Robber barons and silicon sultans
Today’s tech billionaires have a lot in common with a previous generation of capitalist titans—perhaps too much for their own good
IN THE 50 years between the end of the American civil war in 1865 and the outbreak of the first world war in 1914, a group of entrepreneurs spearheaded America’s transformation from an agricultural into an industrial society, built gigantic business empires and amassed huge fortunes. In 1848 John J. Astor, a merchant trader, was America’s richest man with $20m (now $545m). By the time the United States entered the first world war, John D. Rockefeller had become its first billionaire.
In the 50 years since Data General introduced the first mini-computers in the late 1960s, a group of entrepreneurs have spearheaded the transformation of an industrial age into an information society, built gigantic business empires and acquired huge fortunes. When he died in 1992, Sam Walton, the founder of Walmart, was probably America’s richest man with $8 billion. Today Bill Gates occupies that position with $82.3 billion.
The first group is now known as the robber barons. The second lot—call them the silicon sultans—could face a similar fate. Like their predecessors, they were once revered as inventive mould-breakers, delivering gadgets to the masses. But just like Rockefeller and the other “malefactors of great wealth”, these new capitalists are losing their sheen. They have been diversifying into businesses that have little to do with computers, while egotistically proclaiming that they alone can solve mankind’s problems, from ageing to space travel. More pointedly, they stand accused of being greedy businessfolk who suborn politicians, employ sweatshop labour, stiff other shareholders and, especially, monopolise markets. Rockefeller once controlled 80% of the world’s supply of oil: today Google has 90% of the search market in Europe and 67% in the United States.
Together, the two groups throw light on some of the most enduring themes of American history—both the country’s extraordinary ability to generate vast wealth and its enduring ambivalence about concentrations of power. Henry Ford, the youngest of the robber barons, once said that history is more or less bunk. He was wrong. The silicon sultans have the advantage of being able to learn from their predecessors’ mistakes. It is not entirely clear that they are doing so.
History rhymes
All business titans have certain things in common—a steely determination to turn their dreams into reality, a gargantuan appetite for success and, as they grow older, a complicated relationship with the fruits of their labour. But the robbers and sultans have more in common than most: they are the Übermenschen of the past 200 years of American capitalism, the people who feel the future in their bones, bring it into being—and sometimes go too far.
The most striking similarity is that they refashioned the material basis of civilisation. Railway barons such as Leland Stanford and E.H. Harriman laid down more than 200,000 miles of track, creating a national market. Andrew Carnegie replaced iron with much more versatile steel. Ford ushered in the era of the automobile. Mr Gates tried to put a computer in every office and in every home. Larry Page and Sergey Brin put the world’s information at everybody’s fingertips. Mark Zuckerberg made the internet social. Just as the railroad made it possible for obscure companies to revolutionise everything from food (Heinz) to laundry (Procter & Gamble), the internet allows entrepreneurs to disrupt everything from retailing (Amazon) to transport (Uber).
Both relied on the relentless logic of economies of scale. The robber barons started with striking innovations—in Ford’s case, a more efficient way of turning petrol into power—but their real genius lay in their ability to “scale up” these innovations to squeeze the competition. “Cut the prices; scoop the market; run the mills full,” as Carnegie put it. The silicon sultans updated the idea. Mr Gates understood the imminent ubiquity of personal computers, and the money to be made from making their software. Messrs Brin and Page grasped that their search engine could create a massive audience for advertisers. Mr Zuckerberg saw that Facebook could profit from inserting itself into the social lives of a sizeable chunk of the world’s population.
Economies of scale allowed the robber barons to keep reducing prices and improving quality. Henry Ford cut the price of his Model T from $850 in its first year of production to $360 in 1916. In 1924 you could buy a much better car for just $290. The silicon sultans performed exactly the same trick. The price of computer equipment, adjusted for quality and inflation, has declined by 16% a year over the five decades from 1959 to 2009. Each iPhone contains the same amount of computing power as was housed in MIT in 1960.
The robber barons denounced regulators in the name of the free market, but monopoly suited them better. Rockefeller rued the “destructive competition” of the oil industry, with its cycle of glut and shortage, and set about ensuring continuity of supply. The first trust, Standard Oil’s, established in 1882, was designed to persuade his rivals to give up control of their companies in return for a guaranteed income and an easy life. “The Standard was an angel of mercy reaching down from the sky and saying ‘Get into the ark. Put in your old junk. We will take all the risks’,” he wrote.
Others followed. Although the Sherman Anti-Trust Act of 1890 outlawed these devices as restraints on free trade, the barons either neutralised the legislation or got round it with another control-preserving device, the holding company. By the early 20th century trusts and holding companies held nearly 40% of American manufacturing assets. Alfred Chandler, the doyen of American business historians, summed up the hundred years following the civil war as “ten years of competition and 90 years of oligopoly”.
The silicon sultans have it easier. They sometimes brush with the law—Google and Apple have been scolded for creating informal agreements to prevent poaching wars—but network effects, whereby the more customers a service has, the more valuable it becomes, mean that their businesses tend towards monopoly anyway. In the digital world, the alternative is often annihilation. As Peter Thiel, PayPal’s cerebral founder, put it in “Zero to One”: “All failed companies are the same: they failed to escape competition.”
The result, in both cases, is an unparalleled concentration of power. A century ago the barons had a lock on transport and energy. Today Google and Apple between them provide 90% of smartphone operating systems of; over half of North Americans and over a third of Europeans use Facebook. None of the five big car companies, by contrast, controls more than a fifth of the American market.
The 0.000001%
The silicon sultans are some of the few businesspeople who can compete with the robber barons in terms of ownership. Carnegie made a point of always owning more than half of his company. Today most firms are widely held by large numbers of shareholders: the largest individual shareholder in Exxon, the grandchild of Standard Oil, is Rex Tillerson, the company’s chief executive. He owns 0.05% of the stock. But tech is different. Together Google’s two founders, Sergey Brin and Larry Page, and its executive chairman, Eric Schmidt (who also sits on the board of The Economist’s parent company) control two-thirds of the voting stock in Google. Mark Zuckerberg owns 20% of Facebook shares but almost all of its “class B” shares, which have ten times the voting power of ordinary shares.
The tech titans are not as rich in relative terms as the robber barons. When Rockefeller retired in the early 20th century, his net worth was equal to about one-thirtieth of America’s annual GNP. When Mr Gates stepped aside as CEO of Microsoft in 2000 his net worth might have equalled 1/130th of it. But they nevertheless represent the most significant concentration of business wealth in the world. In 2013 34% of billionaire-entrepreneurs aged 40 or under made their money in high tech.
What makes these concentrations of wealth all the more striking is that they followed on the heels of two of the most egalitarian periods in American history. The 1830s-40s saw America (outside the slave-owning South) establish itself as the land of participatory politics and individualism that Alexis de Tocqueville celebrated in “Democracy in America”. The years between the second world war and the late 1970s were years of low inequality of income in the United States.
Today’s tech billionaires have a lot in common with a previous generation of capitalist titans—perhaps too much for their own good
IN THE 50 years between the end of the American civil war in 1865 and the outbreak of the first world war in 1914, a group of entrepreneurs spearheaded America’s transformation from an agricultural into an industrial society, built gigantic business empires and amassed huge fortunes. In 1848 John J. Astor, a merchant trader, was America’s richest man with $20m (now $545m). By the time the United States entered the first world war, John D. Rockefeller had become its first billionaire.
In the 50 years since Data General introduced the first mini-computers in the late 1960s, a group of entrepreneurs have spearheaded the transformation of an industrial age into an information society, built gigantic business empires and acquired huge fortunes. When he died in 1992, Sam Walton, the founder of Walmart, was probably America’s richest man with $8 billion. Today Bill Gates occupies that position with $82.3 billion.
The first group is now known as the robber barons. The second lot—call them the silicon sultans—could face a similar fate. Like their predecessors, they were once revered as inventive mould-breakers, delivering gadgets to the masses. But just like Rockefeller and the other “malefactors of great wealth”, these new capitalists are losing their sheen. They have been diversifying into businesses that have little to do with computers, while egotistically proclaiming that they alone can solve mankind’s problems, from ageing to space travel. More pointedly, they stand accused of being greedy businessfolk who suborn politicians, employ sweatshop labour, stiff other shareholders and, especially, monopolise markets. Rockefeller once controlled 80% of the world’s supply of oil: today Google has 90% of the search market in Europe and 67% in the United States.
Together, the two groups throw light on some of the most enduring themes of American history—both the country’s extraordinary ability to generate vast wealth and its enduring ambivalence about concentrations of power. Henry Ford, the youngest of the robber barons, once said that history is more or less bunk. He was wrong. The silicon sultans have the advantage of being able to learn from their predecessors’ mistakes. It is not entirely clear that they are doing so.
History rhymes
All business titans have certain things in common—a steely determination to turn their dreams into reality, a gargantuan appetite for success and, as they grow older, a complicated relationship with the fruits of their labour. But the robbers and sultans have more in common than most: they are the Übermenschen of the past 200 years of American capitalism, the people who feel the future in their bones, bring it into being—and sometimes go too far.
The most striking similarity is that they refashioned the material basis of civilisation. Railway barons such as Leland Stanford and E.H. Harriman laid down more than 200,000 miles of track, creating a national market. Andrew Carnegie replaced iron with much more versatile steel. Ford ushered in the era of the automobile. Mr Gates tried to put a computer in every office and in every home. Larry Page and Sergey Brin put the world’s information at everybody’s fingertips. Mark Zuckerberg made the internet social. Just as the railroad made it possible for obscure companies to revolutionise everything from food (Heinz) to laundry (Procter & Gamble), the internet allows entrepreneurs to disrupt everything from retailing (Amazon) to transport (Uber).
Both relied on the relentless logic of economies of scale. The robber barons started with striking innovations—in Ford’s case, a more efficient way of turning petrol into power—but their real genius lay in their ability to “scale up” these innovations to squeeze the competition. “Cut the prices; scoop the market; run the mills full,” as Carnegie put it. The silicon sultans updated the idea. Mr Gates understood the imminent ubiquity of personal computers, and the money to be made from making their software. Messrs Brin and Page grasped that their search engine could create a massive audience for advertisers. Mr Zuckerberg saw that Facebook could profit from inserting itself into the social lives of a sizeable chunk of the world’s population.
Economies of scale allowed the robber barons to keep reducing prices and improving quality. Henry Ford cut the price of his Model T from $850 in its first year of production to $360 in 1916. In 1924 you could buy a much better car for just $290. The silicon sultans performed exactly the same trick. The price of computer equipment, adjusted for quality and inflation, has declined by 16% a year over the five decades from 1959 to 2009. Each iPhone contains the same amount of computing power as was housed in MIT in 1960.
The robber barons denounced regulators in the name of the free market, but monopoly suited them better. Rockefeller rued the “destructive competition” of the oil industry, with its cycle of glut and shortage, and set about ensuring continuity of supply. The first trust, Standard Oil’s, established in 1882, was designed to persuade his rivals to give up control of their companies in return for a guaranteed income and an easy life. “The Standard was an angel of mercy reaching down from the sky and saying ‘Get into the ark. Put in your old junk. We will take all the risks’,” he wrote.
Others followed. Although the Sherman Anti-Trust Act of 1890 outlawed these devices as restraints on free trade, the barons either neutralised the legislation or got round it with another control-preserving device, the holding company. By the early 20th century trusts and holding companies held nearly 40% of American manufacturing assets. Alfred Chandler, the doyen of American business historians, summed up the hundred years following the civil war as “ten years of competition and 90 years of oligopoly”.
The silicon sultans have it easier. They sometimes brush with the law—Google and Apple have been scolded for creating informal agreements to prevent poaching wars—but network effects, whereby the more customers a service has, the more valuable it becomes, mean that their businesses tend towards monopoly anyway. In the digital world, the alternative is often annihilation. As Peter Thiel, PayPal’s cerebral founder, put it in “Zero to One”: “All failed companies are the same: they failed to escape competition.”
The result, in both cases, is an unparalleled concentration of power. A century ago the barons had a lock on transport and energy. Today Google and Apple between them provide 90% of smartphone operating systems of; over half of North Americans and over a third of Europeans use Facebook. None of the five big car companies, by contrast, controls more than a fifth of the American market.
The 0.000001%
The silicon sultans are some of the few businesspeople who can compete with the robber barons in terms of ownership. Carnegie made a point of always owning more than half of his company. Today most firms are widely held by large numbers of shareholders: the largest individual shareholder in Exxon, the grandchild of Standard Oil, is Rex Tillerson, the company’s chief executive. He owns 0.05% of the stock. But tech is different. Together Google’s two founders, Sergey Brin and Larry Page, and its executive chairman, Eric Schmidt (who also sits on the board of The Economist’s parent company) control two-thirds of the voting stock in Google. Mark Zuckerberg owns 20% of Facebook shares but almost all of its “class B” shares, which have ten times the voting power of ordinary shares.
The tech titans are not as rich in relative terms as the robber barons. When Rockefeller retired in the early 20th century, his net worth was equal to about one-thirtieth of America’s annual GNP. When Mr Gates stepped aside as CEO of Microsoft in 2000 his net worth might have equalled 1/130th of it. But they nevertheless represent the most significant concentration of business wealth in the world. In 2013 34% of billionaire-entrepreneurs aged 40 or under made their money in high tech.
What makes these concentrations of wealth all the more striking is that they followed on the heels of two of the most egalitarian periods in American history. The 1830s-40s saw America (outside the slave-owning South) establish itself as the land of participatory politics and individualism that Alexis de Tocqueville celebrated in “Democracy in America”. The years between the second world war and the late 1970s were years of low inequality of income in the United States.