How to Make Pittsburgh a Startup Hub (This is a talk I gave at an event called Opt412 in . Much of it will apply to other towns. But not all, because as I say in the talk, has some important advantages over most would-be startup hubs.) What would it take to make into a startup hub, like ? I understand pretty well, because I grew up here, in . And I understand pretty well because that's where I live now. Could you get that kind of startup ecosystem going here? When I agreed to speak here, I didn't think I'd be able to give a very optimistic talk. I thought I'd be talking about what could do to become a startup hub, very much in the subjunctive. Instead I'm going to talk about what can do. What changed my mind was an article I read in, of all places, the New York Times food section. The title was " 's Youth-Driven Food Boom ." To most people that might not even sound interesting, let alone something related to startups. But it was electrifying to me to read that title. I don't think I could pick a more promising one if I tried. And when I read the article I got even more excited. It said "people now make up 7.6 percent of all residents, up from 7 percent ." Wow, I thought, could be the next . It could become the cool place all the people in their twenties want to go live. When I got here , I could feel the difference. I lived here from . I didn't realize it at the time, but during that whole period the city was in free fall. On top of the flight to the suburbs that happened everywhere, the steel and nuclear businesses were both dying. Boy are things different now. It's not just that downtown seems a lot more prosperous. There is an energy here that was not here when I was a kid. When I was a kid, this was a place young people left. Now it's a place that attracts them. What does that have to do with startups? Startups are made of people, and the average age of the people in a typical startup is right in that 25 to 29 bracket. I've seen how powerful it is for a city to have those people. they shifted the center of gravity of from the peninsula to . Google and Facebook are on the peninsula, but the next generation of big winners are all in . The reason the center of gravity shifted was the talent war, for programmers especially. Most want to live in the city, not down in the boring suburbs. So whether they like it or not, founders know they have to be in the city. I know multiple founders who would have preferred to live down in the proper, but who made themselves move to because they knew otherwise they'd lose the talent war. So being a magnet for people in their twenties is a very promising thing to be. It's hard to imagine a place becoming a startup hub without also being that. When I read that statistic about the increasing percentage of , I had exactly the same feeling of excitement I get when I see a startup's graphs start to creep upward off the x axis. Nationally the percentage of is 6.8%. That means you're .8% ahead. The population is <US_DRIVER_LICENSE>, so we're talking about a surplus of about 2500 people. That's the population of a small town, and that's just the surplus. So you have a toehold. Now you just have to expand it. And though "youth-driven food boom" may sound frivolous, it is anything but. Restaurants and cafes are a big part of the personality of a city. Imagine walking down a street in . What are you walking past? Little restaurants and cafes. Imagine driving through some depressing random exurb. What are you driving past? Starbucks and McDonalds and Pizza Hut. As said, there is no there there. You could be anywhere. These independent restaurants and cafes are not just feeding people. They're making there be a there here. So here is my first concrete recommendation for turning into the next : do everything you can to encourage this youth-driven food boom. What could the city do? Treat the people starting these little restaurants and cafes as your users, and go ask them what they want. I can guess at least one thing they might want: a fast permit process. has left you a huge amount of room to beat them in that department. I know restaurants aren't the prime mover though. The prime mover, as the Times article said, is cheap housing. That's a big advantage. But that phrase "cheap housing" is a bit misleading. There are plenty of places that are cheaper. What's special about is not that it's cheap, but that it's a cheap place you'd actually want to live. Part of that is the buildings themselves. I realized a long time ago, back when I was a poor twenty-something myself, that the best deals were places that had once been rich, and then became poor. If a place has always been rich, it's nice but too expensive. If a place has always been poor, it's cheap but grim. But if a place was once rich and then got poor, you can find palaces for cheap. And that's what's bringing people here. When was rich, , the people who lived here built big solid buildings. Not always in the best taste, but definitely solid. So here is another piece of advice for becoming a startup hub: don't destroy the buildings that are bringing people here. When cities are on the way back up, like is now, developers race to tear down the old buildings. Don't let that happen. Focus on historic preservation. Big real estate development projects are not what's bringing the twenty-somethings here. They're the opposite of the new restaurants and cafes; they subtract personality from the city. The empirical evidence suggests you cannot be too strict about historic preservation. The tougher cities are about it, the better they seem to do. But the appeal of is not just the buildings themselves. It's the neighborhoods they're in. Like and , is fortunate in being a pre-car city. It's not too spread out. Because those do not like driving. They prefer walking, or bicycling, or taking public transport. If you've been to recently you can't help noticing the huge number of bicyclists. And this is not just a fad that the twenty-somethings have adopted. In this respect they have discovered a better way to live. The beards will go, but not the bikes. Cities where you can get around without driving are just better period. So I would suggest you do everything you can to capitalize on this. As with historic preservation, it seems impossible to go too far. Why not make the most bicycle and pedestrian friendly city in the country? See if you can go so far that you make seem backward by comparison. If you do, it's very unlikely you'll regret it. The city will seem like a paradise to the young people you want to attract. If they do leave to get jobs elsewhere, it will be with regret at leaving behind such a place. And what's the downside? Can you imagine a headline "City ruined by becoming too bicycle-friendly?" It just doesn't happen. So suppose cool old neighborhoods and cool little restaurants make this the next . Will that be enough? It will put you in a way better position than itself, because has something lacks: a first-rate research university. CMU plus little cafes means you have more than hipsters drinking lattes. It means you have hipsters drinking lattes while talking about distributed systems. Now you're getting really close to . In fact you're better off than in one way, because CMU is downtown, but Stanford and are out in the suburbs. What can CMU do to help become a startup hub? Be an even better research university. CMU is one of the best universities in the world, but imagine what things would be like if it were the very best, and everyone knew it. There are a lot of ambitious people who must go to the best place, wherever it is. If CMU were it, they would all come here. There would be kids in dreaming of living in . Being that kind of talent magnet is the most important contribution universities can make toward making their city a startup hub. In fact it is practically the only contribution they can make. But wait, shouldn't universities be setting up programs with words like "innovation" and "entrepreneurship" in their names? No, they should not. These kind of things almost always turn out to be disappointments. They're pursuing the wrong targets. The way to get innovation is not to aim for innovation but to aim for something more specific, like better batteries or better 3D printing. And the way to learn about entrepreneurship is to do it, which you can't in school . I know it may disappoint some administrators to hear that the best thing a university can do to encourage startups is to be a great university. It's like telling people who want to lose weight that the way to do it is to eat less. But if you want to know where startups come from, look at the empirical evidence. Look at the histories of the most successful startups, and you'll find they grow organically out of a couple of founders building something that starts as an interesting side project. Universities are great at bringing together founders, but beyond that the best thing they can do is get out of the way. For example, by not claiming ownership of "intellectual property" that students and faculty develop, and by having liberal rules about deferred admission and leaves of absence. In fact, one of the most effective things a university could do to encourage startups is an elaborate form of getting out of the way invented by Harvard. Harvard used to have exams for after . At they had something called "Reading Period" when you were supposed to be studying for exams. And Microsoft and Facebook have something in common that few people realize: they were both started during Reading Period. It's the perfect situation for producing the sort of side projects that turn into startups. The students are all on campus, but they don't have to do anything because they're supposed to be studying for exams. Harvard may have closed this window, because they moved exams before and shortened reading period from to 7. But if a university really wanted to help its students start startups, the empirical evidence, weighted by market cap, suggests the best thing they can do is literally nothing. The culture of is another of its strengths. It seems like a city has to be socially liberal to be a startup hub, and it's pretty clear why. A city has to tolerate strangeness to be a home for startups, because startups are so strange. And you can't choose to allow just the forms of strangeness that will turn into big startups, because they're all intermingled. You have to tolerate all strangeness. That immediately rules out big chunks of the . I'm optimistic it doesn't rule out . One of the things I remember from growing up here, though I didn't realize at the time that there was anything unusual about it, is how well people got along. I'm still not sure why. Maybe one reason was that everyone felt like an immigrant. When I was a kid in , people didn't call themselves . They called themselves or or . Just imagine what it must have been like here , when people were pouring in from twenty different countries. Tolerance was the only option. What I remember about the culture of is that it was both tolerant and pragmatic. That's how I'd describe the culture of too. And it's not a coincidence, because was of its time. This was a city where people built new things. And while the things people build have changed, the spirit you need to do that kind of work is the same. So although an influx of latte-swilling hipsters may be annoying in some ways, I would go out of my way to encourage them. And more generally to tolerate strangeness, even unto the degree wacko do. For that is a conservative choice: it's a return to the city's roots. Unfortunately I saved the toughest part for last. There is one more thing you need to be a startup hub, and hasn't got it: investors. has a big investor community because it's had to grow one. has a big investor community because it's full of people who like money a lot and are quick to notice new ways to get it. But has neither of these. And the cheap housing that draws other people here has no effect on investors. If an investor community grows up here, it will happen the same way it did in : slowly and organically. So I would not bet on having a big investor community in the short term. But fortunately there are three trends that make that less necessary than it used to be. One is that startups are increasingly cheap to start, so you just don't need as much outside money as you used to. The second is that thanks to things like Kickstarter, a startup can get to revenue faster. You can put something on from anywhere. The third is programs like Y Combinator. A startup from anywhere in the world can go to YC for , pick up funding, and then return home if they want. My advice is to make a great place for startups, and gradually more of them will stick. Some of those will succeed; some of their founders will become investors; and still more startups will stick. This is not a fast path to becoming a startup hub. But it is at least a path, which is something few other cities have. And it's not as if you have to make painful sacrifices in the meantime. Think about what I've suggested you should do. Encourage local restaurants, save old buildings, take advantage of density, make CMU the best, promote tolerance. These are the things that make good to live in now. All I'm saying is that you should do even more of them. And that's an encouraging thought. If 's path to becoming a startup hub is to be even more itself, then it has a good chance of succeeding. In fact it probably has the best chance of any city its size. It will take some effort, and a lot of time, but if any city can do it, can. Thanks to and for reading drafts of this, and to for organizing Opt412 and inviting me to speak.


Economic Inequality , economic inequality in the has increased dramatically. And in particular, the rich have gotten a lot richer. Nearly everyone who writes about the topic says that economic inequality should be decreased. I'm interested in this question because I was one of the founders of a company called Y Combinator that helps people start startups. Almost by definition, if a startup succeeds, its founders become rich. Which means by helping startup founders I've been helping to increase economic inequality. If economic inequality should be decreased, I shouldn't be helping founders. No one should be. But that doesn't sound right. What's going on here? What's going on is that while economic inequality is a single measure (or more precisely, two: variation in income, and variation in wealth), it has multiple causes. Many of these causes are bad, like tax loopholes and drug addiction. But some are good, like and starting the company you use to find things online. If you want to understand economic inequality - and more importantly, if you actually want to fix the bad aspects of it - you have to tease apart the components. And yet the trend in nearly everything written about the subject is to do the opposite: to squash together all the aspects of economic inequality as if it were a single phenomenon. Sometimes this is done for ideological reasons. Sometimes it's because the writer only has very high-level data and so draws conclusions from that, like the proverbial drunk who looks for his keys under the lamppost, instead of where he dropped them, because the light is better there. Sometimes it's because the writer doesn't understand critical aspects of inequality, like the role of technology in wealth creation. Much of the time, perhaps most of the time, writing about economic inequality combines all three. ___ The most common mistake people make about economic inequality is to treat it as a single phenomenon. The most naive version of which is the one based on the pie fallacy: that the rich get rich by taking money from the poor. Usually this is an assumption people start from rather than a conclusion they arrive at by examining the evidence. Sometimes the pie fallacy is stated explicitly: ose at the top are grabbing an increasing fraction of the nation's income - so much of a larger share that what's left over for the rest is diminished. [ 1 ] Other times it's more unconscious. But the unconscious form is very widespread. I think because we grow up in a world where the pie fallacy is actually true. To kids, wealth is a fixed pie that's shared out, and if one person gets more, it's at the expense of another. It takes a conscious effort to remind oneself that the real world doesn't work that way. In the real world you can create wealth as well as taking it from others. A woodworker creates wealth. He makes a chair, and you willingly give him money in return for it. A high-frequency trader does not. He makes a dollar only when someone on the other end of a trade loses a dollar. If the rich people in a society got that way by taking wealth from the poor, then you have the degenerate case of economic inequality, where the cause of poverty is the same as the cause of wealth. But instances of inequality don't have to be instances of the degenerate case. If one woodworker makes 5 chairs and another makes none, the second woodworker will have less money, but not because anyone took anything from him. Even people sophisticated enough to know about the pie fallacy are led toward it by the custom of describing economic inequality as a ratio of one quantile's income or wealth to another's. It's so easy to slip from talking about income shifting from one quantile to another, as a figure of speech, into believing that is literally what's happening. Except in the degenerate case, economic inequality can't be described by a ratio or even a curve. In the general case it consists of multiple ways people become poor, and multiple ways people become rich. Which means to understand economic inequality in a country, you have to go find individual people who are poor or rich and figure out why. [ 2 ] If you want to understand change in economic inequality, you should ask what those people would have done when it was different. This is one way I know the rich aren't all getting richer simply from some new system for transferring wealth to them from everyone else. When you use the would-have method with startup founders, you find what most would have done back in , when economic inequality was lower, was to join big companies or become professors. Before started Facebook, his default expectation was that he'd end up working at Microsoft. The reason he and most other startup founders are richer than they would have been in is not because of some right turn the country took during the administration, but because progress in technology has made it much easier to start a new company that grows fast . Traditional economists seem strangely averse to studying individual humans. It seems to be a rule with them that everything has to start with statistics. So they give you very precise numbers about variation in wealth and income, then follow it with the most naive speculation about the underlying causes. But while there are a lot of people who get rich through rent-seeking of various forms, and a lot who get rich by playing zero-sum games, there are also a significant number who get rich by creating wealth. And creating wealth, as a source of economic inequality, is different from taking it - not just morally, but also practically, in the sense that it is harder to eradicate. One reason is that variation in productivity is accelerating. The rate at which individuals can create wealth depends on the technology available to them, and that grows exponentially. The other reason creating wealth is such a tenacious source of inequality is that it can expand to accommodate a lot of people. ___ I'm all for shutting down the crooked ways to get rich. But that won't eliminate great variations in wealth, because as long as you leave open the option of getting rich by creating wealth, people who want to get rich will do that instead. Most people who get rich tend to be fairly driven. Whatever their other flaws, laziness is usually not one of them. Suppose new policies make it hard to make a fortune in finance. Does it seem plausible that the people who currently go into finance to make their fortunes will continue to do so, but be content to work for ordinary salaries? The reason they go into finance is not because they love finance but because they want to get rich. If the only way left to get rich is to start startups, they'll start startups. They'll do well at it too, because determination is the main factor in the success of a startup. [ 3 ] And while it would probably be a good thing for the world if people who wanted to get rich switched from playing zero-sum games to creating wealth, that would not only not eliminate great variations in wealth, but might even exacerbate them. In a zero-sum game there is at least a limit to the upside. Plus a lot of the new startups would create new technology that further accelerated variation in productivity. Variation in productivity is far from the only source of economic inequality, but it is the irreducible core of it, in the sense that you'll have that left when you eliminate all other sources. And if you do, that core will be big, because it will have expanded to include the efforts of all the refugees. Plus it will have a large Baumol penumbra around it: anyone who could get rich by creating wealth on their own account will have to be paid enough to prevent them from doing it. You can't prevent great variations in wealth without preventing people from getting rich, and you can't do that without preventing them from starting startups. So let's be clear about that. Eliminating great variations in wealth would mean eliminating startups. And that doesn't seem a wise move. Especially since it would only mean you eliminated startups in your own country. Ambitious people already move halfway around the world to further their careers, and startups can operate from anywhere nowadays. So if you made it impossible to get rich by creating wealth in your country, people who wanted to do that would just leave and do it somewhere else. Which would certainly get you a lower coefficient, along with a lesson in being careful what you ask for. [ 4 ] I think rising economic inequality is the inevitable fate of countries that don't choose something worse. We had a stretch in that convinced some people otherwise. But as I explained in The Refragmentation , that was an anomaly - a unique combination of circumstances that compressed society not just economically but culturally too. [ 5 ] And while some of the growth in economic inequality we've seen since then has been due to bad behavior of various kinds, there has simultaneously been a huge increase in individuals' ability to create wealth. Startups are almost entirely a product of this period. And even within the startup world, there has been a qualitative change in . Technology has decreased the cost of starting a startup so much that founders now have the upper hand over investors. Founders get less diluted, and it is now common for them to retain board control as well. Both further increase economic inequality, the former because founders own more stock, and the latter because, as investors have learned, founders tend to be better at running their companies than investors. While the surface manifestations change, the underlying forces are very, very old. The acceleration of productivity we see in has been happening for . If you look at the history of stone tools, technology was already accelerating in the Mesolithic. The acceleration would have been too slow to perceive in one lifetime. Such is the nature of the leftmost part of an exponential curve. But it was the same curve. You do not want to design your society in a way that's incompatible with this curve. The evolution of technology is one of the most powerful forces in history. said "We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both." That sounds plausible. But if I have to choose between ignoring him and ignoring an exponential curve that has been operating for , I'll bet on the curve. Ignoring any trend that has been operating for is dangerous. But exponential growth, especially, tends to bite you. ___ If accelerating variation in productivity is always going to produce some baseline growth in economic inequality, it would be a good idea to spend some time thinking about that future. Can you have a healthy society with great variation in wealth? What would it look like? Notice how novel it feels to think about that. The public conversation so far has been exclusively about the need to decrease economic inequality. We've barely given a thought to how to live with it. I'm hopeful we'll be able to. was a product of the Gilded Age, and things have changed since then. It's harder to hide wrongdoing now. And to get rich now you don't have to buy politicians the way railroad or oil magnates did. [ 6 ] The great concentrations of wealth I see around me in don't seem to be destroying democracy. There are lots of things wrong with the that have economic inequality as a symptom. We should fix those things. In the process we may decrease economic inequality. But we can't start from the symptom and hope to fix the underlying causes. [ 7 ] The most obvious is poverty. I'm sure most of those who want to decrease economic inequality want to do it mainly to help the poor, not to hurt the rich. [ 8 ] Indeed, a good number are merely being sloppy by speaking of decreasing economic inequality when what they mean is decreasing poverty. But this is a situation where it would be good to be precise about what we want. Poverty and economic inequality are not identical. When the city is turning off your water because you can't pay the bill, it doesn't make any difference what net worth is compared to yours. He might only be a few times richer than you, and it would still be just as much of a problem that your water was getting turned off. Closely related to poverty is lack of social mobility. I've seen this myself: you don't have to grow up rich or even upper middle class to get rich as a startup founder, but few successful founders grew up desperately poor. But again, the problem here is not simply economic inequality. There is an enormous difference in wealth between the household grew up in and that of a successful startup founder, but that didn't prevent him from joining their ranks. It's not economic inequality per se that's blocking social mobility, but some specific combination of things that go wrong when kids grow up sufficiently poor. One of the most important principles in is that "you make what you measure." It means that if you pick some number to focus on, it will tend to improve, but that you have to choose the right number, because only the one you choose will improve; another that seems conceptually adjacent might not. For example, if you're a university president and you decide to focus on graduation rates, then you'll improve graduation rates. But only graduation rates, not how much students learn. Students could learn less, if to improve graduation rates you made classes easier. Economic inequality is sufficiently far from identical with the various problems that have it as a symptom that we'll probably only hit whichever of the two we aim at. If we aim at economic inequality, we won't fix these problems. So I say let's aim at the problems. For example, let's attack poverty, and if necessary damage wealth in the process. That's much more likely to work than attacking wealth in the hope that you will thereby fix poverty. [ 9 ] And if there are people getting rich by tricking consumers or lobbying the government for anti-competitive regulations or tax loopholes, then let's stop them. Not because it's causing economic inequality, but because it's stealing. [ 10 ] If all you have is statistics, it seems like that's what you need to fix. But behind a broad statistical measure like economic inequality there are some things that are good and some that are bad, some that are historical trends with immense momentum and others that are random accidents. If we want to fix the world behind the statistics, we have to understand it, and focus our efforts where they'll do the most good. Notes [ 1 ] , . The Price of Inequality . Norton, . p. 32. [ 2 ] Particularly since economic inequality is a matter of outliers, and outliers are disproportionately likely to have gotten where they are by ways that have little do with the sort of things economists usually think about, like wages and productivity, but rather by, say, ending up on the wrong side of the "War on Drugs." [ 3 ] Determination is the most important factor in deciding between success and failure, which in startups tend to be sharply differentiated. But it takes more than determination to create one of the hugely successful startups. Though most founders start out excited about the idea of getting rich, purely mercenary founders will usually take one of the big acquisition offers most successful startups get on the way up. The founders who go on to the next stage tend to be driven by a sense of mission. They have the same attachment to their companies that an artist or writer has to their work. But it is very hard to predict at the outset which founders will do that. It's not simply a function of their initial attitude. Starting a company changes people. [ 4 ] After reading a draft of this essay, told me how he had once talked to a group of "who said they wanted to make more entrepreneurial and more like . I said by definition this will give you more inequality. They thought I was insane - they could not process it." [ 5 ] Economic inequality has been decreasing globally. But this is mainly due to the erosion of the kleptocracies that formerly dominated all the poorer countries. Once the playing field is leveler politically, we'll see economic inequality start to rise again. The is the bellwether. The situation we face here, the rest of the world will sooner or later. [ 6 ] Some people still get rich by buying politicians. My point is that it's no longer a precondition. [ 7 ] As well as problems that have economic inequality as a symptom, there are those that have it as a cause. But in most if not all, economic inequality is not the primary cause. There is usually some injustice that is allowing economic inequality to turn into other forms of inequality, and that injustice is what we need to fix. For example, the police in the treat the poor worse than the rich. But the solution is not to make people richer. It's to make the police treat people more equitably. Otherwise they'll continue to maltreat people who are weak in other ways. [ 8 ] Some who read this essay will say that I'm clueless or even being deliberately misleading by focusing so much on the richer end of economic inequality - that economic inequality is really about poverty. But that is exactly the point I'm making, though sloppier language than I'd use to make it. The real problem is poverty, not economic inequality. And if you conflate them you're aiming at the wrong target. Others will say I'm clueless or being misleading by focusing on people who get rich by creating wealth - that startups aren't the problem, but corrupt practices in finance, healthcare, and so on. Once again, that is exactly my point. The problem is not economic inequality, but those specific abuses. It's a strange task to write an essay about why something isn't the problem, but that's the situation you find yourself in when so many people mistakenly think it is. [ 9 ] Particularly since many causes of poverty are only partially driven by people trying to make money from them. For example, 's abnormally high incarceration rate is a major cause of poverty. But although for-profit prison companies and prison guard unions both spend a lot lobbying for harsh sentencing laws, they are not the original source of them. [ 10 ] Incidentally, tax loopholes are definitely not a product of some power shift due to recent increases in economic inequality. The golden age of economic equality in was also the golden age of tax avoidance. Indeed, it was so widespread and so effective that I'm skeptical whether economic inequality was really so low then as we think. In a period when people are trying to hide wealth from the government, it will tend to be hidden from statistics too. One sign of the potential magnitude of the problem is the discrepancy between government receipts as a percentage of GDP, which have remained more or less constant during the entire period from the end of World War II to the present, and tax rates, which have varied dramatically. Thanks to , , , , , , , , , , and for reading drafts of this. Note: This is a new version from which I removed a pair of metaphors that made a lot of people mad, essentially by macroexpanding them. If anyone wants to see the old version, I put it here . Related: The Short Version A Reply to A Reply to French Translation


The Refragmentation January 2016 One advantage of being old is that you can see change happen in your lifetime. A lot of the change I've seen is fragmentation. politics is much more polarized than it used to be. Culturally we have ever less common ground. The creative class flocks to a handful of happy cities, abandoning the rest. And increasing economic inequality means the spread between rich and poor is growing too. I'd like to propose a hypothesis: that all these trends are instances of the same phenomenon. And moreover, that the cause is not some force that's pulling us apart, but rather the erosion of forces that had been pushing us together. Worse still, for those who worry about these trends, the forces that were pushing us together were an anomaly, a one-time combination of circumstances that's unlikely to be repeated - and indeed, that we would not want to repeat. The two forces were war (above all World War II), and the rise of large corporations. The effects of World War II were both economic and social. Economically, it decreased variation in income. Like all modern armed forces, 's were socialist economically. From each according to his ability, to each according to his need. More or less. Higher ranking members of the military got more (as higher ranking members of socialist societies always do), but what they got was fixed according to their rank. And the flattening effect wasn't limited to those under arms, because the economy was conscripted too. all wages were set by the National War Labor Board. Like the military, they defaulted to flatness. And this national standardization of wages was so pervasive that its effects could still be after the war ended. [ 1 ] Business owners weren't supposed to be making money either. said "not a single war millionaire" would be permitted. To ensure that, any increase in a company's profits over prewar levels was taxed at 85%. And when what was left after corporate taxes reached individuals, it was taxed again at a marginal rate of 93%. [ 2 ] Socially too the war tended to decrease variation. Over 16 million men and women from all sorts of different backgrounds were brought together in a way of life that was literally uniform. Service rates for men born in approached 80%. And working toward a common goal, often under stress, brought them still closer together. Though strictly speaking World War II lasted for the , its effects lasted longer. Wars make central governments more powerful, and World War II was an extreme case of this. In the , as in all the other Allied countries, the federal government was slow to give up the new powers it had acquired. Indeed, in some respects the war didn't end in ; the enemy just switched to . In tax rates, federal power, defense spending, conscription, and nationalism, after the war looked more like wartime than prewar peacetime. [ 3 ] And the social effects lasted too. The kid pulled into the army from behind a mule team in didn't simply go back to the farm afterward. Something else was waiting for him, something that looked a lot like the army. If total war was the big political story of , the big economic story was the rise of a new kind of company. And this too tended to produce both social and economic cohesion. [ 4 ] was of the big, national corporation. General Electric, General Foods, General Motors. Developments in finance, communications, transportation, and manufacturing enabled a new type of company whose goal was above all scale. Version 1 of this world was low-res: a Duplo world of a few giant companies dominating each big market. [ 5 ] The late 19th and had been a time of consolidation, led especially by . Thousands of companies run by their founders were merged into a couple hundred giant ones run by professional managers. Economies of scale ruled . It seemed to people at the time that this was the final state of things. said in of combination is here to stay. Individualism has gone, never to return. He turned out to be mistaken, but he seemed right for . The consolidation that began in continued for most of . By World War II, as writes, "the major sectors of the economy were either organized as government-backed cartels or dominated by a few oligopolistic corporations." For consumers this new world meant the same choices everywhere, but only a few of them. When I grew up there were only 2 or 3 of most things, and since they were all aiming at the middle of the market there wasn't much to differentiate them. One of the most important instances of this phenomenon was in TV. Here there were 3 choices: NBC, CBS, and ABC. Plus public TV for eggheads and communists. The programs that the 3 networks offered were indistinguishable. In fact, here there was a triple pressure toward the center. If one show did try something daring, local affiliates in conservative markets would make them stop. Plus since TVs were expensive, whole families watched the same shows together, so they had to be suitable for everyone. And not only did everyone get the same thing, they got it at the same time. It's difficult to imagine now, but tens of millions of families would sit down together in front of their TV set watching the same show, at the same time, as their next door neighbors. What happens now with the Super Bowl used to happen every night. We were literally in sync. [ 6 ] In a way TV culture was good. The view it gave of the world was like you'd find in a children's book, and it probably had something of the effect that (parents hope) children's books have in making people behave better. But, like children's books, TV was also misleading. Dangerously misleading, for adults. In his autobiography, talks of seeing gruesome images that had just come in from and thinking, we can't show these to families while they're having dinner. I know how pervasive the common culture was, because I tried to opt out of it, and it was practically impossible to find alternatives. When I was I realized, more from internal evidence than any outside source, that the ideas we were being fed on TV were crap, and I stopped watching it. [ 7 ] But it wasn't just TV. It seemed like everything around me was crap. The politicians all saying the same things, the consumer brands making almost identical products with different labels stuck on to indicate how prestigious they were meant to be, the balloon-frame houses with fake "colonial" skins, the cars with several feet of gratuitous metal on each end that started to fall apart after , the "red delicious" apples that were red but only nominally apples. And in retrospect, it was crap. [ 8 ] But when I went looking for alternatives to fill this void, I found practically nothing. There was no Internet then. The only place to look was in the chain bookstore in our local shopping mall. [ 9 ] There I found a copy of The . I wish I could say it became a gateway into a wider world, but in fact I found it boring and incomprehensible. Like a kid tasting whisky for the first time and pretending to like it, I preserved that magazine as carefully as if it had been a book. I'm sure I still have it somewhere. But though it was evidence that there was, somewhere, a world that wasn't red delicious, I didn't find it till college. It wasn't just as consumers that the big companies made us similar. They did as employers too. Within companies there were powerful forces pushing people toward a single model of how to look and act. IBM was particularly notorious for this, but they were only a little more extreme than other big companies. And the models of how to look and act varied little between companies. Meaning everyone within this world was expected to seem more or less the same. And not just those in the corporate world, but also everyone who aspired to it - which in meant most people who weren't already in it. For most of , working-class people tried hard to look middle class. You can see it in old photos. Few adults aspired to look dangerous in . But the rise of national corporations didn't just compress us culturally. It compressed us economically too, and on both ends. Along with giant national corporations, we got giant national labor unions. And in the corporations cut deals with the unions where they paid over market price for labor. Partly because the unions were monopolies. [ 10 ] Partly because, as components of oligopolies themselves, the corporations knew they could safely pass the cost on to their customers, because their competitors would have to as well. And partly because in most of the giant companies were still focused on finding new ways to milk economies of scale. Just as startups rightly pay AWS a premium over the cost of running their own servers so they can focus on growth, many of the big national corporations were willing to pay a premium for labor. [ 11 ] As well as pushing incomes up from the bottom, by overpaying unions, the big companies of also pushed incomes down at the top, by underpaying their top management. Economist wrote in that "There are few corporations in which it would be suggested that executive salaries are at a maximum." [ 12 ] To some extent this was an illusion. Much of the de facto pay of executives never showed up on their income tax returns, because it took the form of perks. The higher the rate of income tax, the more pressure there was to pay employees upstream of it. (In the , where taxes were even higher than in the , companies would even pay their kids' private school tuitions.) One of the most valuable things the big companies of gave their employees was job security, and this too didn't show up in tax returns or income statistics. So the nature of employment in these organizations tended to yield falsely low numbers about economic inequality. But even accounting for that, the big companies paid their best people less than market price. There was no market; the expectation was that you'd work for the same company for if not your whole career. [ 13 ] Your work was so illiquid there was little chance of getting market price. But that same illiquidity also encouraged you not to seek it. If the company promised to employ you till you retired and give you a pension afterward, you didn't want to extract as much from it as you could. You needed to take care of the company so it could take care of you. Especially when you'd been working with the same group of people for . If you tried to squeeze the company for more money, you were squeezing the organization that was going to take care of them . Plus if you didn't put the company first you wouldn't be promoted, and if you couldn't switch ladders, promotion on this one was the only way up. [ 14 ] To someone who'd spent in the armed forces, this situation didn't seem as strange as it does to us now. From their point of view, as big company executives, they were high-ranking officers. They got paid a lot more than privates. They got to have expense account lunches at the best restaurants and fly around on the company's Gulfstreams. It probably didn't occur to most of them to ask if they were being paid market price. The ultimate way to get market price is to work for yourself, by starting your own company. That seems obvious to any ambitious person now. But in it was an alien concept. Not because starting one's own company seemed too ambitious, but because it didn't seem ambitious enough. Even as late as the 1970s, when I grew up, the ambitious plan was to get lots of education at prestigious institutions, and then join some other prestigious institution and work one's way up the hierarchy. Your prestige was the prestige of the institution you belonged to. People did start their own businesses of course, but educated people rarely did, because in there was practically zero concept of starting what we now call a startup : a business that starts small and grows big. That was much harder to do in . Starting one's own business meant starting a business that would start small and stay small. Which in of big companies often meant scurrying around trying to avoid being trampled by elephants. It was more prestigious to be one of the executive class riding the elephant. By , no one stopped to wonder where the big prestigious companies had come from in the first place. It seemed like they'd always been there, like the chemical elements. And indeed, there was a double wall between ambitious kids in and the origins of the big companies. Many of the big companies were roll-ups that didn't have clear founders. And when they did, the founders didn't seem like us. Nearly all of them had been uneducated, in the sense of not having been to college. They were what called rude mechanicals. College trained one to be a member of the professional classes. Its graduates didn't expect to do the sort of grubby menial work that or started out doing. [ 15 ] And in there were more and more college graduates. They increased from about 2% of the population in to about 25% in . In our two big forces intersect, in the form of the GI Bill, which sent 2.2 million World War II veterans to college. Few thought of it in these terms, but the result of making college the canonical path for the ambitious was a world in which it was socially acceptable to work for , but not to be . [ 16 ] I remember this world well. I came of age just as it was starting to break up. In my childhood it was still dominant. Not quite so dominant as it had been. We could see from old TV shows and yearbooks and the way adults acted that people in and 60s had been even more conformist than us. The model was already starting to get old. But that was not how we saw it at the time. We would at most have said that one could be a bit more daring in than . And indeed, things hadn't changed much yet. But change was coming soon. And when the Duplo economy started to disintegrate, it disintegrated in several different ways at once. Vertically integrated companies literally dis-integrated because it was more efficient to. Incumbents faced new competitors as (a) markets went global and (b) technical innovation started to trump economies of scale, turning size from an asset into a liability. Smaller companies were increasingly able to survive as formerly narrow channels to consumers broadened. Markets themselves started to change faster, as whole new categories of products appeared. And last but not least, the federal government, which had previously smiled upon world as the natural state of things, began to realize it wasn't the last word after all. What was to the horizontal axis, was to the vertical. He wanted to do everything himself. The giant plant he built at literally took in iron ore at one end and sent cars out the other. <US_DRIVER_LICENSE> people worked there. At the time it seemed the future. But that is not how car companies operate . Now much of the design and manufacturing happens in a long supply chain, whose products the car companies ultimately assemble and sell. The reason car companies operate this way is that it works better. Each company in the supply chain focuses on what they know best. And they each have to do it well or they can be swapped out for another supplier. Why didn't realize that networks of cooperating companies work better than a single big company? One reason is that supplier networks take a while to evolve. In , doing everything himself seemed to Ford the only way to get the scale he needed. And the second reason is that if you want to solve a problem using a network of cooperating companies, you have to be able to coordinate their efforts, and you can do that much better with computers. Computers reduce the transaction costs that argued are the raison d'etre of corporations. That is a fundamental change. In , big companies were synonymous with efficiency. In they were synonymous with inefficiency. To some extent this was because the companies themselves had become sclerotic. But it was also because our standards were higher. It wasn't just within existing industries that change occurred. The industries themselves changed. It became possible to make lots of new things, and sometimes the existing companies weren't the ones who did it best. Microcomputers are a classic example. The market was pioneered by upstarts like Apple. When it got big enough, IBM decided it was worth paying attention to. At the time IBM completely dominated the computer industry. They assumed that all they had to do, now that this market was ripe, was to reach out and pick it. Most people at the time would have agreed with them. But what happened next illustrated how much more complicated the world had become. IBM did launch a microcomputer. Though quite successful, it did not crush Apple. But even more importantly, IBM itself ended up being supplanted by a supplier coming in from the side - from software, which didn't even seem to be the same business. IBM's big mistake was to accept a non-exclusive license for DOS. It must have seemed a safe move at the time. No other computer manufacturer had ever been able to outsell them. What difference did it make if other manufacturers could offer DOS too? The result of that miscalculation was an explosion of inexpensive PC clones. Microsoft now owned the PC standard, and the customer. And the microcomputer business ended up being Apple vs Microsoft. Basically, Apple bumped IBM and then Microsoft stole its wallet. That sort of thing did not happen to big companies in . But it was going to happen increasingly often in the future. Change happened mostly by itself in the computer business. In other industries, legal obstacles had to be removed first. Many of the oligopolies had been anointed by the federal government with policies (and in wartime, large orders) that kept out competitors. This didn't seem as dubious to government officials at the time as it sounds to us. They felt a two-party system ensured sufficient competition in politics. It ought to work for business too. Gradually the government realized that anti-competitive policies were doing more harm than good, and during the administration it started to remove them. The word used for this process was misleadingly narrow: deregulation. What was really happening was de-oligopolization. It happened to one industry after another. Two of the most visible to consumers were air travel and long-distance phone service, which both became dramatically cheaper after deregulation. Deregulation also contributed to the wave of hostile takeovers in . In the only limit on the inefficiency of companies, short of actual bankruptcy, was the inefficiency of their competitors. Now companies had to face absolute rather than relative standards. Any public company that didn't generate sufficient returns on its assets risked having its management replaced with one that would. Often the new managers did this by breaking companies up into components that were more valuable separately. [ 17 ] Version 1 of the national economy consisted of a few big blocks whose relationships were negotiated in back rooms by a handful of executives, politicians, regulators, and labor leaders. Version 2 was higher resolution: there were more companies, of more different sizes, making more different things, and their relationships changed faster. In this world there were still plenty of back room negotiations, but more was left to market forces. Which further accelerated the fragmentation. It's a little misleading to talk of versions when describing a gradual process, but not as misleading as it might seem. There was a lot of change in , and what we ended up with was qualitatively different. The companies in the S&P 500 in had been there an average of . By that number was . [ 18 ] The breakup of the Duplo economy happened simultaneously with the spread of computing power. To what extent were computers a precondition? It would take a book to answer that. Obviously the spread of computing power was a precondition for the rise of startups. I suspect it was for most of what happened in finance too. But was it a precondition for globalization or the LBO wave? I don't know, but I wouldn't discount the possibility. It may be that the refragmentation was driven by computers in the way the industrial revolution was driven by steam engines. Whether or not computers were a precondition, they have certainly accelerated it. The new fluidity of companies changed people's relationships with their employers. Why climb a corporate ladder that might be yanked out from under you? Ambitious people started to think of a career less as climbing a single ladder than as a series of jobs that might be at different companies. More movement (or even potential movement) between companies introduced more competition in salaries. Plus as companies became smaller it became easier to estimate how much an employee contributed to the company's revenue. Both changes drove salaries toward market price. And since people vary dramatically in productivity, paying market price meant salaries started to diverge. By no coincidence it was in that the term "yuppie" was coined. That word is not much used now, because the phenomenon it describes is so taken for granted, but at the time it was a label for something novel. Yuppies were young professionals who made lots of money. To someone in their , this wouldn't seem worth naming. Why wouldn't young professionals make lots of money? But until , being underpaid early in your career was part of what it meant to be a professional. Young professionals were paying their dues, working their way up the ladder. The rewards would come later. What was novel about yuppies was that they wanted market price for the work they were doing now. The first yuppies did not work for startups. That was still in the future. Nor did they work for big companies. They were professionals working in fields like law, finance, and consulting. But their example rapidly inspired their peers. Once they saw that new BMW 325i, they wanted one too. Underpaying people at the beginning of their career only works if everyone does it. Once some employer breaks ranks, everyone else has to, or they can't get good people. And once started this process spreads through the whole economy, because at the beginnings of people's careers they can easily switch not merely employers but industries. But not all young professionals benefitted. You had to produce to get paid a lot. It was no coincidence that the first yuppies worked in fields where it was easy to measure that. More generally, an idea was returning whose name sounds old-fashioned precisely because it was so rare for so long: that you could make your fortune. As in the past there were multiple ways to do it. Some made their fortunes by creating wealth, and others by playing zero-sum games. But once it became possible to make one's fortune, the ambitious had to decide whether or not to. A physicist who chose physics over Wall Street in was making a sacrifice that a physicist in didn't have to think about. The idea even flowed back into big companies. CEOs of big companies make more now than they used to, and I think much of the reason is prestige. In , corporate CEOs had immense prestige. They were the winners of the only economic game in town. But if they made as little now as they did then, in real dollar terms, they'd seem like small fry compared to professional athletes and whiz kids making millions from startups and hedge funds. They don't like that idea, so now they try to get as much as they can, which is more than they had been getting. [ 19 ] Meanwhile a similar fragmentation was happening at the other end of the economic scale. As big companies' oligopolies became less secure, they were less able to pass costs on to customers and thus less willing to overpay for labor. And as the Duplo world of a few big blocks fragmented into many companies of different sizes - some of them overseas - it became harder for unions to enforce their monopolies. As a result workers' wages also tended toward market price. Which (inevitably, if unions had been doing their job) tended to be lower. Perhaps dramatically so, if automation had decreased the need for some kind of work. And just as the model induced social as well as economic cohesion, its breakup brought social as well as economic fragmentation. People started to dress and act differently. Those who would later be called the "creative class" became more mobile. People who didn't care much for religion felt less pressure to go to church for appearances' sake, while those who liked it a lot opted for increasingly colorful forms. Some switched from meat loaf to tofu, and others to Hot Pockets. Some switched from driving Ford sedans to driving small imported cars, and others to driving SUVs. Kids who went to private schools or wished they did started to dress "preppy," and kids who wanted to seem rebellious made a conscious effort to look disreputable. In a hundred ways people spread apart. [ 20 ] Almost , fragmentation is still increasing. Has it been net good or bad? I don't know; the question may be unanswerable. Not entirely bad though. We take for granted the forms of fragmentation we like, and worry only about the ones we don't. But as someone who caught the tail end of conformism , I can tell you it was no utopia. [ 21 ] My goal here is not to say whether fragmentation has been good or bad, just to explain why it's happening. With the centripetal forces of total war and oligopoly mostly gone, what will happen next? And more specifically, is it possible to reverse some of the fragmentation we've seen? If it is, it will have to happen piecemeal. You can't reproduce cohesion the way it was originally produced. It would be insane to go to war just to induce more national unity. And once you understand the degree to which the economic history of was a low-res version 1, it's clear you can't reproduce that either. cohesion was something that happened at least in a sense naturally. The war was due mostly to external forces, and the Duplo economy was an evolutionary phase. If you want cohesion now, you'd have to induce it deliberately. And it's not obvious how. I suspect the best we'll be able to do is address the symptoms of fragmentation. But that may be enough. The form of fragmentation people worry most about lately is economic inequality , and if you want to eliminate that you're up against a truly formidable headwind that has been in operation since the stone age. Technology. Technology is a lever. It magnifies work. And the lever not only grows increasingly long, but the rate at which it grows is itself increasing. Which in turn means the variation in the amount of wealth people can create has not only been increasing, but accelerating. The unusual conditions that prevailed in masked this underlying trend. The ambitious had little choice but to join large organizations that made them march in step with lots of other people - literally in the case of the armed forces, figuratively in the case of big corporations. Even if the big corporations had wanted to pay people proportionate to their value, they couldn't have figured out how. But that constraint has gone now. Ever since it started to erode in , we've seen the underlying forces at work again. [ 22 ] Not everyone who gets rich now does it by creating wealth, certainly. But a significant number do, and the Baumol Effect means all their peers get dragged along too. [ 23 ] And as long as it's possible to get rich by creating wealth, the default tendency will be for economic inequality to increase. Even if you eliminate all the other ways to get rich. You can mitigate this with subsidies at the bottom and taxes at the top, but unless taxes are high enough to discourage people from creating wealth, you're always going to be fighting a losing battle against increasing variation in productivity. [ 24 ] That form of fragmentation, like the others, is here to stay. Or rather, back to stay. Nothing is forever, but the tendency toward fragmentation should be more forever than most things, precisely because it's not due to any particular cause. It's simply a reversion to the mean. When Rockefeller said individualism was gone, he was right for . It's back now, and that's likely to be true for longer. I worry that if we don't acknowledge this, we're headed for trouble. If we think cohesion disappeared because of few policy tweaks, we'll be deluded into thinking we can get it back (minus the bad parts, somehow) with a few countertweaks. And then we'll waste our time trying to eliminate fragmentation, when we'd be better off thinking about how to mitigate its consequences. Notes [ 1 ] , writing in , said the wage differentials prevailing at World War II had become so embedded that they "were regarded as 'just' even after the egalitarian pressures of World War II had disappeared. Basically, the same differentials exist to , ." But and think market forces in the postwar period also helped preserve the wartime compression of wages - specifically increased demand for unskilled workers, and oversupply of educated ones. (Oddly enough, the custom of having employers pay for health insurance derives from efforts by businesses to circumvent NWLB wage controls in order to attract workers.) [ 2 ] As always, tax rates don't tell the whole story. There were lots of exemptions, especially for individuals. And in World War II the tax codes were so new that the government had little acquired immunity to tax avoidance. If the rich paid high taxes during the war it was more because they wanted to than because they had to. After the war, federal tax receipts as a percentage of GDP were about the same as they are now. In fact, for the entire period since the war, tax receipts have stayed close to 18% of GDP, despite dramatic changes in tax rates. The lowest point occurred when marginal income tax rates were highest: 14.1% in . Looking at the data, it's hard to avoid the conclusion that tax rates have had little effect on what people actually paid. [ 3 ] Though in fact preceding the war had been a time of unprecedented federal power, in response to the Depression. Which is not entirely a coincidence, because the Depression was one of the causes of the war. In many ways the New Deal was a sort of dress rehearsal for the measures the federal government took during wartime. The wartime versions were much more drastic and more pervasive though. As wrote, "for many the decisive change in their experiences came not with the New Deal but with World War II." [ 4 ] I don't know enough about the origins of the world wars to say, but it's not inconceivable they were connected to the rise of big corporations. If that were the case, cohesion would have a single cause. [ 5 ] More precisely, there was a bimodal economy consisting, in Galbraith's words, of "the world of the technically dynamic, massively capitalized and highly organized corporations on the one hand and the hundreds of thousands of small and traditional proprietors on the other." Money, prestige, and power were concentrated in the former, and there was near zero crossover. [ 6 ] I wonder how much of the decline in families eating together was due to the decline in families watching TV together afterward. [ 7 ] I know when this happened because it was the season premiered. Everyone else was talking about what was happening on , and I had no idea what they meant. [ 8 ] I didn't realize it till I started doing research for this essay, but the meretriciousness of the products I grew up with is a well-known byproduct of oligopoly. When companies can't compete on price, they compete on tailfins. [ 9 ] Monroeville Mall was at the time of its completion in the largest in the country. In the movie Dawn of the Dead was shot there. Apparently the mall was not just the location of the movie, but its inspiration; the crowds of shoppers drifting through this huge mall reminded of zombies. My first job was scooping ice cream in . [ 10 ] Labor unions were exempted from antitrust laws by the Clayton Antitrust Act in on the grounds that a person's work is not "a commodity or article of commerce." I wonder if that means service companies are also exempt. [ 11 ] The relationships between unions and unionized companies can even be symbiotic, because unions will exert political pressure to protect their hosts. According to , when politicians tried to attack the A&P supermarket chain because it was putting local grocery stores out of business, "A&P successfully defended itself by allowing the unionization of its workforce in , thereby gaining organized labor as a constituency." I've seen this phenomenon myself: hotel unions are responsible for more of the political pressure against Airbnb than hotel companies. [ 12 ] Galbraith was clearly puzzled that corporate executives would work so hard to make money for other people (the shareholders) instead of themselves. He devoted much of The New Industrial State to trying to figure this out. His theory was that professionalism had replaced money as a motive, and that modern corporate executives were, like (good) scientists, motivated less by financial rewards than by the desire to do good work and thereby earn the respect of their peers. There is something in this, though I think lack of movement between companies combined with self-interest explains much of observed behavior. [ 13 ] Galbraith (p. 94) says a study of the 800 highest paid executives at 300 big corporations found that three quarters of them had been with their company for . [ 14 ] It seems likely that in executive salaries were low partly because companies then were more dependent on banks, who would have disapproved if executives got too much. This was certainly true in the beginning. The first big company CEOs were hired hands. Companies didn't start to finance themselves with retained earnings till . Till then they had to pay out their earnings in dividends, and so depended on banks for capital for expansion. Bankers continued to sit on corporate boards till the -Steagall act in . By big companies funded 3/4 of their growth from earnings. But of bank dependence, reinforced by the financial controls of World War II, must have had a big effect on social conventions about executive salaries. So it may be that the lack of movement between companies was as much the effect of low salaries as the cause. Incidentally, the switch in to financing growth with retained earnings was one cause of the crash. The banks now had to find someone else to lend to, so they made more margin loans. [ 15 ] Even now it's hard to get them to. One of the things I find hardest to get into the heads of would-be startup founders is how important it is to do certain kinds of menial work early in the life of a company. Doing things that don't scale is to how got started as a high-fiber diet is to the traditional peasant's diet: they had no choice but to do the right thing, while we have to make a conscious effort. [ 16 ] Founders weren't celebrated in the press when I was a kid. "Our founder" meant a photograph of a severe-looking man with a walrus mustache and a wing collar who had died . The thing to be when I was a kid was an executive . If you weren't around then it's hard to grasp the cachet that term had. The fancy version of everything was called the "executive" model. [ 17 ] The wave of hostile takeovers in was enabled by a combination of circumstances: court decisions striking down state anti-takeover laws, starting with the Supreme Court's decision in Edgar v. MITE Corp. the administration's comparatively sympathetic attitude toward takeovers; the Depository Institutions Act of , which allowed banks and savings and loans to buy corporate bonds; a new SEC rule issued in (rule 415) that made it possible to bring corporate bonds to market faster; the creation of the junk bond business by ; a vogue for conglomerates in the preceding period that caused many companies to be combined that never should have been; of inflation that left many public companies trading below the value of their assets; and not least, the increasing complacency of managements. [ 18 ] Foster, . "Creative Destruction Whips through Corporate America." Innosight, . [ 19 ] CEOs of big companies may be overpaid. I don't know enough about big companies to say. But it is certainly not impossible for a CEO to make 200x as much difference to a company's revenues as the average employee. Look at what did for Apple when he came back as CEO. It would have been a good deal for the board to give him 95% of the company. Apple's market cap <DATE_TIME> came back in was 1.73 billion. 5% of Apple now ( ) would be worth about 30 billion. And it would not be if hadn't come back; Apple probably wouldn't even exist anymore. Merely including in the sample might be enough to answer the question of whether public company CEOs in the aggregate are overpaid. And that is not as facile a trick as it might seem, because the broader your holdings, the more the aggregate is what you care about. [ 20 ] The were famous for social upheaval. But that was more rebellion (which can happen in any era if people are provoked sufficiently) than fragmentation. You're not seeing fragmentation unless you see people breaking off to both left and right. [ 21 ] Globally the trend has been in the other direction. While the is becoming more fragmented, the world as a whole is becoming less fragmented, and mostly in good ways. [ 22 ] There were a handful of ways to make a fortune in . The main one was drilling for oil, which was open to newcomers because it was not something big companies could dominate through economies of scale. How did individuals accumulate large fortunes in an era of such high taxes? Giant tax loopholes defended by two of the most powerful men in Congress, and . But becoming a oilman was not in something one could aspire to the way starting a startup or going to work on Wall Street were in , because (a) there was a strong local component and (b) success depended so much on luck. [ 23 ] The Baumol Effect induced by startups is very visible in . Google will pay people millions of dollars a year to keep them from leaving to start or join startups. [ 24 ] I'm not claiming variation in productivity is the only cause of economic inequality in the . But it's a significant cause, and it will become as big a cause as it needs to, in the sense that if you ban other ways to get rich, people who want to get rich will use this route instead. Thanks to , , , , , , , , , , , , , , , and for reading drafts of this. also told me about several valuable sources. , . The Big Change . , . , . The Dual Economy . Norton, . , . The New Deal . and <PERSON>, . , . The . Doubleday, . , . . , . , . Wheels for the World . Viking, . , . Federal Taxation in . , . , . The Visible Hand . Harvard, . , . The House of Morgan . Simon & Schuster, . Chernow, . Titan: The Life of John D. Rockefeller . , . , . The New Industrial State . , . , and . "The Great Compression: The Wage Structure in at ." NBER Working Paper 3817, . , . An Empire of Wealth . HarperCollins, . , . The Genesis of Industrial America, . , . , . Land of Promise . HarperCollins, . , , and . The Company . Modern Library, . , . . <PERSON>, . , . The Age of Giant Corporations . Praeger, . Thurow, . Generating Inequality: Mechanisms of Distribution . Basic Books, . , . The Politics and Development of the Federal Income Tax . , . Related: Too Many Elite American Men Are Obsessed With Work and Wealth


an article about Y Combinator said that early on it had been a "one-man show." It's sadly common to read that sort of thing. But the problem with that description is not just that it's unfair. It's also misleading. Much of what's most novel about YC is due to . If you don't understand her, you don't understand YC. So let me tell you a little about Jessica. YC had 4 founders. and I decided to start it, and we recruited my friends and . and I ran YC day to day, and and read applications and did interviews with us. and I were already dating when we started YC. At first we tried to act "professional" about this, meaning we tried to conceal it. In retrospect that seems ridiculous, and we soon dropped the pretense. And the fact that and I were a couple is a big part of what made YC what it was. YC felt like a family. The founders early on were mostly young. We all had dinner together once a week, cooked for by me. Our first building had been a private home. The overall atmosphere was shockingly different from a VC's office on , in a way that was entirely for the better. There was an authenticity that everyone who walked in could sense. And that didn't just mean that people trusted us. It was the perfect quality to instill in startups. Authenticity is one of the most important things YC looks for in founders, not just because fakers and opportunists are annoying, but because authenticity is one of the main things that separates the most successful startups from the rest. Early YC was a family, and was its mom. And the culture she defined was one of YC's most important innovations. Culture is important in any organization, but at YC culture wasn't just how we behaved when we built the product. At YC, the culture was the product. was also the mom in another sense: she had the last word. Everything we did as an organization went through her first - who to fund, what to say to the public, how to deal with other companies, who to hire, everything. Before we had kids, YC was more or less our life. There was no real distinction and not. We talked about YC all the time. And while there might be some businesses that it would be tedious to let infect your private life, we liked it. We'd started YC because it was something we were interested in. And some of the problems we were trying to solve were endlessly difficult. How do you recognize good founders? You could talk about that for , and we did; we still do. I'm better at some things than Jessica, and she's better at some things than me. One of the things she's best at is judging people. She's one of those rare individuals with x-ray vision for character. She can see through any kind of faker almost immediately. Her nickname within YC was the Social Radar, and this special power of hers was critical in making YC what it is. The earlier you pick startups, the more you're picking the founders. Later stage investors get to try products and look at growth numbers. At the stage where YC invests, there is often neither a product nor any numbers. Others thought YC had some special insight about the future of technology. Mostly we had the same sort of insight claimed: we at least knew we knew nothing. What made YC successful was being able to pick good founders. We thought Airbnb was a bad idea. We funded it because we liked the founders. During interviews, and and I would pepper the applicants with technical questions. would mostly watch. A lot of the applicants probably read her as some kind of secretary, especially early on, because she was the one who'd go out and get each new group and she didn't ask many questions. She was ok with that. It was easier for her to watch people if they didn't notice her. But after the interview, the three of us would turn to Jessica and ask "What does the Social Radar say?" [ 1 ] Having the Social Radar at interviews wasn't just how we picked founders who'd be successful. It was also how we picked founders who were good people. At first we did this because we couldn't help it. Imagine what it would feel like to have x-ray vision for character. Being around bad people would be intolerable. So we'd refuse to fund founders whose characters we had doubts about even if we thought they'd be successful. Though we initially did this out of self-indulgence, it turned out to be very valuable to YC. We didn't realize it in the beginning, but the people we were picking would become the YC alumni network. And once we picked them, unless they did something really egregious, they were going to be part of it for life. Some now think YC's alumni network is its most valuable feature. I personally think YC's advice is pretty good too, but the alumni network is certainly among the most valuable features. The level of trust and helpfulness is remarkable for a group of such size. And is the main reason why. (As we later learned, it probably cost us little to reject people whose characters we had doubts about, because how good founders are and how well they do are not orthogonal . If bad founders succeed at all, they tend to sell early. The most successful founders are almost all good.) If was so important to YC, why don't more people realize it? Partly because I'm a writer, and writers always get disproportionate attention. YC's brand was initially my brand, and our applicants were people who'd read my essays. But there is another reason: hates attention. Talking to reporters makes her nervous. The thought of giving a talk paralyzes her. She was even uncomfortable at our wedding, because the bride is always the center of attention. [ 2 ] It's not just because she's shy that she hates attention, but because it throws off the Social Radar. She can't be herself. You can't watch people when everyone is watching you. Another reason attention worries her is that she hates bragging. In anything she does that's publicly visible, her biggest fear (after the obvious fear that it will be bad) is that it will seem ostentatious. She says being too modest is a common problem for women. But in her case it goes beyond that. She has a horror of ostentation so visceral it's almost a phobia. She also hates fighting. She can't do it; she just shuts down. And unfortunately there is a good deal of fighting in being the public face of an organization. So although Jessica more than anyone made YC unique, the very qualities that enabled her to do it mean she tends to get written out of YC's history. Everyone buys this story that PG started YC and his wife just kind of helped. Even YC's haters buy it. when people were attacking us for not funding more female founders (than exist), they all treated YC as identical with PG. It would have spoiled the narrative to acknowledge Jessica's central role at YC. was boiling mad that people were accusing her company of sexism. I've never seen her angrier about anything. But she did not contradict them. Not publicly. In private there was a great deal of profanity. And she wrote three separate essays about the question of female founders. But she could never bring herself to publish any of them. She'd seen the level of vitriol in this debate, and she shrank from engaging. [ 3 ] It wasn't just because she disliked fighting. She's so sensitive to character that it repels her even to fight with dishonest people. The idea of mixing it up with linkbait journalists or Twitter trolls would seem to her not merely frightening, but disgusting. But Jessica knew her example as a successful female founder would encourage more women to start companies, so she did something YC had never done before and hired a PR firm to get her some interviews. At one of the first she did, the reporter brushed aside her insights about startups and turned it into a sensationalistic story about how some guy had tried to chat her up as she was waiting outside the bar where they had arranged to meet. was mortified, partly because the guy had done nothing wrong, but more because the story treated her as a victim significant only for being a woman, rather than one of the most knowledgeable investors in the . After that she told the PR firm to stop. You're not going to be hearing in the press about what has achieved. So let me tell you what has achieved. Y Combinator is fundamentally a nexus of people, like a university. It doesn't make a product. What defines it is the people. Jessica more than anyone curated and nurtured that collection of people. In that sense she literally made YC. knows more about the qualities of startup founders than anyone else ever has. Her immense data set and x-ray vision are the perfect storm in that respect. The qualities of the founders are the best predictor of how a startup will do. And startups are in turn the most important source of growth in mature economies. The person who knows the most about the most important factor in the growth of mature economies - that is who is. Doesn't that sound like someone who should be better known? Notes [ 1 ] Harj Taggar reminded me that while Jessica didn't ask many questions, they tended to be important ones: "She was always good at sniffing out any red flags about the team or their determination and disarmingly asking the right question, which usually revealed more than the founders realized." [ 2 ] Or more precisely, while she likes getting attention in the sense of getting credit for what she has done, she doesn't like getting attention in the sense of being watched in real time. Unfortunately, not just for her but for a lot of people, how much you get of the former depends a lot on how much you get of the latter. Incidentally, if you saw at a public event, you would never guess she hates attention, because (a) she is very polite and (b) when she's nervous, she expresses it by smiling more. [ 3 ] The existence of people like is not just something the mainstream media needs to learn to acknowledge, but something feminists need to learn to acknowledge as well. There are successful women who don't like to fight. Which means if the public conversation about women consists of fighting, their voices will be silenced. There's a sort of Gresham's Law of conversations. If a conversation reaches a certain level of incivility, the more thoughtful people start to leave. No one understands female founders better than Jessica. But it's unlikely anyone will ever hear her speak candidly about the topic. She ventured a toe in that water a while ago, and the reaction was so violent that she decided "never again." Thanks to , , , , , , , , , and Harj Taggar for reading drafts of this. And yes, , who made me cut surprisingly little.


A Way to Detect Bias This will come as a surprise to a lot of people, but in some cases it's possible to detect bias in a selection process without knowing anything about the applicant pool. Which is exciting because among other things it means third parties can use this technique to detect bias whether those doing the selecting want them to or not. You can use this technique whenever (a) you have at least a random sample of the applicants that were selected, (b) their subsequent performance is measured, and (c) the groups of applicants you're comparing have roughly equal distribution of ability. How does it work? Think about what it means to be biased. What it means for a selection process to be biased against applicants of type x is that it's harder for them to make it through. Which means applicants of type x have to be better to get selected than applicants not of type x. [ 1 ] Which means applicants of type x who do make it through the selection process will outperform other successful applicants. And if the performance of all the successful applicants is measured, you'll know if they do. Of course, the test you use to measure performance must be a valid one. And in particular it must not be invalidated by the bias you're trying to measure. But there are some domains where performance can be measured, and in those detecting bias is straightforward. Want to know if the selection process was biased against some type of applicant? Check whether they outperform the others. This is not just a heuristic for detecting bias. It's what bias means. For example, many suspect that venture capital firms are biased against female founders. This would be easy to detect: among their portfolio companies, do startups with female founders outperform those without? , one firm (almost certainly unintentionally) published a study showing bias of this type. First Round Capital found that among its portfolio companies, startups with female founders outperformed those without by 63%. [ 2 ] The reason I began by saying that this technique would come as a surprise to many people is that we so rarely see analyses of this type. I'm sure it will come as a surprise to First Round that they performed one. I doubt anyone there realized that by limiting their sample to their own portfolio, they were producing a study not of startup trends but of their own biases when selecting companies. I predict we'll see this technique used more in the future. The information needed to conduct such studies is increasingly available. Data about who applies for things is usually closely guarded by the organizations selecting them, but nowadays data about who gets selected is often publicly available to anyone who takes the trouble to aggregate it. Notes [ 1 ] This technique wouldn't work if the selection process looked for different things from different types of applicants-for example, if an employer hired men based on their ability but women based on their appearance. [ 2 ] As points out, First Round excluded their most successful investment, Uber, from the study. And while it makes sense to exclude outliers from some types of studies, studies of returns from startup investing, which is all about hitting outliers, are not one of them. Thanks to , , and for reading drafts of this. Arabic Translation Swedish Translation


Write Like You Talk Here's a simple trick for getting more people to read what you write: write in spoken language. Something comes over most people when they start writing. They write in a different language than they'd use if they were talking to a friend. The sentence structure and even the words are different. No one uses "pen" as a verb in spoken English. You'd feel like an idiot using "pen" instead of "write" in a conversation with a friend. The last straw for me was a sentence I read : The mercurial himself declared: "After , all is decadence." It's from A History of Ancient Britain . I feel bad making an example of this book, because it's no worse than lots of others. But just imagine calling "the mercurial " when talking to a friend. Even one sentence of this would raise eyebrows in conversation. And yet people write whole books of it. Ok, so written and spoken language are different. Does that make written language worse? If you want people to read and understand what you write, yes. Written language is more complex, which makes it more work to read. It's also more formal and distant, which gives the reader's attention permission to drift. But perhaps worst of all, the complex sentences and fancy words give you, the writer, the false impression that you're saying more than you actually are. You don't need complex sentences to express complex ideas. When specialists in some abstruse topic talk to one another about ideas in their field, they don't use sentences any more complex than they do when talking about what to have for lunch. They use different words, certainly. But even those they use no more than necessary. And in my experience, the harder the subject, the more informally experts speak. Partly, I think, because they have less to prove, and partly because the harder the ideas you're talking about, the less you can afford to let language get in the way. Informal language is the athletic clothing of ideas. I'm not saying spoken language always works best. Poetry is as much music as text, so you can say things you wouldn't say in conversation. And there are a handful of writers who can get away with using fancy language in prose. And then of course there are cases where writers don't want to make it easy to understand what they're saying-in corporate announcements of bad news, for example, or at the more bogus end of the humanities. But for nearly everyone else, spoken language is better. It seems to be hard for most people to write in spoken language. So perhaps the best solution is to write your first draft the way you usually would, then afterward look at each sentence and ask "Is this the way I'd say this if I were talking to a friend?" If it isn't, imagine what you would say, and use that instead. After a while this filter will start to operate as you write. When you write something you wouldn't say, you'll hear the clank as it hits the page. Before I publish a new essay, I read it out loud and fix everything that doesn't sound like conversation. I even fix bits that are phonetically awkward; I don't know if that's necessary, but it doesn't cost much. This trick may not always be enough. I've seen writing so far removed from spoken language that it couldn't be fixed sentence by sentence. For cases like that there's a more drastic solution. After writing the first draft, try explaining to a friend what you just wrote. Then replace the draft with what you said to your friend. People often tell me how much my essays sound like me talking. The fact that this seems worthy of comment shows how rarely people manage to write in spoken language. Otherwise everyone's writing would sound like them talking. If you simply manage to write in spoken language, you'll be ahead of 95% of writers. And it's so easy to do: just don't let a sentence through unless it's the way you'd say it to a friend. Thanks to and for reading drafts of this. Translation Arabic Translation


Default Alive or Default Dead? When I talk to a startup that's been operating for more than 8 or , the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it has been over , do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die? The startling thing is how often the founders themselves don't know. Half the founders I talk to don't know whether they're default alive or default dead. If you're among that number, has made a handy calculator you can use to find out. The reason I want to know first whether a startup is default alive or default dead is that the rest of the conversation depends on the answer. If the company is default alive, we can talk about ambitious new things they could do. If it's default dead, we probably need to talk about how to save it. We know the current trajectory ends badly. How can they get off that trajectory? Why do so few founders know whether they're default alive or default dead? Mainly, I think, because they're not used to asking that. It's not a question that makes sense to ask early on, any more than it makes sense to ask a how he plans to support himself. But as the company grows older, the question switches from meaningless to critical. That kind of switch often takes people by surprise. I propose the following solution: instead of starting to ask too late whether you're default alive or default dead, start asking too early. It's hard to say precisely when the question switches polarity. But it's probably not that dangerous to start worrying too early that you're default dead, whereas it's very dangerous to start worrying too late. The reason is a phenomenon I wrote about earlier: the fatal pinch . The fatal pinch is default dead + slow growth + not enough time to fix it. And the way founders end up in it is by not realizing that's where they're headed. There is another reason founders don't ask themselves whether they're default alive or default dead: they assume it will be easy to raise more money. But that assumption is often false, and worse still, the more you depend on it, the falser it becomes. Maybe it will help to separate facts from hopes. Instead of thinking of the future with vague optimism, explicitly separate the components. Say "We're default dead, but we're counting on investors to save us." Maybe as you say that, it will set off the same alarms in your head that it does in mine. And if you set off the alarms sufficiently early, you may be able to avoid the fatal pinch. It would be safe to be default dead if you could count on investors saving you. As a rule their interest is a function of growth. If you have steep revenue growth, say over 5x a year, you can start to count on investors being interested even if you're not profitable. [ 1 ] But investors are so fickle that you can never do more than start to count on them. Sometimes something about your business will spook investors even if your growth is great. So no matter how good your growth is, you can never safely treat fundraising as more than a plan A. You should always have a plan B as well: you should know (as in write down) precisely what you'll need to do to survive if you can't raise more money, and precisely when you'll have to switch to plan B if plan A isn't working. In any case, growing fast versus operating cheaply is far from the sharp dichotomy many founders assume it to be. In practice there is surprisingly little connection between how much a startup spends and how fast it grows. When a startup grows fast, it's usually because the product hits a nerve, in the sense of hitting some big need straight on. When a startup spends a lot, it's usually because the product is expensive to develop or sell, or simply because they're wasteful. If you're paying attention, you'll be asking at this point not just how to avoid the fatal pinch, but how to avoid being default dead. That one is easy: don't hire too fast. Hiring too fast is by far the biggest killer of startups that raise money. [ 2 ] Founders tell themselves they need to hire in order to grow. But most err on the side of overestimating this need rather than underestimating it. Why? Partly because there's so much work to do. Naive founders think that if they can just hire enough people, it will all get done. Partly because successful startups have lots of employees, so it seems like that's what one does in order to be successful. In fact the large staffs of successful startups are probably more the effect of growth than the cause. And partly because when founders have slow growth they don't want to face what is usually the real reason: the product is not appealing enough. Plus founders who've just raised money are often encouraged to overhire by the who funded them. Kill-or-cure strategies are optimal for VCs because they're protected by the portfolio effect. VCs want to blow you up, in one sense of the phrase or the other. But as a founder your incentives are different. You want above all to survive. [ 3 ] Here's a common way startups die. They make something moderately appealing and have decent initial growth. They raise their first round fairly easily, because the founders seem smart and the idea sounds plausible. But because the product is only moderately appealing, growth is ok but not great. The founders convince themselves that hiring a bunch of people is the way to boost growth. Their investors agree. But (because the product is only moderately appealing) the growth never comes. Now they're rapidly running out of runway. They hope further investment will save them. But because they have high expenses and slow growth, they're now unappealing to investors. They're unable to raise more, and the company dies. What the company should have done is address the fundamental problem: that the product is only moderately appealing. Hiring people is rarely the way to fix that. More often than not it makes it harder. At this early stage, the product needs to evolve more than to be "built out," and that's usually easier with fewer people. [ 4 ] Asking whether you're default alive or default dead may save you from this. Maybe the alarm bells it sets off will counteract the forces that push you to overhire. Instead you'll be compelled to seek growth in other ways. For example, by doing things that don't scale , or by redesigning the product in the way only founders can. And for many if not most startups, these paths to growth will be the ones that actually work. Airbnb waited after raising money at the end of Y Combinator before they hired their first employee. In the meantime the founders were terribly overworked. But they were overworked evolving Airbnb into the astonishingly successful organism it is now. Notes [ 1 ] Steep usage growth will also interest investors. Revenue will ultimately be a constant multiple of usage, so x% usage growth predicts x% revenue growth. But in practice investors discount merely predicted revenue, so if you're measuring usage you need a higher growth rate to impress investors. [ 2 ] Startups that don't raise money are saved from hiring too fast because they can't afford to. But that doesn't mean you should avoid raising money in order to avoid this problem, any more than that total abstinence is the only way to avoid becoming an alcoholic. [ 3 ] I would not be surprised if VCs' tendency to push founders to overhire is not even in their own interest. They don't know how many of the companies that get killed by overspending might have done well if they'd survived. My guess is a significant number. [ 4 ] After reading a draft, wrote: "I think you should make the hiring point more strongly. I think it's roughly correct to say that YC's most successful companies have never been the fastest to hire, and one of the marks of a great founder is being able to resist this urge." adds: "A related problem that I see a lot is premature scaling-founders take a small business that isn't really working (bad unit economics, typically) and then scale it up because they want impressive growth numbers. This is similar to over-hiring in that it makes the business much harder to fix once it's big, plus they are bleeding cash really fast." Thanks to , , , , and for reading drafts of this.