January 2016One advantage of being old is that you can see change happen inyour lifetime. A lot of the change I've seen is fragmentation. USpolitics is much more polarized than it used to be. Culturally wehave ever less common ground. The creative class flocks to a handfulof happy cities, abandoning the rest. And increasing economicinequality means the spread between rich and poor is growing too.I'd like to propose a hypothesis: that all these trends are instancesof the same phenomenon. And moreover, that the cause is not someforce that's pulling us apart, but rather the erosion of forcesthat had been pushing us together.Worse still, for those who worry about these trends, the forcesthat were pushing us together were an anomaly, a one-time combinationof circumstances that's unlikely to be repeated — and indeed, thatwe would not want to repeat.The two forces were war (above all World War II), and the rise oflarge corporations.The effects of World War II were both economic and social.Economically, it decreased variation in income. Like all modernarmed forces, America's were socialist economically. From eachaccording to his ability, to each according to his need. More orless. Higher ranking members of the military got more (as higherranking members of socialist societies always do), but what theygot was fixed according to their rank. And the flattening effectwasn't limited to those under arms, because the US economy wasconscripted too. Between 1942 and 1945 all wages were set by theNational War Labor Board. Like the military, they defaulted toflatness. And this national standardization of wages was so pervasivethat its effects could still be seen years after the war ended.[1]Business owners weren't supposed to be making money either. FDRsaid "not a single war millionaire" would be permitted. To ensurethat, any increase in a company's profits over prewar levels wastaxed at 85%. And when what was left after corporate taxes reachedindividuals, it was taxed again at a marginal rate of 93%.[2]Socially too the war tended to decrease variation. Over 16 millionmen and women from all sorts of different backgrounds were broughttogether in a way of life that was literally uniform. Service ratesfor men born in the early 1920s approached 80%. And working towarda common goal, often under stress, brought them still closer together.Though strictly speaking World War II lasted less than 4 years forthe US, its effects lasted longer. Wars make central governmentsmore powerful, and World War II was an extreme case of this. Inthe US, as in all the other Allied countries, the federal governmentwas slow to give up the new powers it had acquired. Indeed, insome respects the war didn't end in 1945; the enemy just switchedto the Soviet Union. In tax rates, federal power, defense spending,conscription, and nationalism, the decades after the war looked morelike wartime than prewar peacetime.[3]And the social effectslasted too. The kid pulled into the army from behind a mule teamin West Virginia didn't simply go back to the farm afterward.Something else was waiting for him, something that looked a lotlike the army.If total war was the big political story of the 20th century, thebig economic story was the rise of a new kind of company. And thistoo tended to produce both social and economic cohesion.[4]The 20th century was the century of the big, national corporation.General Electric, General Foods, General Motors. Developments infinance, communications, transportation, and manufacturing enableda new type of company whose goal was above all scale. Version 1of this world was low-res: a Duplo world of a few giant companiesdominating each big market.[5]The late 19th and early 20th centuries had been a time of consolidation,led especially by J. P. Morgan. Thousands of companies run by theirfounders were merged into a couple hundred giant ones run byprofessional managers. Economies of scale ruled the day. It seemedto people at the time that this was the final state of things. JohnD. Rockefeller said in 1880 The day of combination is here to stay. Individualism has gone, never to return.He turned out to be mistaken, but he seemed right for the nexthundred years.The consolidation that began in the late 19th century continued formost of the 20th. By the end of World War II, as Michael Lindwrites, "the major sectors of the economy were either organizedas government-backed cartels or dominated by a few oligopolisticcorporations."For consumers this new world meant the same choices everywhere, butonly a few of them. When I grew up there were only 2 or 3 of mostthings, and since they were all aiming at the middle of the marketthere wasn't much to differentiate them.One of the most important instances of this phenomenon was in TV.Here there were 3 choices: NBC, CBS, and ABC. Plus public TV foreggheads and communists. The programs that the 3 networks offered wereindistinguishable. In fact, here there was a triple pressure towardthe center. If one show did try something daring, local affiliatesin conservative markets would make them stop. Plus since TVs wereexpensive, whole families watched the same shows together, so theyhad to be suitable for everyone.And not only did everyone get the same thing, they got it at thesame time. It's difficult to imagine now, but every night tens ofmillions of families would sit down together in front of their TVset watching the same show, at the same time, as their next doorneighbors. What happens now with the Super Bowl used to happenevery night. We were literally in sync.[6]In a way mid-century TV culture was good. The view it gave of theworld was like you'd find in a children's book, and it probably hadsomething of the effect that (parents hope) children's books havein making people behave better. But, like children's books, TV wasalso misleading. Dangerously misleading, for adults. In hisautobiography, Robert MacNeil talks of seeing gruesome images thathad just come in from Vietnam and thinking, we can't show these tofamilies while they're having dinner.I know how pervasive the common culture was, because I tried to optout of it, and it was practically impossible to find alternatives.When I was 13 I realized, more from internal evidence than anyoutside source, that the ideas we were being fed on TV were crap,and I stopped watching it.[7]But it wasn't just TV. It seemedlike everything around me was crap. The politicians all saying thesame things, the consumer brands making almost identical productswith different labels stuck on to indicate how prestigious theywere meant to be, the balloon-frame houses with fake "colonial"skins, the cars with several feet of gratuitous metal on each endthat started to fall apart after a couple years, the "red delicious"apples that were red but only nominally apples. And in retrospect, it was crap.[8]But when I went looking for alternatives to fill this void, I foundpractically nothing. There was no Internet then. The only placeto look was in the chain bookstore in our local shopping mall. [9]There I found a copy of The Atlantic. I wish I could say it becamea gateway into a wider world, but in fact I found it boring andincomprehensible. Like a kid tasting whisky for the first time andpretending to like it, I preserved that magazine as carefully asif it had been a book. I'm sure I still have it somewhere. Butthough it was evidence that there was, somewhere, a world thatwasn't red delicious, I didn't find it till college.It wasn't just as consumers that the big companies made us similar.They did as employers too. Within companies there were powerfulforces pushing people toward a single model of how to look and act.IBM was particularly notorious for this, but they were only a littlemore extreme than other big companies. And the models of how tolook and act varied little between companies. Meaning everyonewithin this world was expected to seem more or less the same. Andnot just those in the corporate world, but also everyone who aspiredto it — which in the middle of the 20th century meant most peoplewho weren't already in it. For most of the 20th century, working-classpeople tried hard to look middle class. You can see it in oldphotos. Few adults aspired to look dangerous in 1950.But the rise of national corporations didn't just compress usculturally. It compressed us economically too, and on both ends.Along with giant national corporations, we got giant national laborunions. And in the mid 20th century the corporations cut dealswith the unions where they paid over market price for labor. Partlybecause the unions were monopolies. [10]Partly because, ascomponents of oligopolies themselves, the corporations knew theycould safely pass the cost on to their customers, because theircompetitors would have to as well. And partly because in mid-centurymost of the giant companies were still focused on finding new waysto milk economies of scale. Just as startups rightly pay AWS apremium over the cost of running their own servers so they can focuson growth, many of the big national corporations were willing topay a premium for labor. [11]As well as pushing incomes up from the bottom, by overpaying unions,the big companies of the 20th century also pushed incomes down atthe top, by underpaying their top management. Economist J. K.Galbraith wrote in 1967 that "There are few corporations in whichit would be suggested that executive salaries are at a maximum."[12]To some extent this was an illusion. Much of the de facto pay ofexecutives never showed up on their income tax returns, because ittook the form of perks. The higher the rate of income tax, themore pressure there was to pay employees upstream of it. (In theUK, where taxes were even higher than in the US, companies wouldeven pay their kids' private school tuitions.) One of the mostvaluable things the big companies of the mid 20th century gave theiremployees was job security, and this too didn't show up in taxreturns or income statistics. So the nature of employment in theseorganizations tended to yield falsely low numbers about economicinequality. But even accounting for that, the big companies paidtheir best people less than market price. There was no market; theexpectation was that you'd work for the same company for decadesif not your whole career. [13]Your work was so illiquid there was little chance of getting marketprice. But that same illiquidity also encouraged you not to seekit. If the company promised to employ you till you retired andgive you a pension afterward, you didn't want to extract as muchfrom it this year as you could. You needed to take care of thecompany so it could take care of you. Especially when you'd beenworking with the same group of people for decades. If you triedto squeeze the company for more money, you were squeezing theorganization that was going to take care of them. Plus ifyou didn't put the company first you wouldn't be promoted, and ifyou couldn't switch ladders, promotion on this one was the only wayup. [14]To someone who'd spent several formative years in the armed forces,this situation didn't seem as strange as it does to us now. Fromtheir point of view, as big company executives, they were high-rankingofficers. They got paid a lot more than privates. They got tohave expense account lunches at the best restaurants and fly aroundon the company's Gulfstreams. It probably didn't occur to most ofthem to ask if they were being paid market price.The ultimate way to get market price is to work for yourself, bystarting your own company. That seems obvious to any ambitiousperson now. But in the mid 20th century it was an alien concept.Not because starting one's own company seemed too ambitious, butbecause it didn't seem ambitious enough. Even as late as the 1970s,when I grew up, the ambitious plan was to get lots of education atprestigious institutions, and then join some other prestigiousinstitution and work one's way up the hierarchy. Your prestige wasthe prestige of the institution you belonged to. People did starttheir own businesses of course, but educated people rarely did,because in those days there was practically zero concept of startingwhat we now call a startup: a business that starts small and growsbig. That was much harder to do in the mid 20th century. Startingone's own business meant starting a business that would start smalland stay small. Which in those days of big companies often meantscurrying around trying to avoid being trampled by elephants. Itwas more prestigious to be one of the executive class riding theelephant.By the 1970s, no one stopped to wonder where the big prestigiouscompanies had come from in the first place. It seemed like they'dalways been there, like the chemical elements. And indeed, therewas a double wall between ambitious kids in the 20th century andthe origins of the big companies. Many of the big companies wereroll-ups that didn't have clear founders. And when they did, thefounders didn't seem like us. Nearly all of them had been uneducated,in the sense of not having been to college. They were what Shakespearecalled rude mechanicals. College trained one to be a member of theprofessional classes. Its graduates didn't expect to do the sortof grubby menial work that Andrew Carnegie or Henry Ford startedout doing. [15]And in the 20th century there were more and more college graduates.They increased from about 2% of the population in 1900 to about 25%in 2000. In the middle of the century our two big forces intersect,in the form of the GI Bill, which sent 2.2 million World War IIveterans to college. Few thought of it in these terms, but theresult of making college the canonical path for the ambitious wasa world in which it was socially acceptable to work for Henry Ford,but not to be Henry Ford.[16]I remember this world well. I came of age just as it was startingto break up. In my childhood it was still dominant. Not quite sodominant as it had been. We could see from old TV shows and yearbooksand the way adults acted that people in the 1950s and 60s had beeneven more conformist than us. The mid-century model was alreadystarting to get old. But that was not how we saw it at the time.We would at most have said that one could be a bit more daring in1975 than 1965. And indeed, things hadn't changed much yet.But change was coming soon. And when the Duplo economy started todisintegrate, it disintegrated in several different ways at once.Vertically integrated companies literally dis-integrated becauseit was more efficient to. Incumbents faced new competitors as (a)markets went global and (b) technical innovation started to trumpeconomies of scale, turning size from an asset into a liability.Smaller companies were increasingly able to survive as formerlynarrow channels to consumers broadened. Markets themselves startedto change faster, as whole new categories of products appeared. Andlast but not least, the federal government, which had previouslysmiled upon J. P. Morgan's world as the natural state of things,began to realize it wasn't the last word after all.What J. P. Morgan was to the horizontal axis, Henry Ford was to thevertical. He wanted to do everything himself. The giant plant hebuilt at River Rouge between 1917 and 1928 literally took in ironore at one end and sent cars out the other. 100,000 people workedthere. At the time it seemed the future. But that is not how carcompanies operate today. Now much of the design and manufacturinghappens in a long supply chain, whose products the car companiesultimately assemble and sell. The reason car companies operatethis way is that it works better. Each company in the supply chainfocuses on what they know best. And they each have to do it wellor they can be swapped out for another supplier.Why didn't Henry Ford realize that networks of cooperating companieswork better than a single big company? One reason is that suppliernetworks take a while to evolve. In 1917, doing everything himselfseemed to Ford the only way to get the scale he needed. And thesecond reason is that if you want to solve a problem using a networkof cooperating companies, you have to be able to coordinate theirefforts, and you can do that much better with computers. Computersreduce the transaction costs that Coase argued are the raison d'etreof corporations. That is a fundamental change.In the early 20th century, big companies were synonymous withefficiency. In the late 20th century they were synonymous withinefficiency. To some extent this was because the companiesthemselves had become sclerotic. But it was also because ourstandards were higher.It wasn't just within existing industries that change occurred.The industries themselves changed. It became possible to make lotsof new things, and sometimes the existing companies weren't theones who did it best.Microcomputers are a classic example. The market was pioneered byupstarts like Apple. When it got big enough, IBM decided it wasworth paying attention to. At the time IBM completely dominatedthe computer industry. They assumed that all they had to do, nowthat this market was ripe, was to reach out and pick it. Mostpeople at the time would have agreed with them. But what happenednext illustrated how much more complicated the world had become.IBM did launch a microcomputer. Though quite successful, it didnot crush Apple. But even more importantly, IBM itself ended upbeing supplanted by a supplier coming in from the side — fromsoftware, which didn't even seem to be the same business. IBM'sbig mistake was to accept a non-exclusive license for DOS. It musthave seemed a safe move at the time. No other computer manufacturerhad ever been able to outsell them. What difference did it make ifother manufacturers could offer DOS too? The result of thatmiscalculation was an explosion of inexpensive PC clones. Microsoftnow owned the PC standard, and the customer. And the microcomputerbusiness ended up being Apple vs Microsoft.Basically, Apple bumped IBM and then Microsoft stole its wallet.That sort of thing did not happen to big companies in mid-century.But it was going to happen increasingly often in the future.Change happened mostly by itself in the computer business. In otherindustries, legal obstacles had to be removed first. Many of themid-century oligopolies had been anointed by the federal governmentwith policies (and in wartime, large orders) that kept out competitors.This didn't seem as dubious to government officials at the time asit sounds to us. They felt a two-party system ensured sufficientcompetition in politics. It ought to work for business too.Gradually the government realized that anti-competitive policieswere doing more harm than good, and during the Carter administrationit started to remove them. The word used for this process wasmisleadingly narrow: deregulation. What was really happening wasde-oligopolization. It happened to one industry after another.Two of the most visible to consumers were air travel and long-distancephone service, which both became dramatically cheaper afterderegulation.Deregulation also contributed to the wave of hostile takeovers inthe 1980s. In the old days the only limit on the inefficiency ofcompanies, short of actual bankruptcy, was the inefficiency of theircompetitors. Now companies had to face absolute rather than relativestandards. Any public company that didn't generate sufficientreturns on its assets risked having its management replaced withone that would. Often the new managers did this by breaking companiesup into components that were more valuable separately.[17]Version 1 of the national economy consisted of a few big blockswhose relationships were negotiated in back rooms by a handful ofexecutives, politicians, regulators, and labor leaders. Version 2was higher resolution: there were more companies, of more differentsizes, making more different things, and their relationships changedfaster. In this world there were still plenty of back room negotiations,but more was left to market forces. Which further accelerated thefragmentation.It's a little misleading to talk of versions when describing agradual process, but not as misleading as it might seem. There wasa lot of change in a few decades, and what we ended up with wasqualitatively different. The companies in the S&P 500 in 1958 hadbeen there an average of 61 years. By 2012 that number was 18 years.[18]The breakup of the Duplo economy happened simultaneously with thespread of computing power. To what extent were computers a precondition?It would take a book to answer that. Obviously the spread of computingpower was a precondition for the rise of startups. I suspect itwas for most of what happened in finance too. But was it aprecondition for globalization or the LBO wave? I don't know, butI wouldn't discount the possibility. It may be that the refragmentationwas driven by computers in the way the industrial revolution wasdriven by steam engines. Whether or not computers were a precondition,they have certainly accelerated it.The new fluidity of companies changed people's relationships withtheir employers. Why climb a corporate ladder that might be yankedout from under you? Ambitious people started to think of a careerless as climbing a single ladder than as a series of jobs that mightbe at different companies. More movement (or even potential movement)between companies introduced more competition in salaries. Plusas companies became smaller it became easier to estimate how muchan employee contributed to the company's revenue. Both changesdrove salaries toward market price. And since people vary dramaticallyin productivity, paying market price meant salaries started todiverge.By no coincidence it was in the early 1980s that the term "yuppie"was coined. That word is not much used now, because the phenomenonit describes is so taken for granted, but at the time it was a labelfor something novel. Yuppies were young professionals who made lotsof money. To someone in their twenties today, this wouldn't seemworth naming. Why wouldn't young professionals make lots of money?But until the 1980s, being underpaid early in your career was partof what it meant to be a professional. Young professionals werepaying their dues, working their way up the ladder. The rewardswould come later. What was novel about yuppies was that they wantedmarket price for the work they were doing now.The first yuppies did not work for startups. That was still in thefuture. Nor did they work for big companies. They were professionalsworking in fields like law, finance, and consulting. But their example rapidly inspired their peers. Once they saw that new BMW 325i, they wanted one too.Underpaying people at the beginning of their career only works ifeveryone does it. Once some employer breaks ranks, everyone elsehas to, or they can't get good people. And once started this processspreads through the whole economy, because at the beginnings ofpeople's careers they can easily switch not merely employers butindustries.But not all young professionals benefitted. You had to produce toget paid a lot. It was no coincidence that the first yuppies workedin fields where it was easy to measure that.More generally, an idea was returning whose name sounds old-fashionedprecisely because it was so rare for so long: that you could makeyour fortune. As in the past there were multiple ways to do it.Some made their fortunes by creating wealth, and others by playingzero-sum games. But once it became possible to make one's fortune,the ambitious had to decide whether or not to. A physicist whochose physics over Wall Street in 1990 was making a sacrifice thata physicist in 1960 didn't have to think about.The idea even flowed back into big companies. CEOs of big companiesmake more now than they used to, and I think much of the reason isprestige. In 1960, corporate CEOs had immense prestige. They werethe winners of the only economic game in town. But if they made aslittle now as they did then, in real dollar terms, they'd seem likesmall fry compared to professional athletes and whiz kids makingmillions from startups and hedge funds. They don't like that idea,so now they try to get as much as they can, which is more than theyhad been getting. [19]Meanwhile a similar fragmentation was happening at the other endof the economic scale. As big companies' oligopolies became lesssecure, they were less able to pass costs on to customers and thusless willing to overpay for labor. And as the Duplo world of a fewbig blocks fragmented into many companies of different sizes — someof them overseas — it became harder for unions to enforce theirmonopolies. As a result workers' wages also tended toward marketprice. Which (inevitably, if unions had been doing their job) tendedto be lower. Perhaps dramatically so, if automation had decreasedthe need for some kind of work.And just as the mid-century model induced social as well as economiccohesion, its breakup brought social as well as economic fragmentation.People started to dress and act differently. Those who would laterbe called the "creative class" became more mobile. People who didn'tcare much for religion felt less pressure to go to church forappearances' sake, while those who liked it a lot opted forincreasingly colorful forms. Some switched from meat loaf to tofu,and others to Hot Pockets. Some switched from driving Ford sedansto driving small imported cars, and others to driving SUVs. Kidswho went to private schools or wished they did started to dress"preppy," and kids who wanted to seem rebellious made a consciouseffort to look disreputable. In a hundred ways people spread apart.[20]Almost four decades later, fragmentation is still increasing. Hasit been net good or bad? I don't know; the question may beunanswerable. Not entirely bad though. We take for granted theforms of fragmentation we like, and worry only about the ones wedon't. But as someone who caught the tail end of mid-centuryconformism, I can tell you it was no utopia.[21]My goal here is not to say whether fragmentation has been good orbad, just to explain why it's happening. With the centripetalforces of total war and 20th century oligopoly mostly gone, whatwill happen next? And more specifically, is it possible to reversesome of the fragmentation we've seen?If it is, it will have to happen piecemeal. You can't reproducemid-century cohesion the way it was originally produced. It wouldbe insane to go to war just to induce more national unity. Andonce you understand the degree to which the economic history of the20th century was a low-res version 1, it's clear you can't reproducethat either.20th century cohesion was something that happened at least in asense naturally. The war was due mostly to external forces, andthe Duplo economy was an evolutionary phase. If you want cohesionnow, you'd have to induce it deliberately. And it's not obvioushow. I suspect the best we'll be able to do is address the symptomsof fragmentation. But that may be enough.The form of fragmentation people worry most about lately is economic inequality, and if you want to eliminatethat you're up against a truly formidable headwind that hasbeen in operation since the stone age. Technology.Technology isa lever. It magnifies work. And the lever not only grows increasinglylong, but the rate at which it grows is itself increasing.Which in turn means the variation in the amount of wealth peoplecan create has not only been increasing, but accelerating. Theunusual conditions that prevailed in the mid 20th century maskedthis underlying trend. The ambitious had little choice but to joinlarge organizations that made them march in step with lots of otherpeople — literally in the case of the armed forces, figurativelyin the case of big corporations. Even if the big corporations hadwanted to pay people proportionate to their value, they couldn'thave figured out how. But that constraint has gone now. Ever sinceit started to erode in the 1970s, we've seen the underlying forcesat work again.[22]Not everyone who gets rich now does it by creating wealth, certainly.But a significant number do, and the Baumol Effect means all theirpeers get dragged along too.[23]And as long as it's possible toget rich by creating wealth, the default tendency will be foreconomic inequality to increase. Even if you eliminate all theother ways to get rich. You can mitigate this with subsidies atthe bottom and taxes at the top, but unless taxes are high enoughto discourage people from creating wealth, you're always going tobe fighting a losing battle against increasing variation inproductivity.[24]That form of fragmentation, like the others, is here to stay. Orrather, back to stay. Nothing is forever, but the tendency towardfragmentation should be more forever than most things, preciselybecause it's not due to any particular cause. It's simply a reversionto the mean. When Rockefeller said individualism was gone, he wasright for a hundred years. It's back now, and that's likely to betrue for longer.I worry that if we don't acknowledge this, we're headed for trouble.If we think 20th century cohesion disappeared because of few policytweaks, we'll be deluded into thinking we can get it back (minusthe bad parts, somehow) with a few countertweaks. And then we'llwaste our time trying to eliminate fragmentation, when we'd bebetter off thinking about how to mitigate its consequences.Notes[1]Lester Thurow, writing in 1975, said the wage differentialsprevailing at the end of World War II had become so embedded thatthey "were regarded as 'just' even after the egalitarian pressuresof World War II had disappeared. Basically, the same differentialsexist to this day, thirty years later." But Goldin and Margo thinkmarket forces in the postwar period also helped preserve the wartimecompression of wages — specifically increased demand for unskilledworkers, and oversupply of educated ones.(Oddly enough, the American custom of having employers pay forhealth insurance derives from efforts by businesses to circumventNWLB wage controls in order to attract workers.)[2]As always, tax rates don't tell the whole story. There werelots of exemptions, especially for individuals. And in World WarII the tax codes were so new that the government had little acquiredimmunity to tax avoidance. If the rich paid high taxes during thewar it was more because they wanted to than because they had to.After the war, federal tax receipts as a percentage of GDP wereabout the same as they are now. In fact, for the entire period sincethe war, tax receipts have stayed close to 18% of GDP, despitedramatic changes in tax rates. The lowest point occurred whenmarginal income tax rates were highest: 14.1% in 1950. Looking atthe data, it's hard to avoid the conclusion that tax rates have hadlittle effect on what people actually paid.[3]Though in fact the decade preceding the war had been a timeof unprecedented federal power, in response to the Depression.Which is not entirely a coincidence, because the Depression was oneof the causes of the war. In many ways the New Deal was a sort ofdress rehearsal for the measures the federal government took duringwartime. The wartime versions were much more drastic and morepervasive though. As Anthony Badger wrote, "for many Americans thedecisive change in their experiences came not with the New Deal butwith World War II."[4]I don't know enough about the origins of the world wars tosay, but it's not inconceivable they were connected to the rise ofbig corporations. If that were the case, 20th century cohesion wouldhave a single cause.[5]More precisely, there was a bimodal economy consisting, inGalbraith's words, of "the world of the technically dynamic, massivelycapitalized and highly organized corporations on the one hand andthe hundreds of thousands of small and traditional proprietors onthe other." Money, prestige, and power were concentrated in theformer, and there was near zero crossover.[6]I wonder how much of the decline in families eating togetherwas due to the decline in families watching TV together afterward.[7]I know when this happened because it was the season Dallaspremiered. Everyone else was talking about what was happening onDallas, and I had no idea what they meant.[8]I didn't realize it till I started doing research for thisessay, but the meretriciousness of the products I grew up with isa well-known byproduct of oligopoly. When companies can't competeon price, they compete on tailfins.[9]Monroeville Mall was at the time of its completion in 1969the largest in the country. In the late 1970s the movie Dawn ofthe Dead was shot there. Apparently the mall was not just thelocation of the movie, but its inspiration; the crowds of shoppersdrifting through this huge mall reminded George Romero of zombies.My first job was scooping ice cream in the Baskin-Robbins.[10]Labor unions were exempted from antitrust laws by the ClaytonAntitrust Act in 1914 on the grounds that a person's work is not"a commodity or article of commerce." I wonder if that means servicecompanies are also exempt.[11]The relationships between unions and unionized companies caneven be symbiotic, because unions will exert political pressure toprotect their hosts. According to Michael Lind, when politicianstried to attack the A&P supermarket chain because it was puttinglocal grocery stores out of business, "A&P successfully defendeditself by allowing the unionization of its workforce in 1938, therebygaining organized labor as a constituency." I've seen this phenomenonmyself: hotel unions are responsible for more of the politicalpressure against Airbnb than hotel companies.[12]Galbraith was clearly puzzled that corporate executives wouldwork so hard to make money for other people (the shareholders)instead of themselves. He devoted much of The New IndustrialState to trying to figure this out.His theory was that professionalism had replaced money as a motive,and that modern corporate executives were, like (good) scientists,motivated less by financial rewards than by the desire to do goodwork and thereby earn the respect of their peers. There is somethingin this, though I think lack of movement between companies combinedwith self-interest explains much of observed behavior.[13]Galbraith (p. 94) says a 1952 study of the 800 highest paidexecutives at 300 big corporations found that three quarters ofthem had been with their company for more than 20 years.[14]It seems likely that in the first third of the 20th centuryexecutive salaries were low partly because companies then were moredependent on banks, who would have disapproved if executives gottoo much. This was certainly true in the beginning. The first bigcompany CEOs were J. P. Morgan's hired hands.Companies didn't start to finance themselves with retained earningstill the 1920s. Till then they had to pay out their earnings individends, and so depended on banks for capital for expansion.Bankers continued to sit on corporate boards till the Glass-Steagallact in 1933.By mid-century big companies funded 3/4 of their growth from earnings.But the early years of bank dependence, reinforced by the financialcontrols of World War II, must have had a big effect on socialconventions about executive salaries. So it may be that the lackof movement between companies was as much the effect of low salariesas the cause.Incidentally, the switch in the 1920s to financing growth withretained earnings was one cause of the 1929 crash. The banks nowhad to find someone else to lend to, so they made more margin loans.[15]Even now it's hard to get them to. One of the things I findhardest to get into the heads of would-be startup founders is howimportant it is to do certain kinds of menial work early in thelife of a company. Doing things that don'tscale is to how Henry Ford got started as a high-fiber diet isto the traditional peasant's diet: they had no choice but to do theright thing, while we have to make a conscious effort.[16]Founders weren't celebrated in the press when I was a kid."Our founder" meant a photograph of a severe-looking man with awalrus mustache and a wing collar who had died decades ago. Thething to be when I was a kid was an executive. If you weren'taround then it's hard to grasp the cachet that term had. The fancyversion of everything was called the "executive" model.[17]The wave of hostile takeovers in the 1980s was enabled by acombination of circumstances: court decisions striking down stateanti-takeover laws, starting with the Supreme Court's 1982 decisionin Edgar v. MITE Corp.; the Reagan administration's comparativelysympathetic attitude toward takeovers; the Depository InstitutionsAct of 1982, which allowed banks and savings and loans to buycorporate bonds; a new SEC rule issued in 1982 (rule 415) that madeit possible to bring corporate bonds to market faster; the creationof the junk bond business by Michael Milken; a vogue for conglomeratesin the preceding period that caused many companies to be combinedthat never should have been; a decade of inflation that left manypublic companies trading below the value of their assets; and notleast, the increasing complacency of managements.[18]Foster, Richard. "Creative Destruction Whips through CorporateAmerica." Innosight, February 2012.[19]CEOs of big companies may be overpaid. I don't know enoughabout big companies to say. But it is certainly not impossible fora CEO to make 200x as much difference to a company's revenues asthe average employee. Look at what Steve Jobs did for Apple whenhe came back as CEO. It would have been a good deal for the boardto give him 95% of the company. Apple's market cap the day Stevecame back in July 1997 was 1.73 billion. 5% of Apple now (January2016) would be worth about 30 billion. And it would not be if Stevehadn't come back; Apple probably wouldn't even exist anymore.Merely including Steve in the sample might be enough to answer thequestion of whether public company CEOs in the aggregate are overpaid.And that is not as facile a trick as it might seem, because thebroader your holdings, the more the aggregate is what you careabout.[20]The late 1960s were famous for social upheaval. But that wasmore rebellion (which can happen in any era if people are provokedsufficiently) than fragmentation. You're not seeing fragmentationunless you see people breaking off to both left and right.[21]Globally the trend has been in the other direction. Whilethe US is becoming more fragmented, the world as a whole is becomingless fragmented, and mostly in good ways.[22]There were a handful of ways to make a fortune in the mid20th century. The main one was drilling for oil, which was opento newcomers because it was not something big companies coulddominate through economies of scale. How did individuals accumulatelarge fortunes in an era of such high taxes? Giant tax loopholesdefended by two of the most powerful men in Congress, Sam Rayburnand Lyndon Johnson.But becoming a Texas oilman was not in 1950 something one couldaspire to the way starting a startup or going to work on Wall Streetwere in 2000, because (a) there was a strong local component and(b) success depended so much on luck.[23]The Baumol Effect induced by startups is very visible inSilicon Valley. Google will pay people millions of dollars a yearto keep them from leaving to start or join startups.[24]I'm not claiming variation in productivity is the only causeof economic inequality in the US. But it's a significant cause, andit will become as big a cause as it needs to, in the sense that ifyou ban other ways to get rich, people who want to get rich willuse this route instead.Thanks to Sam Altman, Trevor Blackwell, Paul Buchheit, PatrickCollison, Ron Conway, Chris Dixon, Benedict Evans, Richard Florida,Ben Horowitz, Jessica Livingston, Robert Morris, Tim O'Reilly, GeoffRalston, Max Roser, Alexia Tsotsis, and Qasar Younis for readingdrafts of this. Max also told me about several valuable sources.BibliographyAllen, Frederick Lewis. The Big Change. Harper, 1952.Averitt, Robert. The Dual Economy. Norton, 1968.Badger, Anthony. The New Deal. Hill and Wang, 1989.Bainbridge, John. The Super-Americans. Doubleday, 1961.Beatty, Jack. Collossus. Broadway, 2001.Brinkley, Douglas. Wheels for the World. Viking, 2003.Brownleee, W. Elliot. Federal Taxation in America. Cambridge, 1996.Chandler, Alfred. The Visible Hand. Harvard, 1977.Chernow, Ron. The House of Morgan. Simon & Schuster, 1990.Chernow, Ron. Titan: The Life of John D. Rockefeller. Random House,1998.Galbraith, John. The New Industrial State. Houghton Mifflin, 1967.Goldin, Claudia and Robert A. Margo. "The Great Compression: TheWage Structure in the United States at Mid-Century." NBER WorkingPaper 3817, 1991.Gordon, John. An Empire of Wealth. HarperCollins, 2004.Klein, Maury. The Genesis of Industrial America, 1870-1920. Cambridge,2007.Lind, Michael. Land of Promise. HarperCollins, 2012.Mickelthwaite, John, and Adrian Wooldridge. The Company. ModernLibrary, 2003.Nasaw, David. Andrew Carnegie. Penguin, 2006.Sobel, Robert. The Age of Giant Corporations. Praeger, 1993.Thurow, Lester. Generating Inequality: Mechanisms of Distribution.Basic Books, 1975.Witte, John. The Politics and Development of the Federal IncomeTax. Wisconsin, 1985.Related:
