Be Done to Improve It (Harvard University Press, 2014).

 

This essay is derived from the Introduction of Die Start-up-Illusion: Wie die Internet-Ökonomie unseren Sozialstaat ruiniert, published in German in May 2017 by Droemer Knaur. It is published here in English by author permission. Steven Hill was a spring 2016 Holtzbrinck Fellow at the American Academy in Berlin.

Photo: twitter.com/GorillaMediaLtd