Every year since 1982, Forbes magazine publishes a list of the richest Amerikantsev. If we compare the 100 richest people in 1982 to 100 richest in 2020, we
have noticed some big differences.
In 1982, the most common source of wealth was inheritance. Of the 100 richest people, 60 were heirs. Moreover, 10 of them were heirs of the du Pont family. By 2020, the number of those who inherited the fortune had dropped by half, now numbering only 27 out of 100.
Why is the percentage of heirs decreasing? Not because inheritance taxes have gone up. In fact, they have dropped significantly over this period. The reason for the decrease in interest
heirs not in the fact that fewer people inherit large fortunes, but in the fact that more people earn fortunes .
How do people make new fortunes? About 3/4 by setting up companies and 1/4 by investing. Of the 73 new fortunes in 2020, 56 are attributed to the equity capital of the founders or early employees (52 founders, 2 early employees and 2 wives of the founders), and 17 due to investment fund management.
Among the 100 richest Americans in 1982, there were no fund managers. Hedge funds and private equity funds already existed, but none of their founders made it to the top 100. Two things changed: Fund managers found ways to generate high returns and more investors were willing to trust their money to manage. [1]
But the main source of new fortunes now is the creation of companies, and if you look at the data, you will see big changes there too. People are getting richer starting companies now than they were in 1982 because companies do different things.
In 1982, there were two dominant sources of new wealth: oil and real estate. Of the 40 new estates in 1982, at least 24 were primarily related to oil or real estate. Now this is only a small number: out of 73 new fortunes in 2020, 4 were related to real estate and only 2 were related to oil.
By 2020, the biggest source of new wealth has become what is sometimes referred to as "tech" companies. Of the 73 new fortunes, about 30 come from such companies. They are especially common among the wealthiest of the wealthiest: 8 of the 10 largest fortunes in 2020 were new fortunes of this type.
Perhaps this is a bit misleading, considering technology as a category. Isn't Amazon a retailer and Tesla a car manufacturer? Yes and no. Maybe 50 years from now, when what we call technology becomes a matter of course, it doesn't seem right to categorize the two businesses. But at least for now, they definitely have something in common that sets them apart. Which retailer is launching AWS? Which carmaker is run by someone who also has a rocket company?
The tech companies behind the top 100 fortunes also form a well-differentiated group in the sense that they are all companies that venture capitalists are willing to invest in and the rest are mostly not. And there's a reason for that: it's mostly companies that benefit with the best technology, not that their CEO is truly ambitious and good at closing deals.
In this sense, the growth of tech companies represents a qualitative change. The oil and real estate tycoons of the 1982 Forbes 400 did not win by improving technology. They won by being truly motivated and able to close deals. [2] Indeed, this way of getting rich is so old that it predates the industrial revolution. The courtiers who made their fortune in the (nominal) service of European royal houses in the 16th and 17th centuries also tended to be truly motivated and able to bargain.
People who don't look deeper than the Gini look at the 1982 world like the good old days, because those who got rich didn't get rich. But if you delve deeper into how they got rich, the old days don't look so good. In 1982, 84% of the richest 100 people became wealthy through inheritance, natural resource extraction, or real estate transactions. Is this really any better than a world where the richest people get richest by starting tech companies?
Why are people starting so many new companies than before, and why are they so rich? Oddly enough, the answer to the first question is that it is worded incorrectly. We shouldn't ask why people start companies and why they start companies again. [3]
In 1892, the New York Herald Tribune compiled a list of all America's millionaires. 4047 of them were found. How many then inherited their wealth? Only about 20% - less than the share of heirs today. And when you investigate the sources of new conditions, 1892 is even more similar to today. Hugh Rockoff found that "many of the wealthiest ... gained their initial advantage through new mass-production technology." [four]
So the anomaly is not here in 2020, but in 1982. The real question is why so few people got rich by starting companies in 1982. And the answer is that even as the Herald Tribune was being listed, a wave of consolidation swept through the American economy. In the late 19th and early 20th centuries, financiers like J.P. Morgan amalgamated thousands of small companies into several hundred giant ones with strong economies of scale. By the end of World War II, as Michael Lindh writes, "the main sectors of the economy were either organized as state-backed cartels or dominated by a few oligopolistic corporations." [five]
In 1960, most people who start startups today would go to work for one of them. You could have gotten rich by starting your own company in 1890 and 2020, but that wasn't a viable option in 1960. You cannot break through oligopolies to enter the markets. So, the prestigious path in 1960 was not opening your own company, but moving up the career ladder in an existing one. [6]
Making everyone a corporate employee has reduced economic inequality (and all other varieties of variation), but if your model of normality is from the mid-20th century, you have a very misleading model in this regard. J.P. Morgan's economy turned out to be just a phase, and from the 1970s onwards it began to disintegrate.
So why did she end up breaking up? Partly because it is outdated. Large companies, which in the 1930s seemed to be models of scale and efficiency, were weak and bloated by 1970. By 1970, the rigid structure of the economy was full of cozy nests that various groups were building to insulate themselves from market forces. During the Carter administration, the federal government realized that something was wrong and began, in a process they called "deregulation," to roll back policies that supported the oligopolies.
But it was not only internal decline that destroyed J.P. Morgan's economy. There was also pressure from outside in the form of new technologies, especially microelectronics. The best way to imagine what happened is to imagine a pond with a crust of ice on the surface. Initially, the only way from the bottom to the surface is to aim for the edge of the pond. But as the ice crust weakens, you start punching through the middle.
At the edges of the pond was clean technology: companies that actually called themselves working in the electronics or software industry. When you used the word startup in 1990, that is what you meant. But now startups are punching their way through the ice crust and crowding out incumbents such as retailers, TV channels and car companies. [7]
But while the collapse of J.P. Morgan's economy created a new world in a technological sense, it was a return to normalcy in a social sense. If you only look back to the middle of the 20th century, it seems that people who got rich by starting their own companies are a recent phenomenon. But if you look further, you will realize that this is actually the default. So we should expect the same in the future. Indeed, we should expect the number and wealth of founders to grow, because starting a startup becomes easier every decade.
One of the reasons it becomes easier to start a startup is because of social media. Society (re) internalizes this concept. If you start now, your parents will not be as worried as they would have been a generation ago, and the knowledge of how to do this spreads much more widely. But the main reason it's easier to start a startup right now is because it's cheaper. Technology has reduced the cost of both product creation and customer acquisition.
The declining startup cost has, in turn, changed the balance of power between founders and investors. Previously, when starting a startup meant building a factory, you generally needed investor approval. But now investors need founders more than founders need investors, and this, coupled with the growing volume of venture capital available, has driven valuations up. [8]
Thus, reducing the cost of starting a startup increases the number of wealthy people in two ways: it means that more people start them, and that those who do it can raise money on better terms.
But a third factor is also at work: the companies themselves are more valuable because the newly formed companies are growing faster than before. Technology not only made it cheaper to create and distribute things, but also made them faster.
This trend has been around for a long time. Founded in 1896, IBM took 45 years for the company to reach $ 1 billion in revenue (when recalculated for 2020). Founded in 1939, Hewlett-Packard took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm for fast-growing companies is 7-8 years. [nine]
Rapid growth has a double effect on the value of the founders' shares. The value of a company depends on its income and growth rate. So, if a company grows faster, not only do you make billions of dollars in revenue faster, but the company becomes more valuable when it reaches that point than if it grew more slowly.
This is why nowadays founders sometimes become so rich at such a young age. The low initial cost of starting a startup means founders can start young, and the rapid growth of companies today means that if successful, they can become surprisingly wealthy just a few years later.
Starting and growing a company is now easier than ever. This means that more people start them, those who actually get better terms from investors, and that the resulting companies become more valuable. Once you understand how these mechanisms work and that startups have been suppressed for much of the 20th century, you don't have to resort to the fuzzy right turn that the country took under Reagan to explain why America's Gini coefficient is rising. Of course, the Gini coefficient is increasing. How could it be otherwise when more people start more valuable companies?
Notes (edit)
[1] Investment firms grew rapidly after the Department of Labor changed regulations in 1978 to allow pension funds to invest in them, but the effects of this growth were not yet visible in the top 100 fortunes in 1982.
[2] George Mitchell deserves to be mentioned as an exception. While he was truly ambitious and skilled at closing deals, he was also the first to understand how to use hydraulic fracturing to extract natural gas from shale.
[3] When I say people start more companies, I mean the type of company that is going to get very big. In fact, over the past couple of decades, the total number of new companies has declined. But the vast majority of companies are small retail and service businesses. The statistics on the dwindling number of new businesses means that people are opening fewer shoe stores and hairdressers.
People sometimes get confused when they see a graph that says startups falling because the word startup has two meanings: (1) founding a company and (2) a certain type of company designed to grow. great fast. Statistics means launch in the sense of (1), not in the sense of (2).
[4] Rockoff, Hugh. "The Great Fates of the Gilded Age". NBER Working Paper 14555, 2008
[5] Lind, Michael. Promised land. Harper Collins, 2012.
It is also likely that high tax rates in the mid-20th century deterred people from starting their own companies. Starting your own company is risky, and when the risk is not rewarded, people choose safety instead.
But it wasn't just cause and effect. The oligopolies and high tax rates of the mid-20th century were one. Tax cuts are not just a cause of entrepreneurship, but a consequence of it: people who got rich in the mid-20th century from real estate and oil exploration lobbied and got huge tax loopholes that made their effective tax rate much lower, and presumably, if it was common practice to grow big companies by creating new technologies, and the people who did it also lobbied for their own loopholes.
[6] This is why people who did get rich in the middle of the 20th century so often got rich from oil or real estate exploration. These were two large areas of the economy that did not lend themselves to consolidation.
[7] Clean tech companies used to be called "high tech" startups. But now that startups can break through the ice crust, we don't need a separate name for the edges, and the term high-tech definitely has a retro feel.
[8] A higher rating means that you either sell fewer shares to get a certain amount of money, or you get more money for a certain number of shares. The typical startup does something of each. Obviously, you will get richer if you keep more inventory, but you should also get richer if you raise more money, because (a) it should make the company more successful, and (b) you can last longer until the next round, or even not needed. However, pay attention to all of these rules. In practice, a lot of money escapes through them.
It might seem that the huge rounds that startups are collecting these days contradict claims that it has become cheaper to start them. But there is no contradiction here; most attracted by startups that do it of their own choosing in order to grow faster, not because they need money to survive. There is nothing better than not needing money to have people offer it to you.
You might think, after nearly two centuries on the side of labor in its struggle against capital, that the far left will be happy that labor will finally triumph. But it looks like none of them are there. You can almost hear them say, "No, no, not like that."
[9] IBM was formed in 1911 through the merger of three companies, the most important of which was Hermann Hollerith's company, founded in 1896. The company's revenue in 1941 was $ 60 million.
Hewlett-Packard's revenue in 1964 was $ 125 million.
Microsoft revenues in 1988 were $ 590 million.
Thanks to Trevor Blackwell, Jessica Livingston, Robert Morris, Russ Roberts and Alex Tabarrok for reading the drafts of this text.
Thanks to everyone who took part in the collective translation of this material. Please send corrections to the translation in a personal message.
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