THE TERM picks & shovels and its associated plays suggest a dynamic between two broad categories of people: practitioners and promoters.
The practitioners are those willing to assume personal risk to pursue prosperity—however misguided—through some combined investment of time and labor. Due to this investment, they bear full responsibility for whether they strike gold or not.
The promoters, meanwhile, seek to capitalize on the hopes of practitioners by offering portraits of success, fanning the flames of hype, and selling all kinds of tools they frame as essential for practitioners to achieve their dreams.
Since we’re already working with broad brushstrokes here, I’ll offer a few more generalities to flesh out each type:
Practitioners have to believe in the value of things like hard work, skill, talent, experience, and expertise. (I say have to because it would be almost impossible to invest time and effort into an endeavor if they didn’t believe it would prove rewarding.)
Promoters, due to the way they hover around the early-stage transaction, tend to be the fast-talkers, the showmen, the salesmen: They traffic in the 30,000-foot view (because they’re nowhere near the work), anecdotal stories of success, and, in the modern era, “proven systems” backed by screenshots of charts that go up and to the right. They also tend to be “real-estate-agent friendly,” which is to say they’re in constant contact and act like your best friend until a few minutes after the deal closes. Then they’re “super busy” because “things are crazy,” and you end up never hearing from them again.
Here we get echoes of the missionary and mercenary categories that were frequently discussed within the start-up community about a decade ago. The practitioner, by dint of their faith in pursuing an action and the risk they’re taking by pursuing that action, displays traits of the missionary. The promoter, by dint of their strategy and detachment from any outcome beyond a transaction, displays traits of the mercenary.
In the early stages of a boom—when enthusiasm is high—these two groups fall into a natural codependency: Practitioners need both the tools and the inspiration a promoter’s hype provides. Promoters, of course, need people to buy their stuff.
But while they might be codependent, there is a clear asymmetry in the relationship: Practitioners waded into the river or chipped away at rock completely dependent on their outcome, while the promoters counted their daily take free from any nagging sense of responsibility for how things turned out. If the customer struck gold, that would be good for business. If they fell down a mine shaft and broke their neck, well, the promoter already made their sale.
Due to this asymmetry, their incentives are fundamentally misaligned, as the promoter wants to perpetuate a narrative that sells picks & shovels even if they know that narrative doesn’t reflect the practitioner’s reality.
This is to say that at a certain point in every boom, the people selling picks & shovels become more and more aware of the dwindling odds of their customers’ success. But due to self-interest and the natural asymmetry of the dynamic, many decide to sell harder the closer the boom gets to being played out.
Sometimes this is achieved through outright fraud and manipulation, but in many cases, it involves the more subtle shift from utilitarian information to opportunistic information.
If you sell picks & shovels and one of your customers returns to your tent with a report that they struck gold in Freeman’s Fork, then in the short term that’s utilitarian information. You can relate it to the next customer, and it will help you sell some equipment while also serving as a helpful tip. Everyone wins.
If, however, a year passes and many customers have reported going bust, telling the next customer that someone struck gold in Freeman’s Fork has become opportunistic information. It’s not outright fraud, but you’re sharing it for your own purposes with a complete disregard for whether it distorts reality or otherwise misleads your prospective customer.
As the gold rush went on, fewer and fewer individuals struck gold. Bigger players then elbowed out the smaller players by acquiring land, sophisticated machinery, and large teams of laborers. Soon, the ratio of those selling picks & shovels grew out of proportion with the number of people willing to seek their fortune in that way. The hustle became too obvious. The myth and mania evaporated, followed by the demand. And then came the inevitable implosion of the market. Boomtowns became ghost towns.
After the gold rush, during a period that led up to the Roaring 20s, the United States’ economy was in recession about half the time, with very brief periods of growth amid a series of “panics.” The Roaring 20s led to the harsh adversity of the Great Depression, which traumatized generations of Americans.
As these various crises occurred, the Federal Reserve, the Federal Deposit Insurance Corporation, and a variety of other organizations were developed to mitigate the volatility of markets, but the gold rush and its subsequent fallout is still noteworthy because the pick & shovels mentality remains, and it is a significant contributor to a boom-bust cycle that continues to repeat itself.
Given the bursting of the first tech bubble in the early 2000s, the Great Recession in the late 2000s, the abundant fraud within the world of start-ups and cryptocurrency markets throughout the 2010s, and the rise and fall of NFTs in the early 2020s, an argument can be made that rather than learning a lesson from the picks & shovels boom-bust pattern, we’ve simply embraced the phenomenon and caused it to speed up.
And much of this has been aided by the increasing privatization of businesses and the opacity the internet affords online charlatans to hide in plain sight.