It is better to lead revolutions than to be conquered by them.
A lesson from the technology industry is that it’s better to be in front of a big change than to be behind it.
He who does not risk, does not drink champagne.
On August 9, 2007, BNP Paribas froze withdrawals from three of its funds. Fearing that move would halt interbank lending, the world’s worried central bankers, led by the European Central Bank’s Jean-Claude Trichet, pumped billions into global money markets. Those twin steps eventually came to be viewed as the opening shot in the global credit crisis.
Eight days later, George Soros hosted twenty of Wall Street’s most influential investors for lunch at his Southampton estate, on the eastern end of Long Island. It was a warm but overcast Friday afternoon. As the group dined on Long Island striped bass, fruit salad, and cookies, their tone was serious and rather formal. The meal was one of two annual “Benchmark Lunches,” held on successive Fridays in late August and organized by Byron Wien, a Wall Street veteran who had befriended Soros four decades earlier thanks to a shared interest in then obscure Japanese stocks.
James Chanos, the influential short hedge fund manager, was one of the guests. It was a group, Chanos told me, of “pretty heavyweight investors.” Other diners included Julian Robertson, legendary founder of the Tiger Management hedge fund; Donald Marron, the former chief executive of PaineWebber and now boss of Lightyear Capital; and Leon Black, cofounder of the Apollo private equity group.
In a memo about the luncheon discussion he distributed a few weeks later, Wien wrote that the talk focused on one issue: “Were we about to experience a recession?” We all know the answer today. But just over a year before the collapse of Lehman Brothers definitively plunged the world into the most profound financial crisis since the Great Depression, the private consensus among this group of Wall Street savants was that we were not. According to Wien’s memo, “The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.”
Only two of the twenty-one participants had dissented from that bullish view. One of the bears was Soros. “George was formulating the idea that the world was coming to an end,” Wien recalled. Far from being won over by his friends, Soros saw their optimism as reinforcing his fears. He left the lunch convinced that the global financial crisis he had been predicting prematurely for years had finally begun.
His conclusion had immediate and practical consequences. Soros had been one of the world’s most successful and most influential investors: for the thirty years from 1969 through 2000, Soros’s Quantum Fund returned investors an average of 31 percent a year. Ten thousand dollars invested with Soros in 1969 would have been worth $43 million by 2000. According to a study by LCH Investments, a fund owned by the Edmond de Rothschild Group, during his professional career Soros has been the world’s most successful investor, earning, as of 2010, a greater total profit than Warren Buffett, the entire Walt Disney Company, or Apple.
But in 2000, following the departure of Stan Druckenmiller, who had been running Quantum, Soros stepped back from active fund management. Instead, he recalled, “I converted my hedge fund into a less aggressively managed vehicle and renamed it an ‘endowment fund’ whose primary task was to manage the assets of my foundations.”
On August 17, 2007, he realized he had to get back in the game. “I did not want to see my accumulated wealth be severely impaired,” Soros told me during a two-hour conversation in December 2008 in his thirty-third-floor conference room in midtown Manhattan, with views overlooking Central Park. “So I came back and set up a macro account within which I counterbalanced what I thought was the exposure of the firm.”
Soros complained that his years of semiretirement meant he didn’t have the kind of “detailed knowledge of particular companies I used to have, so I’m not in a position to pick stocks.” Moreover, “even many of the macro instruments that have been recently invented were unfamiliar to me.” At the moment he made his crisis call, Soros was so disengaged from daily trading that he didn’t even know what credit default swaps—the now notorious derivatives that brought down insurance giant AIG—were. Even so, his intervention was sufficient to deliver a 32 percent return for Quantum in 2007, making the then seventy-seven-year-old the second-highest-paid hedge fund manager in the world, according to Institutional Investor’s Alpha magazine. He ended 2008 up almost 10 percent, the same year that saw global destruction of wealth on the most colossal scale since the Second World War, with two out of three hedge funds losing money, and he was ranked the world’s fourth highest-paid hedge fund manager. Druckenmiller, his former first lieutenant and a self-confessed admirer of Soros’s approach to investing, came in at number eight.
The twenty more bullish guests at the Soros table that August afternoon weren’t outliers. They reflected the consensus view of corporate America’s top economists. When the Wall Street Journal reviewed the 2008 predictions of America’s fifty-two leading economic forecasters, it found that only one of them had foreseen a fall in GDP. As Dick Fuld, the once lionized Lehman chief, told a congressional committee in October 2008, a month after his firm’s bankruptcy and more than a year after Soros’s lunch: “No one realized the extent and magnitude of these problems, nor how the deterioration of mortgage-backed assets would infect other types of assets and threaten our entire system.”
Alan Greenspan was so wrong-footed by the crash of 2008 that he admitted intellectual defeat. “I made a mistake,” he told a congressional committee on October 23, 2008. “Something which looked to be a very solid edifice, and indeed a critical pillar to market competition and free markets, did break down. And I think that, as I said, shocked me.”
Hindsight makes all of us Einsteins. With the wisdom it bestows, it is easy to mock and malign the actions and the explanations of the Fulds and the Greenspans. But in 2007 and early 2008, inertia—whether you believe it to have been motivated by avariciousness or incompetence—was the normal response. While the bubbles are easy to identify in retrospect, when we are caught up in them, most of us find it difficult to imagine they will ever burst. And even those of us who are intellectually honest and experienced enough to appreciate that, one day, the boom is bound to end, find it tough to act on that realization.
It is not just financial crashes we have a hard time anticipating. Significant paradigm shifts more generally—revolutions in politics and society, as well as those in business and the markets—are notoriously hard to foresee. The CIA famously failed to predict the collapse of the Soviet Union. Less than a year before Hosni Mubarak was toppled, the IMF published a report lauding his economic reforms and the stability they had created. Mike McFaul, a political scientist who was appointed U.S. ambassador to Russia in 2011, believes that “we always assume regime stability and when it comes to authoritarian regimes we are always wrong.”
Even after the revolution has begun—after the first overleveraged bank freezes withdrawals from its riskiest fund, after the protesters win their first important standoff against the soldiers of the ruling regime—most of us are reluctant to admit that the world has changed. As historian Richard Pipes observed, after the Bolsheviks seized power in 1917, prices on the Petrograd stock exchange remained stable. And once we recognize that the world has changed, most of us are very bad at adapting our behavior to the new reality.
Instead, according to London Business School professor Donald Sull, most companies respond to revolutionary change by doing what they did before, only more energetically. Sull calls this “active inertia” and he believes it is the main reason good companies fail: “When the world changes, organizations trapped in active inertia do more of the same. A little faster perhaps or tweaked at the margin, but basically the same old same old…. Organizations trapped in active inertia resemble a car with its back wheels stuck in a rut. Managers step on the gas. Rather than escape the rut, they only dig themselves in deeper.”
Clayton Christensen, the Harvard Business School professor whose book The Innovator’s Dilemma is the corporate bible on disruptive change, has found that established companies almost always fail when their industries are confronted with disruptive new technologies or markets. And that is not, he argues, because their managers are dumb or lazy. It is because what works in ordinary times is a recipe for disaster in revolutionary ones. “These failed firms,” he writes, “were as well run as one could expect a firm managed by mortals to be—but there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure.”
The rare ability—like Soros’s—to spot paradigm shifts and to adapt to them is one of the economic forces creating the super-elite. That’s because moments of revolutionary change are also usually moments when it is possible to make an instant fortune. And, thanks to the twin gilded ages, we are living in an era of a lot of revolutionary shifts.
One set of changes is in the emerging markets. The broad secular trend since the late 1980s has been for authoritarian regimes to give way to more democratic ones and for closed, state-controlled economies to become more open. Sometimes the transition happens with a bang, as it did in Eastern Europe in 1989 and North Africa in 2011; sometimes it happens more gradually, as in India, China, and parts of sub-Saharan Africa. But in much of the world, the late eighties and the nineties were a time of privatization, deregulation, and the lowering of trade barriers. The result was economic windfalls for the locals and foreigners with the skills, the smarts, and the psyche to take advantage of them.
A second set of revolutions is in technology. New technologies, especially computers and the Internet, then mobile and wireless, are disrupting existing businesses and opening up the chance to create new ones. Like the industrial revolution, which started with mechanization of the textile industry, then the invention of the steam engine, followed by the combustion engine and electricity, the technology revolution isn’t a single discovery; it is wave after wave of related transformations. In 2012, the hot new areas were big data—our ability to collect and analyze massive amounts of information—and machines talking to machines, creating what W. Brian Arthur, the economist who studies technological change, describes as the second, digital economy—“vast, silent, connected, unseen, and autonomous.”
Finally, these two big revolutions, together with a broader global trend toward more open markets in money, goods, and ideas, combine to reinforce each other and create a faster-paced, more volatile world. Twitter and Facebook are the offspring of the technology revolution, but they turn out to have made political revolutions easier to organize. Before the invention of the personal computer, the securitization of mortgages—which turned out to be part of the kindling for the financial crisis—would not have been possible. Nor would the algorithmic trading revolution, in which machines are replacing centuries-old stock exchanges and a couple of lines of corrupt code can trigger a multibillion-dollar loss of market value in moments, as occurred during the “flash crash” on May 6, 2010.
Revolution is the new global status quo, but not everyone is good at responding to it. My shorthand for the archetype best equipped to deal with it is “Harvard kids who went to provincial public schools.” They got into Harvard, or, increasingly, its West Coast rival, Stanford, so they are smart, focused, and reasonably privileged. But they went to public schools, often in the hinterlands, so they have an outsider’s ability to spot the weaknesses of the ruling paradigm and don’t have so much vested in the current system that they are afraid of stepping outside it.
Facebook’s Mark Zuckerberg (New York State public school, Harvard), Blackstone cofounder Steve Schwarzman (Pennsylvania public school, Yale undergraduate, Harvard MBA), and Goldman Sachs CEO Lloyd Blankfein (Brooklyn public school, Harvard) are literal examples of this model. Most of the Russian oligarchs—who were clever and driven enough to get degrees from elite Moscow universities before the collapse of the Soviet Union, but were mostly Jewish and therefore not fully part of the Soviet elite—have a similar insider/outsider starting point. Soros, the worldly and well-educated son of a prosperous Budapest lawyer, who was forced by war and revolution to make his own way in London and New York, is another representative of the genre.
The Citigroup analysts who coined the term “plutonomy” go one step further. They argue that responding to revolution is a biological trait, genetically inherited, and that one way to be sure your society is good at it is to open your borders to immigrants, on the theory that moving to a new country is an example of responding to revolution. They write, “Dopamine, a pleasure-inducing brain chemical, is linked with curiosity, adventure, entrepreneurship, and helps drive results in uncertain environments. Populations generally have about 2% of their members with high enough dopamine levels with the curiosity to emigrate. Ergo, immigrant nations like the United States and Canada, and increasingly the UK, have high dopamine-intensity populations.” Responding to revolution—and the economic rewards it brings today—they argue, isn’t just something we can learn by reading the works of business school professors like Christensen or Sull, or the result of an insider/outsider background. It is, they believe, hard-coded in our DNA.
The economic premium on responding to revolution not only helps to create the super-elite, it is one of the forces widening the gap between the super-elite and everyone else. The revolutions that those Harvard public school kids capitalize on create outsize rewards for the winners and, in the medium term, usually make the world a better place for everyone.
But in the short run, they also create a lot of losers: new technologies destroy old jobs and, according to extensive research by MIT’s David Autor, have significantly hollowed out the U.S. middle class; Russia’s market transition created seventeen billionaires in a decade, but also led to a 40 percent drop in GDP; Soros profited from the 2008 crash and it made John Paulson a billionaire, but millions lost their jobs, homes, and retirement savings. For the winners, revolutions can bring a windfall; for the losers, disaster.
By any measure, private equity tycoon David Rubenstein is a plutocrat. Forbes estimated his personal fortune in 2012 to be $2.8 billion. Carlyle, the private equity group he cofounded, manages $150 billion. The atrium of New York’s premier cultural venue, Lincoln Center, is named after him. Former president George H. W. Bush served as a senior adviser to Carlyle; James Baker, the former secretary of both the Treasury and state, was a partner. John Major, the former British prime minister, was chairman of Carlyle Europe.
One afternoon in 2007, when Rubenstein noticed that the last privately held copy of the Magna Carta was being auctioned off by Sotheby’s, he was suddenly struck by the idea that the Magna Carta wasn’t just the founding document of Britain’s constitutional monarchy, it was the founding document of American democracy, too. The United States, he thought, really should have its own copy of this seminal agreement. So he bought it. For $21.3 million. When he tells this story, with a mixture of pride and lingering incredulity at his own impetuosity, Rubenstein’s favorite moment is talking to his wife at the end of the day and offering a humdinger of a punch line to the classic conjugal question “What did you do today, darling?” Rubenstein’s answer: “I bought the Magna Carta.”
All of which is to say that Rubenstein is no stranger to super-wealth. But the first time I met him, he was fascinated by the years I had spent chronicling the rise of the Russian oligarchs. Now that, he told me, was a time and place where you could make some real money.
Rubenstein is right. Responding to revolution has been particularly profitable in those parts of the world where there has been a real revolution, either overthrowing the ancien régime, as in the former Soviet bloc, or just a shift in the economic system, from central planning to the market. The most dramatic transition—and the biggest opportunity to earn a windfall—was in Russia, where twenty years of capitalism has created around a hundred billionaires, 8 percent of the world’s total. The personal wealth of this group of Russians could buy roughly 20 percent of their home country’s annual economic output.
Russia, of course, gives plutocracy a bad name. The Kremlin version of capitalism has been exceptionally good at producing billionaires—Russia has the world’s highest ratio of billionaires relative to the size of the economy—but the country’s overall performance has been less impressive. The economy shrank by 40 percent in six years and male life expectancy dropped nearly to the levels of sub-Saharan Africa in the 1990s—the decade when most of today’s oligarchs got their start. It has been growing more robustly for the past ten years, but has been outpaced by China, India, and Brazil, and remains largely dependent on natural resources. By 2011, per capita income was $12,993, well above emerging markets like China and India but below Lithuania, Chile, and Barbados, and male life expectancy is a mere sixty-two. Russia remains a tough place to do business: the World Bank rates it at 120, below Nicaragua, Yemen, and Pakistan.
But, as Rubenstein recognized, if you knew how to respond to revolution, there was no better place to be than Moscow in the 1990s. The conventional wisdom, even in Russia, is that the winners of the great privatization windfalls were Kremlin insiders. But that isn’t quite true. Of course, onetime apparatchiks have done extremely well in Russia’s transition to a market economy—one of the country’s richest men is probably Vladimir Putin. But in the former Soviet Union, as in the United States, many of the plutocrats have turned out to be the Russian equivalent of public school kids who went to Harvard: close enough to the levers of power to take advantage of the market transition, but also far enough away that they understood that the regime was crumbling.
Mikhail Fridman, an oil, banking, and telecom magnate worth $13.4 billion in 2012, is an archetypal oligarch. He was born and raised in L’viv, in western Ukraine, one of the Soviet Union’s freest and most cultured cities, but also far from the center of political power. Fridman was smart enough to make it to an elite Moscow polytechnic institute, where he earned a degree in physics. But Fridman was both unconnected and Jewish, which blocked him from becoming a total insider. He wasn’t allowed to do graduate research work, as he wanted, and was instead assigned a job in a provincial factory 150 miles outside Moscow.
With hindsight, that exclusion was a blessing. Fridman had been an energetic college entrepreneur, organizing ventures ranging from window washing to a theater ticket purchasing system, and he had accumulated enough rare goods (mostly jeans and caviar) to bribe his way into a choicer work assignment in Moscow. But the experience made him skeptical about his chances to prosper inside the Soviet system and determined to focus on opportunities outside it. By the time the Soviet Union collapsed, and the really big business opportunities materialized, he was already a millionaire, a powerful starting position.
“What I really, really wanted to do, my childhood dream, was to be a physics professor,” Fridman once told me. “If I had been born in America, that is what I would be. Thank goodness for Soviet anti-Semitism.”
The early biographies of the other oligarchs are uncannily similar. Viktor Vekselberg, a metals and oil oligarch, is another Jew from western Ukraine who got a PhD in math from an elite Moscow polytechnic. But he was enough of an outsider that in the late 1980s he decided to supplement his family income—“I really wanted a car,” he told me—by writing and selling computer programs. Again, by the time the Soviet Union collapsed, he was poised to pounce. Boris Berezovsky, an oil, industrial, and media magnate before he lost a power struggle with Putin, was an obscure mathematician and apparatchik when perestroika was first declared, bringing its attendant business opportunities. Vladimir Gusinsky, Russia’s most powerful media baron before he, too, lost a power struggle with Putin, was a Jewish theater impresario who never made it into the first circle of state-supported Soviet cultural intellectuals and who supplemented his income by trading consumer goods like jeans, copper bracelets, and Sony Walkman players in the black market.
In fact, of the seven men who between them controlled half of the entire Russian economy in 1998, and who became known as the oligarchs, six were Jewish and few of them were privileged. The only oligarch who was a real insider, a member of a group known as “the gilded youth” because of their privileged upbringing as the children of the nomenklatura, was Vladimir Potanin, the son of an official in the Ministry of Foreign Trade. Ultimately, that network and that pedigree were a great help to Potanin as he built his metals and banking empire, including control of Norilsk Nickel, the world’s largest nickel producer. And it is no accident that Potanin is the only oligarch who served in the cabinet.
But at the moment of transition, Potanin’s elite background almost blinded him to the biggest economic opportunity in his country’s history. In the late eighties and early nineties, while men like Fridman, Vekselberg, and Gusinsky were experimenting in the small space for private business permitted by Gorbachev, Potanin was still climbing the Soviet political ladder, earning his degree in foreign relations, and winning a coveted job at the Ministry of Foreign Trade. He sensed that the world was changing, and he had just about summoned the courage to start his own trading firm when he was offered a post in Brussels, a plum assignment at a time when travel to the West was highly restricted.
“I was proud and excited and I accepted the assignment,” Potanin told me. “But then, at the last minute, I realized things were changing so quickly in Russia and I had to be part of the change. Everyone thought I was crazy.”
A lot of responding to revolution is about luck. Not just being at the right place at the right time, but also reading the one book or having the single conversation that allows you to spot a nascent opportunity in a fast-changing world. And sometimes, you might have the misfortune to read the wrong book or watch the wrong movie. That is what happened to Kakha Bendukidze, a Georgian-born biologist (yes, another smart outsider) who parlayed his scientific skills and connections into a small manufacturing empire, including ownership of Uralmash, a legendary Soviet heavy machine–building factory.
Bendukidze became a multimillionaire, but he never became an oligarch. Why? “I blame Wall Street,” he told me—the film, not the Manhattan neighborhood. “We watched that movie in 1992 and we didn’t understand any of it. I thought to myself, If I can’t even understand as much finance as an ordinary American moviegoer understands, it would be crazy for me to start my own bank.” But at a moment of hyperinflation and slightly lower state interest rates, banking offered an opportunity to make the first big post-Soviet windfall. Even more important, the fortunes earned using state credits provided the future oligarchs with the capital and the connections to muscle their way into the real windfall, the 1995 loans-for-shares giveaway of Russia’s natural resources. Because of Gordon Gekko, Bendukidze missed out.
Soros learned about revolutions the hard way. He compares 2008, with its cataclysmic events and his survival of them, with 1944, when as a Jewish fourteen-year-old in Nazi-occupied Budapest he and his family eluded the Holocaust. The Soroses and their circle of friends had lived comfortable, largely secular lives before the Germans arrived. Many in their community were unable to grasp that that life was over and they needed to flee at once. An exception was Tivadar, Soros’s beloved father, whose experience of the Russian Revolution as an Austro-Hungarian officer had taught him the necessity of responding to revolutionary change with equally radical behavior. Over the objections of his wife and mother-in-law, Tivadar immediately sent the family into hiding—a decision that saved all their lives. Now a fit, often tanned eighty-two-year-old who favors beautifully tailored suits and has a thick, graying head of hair as well as a hearing aid, George Soros thinks his father’s “formative” experience of revolutionary change helped him to anticipate and respond to the current crisis.
“I recognize that sometimes survival requires a positive effort. I think that is really a childhood experience, and it was partly taught and partly experienced…. I had his [my father’s] experience of where the normal rules don’t apply and that if you abide by the rules, you’re dead. So your survival depends on recognizing that the normal rules don’t apply…. Sometimes not acting is the most dangerous thing of all.”
That early life training shaped Soros’s investing style and his investing philosophy. “My theory of bubbles was a translation of this real-time experience. I became a kind of specialist in boom and bust.”
That is certainly the view of his son Jonathan, a triathlete, Harvard Law School grad, and married father of two—but also, as the child of American prosperity and stability, someone who, in his father’s opinion, is not a leader of radical change. Jonathan says of his father: “That experience has allowed him to see through artifice. He can see the things that look like they are very stable—things that look like marble are not marble, they are plaster—and the institutions that we have built are human institutions and aren’t necessarily permanent.”
Although many CEOs and regulators say the crash had been impossible to predict, among professional traders it was commonplace as early as 2005 to believe that inflated house prices and turbocharged derivatives were creating the next asset bubble.
“Whenever I read about people not seeing it coming, I get a kick out of it,” Keith Anderson, Soros’s former chief investment officer, told me. Tall, burly, and soft-spoken, with a modest office decorated largely with photos of his smiling children, Anderson has a friendly, unpretentious air—more Little League dad than Davos man—and a blue-chip money management CV. “Most every intelligent person—we all understood and knew that there was a housing bubble, that the CDOs and the derivatives were creating distortions.”
The difficulty was knowing when the bubble would burst. “What the problem was,” he said, was “that many of us had thought that for too long and were wrong. We knew it was occurring, but you wouldn’t want to be betting against it, because you weren’t getting satisfaction.
“There are multiple versions of history,” Anderson explained. “The common one, in the normal newspaper, is ‘What fools! No one saw it coming.’ Lots of people saw it coming. The question was: When was it going to stop? What was going to cause it to stop? How do you profit from it?”
In mid-2007, when Soros decided he needed to actively manage his money again, Quantum’s funds were mostly entrusted to outside managers. They, and the smaller number of inside managers, operated with “total discretion,” Soros recalled. “They have their own style and their own exposure and some of them have money for extended periods of time.”
Soros “didn’t interfere in the running of their accounts, because that’s not the way we operate,” so he set up an account to counterbalance their positions, which he ran himself. “Basically, it involved a large amount of hedging. It was neutralizing market exposure [of his external and internal managers] and then taking market exposure on the negative side.” Soros was not only unfamiliar with fancy new derivatives; by his own admission, he didn’t know much about individual stocks anymore, either. So one of the world’s great investors set about protecting himself from the coming crash with tools so simple your average booyah Jim Cramer watcher would scorn to use them: S&P futures and other exchange-traded funds. He made simple bets, too: “Basically, I went short—the stock market and the dollar.”
Soros didn’t get it exactly right. “In a time like this, where the uncertainty is so big and the volatility is so big, you must not bet on a large scale,” Soros told me at the end of 2008. “One of the mistakes I made is that actually I bet too much this year, too large positions, and therefore I had to move in and out to limit the risk. I would have actually done better had I taken my basic positions on a smaller scale and not allowed the market to scare me out of those positions. I would have done much better.”
That’s because Soros’s radar for revolution is a way of thinking about the world, not a foolproof algorithm. “That’s what makes this macro investing difficult,” Anderson told me. “People like George can see the disequilibrium, but there is always the question of what catalyst is going to cause the change.”
The biggest disequilibrium of the twentieth century was the economic gap between the developed Western economies and everywhere else. And the single biggest catalyst for change was the collapse of Soviet communism. But the opportunities created by that monumental revolution weren’t limited to Russia. Across the Warsaw Pact as well as in Asia and in Latin America, a global wave of economic liberalization opened up huge opportunities for the people who figured out how to respond to revolution. As in the former Soviet Union, this wasn’t something you could teach in business school—talent and an appetite for risk were essential, but most of all you needed to be in the right place at the right time.
Azim Premji is the chairman of Wipro, the pioneering Bangalore-based IT company. The first revolution in Premji’s life was personal. He was studying engineering at Stanford University in 1966 when his father died suddenly. The twenty-one-year-old had to drop out of college and return from Palo Alto to Bangalore to run the family vegetable oil company. Premji turned out to be an energetic, talented, and omnivorous businessman. A decade after he took over, Wipro was still producing vegetable oil, but it also made lightbulbs in a partnership with GE, as well as shampoo, soap, and hydraulic cylinders. The really big break came in 1978, when IBM was forced out of India. Premji saw the opportunity to return to his first passion—computer science, whose pioneers he had met as a student at Stanford. By 1991, when Manmohan Singh’s liberalization opened up India to the world economy, Premji and Wipro were perfectly poised to seize the opportunity—and the Indian outsourcing revolution was born.
“I was very lucky,” Premji, today a dignified patriarch with a quiff of white hair, told me when I asked him how he did it. “I had the right education, at the right moment, in the right country.”
“India is growing at 8 percent per annum,” explained Ashutosh Varshney, the Brown professor who spends half his time in his hometown of Bangalore. “But the main point was that when an economy grows at 7 to 8 percent, then some sectors grow at 18 to 20 percent—8 percent is an average.”
If you are good at responding to revolution, you figure that out and start a business in one of the 18 to 20 percent sectors: “It is the possibility of multimillionaires overnight.”
You hear the same story in China. Lai Changxing was born and raised in a small village outside Xiamen, on China’s southeast coast, less than two hundred miles from Taiwan.
When in the early 1980s Deng Xiaoping told the brutalized Chinese people it was okay to make money, Xiamen was one of the first provinces where the market experiment was launched, and Lai responded to that revolutionary opportunity. Starting with an auto parts company, by the middle of the next decade he had diversified into everything from umbrellas to textiles to electronics—and he had become a billionaire.
“You could start a business in the morning and make money by the evening,” he told a journalist. “Everything was so free and open back then that everyone had lot of businesses. You would be stupid not to.”
If you have the right skills and the right connections and the right appetite for risk, surfing the wave of emerging market revolution is thrilling—and even feels easy.
David Neeleman is a serial entrepreneur. He has founded two U.S. airlines and a touch-screen airline reservation system that was acquired by HP. When Neeleman was eased out of the CEO’s chair at JetBlue, his most successful creation, it was less than a year before he announced the launch of a third big entrepreneurial venture. That was no surprise—starting companies is simply what Neeleman does. And it made sense that it was an airline, the business Neeleman knows. But for his third big play, Neeleman left the United States for Brazil.
“Well, the U.S., like I said, it’s kind of tapped out,” Neeleman told me in the fall of 2010. “We’re growing [in Brazil], us and our competitors, 25 percent a year. That’s three times GDP growth, which in the first half of last year was almost 9 percent. And we’re growing traffic 27 percent. So that’s exciting. You know, if I was here in the U.S., we would be still trying to fight it out with other established carriers, whereas down there, I’m flying routes that had never had nonstop flights. We will be serving cities that haven’t had airline service for years.”
That’s the real secret of the emerging markets. If you aren’t scared of uncertainty or of leaving home, making money in these frontier economies is a lot simpler than battling for 1 percent more market share in the developed world.
“The next ten years is going to be the most exciting time in our lives! The Indian economy will double! You will only see that once in a lifetime! It will be incredible!” Tejpreet Singh Chopra, then a forty-year-old Indian businessman, told me in the spring of 2010. A few weeks before we met, he had taken the bold decision to jump from the managerial aristocracy to try to become one of the entrepreneurs who have figured out how to respond to the emerging market revolution.
Chopra had just the right inside/outside CV. Born and educated in Chennai, India, he landed his first two jobs working for Lucas Diesel Systems in the UK and France. He got his MBA in the United States, from Cornell University, and spent the next decade at GE in Stamford, Connecticut, and Hong Kong, before moving back to India. Chopra met his wife, a fellow Indian, while he was working in the United States; she has a law degree from NYU and worked as an M&A lawyer for white-shoe Wall Street firm Weil, Gotshal and Manges.
In 2007, when he was just thirty-seven, Chopra was chosen as the first Indian to run GE’s Indian business. That job put Chopra at the center of the globalization and technology revolutions, which are transforming our world as dramatically as the industrial revolution did two centuries ago.
Consider the Mac 400, a portable electrocardiograph made and designed in India in 2008, which Chopra touts as one of the flagship achievements of his tenure in the GE India job. The Mac 400 is a cheaper, cruder, and lighter version of its American parent—it weighs less than three pounds, rather than fifteen; sells for around $800 (already barely half of the $1,500 it cost when it hit the market), rather than $10,000; and costs $500,000 to develop, rather than $5.4 million. Eight of the nine engineers who created it were based at GE’s Bangalore research lab.
Selling Western technology and brands into emerging markets is an old story. So is selling cheap emerging market labor—in the form of manufactured goods, electronics, or commodity white-collar services like call centers—into developed markets.
The Mac 400 is an example of the next stage—emerging market engineers, employed by a Western company, creating a product inspired by a Western prototype, and redesigned for emerging market consumers.
The world’s smartest megacorporations—GE, Google, Goldman Sachs—are finding ways to profit from the great economic shift of our times. The biggest winners, though, are individuals, not institutions; globalization and technology have dramatically lowered barriers to entry, and the beneficiaries are the people smart enough and lucky enough to make it on their own.
Chopra was aware of the perks of working for a highly respected global behemoth like GE—“If you are the CEO of GE, anyone anywhere in the world will take a meeting with you,” he said—but he couldn’t resist the lure of responding to revolution.
Following the model of Nucor, which revolutionized the U.S. steel business by building mini-mills, Chopra is working to create an Indian power company based on small, twenty- to forty-megawatt plants using environmentally friendly sources of energy. With Bharat Light and Power, his new firm, Chopra is hoping to surf at least three revolutionary transformations at once. The first is the shift from big factories to small ones. Nucor—one of Professor Christensen’s case studies of the impact of disruptive technologies on legacy competitors—is the textbook example of this transition in the steel business. By building mini-mills, which can be constructed at less than a tenth the cost of large, integrated steel mills and operated more efficiently, Nucor outflanked North America’s steel giants. Chopra hopes to apply the same approach to power generation. The second revolutionary wave he hopes to surf is the shift to renewable sources of energy. And finally, he hopes to take advantage of the liberalization of the Indian economy and the country’s consequent burst of economic growth. An example of Chopra’s approach is Bharat’s decision in 2012 to invest in a rooftop solar power project in Gandhinagar, the capital city of Gujarat, in western India, constructed after World War II. This pilot plan lets power companies rent roof space for solar panels from the buildings’ owners—a way of getting around the shortage of space and the logistical and bureaucratic difficulties of new construction in India.
“I’ve helped so many entrepreneurs when they were just a piece of paper, and I thought, ‘I could do that,’” Chopra said. “When you work in a corporation, when you retire, you only look back. As an entrepreneur, you are always looking forward. I wouldn’t be happy in my life if I was always looking back.”
Wherever you go in the emerging markets—or the fast-growing markets, as their boosters are trying to rebrand them—you hear a variation on this theme.
Stephen Jennings grew up in New Zealand’s Taranaki territory, where the sheep really do outnumber the people. When New Zealand flirted with an antipodean version of the liberal economic reforms being championed by Thatcher and Reagan in the 1980s, Jennings, with his freshly minted degree in economics, was a young member of the team that enacted them. That took him to Credit Suisse First Boston, first in Auckland, then London, and then, as Russia plunged into its own radical reforms, Moscow, in 1992.
Jennings was one of the Westerners who most adeptly surfed the waves of Russia’s revolution. By the beginning of the next century, the investment bank he cofounded, Renaissance Capital, had expanded aggressively into Eastern Europe and Africa and had ambitions of becoming the first global emerging market bank. In April 2009, while most of the world was still in a deep recession set off by the financial crisis, Jennings went home to New Zealand to deliver his country’s most prestigious annual economic lecture. The theme he chose, naturally, was the rise of the emerging markets, and he urged his countrymen to dive in and take part in what he described as the most important and fastest economic transformation in human history.
“Yes, you need to be bold and extremely committed, but you can participate fully in an historically unique opportunity for value creation,” Jennings told the gathering of New Zealand’s top businesspeople. “And it is a lot more fun than watching others do it on CNN!”
But to thrive in revolutionary environments, Jennings warned his audience, you need different skills and a different attitude from those who work in slower-growing societies.
“In economies growing at 2 to 3 percent a year, industrial change is relatively gradual,” Jennings explained. “In these countries, explosive change is usually associated with rapid technological change, such as with the information technology industry in the 1980s and ’90s. In fast-growing emerging markets all industries are like IT. Market growth and changes in competitive dynamics are explosive. For Russian retailers or Nigerian banks, 100 percent–plus growth in revenues or profits is totally normal. Small businesses can become multibillion-dollar enterprises in just a few years. Losers rapidly disappear without a trace. Needless to say, with these stakes, the winners tend to be highly organized and extremely aggressive in their business style and strategies.”
This chaotic, messy, high-risk, high-reward world is anathema to many of the managerial aristocrats of the developed world. Jennings recalled how “Credit Suisse First Boston’s elite European bankers had a nickname for our tiny group camped out in borrowed office space in Moscow. We were called the ‘smellies,’ a reference to sanitary conditions in Eastern Europe at the time.”
The “smellies” had the last laugh. “By the beginning of 1999, you could not mention Russian finance in polite company, but you could buy shares in Gazprom for five cents. Six months ago, the stock was trading at US$10.”
This contrast between the Moscow smellies and the elite European bankers of Zurich, Frankfurt, and London isn’t confined to CSFB. Jennings argued it was an example of the wider difference between emerging markets entrepreneurs, whose defining characteristic was their ability to respond to revolution, and the slower-moving corporate princes of Western multinationals.
“Slow or hesitant business leaders are quickly weeded out in high-growth emerging markets. The survivors are typically able to think on a big canvas, to make bold decisions and have the resilience to withstand extreme volatility and market setbacks,” he explained. “It is virtually impossible for multinationals to operate in this manner…. Their advantages in terms of know-how and capital have been neutralized by their inability or reluctance to grow explosively in complex, foreign environments…. Their key decision makers usually live in a distant part of the world; they think they fully understand the risks but cannot grasp the upside.”
One of the rising emerging markets champions that Jennings cites is Mittal Steel. Aditya Mittal, son of Lakshmi, the company’s founder, and his partner in business and heir apparent, describes an embrace of change that dovetails with Jennings’s theory of the case.
“Some people, when the trends are smacking them right in the face, they don’t wake up and realize it,” Mittal told me. “When I was head of M&A [mergers and acquisitions] and focused on expanding in Central and Eastern Europe, where there were a lot of good opportunities, I kept thinking, when is everyone else going to wake up and start competing with the U.S. for these assets, particularly the other European steel companies. But I didn’t have competition for five years. I was like, ‘What is wrong with these guys?’ I’m in their backyards buying steel companies in Poland, the Czech Republic, Romania, and they are nowhere to be seen.”
For Mittal, crisis is always an opportunity: “Historically we’ve found opportunity from a crisis…. A crisis doesn’t change the long-term trajectory that the economies will industrialize, right? And if they are not performing well for a short time, that’s when you go and buy them, and not cloud your judgment of the future. Provided you’re confident in the medium- to long-term investment case and you are confident you can create value for shareholders, then it can be a good thing to do. That’s what we’ve done in the past and it’s what we’d do again in the future if we saw the right opportunities.”
Responding to revolution is how you become a plutocrat. “Change is great,” Mittal told me. “Change is fantastic. That’s how you create value because you participate in the change that you see. Now, it can be wrong, or it can be right—that is your own judgment call. But change is how you create value. If there is no change, how else do you create value?”
It is back to Budapest in 1944. In some environments—like today’s emerging market economies—not acting is the greatest risk. You may not need to be bold to survive, but you certainly must be bold to thrive.
Jennings was selling his countrymen on the rewards of jumping into the emerging markets—his speech was titled “Opportunities of a Lifetime.” But the risks are real, too. Six months before his triumphant hometown lecture, Jennings’s firm was on the brink of bankruptcy. To survive, he had to sell a 50 percent stake at a fire sale price to Russian oligarch Mikhail Prokhorov.
Lai, the Xiamen entrepreneur who gloried in the moneymaking opportunities in 1980s China, spent a decade evading Beijing in Canada, but was finally deported back home in 2002. In 1999 China accused him of smuggling, bribery, and tax evasion in one of its periodic high-profile anticorruption campaigns.
“If Lai Changxing were executed three times over, it would not be too much,” Zhu Rongji, the former premier who led the attack, said after the verdict. Mikhail Khodorkovsky, the biggest winner in the loans-for-shares privatization and in 2003 the richest man in Russia, has been in jail, mostly in a Siberian labor camp, for nearly a decade.
This volatility at the top is a defining characteristic of the new plutocracy and one reason it is less secure and less homogeneous than its bank balances might suggest. The biggest winners in today’s economy are the experts in responding to revolution, but that means that they live in a world in which, as another Hungarian adept famously put it, “only the paranoid survive.”
Yuri Milner is another smart, driven Russian who missed out on the privatization windfall. He suffered from the Bendukidze problem. Like the Georgian industrialist, Milner didn’t think he knew enough to succeed in an advanced capitalist economy. So after graduating from Wharton, where he was the first non-émigré Russian to get an MBA there, instead of returning home, he went to Washington to work for the World Bank. Unfortunately for him, his job in America—a position whose perks and prestige would have been unmatchable just five years earlier—coincided with Russia’s privatization bonanza. He calls that period his “lost years.” By the time Milner got back home, the choicest spoils had been divided. Instead of becoming an oligarch, he went to work for one: Mikhail Khodorkovsky.
But the experience taught Milner the value of capitalizing on paradigm shifts, and he began to look for the next one. He found it not in a political revolution but in a technological one. Milner was one of the first Russians to understand the impact of social networks. His first step was the classic developing market technique of copying what was working elsewhere: he bought and invested in Mail.ru, the Russian equivalent of Hotmail, and Odnoklassniki, Russia’s Facebook. The Cyrillic alphabet, which had sometimes been a barrier to Russia’s success in the global economy, turned out to be a boon for Milner, making it harder for Silicon Valley to conquer his domestic market.
But winning in the Russian technology market wasn’t enough for Milner. He decided that his failure in Russia had taught him to be faster and hungrier than the Americans he had met at Wharton. Now that he understood how to respond to revolution, he would take that talent to the place where the biggest transformation in the world was happening: Silicon Valley. Milner was the first major outside investor in Facebook, a coup he pulled off in May 2009 by agreeing to terms that seemed ridiculous to the Valley: $200 million for a 1.96 percent stake, valuing the five-year-old company at more than $1 billion, and with no board seats. When Facebook made an initial public offering in 2012, Milner’s stake was valued at more than $6 billion. The day the Facebook investment was announced, one of Milner’s colleagues approached the founder of Zynga, the online gaming company, at a conference; a few months later Digital Sky Technologies led a $180 million investment round. Groupon was easier—by the time the online coupon company was looking for investors, Milner’s prescience with Facebook and Zynga had made him a prestige investor.
In the United States, the technology revolution is the radical paradigm shift that is yielding windfalls for those with the skill, the luck, and the chutzpah to take advantage of it. The scale of the change is tremendous. Randall Stephenson, the CEO of AT&T, told me the shift was the biggest economic change since the discovery of electricity and the internal combustion engine.
And like Russia’s transition from communism to capitalism, the technology revolution is driving a paradigm shift that creates the opportunity to reap a windfall. Dan Abrams, founder of the Mediaite group of Web sites, describes it as a frontier moment. Whoever has the courage and the vision to claim that frontier, he believes, will lay the foundation for the business empires of the future. Actually, the opportunity is even richer and more complicated: the technology revolution isn’t a single moment of revolutionary change, the way Russian privatization was. Instead, like the industrial revolution, it is a series of paradigm shifts, each of which offers a financial windfall for those who are in the right place at the right time—and who have the ability to respond to revolution.
One example is the generation of app inventors who made a fortune by riding on Facebook’s coattails. In 2007, as that social network was taking off, it threw its platform open to developers as a way to multiply its own reach. That approach worked so well that by 2009 Facebook decided to close the floodgates a little bit, by controlling how apps spread virally. But for the developers who got their timing right, it was a windfall.
“There was a period of time when you could walk in and collect gold,” B. J. Fogg, a specialist in technology and innovation who taught a class at Stanford in the fall of 2007 that challenged students to build a business on Facebook, told the New York Times. “It was a landscape that was ready to be harvested.” And as Mike Maples, a Silicon Valley investor, told the reporter, “The Facebook platform was taking off and there was this feeling of a gold rush.”
Another wavelet is the shift from broadcast and cable television to Web-based video. Now that we have seen what the Web has done to the print and music businesses, that revolution seems inevitable. But to capitalize on it, the big question is timing. In 2011, when YouTube announced a big push to open up its platform to producers of Web-based videos, Michael Hirschorn, a writer and former head of programming at VH1, decided the digital television revolution was about to begin—and he was determined not to miss out. “I felt, having been late to several revolutions previously, that we needed to go all out for this,” Hirschorn told a journalist. He called his future partner and insisted, “We need to start a company now!”
If you have a PhD in math or statistics, the revolution you are probably trying to capitalize on today is big data—a term for the vast amounts of digital data we now create and have an increasing ability to store and manipulate.
If wonks were fashionistas, big data would be this season’s hot new color. When I interviewed him before a university audience in late 2011, Larry Summers named big data as one of the three big ideas he is most excited about (the others were biology and the rise of the emerging markets). The McKinsey Global Institute, the management consultancy’s research arm and the closest the corporate world comes to having an ivory tower, published a 143-page report in 2011 on big data, touting it as “the next frontier for innovation, competition, and productivity.”
To understand how much data is now at our fingertips, consider a few striking facts from the McKinsey tome. One is that it costs less than six hundred dollars to buy a disk drive with the capacity to store all of the world’s recorded music. Another is that in 2010 people around the world stored more than six exabytes of new data on devices like PCs and notebook computers; each exabyte contains more than four thousand times the information stored in the U.S. Library of Congress.
McKinsey believes that the transformative power of all this data will amount to a fifth wave in the technology revolution, building on the first four: the mainframe era; the PC era; the Internet and Web 1.0 era; and, most recently, the mobile and Web 2.0 era.
Big data will create a new tribe of highly paid superstars. McKinsey estimates that by 2018 in the United States alone there will be shortfall of between 140,000 and 190,000 people with the “deep analytical talent” required to use big data. And it will probably create a handful of billionaires who understand and capitalize on the revolutionary potential of big data before the rest of us do—indeed, one way to understand Facebook’s $100 billion market capitalization is as a bet on big data.
The technology revolution isn’t just about the nerds of the West Coast. We think of the computer revolution as a Silicon Valley phenomenon. But while most of the technology is invented there, many of its biggest beneficiaries are on Wall Street. Here is how Larry Fink, the billionaire founder of BlackRock, the world’s largest asset manager, with nearly four trillion dollars under management in the spring of 2012, described the impact of computers on finance.
“People have always asked me, ‘What happened in ’83? Why in ’83 did all of this intellectualism create mortgage securitization?’” Fink explained to me in his office just off Park Avenue in a 2010 conversation. “It was the technology revolution, which put computers on our desks…. It was really the advent of the PC and the availability of having individuals to use a computer, the capabilities of computers to analyze securities, risks, a lot of data… And that had never happened before…. And in my mind that was the beginning of the trading desk becoming more profitable. If you start looking at the profitability of Wall Street, Wall Street was never that profitable before ’83.”
And when computers arrived on traders’ desktops, Wall Street understood the rise of the knowledge worker had begun in earnest and went out to get the best ones. “Most of what Wall Street did is they understood,” Fink told me. “So where did they go? They went to the top schools, they went to engineering. They got these really smart quants…. They got some really smart people who could intellectualize a lot of data and come up with trends and formulas. To me a lot has to do with that.”
The Citigroup analysts writing about “plutonomy” describe it as the triumph of the “managerial aristocracy,” and that is certainly true. But, at its apex, the plutonomy is even more about the triumph of the entrepreneurs—a 2011 Capgemini/Merrill Lynch report estimated that 46 percent of the world’s high-net-worth individuals had founded their own businesses.
And while these individualists are fewer in number than the company men, their gains are much more spectacular—and their windfalls are one reason the super-elite are pulling away so sharply from the merely affluent. Richard Attias, a Moroccan-born French businessman who got his start in computer hardware and is now working to create a New York–based equivalent of the World Economic Forum, describes it this way: “It used to be that the big ate the small; now the fast eat the slow.” Sull, the London Business School professor, thinks it is hard for established companies—the big—to be fast, at least in a way that is effective. The problem, his research suggests, isn’t that companies don’t realize the world has changed. They do. But instead of changing their behavior, Sull has found that the most typical corporate reaction is “active inertia”—businesses do what they always did, only more energetically than before. Their vested corporate interest in the existing order is so great, they have a hard time giving up today’s certain profits in the hope of earning a bigger windfall—or avoiding a significant loss—tomorrow.
Sull’s favorite example of active inertia is Firestone. The company’s founder, Harvey Firestone, was adept at responding to revolution. Firestone began producing tires in Akron, Ohio, in 1900. He saw the potential in Henry Ford’s pioneering mass production of automobiles, and in 1906 Firestone was chosen by Ford to supply the tires for the Model T. But in 1988, Firestone was acquired by Bridgestone, a Japanese competitor, for a fraction of its market capitalization a decade and a half earlier. Firestone, like so many strong legacy companies, was undone by the emergence of a new, disruptive technology—the radial tire—that had been introduced to the U.S. market. When Firestone tried to play catch-up, manufacturing radial tires in plants designed to produce the old bias-ply tire, disaster struck. Eventually, Firestone was forced to recall millions of tires and, in congressional hearings, was found at blame for thirty-four deaths.
“Firestone’s historical excellence and disastrous response to global competition and technological innovation posed a paradox for industry observers,” Sull wrote. “Why had the industry’s best-managed company turned in the worst performance in a weak field? Closer analysis reveals that Firestone failed not despite, but because of, its historical success.”
Firestone had been built to prosper in the stable postwar United States. According to Sull: “An ossified success formula is just fine, as long as the context remains stable.” But in a period of revolutionary change—which is what many industries, countries, and the world economy as a whole are experiencing today—“ossified success formulas” aren’t enough, and the outsiders who are good at responding to revolution can outflank the establishment.
Firestone’s fate, as explained by Sull, is a cautionary tale of what Jennings, from his frontier market vantage points, warned the cozy Auckland elites might happen to them: “Basically, we are living in a world that is more competitive than any other era, where change is faster and less predictable, and where long-established orders—whether they are economic, political, or industrial—are being challenged and supplanted. In this world, the difference between ‘success’ and ‘failure’ is greatly magnified. This applies to specific labor market skills, businesses, industries, and entire countries.”
And Firestone, with its active inertia, sounds a lot like Wall Street in 2007 and 2008. Many—even most—of the leaders of the country’s big financial companies knew their businesses were built on a bubble. But the structure of their companies and of their industry made it impossible to pull back.
In early July 2007, on a visit to Tokyo, Chuck Prince, then CEO of Citigroup, gave an interview to journalist Michiyo Nakamoto. Credit markets had not yet frozen, but there were enough signs of trouble to prompt Nakamoto to ask Prince about the turmoil in the U.S. subprime mortgage market and difficulties financing some private equity deals. Prince believed the ocean of cheap, globalization-fed money Citi was then still sloshing around in would eventually dry up: “A disruptive event now needs to be much more disruptive than it used to be…. At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way.”
Today, those remarks read like a prescient description of the overnight collapse in lending triggered by Lehman’s bankruptcy just over a year later. But even though Prince thought a “disruptive event” was inevitable, he also believed we hadn’t reached “that point” yet. In the meantime, it was his job to keep on doing business as usual: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Corporate PR would today cite that line as a cautionary illustration of why bland jargon is the most prudent idiom for business leaders. Prince’s vivid phrase not only made it onto the front page the next day, it has become one of the catchphrases of the crisis: a Google search on it more than two years later turned up nearly one and a half million references. One of the days on which it was evoked most energetically was November 4, 2007, when Prince resigned and his dancing comment became shorthand for Citigroup’s larger failure to anticipate the crisis under his leadership.
Prince deserved his pink slip: during his tenure in the corner office, Citi increased its exposure to the subprime market, grew its credit default swap business (including the number of swaps it kept on its own books), and stashed billions of dollars in risky off-balance-sheet vehicles. But he wasn’t wrong about dancing to the music. When the music stops, the loser is the one left without a chair, but the rules of modern capitalism don’t allow the big players to sit down prematurely, either.
Peter Weinberg is a Wall Street patrician—his paternal grandfather was a seminal early partner of Goldman Sachs and his mother is a Houghton, the great WASP family that founded Corning, Inc. Weinberg sat out the last years of this bubble thanks to what he admits to be lucky circumstance. He’d teamed up with legendary Wall Street deal maker Joe Perella in 2006 to found a boutique advisory firm, and they spent the next twenty-four months focused on raising money and assembling a team. But Weinberg, a seasoned investment banker who rose to run Goldman’s London office before striking out on his own, believes it is almost impossible for the CEOs he has spent a career advising to stop their ears to the boom-time music.
“I’ve been through probably six crises now in my thirty years in the business, and it’s the pendulum of capitalism,” Weinberg told me in June 2009, sitting in a conference room in his firm’s modernist offices in the GM Building on Fifth Avenue. “It’s very, very hard to lean against the wind in a bubble. Very, very hard. And very few people can really do it…. What if one of the heads of the large Wall Street firms stood up and said, ‘You know what? We’re going to cut down our leverage from 30 to 1 to 15 to 1. And we’re not going to participate in a lot of the opportunities in the market.’ I’m not sure that chief executive would have kept his job…. It is very hard to separate yourself from the herd as a leader of a large financial institution.”
This is an even more familiar story in the entertainment, media, and technology businesses. Consider the music industry. Venerable Warner Music, battered by the Web, is today owned by Len Blavatnik, another Russian veteran of that country’s economic upheaval who, like Milner, hopes his skills can be applied to disruptive technological change in the West. And in the technology industry, the cycles of transformative change are so fast that even successful revolutionaries can swiftly be outflanked.
That has already happened to Microsoft. The big question today is whether it will happen to Google. Like Sull’s managers—who see the coming threat, but are able to respond to it only by doing more of the same—the Googlers understand what is happening. In 2010, Urs Hölzle, one of Google’s first ten employees and the company’s first engineering vice president, wrote a memo that company insiders called the Urs Quake. In it he warned that Google was falling behind Facebook in social networking and needed to catch up immediately.
Google’s chiefs listened and they launched an effort to do so, called Emerald Sea, after an 1878 painting by Albert Bierstadt. The painting, which the Googlers working on the project had re-created and displayed in front of the elevators near their desks, depicts a wrecked ship being buffeted by an enormous wave. Google, they believed, was the ship, and the social networking revolution was the wave: Google would either learn to ride it—or drown. Even for Google, a company whose insurgent founders are still in their thirties, responding to revolution is hard.
One reason Google may have a chance is that the business leaders of Silicon Valley, like those in the emerging markets, made their first fortunes by responding to revolution. For them, constant change is the status quo. Indeed, responding to revolution is so central to Silicon Valley culture that the most successful entrepreneurs have developed a culture of continuous revolution.
Caroline O’Connor and Perry Klebahn, at Stanford’s design school, call this the ability to “pivot.” Groupon, which began as a platform for collective political action; PayPal, which started as a way of “beaming” money between mobile phones, and then pivoted to become eBay’s banking network; and Twitter, which was a later iteration of a failed podcasting start-up, are all, according to O’Connor and Klebahn, examples of successful pivots.
Another illustration they cite is WorkerExpress. Joe Mellin and Pablo Fuentes launched that company as a way for home owners to schedule hourly construction workers using text messaging. When the idea didn’t take off, Mellin and Fuentes studied the research they had done before starting WorkerExpress and realized it would be smarter to target their efforts at large contractors who needed temporary help on job sites. Their pivot worked and even in the teeth of the post-2008 construction bust they built a successful Web-platform company.
One of the examples of a pivot most cited by technorati is the story of Flickr, the photo hosting and sharing site. Flickr’s genesis was in 2002, when its founders, Caterina Fake and Stewart Butterfield, created a multiplayer online game called Game Neverending. Fake and Butterfield could see two revolutions happening in the technology world—the rise of social media and the rise of games. They hoped to cash in by putting them together. But Game Neverending failed and Ludicorp, the Vancouver company Fake and Butterfield established to create it, was running out of money. They had noticed, though, that one of the game’s features, a photo- sharing add-on they’d developed in just eight weeks, was popular. So Fake and Butterfield tried again, this time using the photo-sharing technology to create a stand-alone Web site. It worked. Flickr was launched in February 2004. In March 2005, just thirteen months later, Yahoo! acquired it for a reported $35 million. At the beginning of 2012, the site reported that it was hosting more than seven billion images, about one for each person on the planet.
The pivot is about recognizing when you are on the wrong track and changing course—and that, too, is central to Soros’s ability to respond to revolution.
Chanos, who leased office space from Soros’s Quantum Fund in midtown New York between 1988 and 1991, agrees. “One thing that I’ve both wrestled with and admired that Soros conquered many years ago is the ability to go from long to short, the ability to turn on a dime when confronted with the evidence. Emotionally that is really hard.”
“My conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions,” Soros told me. “I reexamine them all the time and recognize when I am on the wrong track…. I know that I’m bound to be wrong and therefore am more likely to correct my mistakes.”
“It’s an almost aggressive pessimism about his own ideas, that he is going to be the first person to find out what’s wrong with his theory, rather than what’s right with his theory,” his son Jonathan told me.
Pivoting is so hard for traditional Western companies that Jennings predicts they will be overtaken by bolder, more agile emerging market champions. “The businesses and institutions underpinning the economies currently going through economic transformation will not only be catching up with the West, but eventually taking over leadership,” he said. “At that point, it will be their business models and institutions that may have to be reexported.”
Already, the premium on responding to revolution has created tremendous upheaval in corporate America. A 2010 study by Deloitte, the tax and consulting firm, measures something it calls the “topple rate,” the speed at which big U.S. companies lose their leadership positions. Between 1965 and 2009, the topple rate more than doubled. Even in the C-suite, it turns out, life is more precarious than ever. “The group of winners is churning at an increasing and rapid rate,” the report found. “Nearly every advantage, once gained, is shown to be temporary.”
The winners of the entrepreneurial sweepstakes of the technology revolution like to think they are mostly smarter and harder working and more determined than everyone else. Tony Hsieh offered me a gentle version of this view. “I could start off anywhere in America with a hundred dollars and by the end of the year I would be a millionaire,” he said. “I really think I could. That is just how I am.”
Some of that is surely true. But part of winning from moments of revolutionary change is the lucky combination of having the right skills, the right character, and the right position in society at the right time.
Timing is equally important in the Silicon Valley gold rush. Consider Jonathan Kaplan, creator of the Flip video camera. Kaplan isn’t a scientist or an engineer. But from the time he graduated from college in 1990 he knew he wanted to be an entrepreneur; early on, he decided the technology industry and San Francisco were where his odds were the greatest. He spent a decade barely getting to first base, mostly with software start-ups that were good, but not great. Then, in 2005, a friend told him technology had advanced so much it was possible to make a video camera as small and easy to use as most regular cameras were at the time. From that powerful insight, the Flip camera was born. It was such a success that Cisco acquired the company for $590 million in 2009.
The Cisco deal turned out to be as well timed as Kaplan’s original epiphany—two years later, video technology had advanced so much further that smartphones had become video cameras, and Cisco closed down Flip, taking a huge corporate write-down.
Kaplan, a multimillionaire, had left his job at Cisco two months earlier. But that, Kaplan insisted, shouldn’t detract from the inspirational power of his initial ability to respond to revolution.
“There are a lot of young entrepreneurs who look at Flip as a huge success, and they should continue to,” Kaplan told the New York Times. “The demise of Flip has nothing to do with how great a product it is. Companies have to make decisions that sometimes people like you and I don’t always understand.”
Sheryl Sandberg, the world’s most successful female executive, is another example of the power of being in the right place at the right time. Sheryl is brilliant—she was one of Larry Summers’s smartest students—and one of the best operating executives around. But the skill that made her fortune is the ability to understand where the action is. She made the perfect, unconventional choice—twice.
The first was in 2001. She had just finished a stint as Larry Summers’s chief of staff at the U.S. Treasury—a high-profile job that gave her, with her MBA and a résumé that already included McKinsey and the World Bank—a plethora of options in corporate America, particularly Wall Street. Instead, Sandberg chose to work for Google, a company the economists and politicos in her Washington universe had barely heard of. In 2008, she made another inspired, iconoclastic decision. Google was flourishing, but Sandberg had a job offer from the new kid on the block, Mark Zuckerberg, who wanted her to come in and be the adult who transformed Facebook into a real company. Again, Sandberg, by then one of the most high-profile women in Silicon Valley, had a number of safer, more prestigious choices. She picked Facebook, whose 2012 IPO made her among the richest self-made woman in the world.
If you are fastidious about taxonomy, you’d probably have to describe Sandberg as an outstanding member of the managerial aristocracy—she is a hugely talented executive, but she isn’t an inventor in her own right or the founder of her own firm. But her instinct for picking the right job at the right time is so finely honed that it surely qualifies as responding to revolution. As Warren Buffett put it in his 2006 letter to shareholders, quoting “a wise friend,” “‘If you want to get a reputation as a good businessman, be sure to get into a good business.’”
In his study of the Nobel scientists, Robert Merton discovered a similar talent for choosing the right work—a skill that was as important as the ability to do the work itself. “Almost to a man, they lay great emphasis on the importance of problem finding, not only problem solving,” Merton wrote in 1968. “They uniformly express the strong conviction that what matters most in their work is developing a sense of taste, of judgment, in seizing upon problems that are of fundamental importance.” In an echo of Buffett’s wise friend, Merton quoted one Nobel laureate who explained, “I learned that it was just as difficult to do an unimportant experiment, often more difficult, than an important one.”
The power of choosing the right work is equally pronounced for members of what Graeme Wood, writing in the Atlantic, called the lucky job choice club: being an early employee at a company that prospers dramatically. These aren’t the entrepreneurs who have a talent for responding to revolution. They are the people lucky—and maybe savvy—enough to be among the first hires of those paradigm-changing entrepreneurs.
When the IPO comes, this group—the first few dozen employees of Microsoft, or Google, or Groupon—is also catapulted into the super-elite. Two California psychologists, Stephen Goldbart and Joan DiFuria, were so concerned by the psychological impact of joining the lucky job club that, in 1997, during the first Internet boom, they gave a name to its baleful outcome—“sudden wealth syndrome”—and set up an institute to treat folks afflicted by it.
When you make your fortune by responding to revolution, the one rule is that there isn’t One Rule. Getting out at exactly the right time may be the smartest business decision Jonathan Kaplan made. But at other times and places, the difference between the millionaires and the billionaires is the difference between those who cashed in early and those who held their nerve.
In 1993, when he had already made $100,000—an unimaginable windfall by Soviet standards—Viktor Vekselberg had a partner who decided it would be prudent to cash in his chips and step away from the table. “I had one friend—let’s not criticize him, it was his personal choice—who said, ‘What vouchers! What privatization! I don’t need that,’” Vekselberg told me. He withdrew his share of the group’s profits so far—about $100,000, Vekselberg recalls—while his erstwhile partners went on to become billionaires. Having worked together for twelve-hour days at the beginning of their capitalist metamorphosis, he and Vekselberg haven’t been in touch for years. “We don’t have much in common anymore,” Vekselberg said.
On September 23, 1932, six weeks before the election that would begin his service as one of America’s most consequential presidents, Franklin Delano Roosevelt addressed the Commonwealth Club of San Francisco. The speech he delivered is a model of rhetoric—U.S. political scientists in 1999 judged it to be one of the best addresses of the twentieth century—and it made the intellectual case for what would become the New Deal. From a distance of eight decades, what is striking about the address is its characterization of the robber barons. FDR paints them as business titans, geniuses at responding to revolution who ushered America into the industrial age.
It was the middle of the nineteenth century that a new force was released and a new dream created. The force was what is called the industrial revolution, the advance of steam and machinery and the rise of the forerunners of the modern industrial plant. The dream was the dream of an economic machine, able to raise the standard of living for everyone; to bring luxury within the reach of the humblest; to annihilate distance by steam power and later by electricity, and to release everyone from the drudgery of the heaviest manual toil.
Bringing this dream to life required the robber barons: “To be made real, it required use of the talents of men of tremendous will, and tremendous ambition, since by no other force could the problems of financing and engineering and new developments be brought to a consummation,” the president explained.
But FDR was also firmly of the view that the interests of these talented “men of tremendous will and tremendous ambition” didn’t perfectly coincide with those of society as a whole:
So manifest were the advantages of the machine age, however, that the United States fearlessly, cheerfully, and, I think, rightly, accepted the bitter with the sweet. It was thought that no price was too high to pay for the advantages which we could draw from a finished industrial system. The history of the last half century is accordingly in large measure a history of a group of financial titans, whose methods were not scrutinized with too much care, and who were honored in proportion as they produced the results, irrespective of the means they used. The financiers who pushed the railroads to the Pacific were always ruthless, often wasteful, and frequently corrupt; but they did build railroads, and we have them today. It has been estimated that the American investor paid for the American railway system more than three times over in the process; but despite this fact the net advantage was to the United States.
From today’s polarized perspective, what is striking is how FDR gave the business titans their due for bringing the industrial revolution to America, yet at the same time insisted that their self-interest differed from that of the nation as a whole. We live—or at least until the 2008 financial crisis, we lived—in the age of triumphant capitalism, in which the titan is, as Pitch Johnson told the Moscow MBA students, “the hero of our time.”
But the reality is more nuanced. The heroic businessman who brilliantly surfs the wave of revolution is driven by the imperative to build his business. That usually creates a lot of value for the rest of us—the railroads of Roosevelt’s speech—but profit, rather than nation building, is the titan’s North Star. Being good at responding to revolution doesn’t necessarily mean focusing on those businesses that are most important for the nation’s long-term growth.
The buzzword in Russia today is “modernization.” That is because, despite the country’s shift to a market economy and its relatively strong economic growth over the past decade, Russia’s leaders have started to worry that they have built a version of capitalism appropriate to the twentieth century rather than to the twenty-first. Where, they wonder, is Russia’s Bangalore, not to mention its Silicon Valley?
This absence is particularly galling for Russians because they take great pride in their national scientific and technological prowess—and not unjustifiably so. America laments its lack of engineers, but in the Soviet Union engineering, math, and physics were the most valued degrees. And the country as a whole wasn’t bad at putting that knowledge to work; after all, the Soviets made it to outer space before the Americans did, and they built a nuclear arsenal bigger than the American one.
That meant that when communism collapsed, a lot of smart observers thought Russia’s liberated scientists would lead a new wave of innovation or, at the very least, offer a stiff challenge to India as an outsourcing center. To understand why that hasn’t happened, at least not in a big way, consider the story of Serguei Beloussov. When the Soviet Union collapsed, he was perfectly poised in a position between insider and outsider. He was from an academic family in St. Petersburg, but he had made it to the Moscow Institute of Physics and Technology, the country’s premier math and technology school. Like many of the oligarchs, he began experimenting with entrepreneurial ventures while he was still in college, organizing national tours for his university’s judo club, among other things, mostly for pocket money.
Beloussov has done well. Today, he owns two software companies, with a global workforce of one thousand. His best-known product is software that allows Windows programs to run on Macs. But Beloussov isn’t an oligarch. And that is because he wasn’t as good as they were at responding to revolution.
“In Russia, all the property belonged to the state and the most money was made by people who were involved in privatization,” Beloussov, wearing dark jeans and a long-sleeved red T-shirt advertising Parallels, one of his companies, told me.
“Business is about money and that is where the money was. Then, ten years ago, the big scarcity in Russia was brick-and-mortar businesses and many of my engineers would come to me and say, ‘I want to open a chain of drugstores’ or ‘I want to build homes.’ Then, five years ago, many businessmen decided to work for the government.” Only now, he thinks, is it starting to make real sense to work in technology.
Beloussov has no illusions about his own decision to focus on building actual computers and then computer software from the very start. Sipping his nine p.m. espresso in a crowded Starbucks in downtown Moscow, he told me, “I was young and stupid”—he was twenty-two at the time. “If I had invested my first money in privatization, that would have been much more profitable.”
Contrast Beloussov’s decisions with those of another smart technologist who saw a market opportunity in the late 1980s in the Soviet Union to write computer software: metals and oil magnate Viktor Vekselberg, today worth $12.4 billion.
Vekselberg made his first small fortune in 1988—when Gorbachev’s USSR took its first tentative step into capitalism with the cooperative movement—by writing and selling his own computer software program. Within three months he had earned enough, he told me, “to buy an apartment, a car, and a dacha.”
He and his five partners next devised a more complicated deal involving salvaging copper wire from scrap heaps in western Siberia (familiar to them because their Moscow institute did a lot of work for the oil fields there), then exporting the copper and using the revenue to import IBM computers, which his group loaded with their own software and sold to Russian companies. The business was hugely lucrative—Vekselberg said he and his partners made a hundred dollars for every single dollar invested—and within a year they had made $1 million. “That sounds funny today,” he mused, “but in those days it was huge money.”
If this were a Silicon Valley story, Vekselberg and his partners would probably have gone on to become serial software entrepreneurs. If this were a story about India, they would probably have moved on to technology outsourcing. If they were Chinese, they might have used that first million to build a factory. But this was Russia, and Vekselberg was turning out to be one of the country’s most adept businessmen, so he saw and jumped on the biggest opportunity: privatization. “People didn’t know what to do with privatization vouchers, so we bought up vouchers and used them to participate in privatization auctions. That is how we bought our first real assets, beginning with aluminum factories, and from there on we built our real business.”
Beloussov says it isn’t his nature to look back, but that his partner “still regrets that we didn’t participate in privatization. But it was just impossible for us to understand conceptually.”
Today, the Kremlin has given Vekselberg the job of building a Russian Silicon Valley. But Beloussov warns that if the price of oil stays too high, that won’t be possible. Most of Russia’s technologists have figured out the value of responding to revolution: “Too high a price for oil is bad for an innovation economy,” he said. “If the price is too high”—he later told me the ceiling he estimates is around one hundred dollars per barrel—“all the engineers will want to work at the banks and at Gazprom.”
Created in 1953 in honor of George C. Marshall, architect of the postwar plan that aided the reconstruction of Europe, the Marshall Scholarship is a glittering academic prize available to American postgraduates to study in the UK. Awarded on the basis of “high ability,” the honor is all about brainpower. In the spring of 1990, one of the Americans singled out for that distinction was Reid Hoffman, a California native who graduated from Stanford that year. Hoffman was a quintessential Marshall scholar: he’d earned his bachelor of science in symbolic systems and cognitive science, a hard-core double major, and he’d won the Lloyd W. Dinkelspiel Award, a yearly honor recognizing two students who’ve made “an exceptional contribution” to undergraduate education. Hoffman arrived in Oxford proud of the prize, excited about what he could learn at that university’s renowned philosophy department, and committed to a life of the mind. “When I graduated from Stanford, my plan was to become a professor and a public intellectual,” he said. “That is not about quoting Kant. It’s about holding up a lens to society and asking, ‘Who are we?’ and ‘Who should we be, as individuals and a society?’”
But twenty years later, Hoffman, who went on to become one of Silicon Valley’s most successful entrepreneurs and investors, told me that the worst risk he ever took was that decision to go to Oxford. It was what you might call a risk of omission, or, as Hoffman put it, “the risk I didn’t know I was taking.”
Going to Oxford on a two-year Marshall Scholarship didn’t seem to be a gamble at the time—quite the opposite. “I was focused on my CV,” Hoffman said. “Everyone will appreciate I went to Oxford and was a Marshall scholar and these sorts of things.”
Here’s the rub. While he was at Oxford pursuing his intellectual passion and building his CV, like the good superstar in training he clearly was, Hoffman realized that the world was changing and the old rules no longer applied. “Being in Oxford was in a sense taking a massive risk by taking me out of Silicon Valley,” he said. “That was when the online revolution was starting. And being present—being in the network when things are happening, where the opportunities are, is really critical.”
Hoffman was lucky. His undergraduate years in the Stanford cognitive science department and having a stepmother who worked in Silicon Valley’s venture capital industry meant that even amid Oxford’s dreamy spires he was able to figure out that a revolution was taking place more than five thousand miles away. That revelation struck him with such force that today Hoffman still muses over whether, once he realized the action was elsewhere, it was the right decision to stay at Oxford and finish his degree rather than hightail it back to the Valley and its revolutionary vanguard: “I think I made the right choice in one sense and the wrong choice in another.”
Once he had his degree, though, Hoffman was determined not to miss out. As a Marshall scholar he was poised to enter the managerial aristocracy and almost certainly become, given his analytical talents, a superstar. But Hoffman wanted more. He wanted to be part of the revolution he saw happening. To do so, he realized, he didn’t need a first job with a blue-chip company, he needed to move back to Silicon Valley and get in on the action.
“I actually took myself off the track that lots of my friends have done,” Hoffman told me. “You know, become partners at McKinsey and these kinds of things.”
But stepping off what Hoffman calls “the career escalator” didn’t mean slacking off. Once he returned to the West Coast, Hoffman pursued revolution with the same straight-A fervor he had demonstrated in the more structured worlds of Stanford and Oxford. He moved back home with his grandparents and madly tapped into his network. He called old friends. He even got his stepmother to call old friends on his behalf—a nontrivial leg up, since she was a venture capitalist and had once worked with Brook Byers, one of the name partners in Kleiner, Perkins, Caufield and Byers, the VC firm that is to the Valley what Goldman Sachs is to Wall Street.
Going back home intensified Hoffman’s belief that a revolution was happening and that he was at risk of missing it. “‘I wish I was here a couple of years ago, when it was really kicking off,’” Hoffman recalls thinking. “‘Wow, other people are already doing this. This thing’s moving. I’m way behind.’” Hoffman’s response, he said, was to decide that “I need to run fast. And the need to run fast is a good impulse to have.”
As it turned out, the revolution wasn’t quite over. By 1997, with just four years of technology experience under his belt, Hoffman, still running fast, decided to found his own company, Socialnet.com, an online dating site. Socialnet eventually closed down four years later without making much of a mark, but as Hoffman waded into the start-up world, two friends, Peter Thiel and Max Levchin, invited him to join the founding board of directors of their new company, PayPal. In January 2000, Hoffman went to work there full-time, a decision that made him a multimillionaire just two years later when eBay acquired the company.
But the revolution still wasn’t over yet, and Hoffman wasn’t finished running. “After the eBay/PayPal deal in 2002, I had a plan to take a year off and do some travel,” he recalled. “To clear my head and plot the year ahead, I first took a two-week vacation to Australia. While there, I reflected on the moment, and I concluded I needed to return to Silicon Valley and start a consumer Internet company as soon as possible. There was a window of opportunity I could not afford to miss. For one, the market conditions were ripe. There was lots of innovation still to be done on the consumer Web, yet many entrepreneurs—possible competitors—and investors were on the sidelines, scarred from the dot-com bust. They wouldn’t be on the sidelines forever. Also, my network was strong coming off the PayPal win, and I could relatively quickly organize the resources to get a new company launched.”
That new company was LinkedIn, which went public in 2011, making Hoffman, its cofounder and executive chairman, a billionaire. As a recovering academic, Hoffman has thought hard about the economic forces that have shaped his success. He isn’t just a practitioner of responding to revolution—he is one of its theorists. In a book published in 2012, Hoffman argues that the long-term effects of globalization and the technology revolution “are actually underhyped.” The result, he believes, is that Detroit—once a symbol of progress, today a symbol of despair—is everywhere. “Once-great companies are falling both more frequently and more quickly than in times past…. The forces of competition and change that brought down Detroit are global and local. They threaten every business, every industry, every city.”
Hoffman understands that the revolutionary waves he surfs so expertly have created a more polarized society, with both winners and losers. “The gap is growing between those who know the new career rules and have the new skills of a global economy, and those who clutch to old ways of thinking and rely on commoditized skills,” he writes. But even as he paints a macro picture of a volatile world with clear winners and losers, Hoffman holds out the hope that each of us can be one of the winners. His book, called The Start-Up of You, is a cheerful business advice primer whose premise is that all of us should mimic the strategies of billionaire innovators like himself. “You were born an entrepreneur,” Hoffman encourages readers in the opening passage. That doesn’t mean, he is quick to stipulate, we should all start our own companies. But he does urge us to think of our own careers as start-ups and manage them with the same agility that the masters of responding to revolution do.
Hoffman, charmingly, doesn’t think of himself as a superstar in a nation of supporting players—by following his advice, he wants all of us to have our shot. He may, at forty-four, already be a billionaire and a veteran of two successful start-ups (plus one failed one), but he thinks a 272-page book is enough to teach the rest of us “the mind-sets and skill sets you need to adapt to the future.” Indeed, if all of us learn how to respond to revolution, he says—“to manage the start-up of you,” that is—society more generally will flourish: “More world problems will be solved—and solved faster—if people practice the values laid out in the pages ahead.”
Hoffman is smart, likable, and compassionate. It is no accident he founded LinkedIn: he is known as Silicon Valley’s nice-guy billionaire, someone so affable he has figured out how to take the sleaze out of networking. He wants to make the world a better place and he is well aware of the downsides of the revolutionary age we live in. But what’s also striking is Hoffman’s confidence, from his privileged perch, that all of us will be able to thrive in these revolutionary times if only we develop the right mind-sets and skill sets.
That may well be the case. But, as experts in revolution, and the beneficiaries of them, the plutocrats sometimes miss the fact that for people in the middle and at the bottom, times of dramatic change are as likely to bring painful dislocation as they are to bring dazzling opportunity.
When the Texas-based Randall Stephenson, CEO of AT&T, visited the Council on Foreign Relations in its elegant town house on the Upper East Side of New York, to describe the mobility revolution and its immense commercial potential, one of the council’s members asked him a question that underscored the difference between these two outcomes.
The questioner was Farooq Kathwari, the CEO of furniture manufacturer and retailer Ethan Allen. Kathwari is one of Citigroup’s dopamine-rich risk takers: he arrived in New York from Kashmir with thirty-seven dollars in his pocket and got his start in the retail trade selling goods sent to him from home by his grandfather.
Here’s what he asked Stephenson: “Over the last ten years, with the help of technology and other things, we today are doing about the same business with 50 percent less people. We’re talking of jobs. I would just like to get your perspectives on this great technology. How is it going to overall affect the job markets in the next five years?”
Not to worry, Stephenson said: “While technology allows companies like yours to do more with less, I don’t think that necessarily means that there is less employment opportunities available. It’s just a redeployment of those employment opportunities. And those employees you have, my expectation was, with your productivity, their standard of living has actually gotten better.”
Unfortunately, at least in the short term, that benign scenario isn’t turning out to be true. The technology revolution is certainly making both Ethan Allen and AT&T more productive, and delivering windfalls to the bosses able to navigate that change. (Stephenson’s compensation in 2010 was $27.3 million.) But both companies have been shedding workers. AT&T has fifty thousand fewer workers today than it did before the financial crisis.
Kathwari has made a point of continuing to manufacture in the United States—70 percent of Ethan Allen’s products are made in North America. But to remain competitive—“Most of our competitors manufacture outside the U.S.,” he told me—Kathwari has turned to technology. His seven North American plants have taken the place of twenty; over the past eight years, Kathwari’s workforce has shrunk by about half.
“The big question is what it does to the people, because it creates unemployment,” Kathwari told me. “If you look at it from an individual business perspective, you are saying, Great! Technology is key to survival from an individual company point of view. But in the long run we can only be successful if the country is working. Business leaders should be concerned.”
Even for those workers who do find new jobs, the consequences of being fired are brutal. Three economists analyzing the 1982 recession have found that U.S. workers take an average 30 percent pay cut when they find a new job after being laid off. Even after twenty years, their earnings were still 20 percent lower than those of peers who kept their jobs in the recession. In emerging markets, the cost of change can be even higher: in the 1990s, the decade when the Russian oligarchs became billionaires, the incomes, health, and birth rates of ordinary Russians plummeted. India’s economic rise has coincided with an epidemic of suicides among its rural farmers. The same is true of inland China, which has been left out of the coast’s economic renaissance.
Our democratic impulse is to imagine that economic forces affect us all equally and that there exists a set of “management skills”—the equivalent of knowing how to read or to add—that serve all of us equally well. But the tougher reality is that economic transformation—the waves of revolution we are living through—has a very uneven impact. As Nobel laureate Michael Spence put it, “Your education isn’t fungible the way an investment portfolio is.” Soros can respond to revolution by cutting his losses and making a different bet; finding a new profession at forty-five, after your old one has been rendered redundant, isn’t so simple.
We are living through a tale not of two cities but of two economies. Hoffman makes the essential point that the winners of the old economic order are among those whose lives and careers are being disrupted. “For the last sixty or so years, the job market for educated workers worked like an escalator. After graduating from college, you landed an entry-level job at the bottom of the escalator at an IBM or a GE or a Goldman Sachs…. There was a sense that if you were basically competent, put forth a good effort, and weren’t unlucky, the strong winds at your back would eventually shoot you to a good high level. For the most part this was a justified expectation.” Hoffman is right about both those expectations and the disappointment of the upper middle class stuck on a jammed career escalator. But what about the telecom or furniture factory workers Kathwari is worried about? Even if they see the revolution coming, do they have the room in their father’s home and the contact book of a venture capitalist stepmom to help them respond to it?
Even Hoffman, who wants to be a sunny self-help guru, is too much of a scholar and an empath not to see that. “Remember: If you don’t find risk, risk will find you,” he warns in one of his book’s scarier passages. “In the past, when you thought about stable employers, you thought IBM, HP, General Motors—all stalwart companies that have been around a long time and employ hundreds of thousands of people…. Imagine what it must have been like for someone who thought he was a lifer at HP; his skills, experience, and network were all inextricably linked to his nine-to-five employer. And then: BOOM. He’s unemployed.”