Notes

On the Introduction

I was at a pub in Oxford, complaining to a friend about the difficulty of writing about the one-percenters and how their fortunes were made. The brave exploits and personal victories of people like Andrew Carnegie, Dhirubhai Ambani, and Bill Gates make great stories, and their wealth secrets are fascinating. But assessing the broader impacts of these individuals on society is complicated. Such complex assessments were detracting from the stories.

My friend said: “Well, have you read Schopenhauer’s The Art of Always Being Right?”

“No,” I said.

“Well,” he said, “it’s written as if Schopenhauer is celebrating other philosophers’ arguments, but actually he’s demonstrating the flaws in their logic.”

(This is the kind of conversation one has with surprising frequency at pubs in Oxford.)

It turned out that my friend was oversimplifying for rhetorical effect (another fairly frequent occurrence in Oxford). But the conversation did become an inspiration. Rather than writing the stories of the one percent and then attempting to assess the impacts on society, I have just written about how the fortunes of the world’s richest were made. Whether you read the book as a guide to earning great riches or a social critique is your choice.

In case you would also like to bring up Schopenhauer at the pub, the details for a recently published edition: Schopenhauer, Arthur, A. C. Grayling, and Thomas B. Saunders. 2005. The Art of Always Being Right. London: Gibson Square.

The quote on the robber barons and their inevitable rise that appears early in the chapter is from: Morris, Charles R. 2005. The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy. New York: Henry Holt. (This book is also extensively cited in chapter 3.)

As noted in the text, Malcolm Gladwell’s book is: Gladwell, Malcolm. 2011. Outliers: The Story of Success. New York: Little, Brown.

I also quote a few statistics from the Forbes list of the world’s billionaires, both in this chapter and throughout the book. In case you have not yet discovered the fascination of sorting and searching the list, the website is at: http://forbes.com/billionaires/. The references in this book refer to the list as it appeared in late summer 2014 unless otherwise noted (it’s updated daily).

Lately, the Forbes list has become so popular it has attracted imitators (the fate of most successful business ventures…). For instance: http://www.bloomberg.com/billionaires/.

On Chapter 1

During the research for this book, I conducted a number of interviews. Most of these interviews were with analysts of one kind or another. I am an economist, not a journalist, and so tripping up billionaires into revealing their wealth secrets on tape is not my forte. Hence the wealth secrets described in this book are mostly based on economic analysis, and supporting evidence comes from academic or commercial research sources cited in these notes. By contrast, the quotes and biographical details that round out my pen portraits of one-percenters are often from books for the general reader. Because it is hard to make a living as a writer, I have tried to name-check the authors of such works in the main body of this book. If there is someone I have left out, I apologize—the citation will at least appear in these notes.

If you loved the Circuit City story, you’ll love the documentary: A Tale of Two Cities: The Circuit City Story, directed by Tom Wulf. It was the 2010 official selection for the Virginia Film Festival.

The description of the fire sale that opens the chapter is based on the documentary as well as blogs such as Technologizer and popular media including, as noted in the text, the Guardian.

Most of the financial details and quotes regarding Circuit City are from Wurtzel, Alan L. 2012. Good to Great to Gone: The 60 Year Rise and Fall of Circuit City. New York: Diversion Publishing. This book was written by one of Circuit City’s CEOs, who was also the son of the company’s founder. Hence it is an insider’s account, and many of the details are based on confidential company documents.

A few other details, as noted in the text, come from Collins, Jim. 2001. Good to Great: Why Some Companies Make the Leap… and Others Don’t. New York: Harper Business. I tried to refrain from picking on Collins too much for selecting Circuit City as a “great” company shortly before its failure, as I certainly would not want my own words to be judged with the benefit of hindsight.

The profitability figures are from Yardeni, Edward, and Joe Abbott. 2014. “S&P 500 Sectors & Industries Profit Margins.” Yardeni Research, August 13, 1–13.

The quotes and biographical details for LTCM’s rise and fall largely come from the following books:

Dunbar, Nicholas. 2000. Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It. Chichester, UK: John Wiley & Sons. This book focuses on the mathematics and science behind LTCM, and attempts an explanation of LTCM’s wealth secrets that is different from my own (of which, more below).

Lewis, Michael. 1999. “How the Eggheads Cracked.” New York Times Magazine, January 24, 24–35. Lewis’s article is based on an interview with LTCM’s founders, and therefore presents the management’s own views on why they failed. The quotes from Meriwether and Haghani describing these views are from this article.

Lowenstein, Roger. 2000. When Genius Failed: The Rise and Fall of Long-Term Capital Management. New York: Random House. This well-written book focuses on the personalities and events associated with LTCM’s rise and fall. Except as noted above, this book is the source of most of the quotes and financial and biographical details I present in the section regarding LTCM’s founders and the fund’s business activities.

An alternate (and popular) explanation of the success of hedge funds in making people rich is that hedge funds are gambling, with leverage. The argument goes something like this. There are relatively few comprehensive studies of hedge fund performance, and many shortcomings in the data (only a minority of the hedge funds choose to report performance data). But a not uncommon finding is that, on the whole, the industry produces returns roughly equivalent to broader market indices (or slightly below). This finding suggests that, on balance, hedge funds would perform better if they bought stocks at random. (Here I am being a bit glib, because high performance is not the only thing investors want from a fund.)

But even if they are essentially picking stocks at random, there are enough hedge funds in existence (at least eight thousand worldwide in 2014, the majority in the United States) that the sheer laws of chance will produce a few outsized winners—a few funds that strike it lucky for several years in a row. And, given enough leverage, a few good years are all it takes to produce a really sizable fortune. This is very different from most industries, where making serious money requires decades of hard graft (consider Circuit City—its financial performance was astonishing, but the company still took decades to reach the heights of the Fortune 500). So, at least in theory, the existence of hedge fund fortunes may be attributable to the combination of lots of gamblers with lots of leverage.

A couple of examples of papers on hedge fund returns are:

Ackermann, C., R. McEnally, and D. Ravenscraft. 1999. “The Performance of Hedge Funds: Risk, Return and Incentives.” Journal of Finance, 833–874.

Capocci, Daniel, and Georges Hübner. 2002. “Analysis of Hedge Fund Performance.” Journal of Empirical Finance, 55–89.

Indeed, in the book I cite above, Nicholas Dunbar contends that LTCM was, in essence, just another gambler. But LTCM’s partners were gambling in a sophisticated way: their clever math enabled them, in effect, to bet that volatility in financial markets would remain low, Dunbar says. This kind of bet will tend to pay off most of the time (because most of the time, volatility is low). But whenever there is a market shock (like Russia’s debt default), the bet is likely to go bad in a spectacular fashion. Dunbar compares this approach to “system” gambling techniques—for instance, the system whereby one bets a small sum consistently on a game that offers roughly 50/50 odds, and then doubles one’s bet if one loses (known as the “Martingale”). This system produces a consistent return until one loses several times in a row, at which point the gambler is completely wiped out.

I also mention Daniel Kahneman’s views on “regression to the mean” and its applicability to daily life, which are explained in this book: Kahneman, Daniel. 2013. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux.

On Chapter 2

While the rest of the world may have forgotten about Rome’s wealth, the locals have not. The breakdown of political order in Iraq and Syria as a result of civil wars in the region has led to widespread looting of archaeological sites. It’s a double blow: because these sites are often in relatively undeveloped regions with arid climates, these were some of the world’s best-preserved ancient remains—until the recent looting. While the area includes archaeological sites from the era of Gilgamesh onward, “they [looters] mostly go for the Roman sites, because that’s where the gold is,” notes Jesse Casana, professor of archaeology at the University of Arkansas. The U.S. government has publicized the damage done to archaeological sites by the Islamic State of Iraq and the Levant (ISIL, which is infamous for blowing up religious sites). Unfortunately, the damage by looters has been far more widespread, impacting most of the unstable regions of these countries—including regions controlled by groups supported by the U.S. government.

This book began life as a fairly serious commentary on the policy implications of recent research on oligarchy, but spent a long time in gestation and emerged as something rather different. If you are curious about the original argument in the book, and would be interested to hear me credit one-percenters with driving economic progress in some of the world’s best-performing economies, you can find it here:

Wilkin, Sam. 2011. “Can Bad Governance Be Good for Development?” Survival, 61–76.

Two of my three favorite books on (modern) oligarchy start with chapters on ancient Rome, and so, continuing the tradition, my book does the same. These three books are:

Acemoglu, Daron, and James A. Robinson. 2012. Why Nations Fail: The Origins of Power, Prosperity and Poverty. New York: Crown Publishers.

Rajan, Raghuram. 2003. Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity. New York: Crown Business.

Winters, Jeffrey A. 2011. Oligarchy. Cambridge: Cambridge University Press.

The broad line of argument regarding the fall of Rome is from Winters. A related argument is made by Acemoglu and Robinson, although in their view Roman decline was inevitable as a result of its “extractive institutions,” rather than—as I argue—being set in motion by the actions of Rome’s richest citizens (like Marcus Crassus).

Early on in the chapter, I made some comparisons of ancient Roman wealth to modern wealth. These are based on: Milanovic, Branko. 2011. The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality. New York: Basic Books. The figures on wealth inequality within Rome and Greece are from Winters, cited above.

For my perspective on the ancient Roman economy, I have largely adopted the view of Temin, Peter. 2013. The Roman Market Economy. Princeton: Princeton University Press. Temin is a leading exponent of the view that the ancient Roman economy operated in some respects as a market economy, and that data, such as price records, from ancient Rome are therefore susceptible to analysis using modern economic techniques. Temin’s view is, however, far from the only view. For an alternative perspective emphasizing the debilitating costs of doing business in ancient Rome—which tended to undermine the operation of markets—see Bang, Peter Fibiger. 2008. The Roman Bazaar: A Comparative Study of Trade and Markets in a Tributary Empire. Cambridge: Cambridge University Press.

My various illustrations of the sophistication of the Roman economy are from a number of sources (in addition to Temin). My explanations of Roman slavery and business operations are largely from Temin. On oil lamps: Harris, William V. 2011. Rome’s Imperial Economy: Twelve Essays. Oxford: Oxford University Press. Note that some scholars have argued that the reason for the prevalence for the Fortis brand throughout the empire was due to unauthorized copying (which certainly occurred), rather than, as I have suggested, production by an extended business enterprise. Indeed, recent papers have indicated that the branch production model broke down over time, being displaced by widespread copying.

On garum production and other businesses in Pompeii: Beard, Mary. 2008. Pompeii: The Life of a Roman Town. London: Profile. This is only one of numerous books by Beard on Roman society and literature, which are always good reads and packed with telling, human details. On Herculaneum: Dorment, Richard. 2013. “Pompeii Exhibition: Life and Death in Pompeii and Herculaneum, British Museum, review.” The Telegraph, March 26. The comment on rhinoceroses is from: MacGregor, Neil. 2010. A History of the World in 100 Objects. London: Penguin.

Research on the Roman economy is a growth industry, if you’ll pardon the expression, so I’ll list only a few of the texts covering various business sectors in ancient Rome. I thank Matt Gibbs for his guidance in finding these sources, although the blame for any misinterpretation falls on me. Gibbs also provided a very useful critique of an early draft of this chapter. Some texts on Roman business sectors:

Andreau, J. 2000. “Commerce and Finance.” In The Cambridge Ancient History, Vol. XI. 2nd ed., by A. K. Bowman, P. Garnsey, and D. Rathbone, 769–786. Cambridge: Cambridge University Press.

Bradley, K. 1994. Slavery and Society at Rome. Cambridge: Cambridge University Press.

Edmondon, J. C. 1987. Two Industries in Roman Lusitania: Mining and Garum Production. Oxford: BAR.

Greene, K. 1986. The Archaeology of the Roman Economy. Berkeley: University of California Press.

Hirt, A. 2010. Imperial Mines and Quarries in the Roman World: Organizational Aspects 27 BC–AD 235. Oxford: Oxford University Press.

Malouta, M., and A. Wilson. 2013. “Mechanical Irrigation: Water-Lifting Devices in the Archaeological Evidence and in the Egyptian Papyri.” In The Roman Agricultural Economy: Organization, Investment, and Production, by A. Bowman and A. Wilson, 273–306. Oxford: Oxford University Press.

Saller, R. 2012. “Human Capital and Economic Growth.” In The Cambridge Companion to the Roman Economy, by W. Scheidel, 71–88. Cambridge: Cambridge University Press.

Wilson, A. 2002. “Machines, Power and the Ancient Economy.” Journal of Roman Studies, 1–32.

^______. 2001. “Timgad and Textile Production.” In Economies beyond Agriculture in the Classical World, by D. J. Mattingly and J. Salmon, 271–296. London and New York: Routledge.

For the biography of our hero, Marcus Crassus, I have relied mostly on:

Adcock, Frank E. 1966. Marcus Crassus, Millionaire. Cambridge: W. Heffer. Despite the fun title, it’s an academic book.

Cadoux, T. J. 1956. “Marcus Crassus: A Revaluation.” Greece & Rome, 153–161. Cadoux argues that Crassus, with better luck, could have been Rome’s first emperor.

Marshall, Bruce A. 1972. “Crassus’ Ovation in 71 BC.” Historia: Zeitschrift für Alte Geschichte, 669–673.

^______. 1976. Crassus: A Political Biography. Amsterdam: A. M. Hakkert.

Ward, Allen Mason. 1977. Marcus Crassus and the Late Roman Republic. Columbia: University of Missouri Press.

Most details of Crassus’s life cited in the chapter are from both Adcock and Ward, cited above, although they disagree on some points (noted in the text). These books, and especially Marshall, also cover Crassus’s political career, which is something I don’t discuss in much detail, as I have focused on revealing his wealth secrets instead.

If you happen to speak German, there is a more recent academic book on Crassus: Weggen, K. 2011. Der Lange Schatten von Carrhae: Studien zu M. Licinius Crassus. Hamburg: Kovac. Let me know if it’s any good.

I have also thrown in a few details on Crassus—particularly his political maneuvering—from Holland, Tom. 2005. Rubicon: The Last Years of the Roman Republic. New York: Anchor. Holland offers an excellent introduction to the politics and history of ancient Rome, based primarily on ancient sources and aimed at the general reader.

As noted in the text, to place Crassus’s fate in context after he “met the Parthians,” I interviewed Matthew Canepa at the University of Minnesota. The details in that section are mostly from the academic biographies of Crassus as well as Canepa’s comments. Appropriately, when I interviewed Canepa, he was living in a reconstructed Roman villa—the Getty Villa in Los Angeles.

One last note on Crassus: a romantic tale is often told of the fate of one of Crassus’s legions in the battle of Carrhae. Unfortunately, it is probably false. A Cambridge historian by the name of Homer Dubs announced in the 1950s, to general bewilderment, that he had found one of the lost legions of Marcus Crassus in a town called Liqian, in western China. He argued that, following their defeat at the hands of the Parthians, some of Crassus’s men had escaped and fled east into central Asia. From there they had perhaps offered themselves up as mercenaries in the service of some central Asian warlord and then been captured, and ultimately resettled, by the Chinese, following a haphazard journey eastward of some 3,500 miles. To the general delight of the news media, when China began to open and news photographers traveled to Liqian, they indeed found a number of villagers who had strikingly Western features, such as green eyes and blond hair. Genetic testing on some of the most Western-looking of these individuals appeared to confirm that they were Caucasian in origin. Of course, Liqian was on the Silk Road, the ancient trade route that stretched from China to Europe, and the ancestors of these few villagers could have been traders. Canepa, for one, is a skeptic. “The whole theory is based on the mistranslation of some Chinese characters,” he says. “It is pure fantasy.”

That said, the story lives on. The U.K.’s Daily Mail in 2010 published an article arguing that new genetic tests “show Chinese villagers with green eyes could be descendants of [a] lost Roman Legion.” These new tests suggest that some two-thirds of the villagers are indeed of Caucasian origin. But this evidence must be taken with a grain of salt: modern China is an increasingly commercially minded place, and the villagers of impoverished Liqian have realized that proof of Roman origins would not do their tourism business any harm.

On the unfortunate would-be imitators of Crassus in the modern day, whose exploits conclude the chapter, the main sources are:

Boffey, Daniel. 2013. “Margaret Thatcher ‘gave her approval’ to her son Mark’s failed coup attempt in Equatorial Guinea.” The Observer, April 13.

Buckley, Neil. 2013. “A Day in the Life of Mikhail Khodorkhovsky.” Financial Times Magazine, October 24.

Throughout the chapter there are also a number of references to ancient texts (Pliny the Elder, Caesar Augustus, Plutarch…). All of the texts I quote are now available online, so if you search for the quote or fact in question and the name of the ancient author, you should be able to find the reference. The descriptions of ancient Roman parties are all from such sources, although I tended to mix and match translations for rhetorical effect.

If you are looking for just the dirty bits of Roman history, you might enjoy the following book—but keep in mind most of it is (ancient) political propaganda: Farrington, Geoffrey, and Dorian Murdoch. 1994. The Dedalus Book of Roman Decadence: Emperors of Debauchery. Cambridge: Dedalus.

On Chapter 3

What is a monopoly? It is a surprisingly controversial question. Throughout the book I use the term “monopoly” frequently, to refer to businesses with a dominant share of their market.

Technically, one could argue—and indeed economists often argue—that the only time the word “monopoly” should be used to describe a business is when that monopoly is awarded by a government, i.e., when it is a legislated monopoly (like the steamboat monopoly that Vanderbilt challenged). To an economist, the word “monopoly” indicates that a business faces no competition in its market. This condition probably applies only to legislated monopolies. Hence, many scholars would contend that to call Standard Oil a monopoly is inaccurate—even though it had a nearly 100 percent share of U.S. oil refining. Instead of saying that such a company has a monopoly, these scholars would prefer to say that a company “dominates its markets,” that it has “pricing power” or that the market is characterized by high “concentration.”

Why not just say monopoly? The reason is that a business that is a legislated monopoly might be expected to behave very differently from a business that achieves a 100 percent market share. For instance, while Rockefeller’s Standard Oil (or Bill Gates’s Microsoft), at the peak of its powers, might have faced little apparent competition, in fact, the behavior of these companies was probably very different from what a business with a legislated monopoly might have done. Had Standard Oil operated inefficiently, some new competitor might have entered the market. To be sure, Standard Oil made a lot of money. But that did not mean it was uncompetitive; rather, one could argue, it was so competitive that it scared off potential rivals (who didn’t want to run the risk of being bankrupted).

In a nod to such views, in the text I try to distinguish between “legislated monopolies”—awarded by governments—and “natural monopolies”—companies that come to dominate their markets based on the operation of economic principles. (Lawyers also tend to use the term “monopoly” a bit more loosely, often calling any business with a market share greater than 25 percent a monopoly.)

One reason economists tend to get upset about people throwing around the term “monopoly” is that there has been a sea change in mainstream views on whether or not monopolies (dominant businesses) are bad. The old view, which became popular in the regulated world that Pierpont Morgan inadvertently ushered in, was that all monopolies should be closely regulated. Monopolies that faced little obvious competition (like Rockefeller’s) were seen as facing no competition, and therefore, to protect the consumer, public oversight was required.

The new view, which came into vogue in the 1980s, was that even a business like Rockefeller’s faced competition—simply from the threat of new entrants. This threat ensured that companies with natural monopolies, if left unregulated, would operate efficiently and even spur innovation as other firms sought to replace the current monopolists. So consumers might not suffer, even if a market was dominated by a single firm. Moreover, efforts to regulate natural monopolies could, in that case, backfire. Limits on monopoly profits would have the unwanted effect of discouraging any potential competitors from entering the market—so, ironically enough, a regulated monopoly might face less competitive pressure than one left free to dominate its market.

As I write, it appears that this new view is likely to be challenged. I imagine that policy—if not necessarily the views of economists—will begin to swing back toward the earlier view, with, for better or worse, utility-style regulation coming back into vogue for dominant businesses.

Anyone interested in further reading on the robber barons will benefit greatly from the fact that these men are something of an American obsession. As a result, the robber barons are the subject of numerous books for the general reader, written by top-notch historians. Many of these biographies are based on unrestricted access to the personal papers of the robber barons themselves, and so offer exceptionally intimate portraits. These books are the primary sources I used for biographical information and quotations from the robber barons:

Brands, H. W. 2010. American Colossus: The Triumph of Capitalism, 1865–1900. New York: Doubleday. This book is the source for much of the background information on the U.S. economy during the 1800s.

Chernow, Ron. 1990. The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance. New York: Atlantic Monthly Press. Along with Strouse (below), this book is a main source for details on Morgan cited in the text. Both books are excellent. Overall, I relied more heavily on Strouse, who focuses more on Morgan’s business dealings.

^______. 1998. Titan: The Life of John D. Rockefeller, Sr. New York: Random House. This book is the source for nearly all the personal details for the section on Rockefeller. Many business details and some quotations are from Brands (above), Morris (below), and the academic sources listed below.

Collier, Peter, and David Horowitz. 1976. The Rockefellers: An American Dynasty. New York: Holt, Rinehart and Winston. Largely used for information on Rockefeller’s estate and heirs.

Krass, Peter. 2002. Carnegie. Hoboken: John Wiley & Sons, Inc. I used this book for a few details on Carnegie’s later acquisitions, but mostly relied on Nasaw (below), who includes more on Carnegie’s personal life.

Morris, Charles R. 2005. The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J. P. Morgan Invented the American Supereconomy. New York: Henry Holt. Morris explains the relationships among the various robber barons—with Carnegie and Rockefeller eager to forge ahead, and Morgan serving as “the regulator.” I have taken a similar view, although I characterized Morgan’s actions as being rather self-interested and based on the economics of banking.

^______. 2012. The Dawn of Innovation: The First American Industrial Revolution. New York: PublicAffairs. Morris’s book deals with the period before the rise of the robber barons. The sections of the chapter on early innovations in the U.S. economy are based largely on details from this book.

Nasaw, David. 2006. Andrew Carnegie. New York: Penguin. This book is the source for nearly all the personal details on Carnegie, with business details from Morris (above) and the academic sources listed below.

Stiles, T. J. 2009. The First Tycoon: The Epic Life of Cornelius Vanderbilt. New York: Alfred A. Knopf. Vanderbilt’s life makes a fascinating story, and this book tells it well. With his investments in steamboat lines, railways, and telegraph companies, Vanderbilt was one of the pioneers of network effects businesses—a subject of chapter 6. However, as the chapter was already getting long, I cut most of Vanderbilt’s story (as well as that of Jay Gould, an equally fascinating character).

Strouse, Jean. 1999. Morgan: American Financier. New York: Random House.

A muckraking review of the robber barons written after the Great Depression provided some interesting tidbits: Josephson, Matthew. 1934. The Great American Capitalists, 1861–1901. New York: Harcourt. A short synopsis of the robber barons, written for British readers, provided a useful reference (although it is mostly based on the above books): Derbyshire, Wyn. 2011. Six Tycoons: The Lives of John Jacob Astor, Cornelius Vanderbilt, Andrew Carnegie, John D. Rockefeller, Henry Ford and Joseph P. Kennedy. London: Grosvenor Group.

The evidence on the wealth secrets of the robber barons mostly comes from academic sources:

Behn, Richard J. 2014. The Founders and the Pursuit of Land. April 4. http://lehrmaninstitute.org/history/founders-land.asp. For Washington’s wealth secret.

De Long, J. Bradford. 1991. “Did J. P. Morgan’s Men Add Value? An Economist’s Perspective on Financial Capitalism.” In Inside the Business Enterprise: Historical Perspectives on the Use of Information, by Peter Temin, 205–249. Chicago: University of Chicago Press.

Folsom, Burton W., Jr. 1987. The Myth of the Robber Barons: A New Look at the Rise of Big Business in America. Herndon: Young America’s Foundation. Details on corruption in the Union Pacific Railroad are mainly from this book, which offers a right-wing perspective on the robber barons and their battles with political entrepreneurs and legislated monopolists.

Granitz, Elizabeth, and Benjamin Klein. 1996. “Monopolization by ‘Raising Rivals’ Costs:’ The Standard Oil Case.” Journal of Law and Economics, 1–47. This paper is the source of my argument regarding Rockefeller’s “South Improvement Lite” quasi-cartel. While the argument has reasonably wide acceptance among scholars as an explanation for Rockefeller’s success, it is not the only view.

John, Richard R. 2010. Network Nation: Inventing American Telecommunications. Cambridge, MA: Harvard University Press. John provides a nuanced and often surprising perspective on the rise of network businesses. This book is the source for details relating to telegraph and railway consolidation (it also covers telephones, which I don’t really address). John also provided a very useful critique of an early draft of this chapter, for which I am grateful.

Khan, B. Z. 2011. “Antitrust and Innovation before the Sherman Act.” Antitrust Law Journal, 757–786. This article is the source for many of the quotes explaining early U.S. attitudes toward monopoly.

Ramirez, Carlos D. 1995. “Did J. P. Morgan’s Men Add Liquidity? Corporate Investment, Cash Flow, and Financial Structure at the Turn of the Twentieth Century.” Journal of Finance, 661–678.

The story of the rise of the Grangers is also mostly based on academic research. I thank Richard John for suggesting many of these sources, although the blame for any misinterpretation is my own:

Anderson, Kym, ed. 2009. Distortions to Agricultural Incentives: A Global Perspective, 1955–2007. Washington and New York: The World Bank and Palgrave Macmillan.

Dickson, Peter R., and Philippa K. Wells. 2001. “The Dubious Origins of the Sherman Act: The Mouse that Roared.” Journal of Public Policy & Marketing, 3–14. This article is the source of the view that the Sherman Act obtained wide support because it had been watered down.

James, Scott C. 2000. Presidents, Parties and the State: A Party System Perspective on Democratic Regulatory Choice, 1884–1936. Cambridge: Cambridge University Press.

Miller, George H. 1971. Railroads and the Granger Laws. Madison: University of Wisconsin Press. This book and James (above) describe how the Grangers were repeatedly thwarted by gifted lobbyists.

Olson, Mancur. 1971. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, MA: Harvard University Press.

All conversions to modern currency in the chapter were performed using Samuel H. Williamson’s helpful online tool “Seven Ways to Compute the Relative Value of a U.S. Dollar Amount, 1774 to Present,” MeasuringWorth, 2014. The purchasing power comparison was used. The U.S. economic growth statistics cited in the chapter are from the same source. The data on agricultural subsidies are from the World Bank World Development Indicators.

Lastly, when Rockefeller writes powerfully about the “heartache and misery” that is introduced by competition, that is from: Rockefeller, John D. 1909. Random Reminiscences of Men and Events. New York: Doubleday, Page & Company.

On Chapter 4

Naturally I must begin the notes on chapter 4 with a plug for my own edited volumes on risk management in the banking sector:

Wilkin, Sam (ed.). 2004. Country and Political Risk: Practical Insights for Global Finance. London: Risk Books.

^______. 2015. Country and Political Risk: Practical Insights for Global Finance (2nd ed.). London: Risk Books.

The first volume is largely from academic contributors and consultants, while the chapters in the second volume are mostly contributed by bankers. Although expensive, these books make great gifts for the financial sector executives in your life.

The description of the debauchery involving bankers that opens the chapter is mostly from the popular media, as noted in the text, as well as: Freeland, Cynthia. 2012. Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else. London: Allen Lane.

The review of the rise of deposit insurance is mostly based on academic sources:

Garten, Helen A. 1994. “A Political Analysis of Bank Failure Resolution.” Boston University Law Review, 429–479. Garten also contributed a valuable critique of an early draft of this chapter, for which I am grateful. Garten’s own view on the causes of the global financial crisis is rather different from my own (see a discussion of some alternate views below).

Johnson, Simon, and James Kwak. 2010. 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. New York: Pantheon. This book was written to explain the global financial crisis but goes into historical detail as well. It is excellent on the degree to which banks were able to shape the regulation of their sector to their financial advantage, a point also made, bravely, in: Johnson, Simon. 2009. “The Quiet Coup.” Atlantic Monthly.

Reinhart, Carmen M., and Kenneth S. Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press. This is the classic account of financial crises and their (economic) causes (of which, more below).

Sprague, Irvine H. 1986. Bailout: An Insider’s Account of Bank Failures and Rescues. New York: Basic Books. This book is remarkable in that it was written by a banking regulator who was present, and a key decision maker, in many of the early banking bailouts.

In contrast to the robber barons, and to the global financial crisis, it is hard to find good books about the S&L crisis written for a general audience. The main sources for the quotes and financial details used in the section on the S&L crisis are:

Day, Kathleen. 1993. S&L Hell: The People and the Politics behind the $1 Trillion Savings and Loan Scandal. New York: W. W. Norton. This book has everything you need to know about the S&L crisis, but out of order, possibly because it is based on a compilation of the author’s articles. The book is the source for most of the human-interest stories I quote (Jeffrey Levitt, Spencer Blain).

Lowy, Martin. 1991. High Rollers: Inside the Savings and Loan Debacle. New York: Praeger.

Mayer, Martin. 1990. The Greatest-Ever Bank Robbery: The Collapse of the Savings and Loan Industry. New York: Charles Scribner’s Sons. This book deals confidently, but somewhat idiosyncratically, with the main economic causes of the S&L crisis (a topic I don’t go into in much detail in the chapter, focusing instead on incidents of fraud).

The section of the chapter that deals with the costs of the S&L crisis, and then the origins of too big to fail, is based on many of the above sources used in tracing the rise of deposit insurance (such as Reinhart and Rogoff, Johnson and Kwak, and especially Sprague—who is often quoted in the main text). In addition:

Boss, Maria, and Gary Watson. 1991. “The FDIC’s Special Defenses: Before and After FIRREA.” American Business Law Journal, 309–334.

Class, Edgar. 1995. “The Precarious Position of the Federal Deposit Insurance Corporation after O’Melveny & Myers v. FDIC.” Administrative Law Journal, 373–402.

Dabos, Marcelo. 2004. “Too Big to Fail in the Banking Industry: A Survey.” In Too Big to Fail: Policies and Practices in Government Bailouts, by Benton E. Gup, 141–151. Westport, CT: Praeger. Long before the global financial crisis, scholars had understood that too big to fail was a problem and were publishing books on the issue, but they were generally ignored. This volume is one example.

Dymski, Gary A. 2011. “Genie out of the Bottle: The Evolution of Too-Big-to-Fail Policy and Banking Strategy in the U.S.” Unpublished paper (UC Riverside, Riverside, CA), 1–47. If you are looking for a Marxist (but very interesting and well-documented) view on the causes of the global financial crisis, this is it.

FDIC. 1997. History of the Eighties—Lessons for the Future, Vol. I. Washington, DC: FDIC.

Hetzel, Robert L. 1991. “Too Big to Fail: Origins, Consequences, and Outlook.” Economic Review, 3–15.

Stern, Gary H., and Ron R. Feldman. 2004. Too Big to Fail: The Hazards of Bank Bailouts. Washington, DC: Brookings Institution Press. This book offered another advance warning of the issues that would (in my view) lead to the global financial crisis. It was also ignored.

In contrast to the S&L crisis, the global financial crisis brought out the A-list talent and induced them to spend a lot of time and effort crafting excellent, well-written books. In addition to the Johnson and Kwak book and Dymski chapter cited above, the main sources I used for the details quoted in this section of the chapter are:

Martin, Iain. 2013. Making It Happen: Fred Goodwin, RBS, and the Men Who Blew Up the British Economy. London: Simon & Schuster. Used for the section on the global game.

McLean, Bethany, and Joe Nocera. 2010. All the Devils Are Here: The Hidden History of the Financial Crisis. New York: Portfolio. This is the most comprehensive book on the financial crisis, covering all the players from the banks to the rating agencies. It was crucial for the sections on the rating game and the risk management game.

Morgenson, Gretchen, and Joshua Rosner. 2011. Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon. New York: Times Books. This book focuses on the U.S.-government-supported entities Fannie Mae and Freddie Mac, as well as securitization—two important aspects of the crisis that, for space reasons, I do not cover in much detail in the chapter (although I returned to the story in chapter 7). Used mostly for the section on the winnings.

Sorkin, Andrew Ross. 2009. Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves. New York: Viking. This is the book (now a movie) that brought too big to fail into the popular lexicon. It is a good book, although it is not really about the too-big-to-fail problem. Rather, it is a play-by-play account of how the banks were saved during the global financial crisis.

Tett, Gillian. 2009. Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. New York: Free Press. This well-written book focuses on the creation of credit default swaps and is the main source for the section on the risk swapping game, as well as some parts of the rating game and risk management game.

To explain the wealth secrets of the bankers (including the section on the winnings, the global game, and the game going on), I have once again turned to academic research. In addition to the sources cited above in reference to the origins of too big to fail, the main sources are:

Bebchuk, Lucian A., Alma Cohen, and Holger Spamann. 2010. “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman, 2000–2008.” Yale Journal on Regulation, 257–282.

Bijlsma, Michiel J., and Remco J. M. Mocking. 2013. “The Private Value of Too Big to Fail Guarantees.” CPB Discussion Paper 240, 1–43.

Brewer, Elijah III, and Julapa Jagtiani. 2013. “How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systemically Important?” Journal of Financial Services Research, 1–35.

Cunliffe, Jon. 2014. “Ending Too Big to Fail: Progress to Date and Remaining Issues.” The Barclays European Bank Capital Summit. London: Bank of England, 1–10.

Karmel, Roberta S. 2011. “An Orderly Liquidation Authority Is Not the Solution to Too Big to Fail.” Brookings Journal of Corporate Finance and Commercial Law, 1–46.

Keister, Todd, and James McAndrews. 1990. “Why Are Banks Holding So Many Excess Reserves?” Federal Reserve Bank of New York Staff Reports, 1–13.

Santos, João. 2014. “Evidence from the Bond Market on Banks’ ‘Too-Big-to-Fail’ Subsidy.” Federal Reserve Bank of New York Economic Policy Review, 1–22.

Seelig, Steven A. 2004. “Too Big to Fail: A Taxonomic Analysis.” In Too Big to Fail: Policies and Practices in Government Bailouts, by Benton E. Gup, ed., 219–229. Westport, CT: Praeger.

van Rixtel, Adrian, Yupana Wiwattanakantang, Toshiyuki Souma, and Kazunori Suzuki. 2004. “Banking in Japan: Will Too Big to Fail Prevail?” In Too Big to Fail: Policies and Practices in Government Bailouts, by Benton E. Gup, ed., 253–283. Westport, CT: Praeger.

The data for the section on the earnings of the bankers and their relationship to the one percent are from:

Bakija, Jon, Adam Cole, and Bradley T. Heim. 2012. “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data.” Working Paper, Williams College.

Piketty, Thomes, and Emmanuel Saez. 2013. “Top Incomes and the Great Recession: Recent Evolutions and Policy Implications.” IMF Economic Review, 456–478.

Tomaskovic-Devey, Donald, and Ken-Hou Lin. 2011. “Income Dynamics, Economic Rents and the Financialization of the U.S. Economy.” American Sociological Review, 538–559.

Wójcik, Dariusz. 2012. “The End of Investment Bank Capitalism? An Economic Geography of Financial Jobs and Power.” Economic Geography, 345–368.

If you have read Thomas Piketty’s well-regarded book, Capital in the Twenty-First Century (Belknap Press, 2014), you’ll notice a difference in emphasis regarding the rise of the one percent. This isn’t because I disagree with Piketty. Piketty’s book mostly focuses on inequality in Europe, which is in many countries increasingly attributable to differences in inherited wealth. In the United States, by contrast, and as Piketty notes, the main driver of income inequality in the present day is salary differentials, the focus of my chapter. While Piketty forecasts that differences in inherited wealth eventually will come to drive U.S. income inequality, this is not at present the case.

Piketty would probably disagree with my focus on the importance of the financial sector in driving the rise of the one percent. Piketty points out that the largest share of the increase in income inequality in the United States is attributable to increases in managerial salaries, with the rise in financial sector compensation accounting for only a minority of this. The point that I emphasize is that financial sector employees, while a minority, are the segment of the one percent—indeed, the only segment of the one percent—whose share of one-percent incomes has grown materially over time. In other words, while general increases in managerial salaries may be the main explanation for the rising fortunes of the one percent (as Piketty notes), it is the particularly meteoric rise of the financial sector that has made everyone else feel they are falling behind (or so I argue).

After reading the chapter, you may come to the conclusion that too big to fail was not only a wealth secret for the bankers, it was a major cause of the global financial crisis. Not only did the too-big-to-fail subsidy help to make the bankers rich, but the existence of a government guarantee helped to encourage the bankers to take more risks (this problem, known as moral hazard, arises when the parties taking risks do not bear the consequences of their actions, but rather these consequences are passed on to another group—in this case, the taxpayer). Furthermore, as I tell it, when the government guarantee was suddenly and unexpectedly withdrawn (when Lehman Brothers was allowed to fail), this touched off the financial crisis.

Let me provide a brief introduction to some other views on the causes of financial crises. My friends in the financial sector who reviewed early drafts of this chapter generally favored hubris as an explanation for the crisis. They argued that bankers did not plan to create banks that failed—they genuinely believed they could manage the risks. And it is true that even though many bankers walked away from the financial crisis very rich, they would have been much richer if their banks had not failed. So it is fair to say that the bankers suffered serious personal losses in the crisis.

The classic view on the economics of banking crises comes from Reinhart and Rogoff, cited above. Two more recent books by economists with similar views on the underlying economic causes of banking crises are:

Admati, Anat, and Martin Hellwig. 2013. The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. Princeton: Princeton University Press.

Wolf, Martin. 2014. The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis. New York: Penguin.

I also interviewed Wolf and Hellwig for the preface to the second edition of my own edited volume on country risk management in banking.

Generally speaking, the view of each of these economists is that the repeated occurrence of financial crises is inherent in the economics of banking. A principal function of banks is “maturity transformation.” That is, banks accept depositor funds that are instantly exchangeable for cash, and they lend funds on longer terms (a bank will probably get its money back from mortgage lending, for example, but only over time, and there is no way the bank can instantly call in its loans). The classic manifestation of the risk inherent in maturity transformation is a bank run: depositors lose confidence in a bank and rush to withdraw their money. But the money is tied up in mortgage loans, and so if enough depositors withdraw simultaneously, the bank fails. While banks hold some assets in reserve against withdrawals, there comes a point when any bank, no matter how well run, will fold in the face of a loss of its depositors’ confidence.

In fact, a bank run is only one way in which the risks inherent in maturity transformation can manifest themselves. For instance, during the U.S. S&L crisis, there weren’t many runs. Rather, the problem was that the S&Ls’ long-term mortgages were paying about 6 percent interest (remember 3-6-3?) but then, after interest rates were deregulated, S&Ls had to offer much higher interest rates to attract short-term depositors—in some cases as high as 15 percent. The difference between outgoings of 15 percent and incomings of 6 percent is a lot, so most S&Ls were losing huge amounts of money. The solution, of course, would have been to raise mortgage interest rates to 15 percent—but many mortgages were long-term, with fixed rates, so the 6 percent rates were locked in for years or even decades. Hence: a risk from maturity transformation.

There are lots of schemes that seek to offset such risks. The most popular is deposit insurance—where banks insure each other, often via a government program, against the risk of failure. But fundamentally, such schemes do not eliminate the risk, which is, as I have said, inherent in maturity transformation. The risk has to go somewhere. For instance, there was still the risk that the deposit insurance fund itself would be overwhelmed. Ultimately, in the global financial crisis, so many banks were impacted at the same time by a real estate collapse, and by their simultaneous “fire sale” efforts to sell assets to raise capital (which led to asset price collapses), that the deposit insurance scheme would have run out of money had there been no bailout. Deposit insurance had hidden the risk, but it was still there.

In the view of the economists I cite above, resolving “too big to fail” would not eliminate the risk of systemic financial crises—any financial system in which leveraged institutions, whether large or small, engage in maturity transformation is inherently at risk. That’s a little worrying, from a policy perspective.

Fortunately, this is not a book about policy. A far more interesting question is: Does this mean there are wealth secrets in finance beyond too big to fail? If the whole system is inherently at risk, that implies there is a lot of money to be made, because risks tend to be rewarded by high returns (a topic covered in chapter 7). Of course, it’s no fun bearing the consequences of financial risks oneself (think LTCM), so masters of wealth secrets who take serious risks generally find a way to have someone else pay.

It certainly seems that there are some further wealth secrets to be found. For instance, securitization involved the passing on of maturity-transformation risks throughout the financial system. Subprime mortgages were packaged together, assigned AAA ratings, and sold on to investors (such as pension funds) that had been excluded from running such risks. The question is whose wealth secret this was. Did the pension funds understand they were in fact running large hidden risks and accept these risks in exchange for higher returns? Or did the well-paid bankers who structured the deals pass the risks off on the unsuspecting funds? Or, amid all the hubris, did no one realize that large, unmanaged risks were being hidden and passed around?

If no one knows it’s a wealth secret, is it still a wealth secret?

On Chapter 5

This is another chapter that has a movie version: Guru, directed by Mani Ratnam. Guru is a standard Bollywood epic—complete with song and dance numbers—but Anil Ambani was tangentially involved in the production, so it is generally taken to be loosely based on Dhirubhai’s life. Because it is Bollywood, some details are changed: Dhiru (Dhirubhai’s nickname among friends and family) becomes “Guru,” the young man travels to Turkey rather than Yemen, the company is called “Shakti Trading” rather than Reliance, and so on. The movie is both well acted and surprisingly moving, and you might enjoy it even if Bollywood song and dance routines are not your thing.

Although there are a number of excellent English-language books on Dhirubhai Ambani—to be discussed in a moment—compared to the Romans, the robber barons, the bankers, or the technology billionaires, coverage of Dhirubhai’s business dealings, particularly in the English-language academic literature, is relatively thin. For this reason, to evaluate Dhirubhai’s wealth secret, I traveled to India and interviewed a number of analysts of, as well as current and former competitors of, Reliance.

The interviewees included: Ashish Chauhan, CEO, Bombay Stock Exchange; Gurcharan Das, author of many well-regarded books (including those cited below) and former CEO of Procter & Gamble India; Chirag Dhaifule, Research Analyst, LKP Securities; Subir Gokarn, Director of Research, Brookings India; Piyush Jain, Equity Research Analyst, Morningstar India; Surajit Mazumdar, Professor, Jawaharlal Nehru University; Ashok Sinha, Chairman, 4i Advisors and former Chairman and Managing Director, Bharat Petroleum Corporation Limited; and Rahul Tongia, Fellow, Brookings India. I thank them, as well as several interviewees who preferred to remain anonymous, for their generosity with their insights.

The backstory about the Indian economy under the license raj, and the analysis of the wealth secrets of the firms that thrived during that era, are based on the following sources, as well as McDonald and Mazumdar (cited below):

Bhattacharya, Debesh. 1989. “Growth and Distribution in India.” Journal of Contemporary Asia, 150–166.

Das, Gurcharan. 2002. India Unbound: The Social and Economic Revolution from Independence to the Global Information Age. New York: Anchor Books. This book is a well-regarded popular economic and business history of India aimed at the general reader.

Forbes, Nashuad. 2002. “Doing Business in India: What Has Liberalization Changed?” In Economic Policy Reforms and the Indian Economy, by Anne O. Krueger, 129–158. Chicago: University of Chicago Press.

Kochanek, Stanley A. 1996. “Liberalisation and Business Lobbying in India.” Journal of Commonwealth and Comparative Politics, 155–173.

Majumdar, Sumit K. 2004. “The Hidden Hand and the License Raj: An Evaluation of the Relationship between Age and the Growth of Firms in India.” Journal of Business Venturing, 107–125.

Mukherji, Rahul. 2009. “The State, Economic Growth, and Development in India.” India Review, 81–106.

Panagariya, Arvind. 2008. India: The Emerging Giant. Oxford: Oxford University Press.

For the personal details regarding the life of G. D. Birla, the main sources are:

Birla, Ghanshyam Das. 1986. Nehru Family and Ghanshyam Das Birla: A Unique Collection of Living Letters. New Delhi: Vision Books. This book records the correspondence of G. D. Birla with India’s first prime minister, Jawaharlal Nehru. Although I cited only one or two details from it in the chapter, it makes for interesting reading.

Kudaisya, Medha M. 2003. The Life and Times of G. D. Birla. New Delhi: Oxford University Press. This is the main source for the details I cite on Birla’s life.

Most of the personal details about Dhirubhai, as well as the quotes from him, come from the excellent English-language biographies available:

Ambani, Kokilaben. 2007. Dhirubhai Ambani: The Man I Knew. Mumbai: Reliance Industries. This large-format picture book by Dhirubhai’s wife contains, in addition to excellent photographs, a number of charming personal details, such as Dhirubhai’s habit of sleeping on his clothes to “iron” them, and his swim through shark-infested waters to claim a reward of ice cream.

Bhushan, K., and G. Katyal. 2002. Dhirubhai Ambani: The Man Behind Reliance. New Delhi: A.P.H. Publishing Corporation. This book includes a long list of quotes from current and former Reliance employees, and is thus the source for most such quotes in the chapter.

McDonald, Hamish. 2010. Ambani & Sons: The Making of the World’s Richest Brothers and Their Feud. New Delhi: Roli. This detailed, well-written but unauthorized biography of Dhirubhai is the source for most of the material on Dhirubhai’s personal life and business dealings quoted in the chapter. Much of the material in the book was originally published as: McDonald, Hamish. 1998. The Polyester Prince: The Rise of Dhirubhai Ambani. Sydney: Allen & Unwin. The earlier book also contains a number of stories that I have largely overlooked in preference to focusing on Dhirubhai’s wealth secret, including Dhirubhai’s innovative capital-raising strategies, and the extraordinary battle between Mukesh and Anil Ambani for control of their father’s empire after his death.

Piramal, Gita. 1996. Business Maharajas. New Delhi: Penguin Books India. This book contains biographies of a number of Indian business leaders including Dhirubhai. Because it focuses on Dhirubhai’s business activities, it was a surprisingly useful resource, including some details missing from longer biographies.

Thakurta, Paranjoy Guha, Subir Ghosh, and Jyotirmoy Chaudhuri. 2014. Gas Wars: Crony Capitalism and the Ambanis. Delhi: Paranjoy Guha Thakurta. This is a surprisingly evenhanded book, despite the fact that the authors’ extreme distrust of Mukesh and Anil Ambani shines through on every page. The authors have taken the approach of interviewing a series of commentators on the oil and gas dealings of the Ambani family and presenting the views of each commentator in sequence. The effect is sort of an oil and gas Rashomon—you get all the angles, despite the authors’ evident bias. But by the third time you read about the decision to change the administered gas price, it becomes a little annoying. Mostly the book focuses on the Ambanis’ investments in oil and gas exploration, which is something I don’t cover very much in the chapter.

Most of the evidence for Dhirubhai’s wealth secret comes from the interviews I conducted in India and the academic literature. The interviewees are cited in the text (for those who wished to be quoted). Academic sources are the following, along with Nashuad Forbes (cited above):

Capelli, Peter, Harbir Singh, Jitendra Singh, and Michael Useem. 2010. The India Way: How India’s Top Business Leaders Are Revolutionizing Management. Boston: Harvard University Press.

Chandrasekhar, C. P. 1999. “Firms, Market and the State: An Analysis of Indian Oligopoly.” In Economy and Organization: Indian Institutions under the Neoliberal Regime, by Amiya Kumar Bagchi, 230–266. New Delhi: Sage.

Heston, Alan, and Vijay Kumar. 2008. “Institutional Flaws and Corruption Incentives in India.” Journal of Development Studies, 1243–1261.

Mazumdar, Surajit. 2011. “The State, Industrialisation and Competition: A Reassessment of India’s Leading Business Enterprises under Dirigisme.” Economic History of Developing Regions, 33–54. Mazumdar has also conducted his own research on Reliance, and provided a very useful critique of an early draft of this chapter.

Vachani, Sushil. 1997. “Economic Liberalization’s Effect on Sources of Competitive Advantage of Different Groups of Companies: The Case of India.” International Business Review, 165–184.

Most of the sources for the review of Carlos Slim and other emerging markets billionaires that concludes the chapter are cited in the text. See http://stats.areppim.com/ for similar, and alternate, calculations on the prevalence of emerging markets billionaires in the Forbes list. The OECD study mentioned is: OECD. 2012. OECD Review of Telecommunication Policy and Regulation in Mexico. http://dx.doi.org/10.1787/9789264060111-en, OECD Publishing.

Finally, a word about the use of Dhirubhai’s first name. In most of this book I refer to people by their last names. However, the English-language books about Dhirubhai Ambani generally use his first name, so I have adopted the same convention (and for his sons Mukesh and Anil as well). I hope I do not cause offense by sounding overly familiar.

On Chapter 6

The description of Bill Gates’s house comes from blogs and the popular media, as well as Gates’s own description from his book: Gates, Bill. 1995. The Road Ahead. London: Viking.

If you want more on the house, photographs of the interior appear in books on architecture, including:

Morrow, Theresa. 1997. James Cutler. Gloucester: Rockport. This is a small volume, in color, with the sections on the Gates house labeled “Guesthouse,” “Garage,” and “Swimming Pool.”

Ojeda, Oscar Riera, ed. 2005. Arcadian Architecture: Bohlin Cywinski Jackson—12 Houses. New York: Rizzoli. This is a large coffee-table book with the Gates house labeled as “Pacific Rim Estate.”

The general feeling of the house is rustic and even cozy, although the use of thick beams of old-growth fir on a large scale and with minimalist precision creates a templelike effect in many rooms—a bit like constructing a house from the torii gates outside the Fushimi Inari Shrine in Kyoto. The garage, taking the form of a huge arch molded from concrete, looks like the inside of an enormous underground bunker.

As usual, most of the “color” in the chapter comes from popular books, in particular a few biographies of Bill Gates and business histories of Microsoft:

Cringely, Robert X. 1992. Accidental Empires: How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can’t Get a Date. New York: HarperCollins.

Cusumano, Michael A., and Richard W. Selby. 1998. Microsoft Secrets: How the World’s Most Powerful Software Company Creates Technology, Shapes Markets, and Manages People. New York: Touchstone. This book takes a look at business strategies adopted by Microsoft, as well as providing a business history.

Manes, Stephen, and Paul Andrews. 1994. Gates: How Microsoft’s Mogul Reinvented an Industry—and Made Himself the Richest Man in America. New York: Touchstone. This is the best of the Gates biographies, in my view.

Rensin, David. 1994. “The Bill Gates Interview.” Playboy, July, 63.

Toulouse, Stephen. 2010. A Microsoft Life. Self-published e-book. Though I used it for only one detail, it was an interesting window into the life of a “Microserf” (and Microsoft true believer).

Wallace, James, and Jim Erickson. 1992. Hard Drive: Bill Gates and the Making of the Microsoft Empire. New York: Wiley.

In the chapter, I introduced intellectual property rights as “tools for making money”—probably not the way most people are used to thinking about the subject. That said, from the earliest days of intellectual property rights in the United States, they were used for precisely this purpose. William Thornton, the Commissioner of Patents during the era of the robber barons, inserted himself into key patents for firearms and steamboats by pretending to have invented “improvements” (which did not work) and refusing to grant the patent until he was added as a co-inventor. This detail is from Morris (cited in the notes to the robber barons chapter). The evidence supporting the review of intellectual property law in the current chapter, as well as the intellectual property rights aspects of Bill Gates’s wealth secrets (for instance, the deal of the century section), are from:

Bessen, James, and Michael J. Meurer. 2008. “Do Patents Perform Like Property?” Academy of Management Perspectives, 8–20.

Boldrin, Michele, and David K. Levine. 2008. Against Intellectual Monopoly. Cambridge: Cambridge University Press. This is the controversial book arguing that intellectual property rights should be abolished.

Devlin, Alan, and Michael Jacobs. 2009. “Microsoft’s Five Fatal Flaws.” Columbia Business Law Review, 67–108.

Easterbrook, Frank H. 2001. “Who Decides the Extent of Rights in Intellectual Property?” In Expanding the Boundaries of Intellectual Property: Innovation Policy for a Knowledge Society, by Rochelle Dreyfuss, Diane L. Zimmerman, and Harry First, 405–413. Oxford: Oxford University Press.

First, Harry. 2006. “Microsoft and the Evolution of the Intellectual Property Concept.” Wisconsin Law Review, 1370–1432.

Gilbert, Richard J. 2011. “A World Without Intellectual Property?: Boldrin and Levine, Against Intellectual Monopoly.” Journal of Economic Literature, 421–432.

McManis, Charles. 2009. “A Rhetorical Response to Boldrin & Levine: Against Intellectual (Property) Extremism.” Review of Law and Economics, 1081–1100.

Merges, Robert P. 2000. “One Hundred Years of Solicitude: Intellectual Property Law, 1900–2000.” California Law Review, 2187–2240. As the title suggests, this offers a historical perspective and was crucial for my discussion of how intellectual property law evolved.

^______. 2001. “Institutions for Intellectual Property Transactions: The Case of Patent Pools.” In Expanding the Boundaries of Intellectual Property: Innovation Policy for a Knowledge Society, by Rochelle Dreyfuss, Diane L. Zimmerman, and Harry First, 123–165. Oxford: Oxford University Press.

Seltzer, Wendy. 2013. “Software Patents and/or Software Development.” Brooklyn Law Review, 929–1131.

Gates’s understanding of the benefits that enforceable rights could have for his computer business started early. In his sophomore year of high school, Gates and several friends took on a project to write some payroll software for a company called Information Services, Inc. (ISI). The work was badly done, so ISI refused to provide the students with the valuable computer time they had been promised in exchange for their coding. Gates immediately got his father to write a threatening lawyer’s letter. Impressed, ISI agreed to negotiate a formal legal contract with the students: for delivery of a quality product, a set amount of time on the ISI computers would be provided. Gates altered some details of the contract to his liking and signed; the altered details enabled Gates and his friends to use the ISI computers to work on a second contract project, earning about $4,200. Not bad for a bunch of high school students (with some legal assistance).

The following articles, as well as Cusumano and Selby (cited above), are the basis of the section on the application of network effects and platform strategies to Gates’s wealth secrets:

Bresnahan, Timothy F. 2001. “Network Effects and Microsoft.” Department of Economics, Stanford University Working Paper. This professor had the excellent idea of trawling through the documents released in the Microsoft case to find out how much Microsoft itself understood about the theory of network effects. Amusingly, Bresnahan is transparently surprised to find that Microsoft clearly understood each of the major implications of the theory (momentarily forgetting that businesses tend to catch on to leading-edge strategies before academics do). However, Bresnahan does give credit where due, noting that “the firm’s analysis… shows that we [academic economists] have missed an important way in which partial equilibrium and general equilibrium diverge.”

Cusumano, Michael A. 2010. “The Evolution of Platform Thinking.” Communications of the ACM, January, 32–34.

^______. 2010. “Platforms and Services: Understanding the Resurgence of Apple.” Communications of the ACM, October, 22–24.

^______. 2011. “The Platform Leader’s Dilemma.” Communications of the ACM, October, 21–23.

Evans, David S., Andrei Hagui, and Richard Schmalensee. 2006. Invisible Engines: How Software Platforms Drive Innovation and Transform Industries. Cambridge, MA: MIT Press. This book offers a relatively precise economist’s view of business strategies in platform businesses. It is mostly accessible to a general reader, if perhaps a little dry.

Gawyer, Annabelle, and Michael A. Cusumano. 2002. Platform Leadership: How Intel, Microsoft, and Cisco Drive Industry Innovation. Boston: Harvard University Press. This book (as well as Cusumano’s articles, cited above) provides an engaging introduction to the strategies of platform businesses, at the expense of some oversimplification in comparison to Evans et al. (above).

Liebowitz, Stan, and Stephen E. Margolis. 1998. “Dismal Science Fiction: Network Effects, Microsoft, and Antitrust Speculation.” Policy Analysis, 1–38.

In 2014, the French economist Jean Tirole was awarded the Nobel Prize in economics in part for his work done on platform competition. His work is the basis for some of the above texts (in general, the formula for creating a classic management text is to find some work by economists, translate it into comprehensible language, and add a diagram or two):

Rochet, Jean-Charles, and Jean Tirole. 2006. “Two-Sided Markets: A Progress Report.” RAND Journal of Economics, 645–667.

Tirole, Jean. 2008. “A Fine Balance.” Business Strategy Review, Winter, 94–95. This short article is accessible to a general reader.

The sources cited above provide some of the detail regarding the government’s antitrust case against Microsoft. In addition I relied on:

Boniwell, Ann. 2012. “The Implications of Network Effects for Competition Law.” Sibergramme, 2–8.

Gilbert, Richard J., and Michael L. Katz. 2001. “An Economist’s Guide to US vs Microsoft.” Journal of Economic Perspectives, 25–44.

Lopatka, John, and William H. Page. 2009. The Microsoft Case: Antitrust, High Technology, and Consumer Welfare. Chicago: University of Chicago Press. This is the authoritative review of the Microsoft trial and its implications. Lopatka also provided a useful critique of an early draft of this chapter, for which I am grateful.

Thierer, Adam. 2012–2013. “The Perils of Classifying Social Media Platforms as Public Utilities.” CommLaw Conspectus, 249–297.

The story about Nathan Myhrvold is taken from the above sources as well as: Orey, Michael. 2006. “Inside Nathan Myhrvold’s Mysterious New Idea Machine.” Bloomberg Businessweek, July 2.

This chapter was written in its entirety using Microsoft Word 2013 on a computer running Microsoft Windows version 8.1.

On Chapter 7

As I was finishing this manuscript, two books were published that independently arrived at some of the conclusions I review in this chapter (there are also, naturally, a few points of disagreement). These books are:

Brilliant, Heather, and Elizabeth Collins. 2014. Why Moats Matter: The Morningstar Approach to Stock Investing. New York: Wiley.

Thiel, Peter, and Blake Masters. 2014. Zero to One: Notes on Startups, or How to Build the Future. New York: Crown Business.

Interestingly, the authors of both of these books appear to have had no interaction with each other, and I did not know of either of them when I was writing this book. We also started from very different places. My objective was to tell the story of the world’s richest people and how they actually made their fortunes. Brilliant and Collins set out to describe the results of their company’s efforts to operationalize Warren Buffett’s concept of a “moat” to forecast stock market returns. Thiel and Masters set out to record the personal experience of Peter Thiel, who is himself a billionaire and venture capitalist with a track record of identifying and backing several successful start-up companies, including PayPal and Facebook.

Brilliant and Collins list five factors that produce moats with staying power: (l) cost advantages, (2) intangible assets, (3) network effects, (4) customer switching costs, and (5) efficient scale. Thiel and Masters come up with a list of four factors that build monopolies: (1) proprietary technology, (2) network effects, (3) economies of scale, and (4) branding.

Compare those lists with my list of seven habits of spectacularly rich people, and you’ll notice some of the points of agreement. The first thing you’ll notice is that we all agree on network effects. These are a clear winner. If you want to be rich, go out and get yourself some.

There is another, also relatively clear, point of agreement: intellectual property rights. I group both brands and patented technologies into this category. Brilliant and Collins lump them together with government licenses (calling them “intangible assets”). For Thiel and Masters they are points 1 (“proprietary technology”) and 4 (“branding”). There is also some overlap on the concept of scale economies. On most other points, the three books tend to disagree with each other, although a little disagreement is always healthy.

I think both books are very much worth reading. The book by Thiel and Masters is short, provocative, and a good read, with lots of memorable catchphrases that are genuinely enlightening. It also features a comparison of hipsters to the Unabomber that on its own justifies the book’s cost. Thiel also, rather bravely, admits that the sources of his fortune, and Google’s success, are monopolies (so he knows the first secret of spectacularly rich people: don’t be the best—be the only).

However, as the book is based on Thiel’s personal experience in the rarefied world of the technology sector (where, thanks in part to Bill Gates, almost everyone enjoys a miniature monopoly from patent protection these days), it has some blind spots. For instance, Thiel unfairly criticizes the financial sector for failing to be innovative. This is a little odd: the financial sector has been innovative to a fault. Not only the structure of the industry (for instance, the rise of hedge funds) but the financial instruments in use today would be all but unrecognizable to a time-traveling banker arriving from the early 1980s. The difference between the financial sector and the technology sector is not that financial firms are not innovative; it is that financial firms, by and large, cannot patent their innovations, while technology firms can. This is a big difference, and is why technology firms become monopolists. But it has very little to do with innovation itself.

Thiel writes: “By ‘monopoly,’ I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.” Well, no. There is no such monopoly. LTCM was exceptionally good at what it did. But there is no possible scenario one can imagine under which LTCM, by being even better than it was, ends up with a monopoly. Monopolies don’t come from being the best, they come from wealth secrets such as barriers to competition. There were few such restrictions on competition in the hedge funds business, and being superior, no matter how superior, wasn’t going to change that.

The book by Brilliant and Collins is longer and more comprehensive. Because it covers many business sectors and is based on more than a decade of experience in applying the framework to assess companies’ prospects, it is rich with detail and case examples. That said, like most business books, you will feel entirely justified in reading it at work, as it is sometimes hard going. There are also a few square peg–round hole moments, where elements that are necessary for stock analysis but don’t really relate to moats are shoehorned into the moat framework. There are also some philosophical issues one could raise (why is a government’s refusal to allow other competitors into the industry sometimes an example of efficient scale and sometimes a type of intangible asset?). In terms of value for money, though, it’s a great book.

I spoke with Elizabeth Collins, head of Morningstar’s North America equity research, about the book. “What matters for equity valuation is not the next few years, but the next five to twenty years,” she explains, which is why the moat is important. If a company is earning a lot of profits now but doesn’t have a moat, these profits are likely to vanish abruptly as competitors, attracted by the high earnings, pile into the market and shamelessly imitate what the company does well.

Morningstar currently assigns Microsoft a wide moat rating (the best possible), although on a negative trend, as the company is playing catch-up in key areas including search, mobile, and cloud computing. In particular, the Office software suite could be threatened by cloud-based products. But then, technological innovation was never really Microsoft’s wealth secret, so I’m not sure we should be all that concerned. By contrast, many U.S. investment banks covered by Morningstar appear to have weak moats. As I’ve mentioned, there are few barriers to competition in banking. But erecting competitive barriers was never the wealth secret of the bankers, so I don’t think we should panic about that either.

After a decade of assigning moat ratings, Morningstar claims to have found that the ratings are useful not just for forecasting profitability, but for forecasting equity returns (particularly for undervalued stocks). If you’d like to get in on the moat action yourself, the company offers a Wide Moat Focus Index, composed of what it believes are the most undervalued stocks with good moats.

A very interesting question is: why is it that three books, with different starting points, and from authors with diverse backgrounds, have come to at least a few of the same conclusions, at roughly the same time?

I would argue that this has to do with the point I make at the end of the chapter: there are more wealth secrets now than ever before. If you are going to analyze stocks based on a traditional framework that does not focus in the first instance on barriers to competition, you are going to miss something important. Morningstar has achieved an impressive track record of forecasting equity returns based on this realization. Similarly, if you are going to invest in the technology sector using one of the traditional frameworks for understanding business profitability (like those I review in this chapter), you are not going to do very well. Thiel, to his credit, saw this early on and developed a new approach based almost entirely on the pursuit of monopoly. He has, partly as a result, been greatly successful and become very wealthy.

With regard to this book, I would make a similar claim: if you are going to understand the rise of the one percent in the modern era, you are going to need to look beyond the standard explanations, like globalization, technology, and increasing returns to education. You’re going to need to understand wealth secrets. The expansion of wealth secrets—like intellectual property rights and government guarantees for the banking elite—has helped to inflate the salaries of both top managers and financial sector executives, as well as contributing to the dramatic expansion of the Forbes list of the world’s billionaires. While it would be hard to quantify the contribution of wealth secrets to inequality, I do think it’s hard to get ahead in stock market investing, or venture capital, or just to get ahead of the Joneses, without them.

Apologies for getting a little carried away—I almost forgot about the notes. Returning to the beginning of the chapter, the facts behind the story of the Thurn and Taxis dynasty are mostly sourced from: Puttkammer, E. W. 1938. “The Princes of Thurn and Taxis.” Chicago Literary Club. Some dates are adjusted in accordance with more recent sources, notably: Grillmeyer, Siegfried. 2005. Habsburgs Diener in Post und Politik: Das “Haus” Thurn und Taxis zwischen 1745 und 1867. Verlag Philipp von Zabern. A few facts about the modern family are from either their profiles on the Forbes billionaire list or: Colacello, Bob. 2006. “The Conversion of Gloria TNT.” Vanity Fair, June. You can contribute to the Thurn and Taxis cause by hiring a room in their castle for your next corporate event. Visit http://www.thurnundtaxis.de/events/vermietung/vermietung.html.

The two iconic business books to which I compare wealth secrets are:

Collins, Jim. 2001. Good to Great: Why Some Companies Make the Leap… and Others Don’t. Harper Business. Also cited in chapter 1, and the source of the Pitney Bowes anecdote.

Peters, Thomas, and Robert Waterman, Jr. 1982. In Search of Excellence: Lessons from America’s Best-Run Companies. New York: Harper & Row.

I was pointed to this book as a potential foil: Harford, Tim. 2012. Adapt: Why Success Always Begins with Failure. London: Picador.

The information on Russian billionaires is from: Zonis, Marvin, Dan Lefkovitz, Sam Wilkin, and Joseph Yackley. 2011. Risk Rules: How Local Politics Threaten the Global Economy. Agate B2.

With a few additions from: Wilkin, Sam. 2011. “Can Bad Governance be Good for Development?” Survival, 61–76. (Also cited in chapter 2.)

As well as the private briefing service offered by Oxford Analytica, at www.oxan.com.

The quote on the joys of monopoly in the Indian telecommunications is from: Chandrasekhar, C. P. 1999. “Firms, Market and the State: An Analysis of Indian Oligopoly.” In Economy and Organization: Indian Institutions under the Neoliberal Regime, by Amiya Kumar Bagchi, 230–266. New Delhi: Sage Publications. (Also cited in chapter 5.)

Most of the quotes and data for the stories of Fannie Mae and Freddie Mac are from: Morgenson, Gretchen, and Joshua Rosner. 2011. Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon. New York: Times Books. (Also cited in chapter 4.)

The quotes and data for the section on spinning laws into gold come from:

Gwartney, James, and Richard E. Wagner. 1988. “The Public Choice Revolution.” Intercollegiate Review, 17–26.

Pollock, Rufus. 2009. “Forever Minus a Day? Calculating Optimal Copyright Term.” Review of Economic Research on Copyright Issues, 35–60.

Wise, Timothy A. 2005. “Identifying the Real Winners from U.S. Agricultural Policies.” Global Development and Environment Institute Working Paper No. 05-07.

The section on Vanderbilt and network effects draws on: Stiles, T. J. 2009. The First Tycoon: The Epic Life of Cornelius Vanderbilt. New York: Alfred A. Knopf. (Also cited in chapter 3.)

An example of a book on getting rich that draws on economic principles: Fridson, Martin S. 2000. How to Be a Billionaire: Proven Strategies from the Titans of Wealth. New York: John Wiley & Sons.

Dhirubhai is quoted in: Bhushan, K., and G. Katyal. 2002. Dhirubhai Ambani: The Man Behind Reliance. New Delhi: A.P.H. Publishing Corporation. (Also cited in chapter 5.)

Piramal, Gita. 1996. Business Maharajas. New Delhi: Penguin Books India. (Also cited in chapter 5.)

Lastly, the quotes regarding Carnegie are from: Brands, H. W. 2010. American Colossus: The Triumph of Capitalism, 1865–1900. New York: Doubleday.