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January 2016  
  
One advantage of being old is that you can see change happen in your lifetime.
A lot of the change I've seen is fragmentation. US politics is much more
polarized than it used to be. Culturally we have ever less common ground. The
creative class flocks to a handful of happy cities, abandoning the rest. And
increasing economic inequality means the spread between rich and poor is
growing too. I'd like to propose a hypothesis: that all these trends are
instances of the same phenomenon. And moreover, that the cause is not some
force that's pulling us apart, but rather the erosion of forces that had been
pushing us together.  
  
Worse still, for those who worry about these trends, the forces that were
pushing us together were an anomaly, a one-time combination of circumstances
that's unlikely to be repeated — and indeed, that we would not want to repeat.  
  
The two forces were war (above all World War II), and the rise of large
corporations.  
  
The effects of World War II were both economic and social. Economically, it
decreased variation in income. Like all modern armed forces, America's were
socialist economically. From each according to his ability, to each according
to his need. More or less. Higher ranking members of the military got more (as
higher ranking members of socialist societies always do), but what they got
was fixed according to their rank. And the flattening effect wasn't limited to
those under arms, because the US economy was conscripted too. Between 1942 and
1945 all wages were set by the National War Labor Board. Like the military,
they defaulted to flatness. And this national standardization of wages was so
pervasive that its effects could still be seen years after the war ended.   
  
Business owners weren't supposed to be making money either. FDR said "not a
single war millionaire" would be permitted. To ensure that, any increase in a
company's profits over prewar levels was taxed at 85%. And when what was left
after corporate taxes reached individuals, it was taxed again at a marginal
rate of 93%.   
  
Socially too the war tended to decrease variation. Over 16 million men and
women from all sorts of different backgrounds were brought together in a way
of life that was literally uniform. Service rates for men born in the early
1920s approached 80%. And working toward a common goal, often under stress,
brought them still closer together.  
  
Though strictly speaking World War II lasted less than 4 years for the US, its
effects lasted longer. Wars make central governments more powerful, and World
War II was an extreme case of this. In the US, as in all the other Allied
countries, the federal government was slow to give up the new powers it had
acquired. Indeed, in some respects the war didn't end in 1945; the enemy just
switched to the Soviet Union. In tax rates, federal power, defense spending,
conscription, and nationalism, the decades after the war looked more like
wartime than prewar peacetime.  And the social effects lasted too. The kid
pulled into the army from behind a mule team in West Virginia didn't simply go
back to the farm afterward. Something else was waiting for him, something that
looked a lot like the army.  
  
If total war was the big political story of the 20th century, the big economic
story was the rise of a new kind of company. And this too tended to produce
both social and economic cohesion.   
  
The 20th century was the century of the big, national corporation. General
Electric, General Foods, General Motors. Developments in finance,
communications, transportation, and manufacturing enabled a new type of
company whose goal was above all scale. Version 1 of this world was low-res: a
Duplo world of a few giant companies dominating each big market.   
  
The late 19th and early 20th centuries had been a time of consolidation, led
especially by J. P. Morgan. Thousands of companies run by their founders were
merged into a couple hundred giant ones run by professional managers.
Economies of scale ruled the day. It seemed to people at the time that this
was the final state of things. John D. 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 next hundred years.  
  
The consolidation that began in the late 19th century continued for most of
the 20th. By the end of World War II, as Michael Lind writes, "the major
sectors of the economy were either organized as government-backed cartels or
dominated by a few oligopolistic corporations."  
  
For consumers this new world meant the same choices everywhere, but only a few
of them. When I grew up there were only 2 or 3 of most things, and since they
were all aiming at the middle of the market there wasn't much to differentiate
them.  
  
One of the most important instances of this phenomenon was in TV. Here there
were 3 choices: NBC, CBS, and ABC. Plus public TV for eggheads and communists.
The programs that the 3 networks offered were indistinguishable. In fact, here
there was a triple pressure toward the center. If one show did try something
daring, local affiliates in conservative markets would make them stop. Plus
since TVs were expensive, whole families watched the same shows together, so
they had to be suitable for everyone.  
  
And not only did everyone get the same thing, they got it at the same time.
It's difficult to imagine now, but every night tens of millions of families
would sit down together in front of their TV set watching the same show, at
the same time, as their next door neighbors. What happens now with the Super
Bowl used to happen every night. We were literally in sync.   
  
In a way mid-century TV culture was good. The view it gave of the world was
like you'd find in a children's book, and it probably had something of the
effect that (parents hope) children's books have in making people behave
better. But, like children's books, TV was also misleading. Dangerously
misleading, for adults. In his autobiography, Robert MacNeil talks of seeing
gruesome images that had just come in from Vietnam and thinking, we can't show
these to families while they're having dinner.  
  
I know how pervasive the common culture was, because I tried to opt out of it,
and it was practically impossible to find alternatives. When I was 13 I
realized, more from internal evidence than any outside source, that the ideas
we were being fed on TV were crap, and I stopped watching it.  But it
wasn't just TV. It seemed like everything around me was crap. The politicians
all saying the same things, the consumer brands making almost identical
products with different labels stuck on to indicate how prestigious they were
meant to be, the balloon-frame houses with fake "colonial" skins, the cars
with several feet of gratuitous metal on each end that started to fall apart
after a couple years, the "red delicious" apples that were red but only
nominally apples. And in retrospect, it _was_ crap.   
  
But when I went looking for alternatives to fill this void, I found
practically nothing. There was no Internet then. The only place to look was in
the chain bookstore in our local shopping mall.  There I found a copy of
_The Atlantic_. I wish I could say it became a gateway into a wider world, but
in fact I found it boring and incomprehensible. Like a kid tasting whisky for
the first time and pretending to like it, I preserved that magazine as
carefully as if it had been a book. I'm sure I still have it somewhere. But
though it was evidence that there was, somewhere, a world that wasn't red
delicious, I didn't find it till college.  
  
It wasn't just as consumers that the big companies made us similar. They did
as employers too. Within companies there were powerful forces pushing people
toward a single model of how to look and act. IBM was particularly notorious
for this, but they were only a little more extreme than other big companies.
And the models of how to look and act varied little between companies. Meaning
everyone within this world was expected to seem more or less the same. And not
just those in the corporate world, but also everyone who aspired to it — which
in the middle of the 20th century meant most people who weren't already in it.
For most of the 20th century, working-class people tried hard to look middle
class. You can see it in old photos. Few adults aspired to look dangerous in
1950.  
  
But the rise of national corporations didn't just compress us culturally. It
compressed us economically too, and on both ends.  
  
Along with giant national corporations, we got giant national labor unions.
And in the mid 20th century the corporations cut deals with the unions where
they paid over market price for labor. Partly because the unions were
monopolies.  Partly because, as components of oligopolies themselves, the
corporations knew they could safely pass the cost on to their customers,
because their competitors would have to as well. And partly because in mid-
century most of the giant companies were still focused on finding new ways to
milk economies of scale. Just as startups rightly pay AWS a premium over the
cost of running their own servers so they can focus on growth, many of the big
national corporations were willing to pay a premium for labor.   
  
As well as pushing incomes up from the bottom, by overpaying unions, the big
companies of the 20th century also pushed incomes down at the top, by
underpaying their top management. Economist J. K. Galbraith wrote in 1967 that
"There are few corporations in which it would be suggested that executive
salaries are at a maximum."   
  
To some extent this was an illusion. Much of the de facto pay of executives
never showed up on their income tax returns, because it took the form of
perks. The higher the rate of income tax, the more pressure there was to pay
employees upstream of it. (In the UK, where taxes were even higher than in the
US, companies would even pay their kids' private school tuitions.) One of the
most valuable things the big companies of the mid 20th century gave their
employees was job security, and this too didn't show up in tax returns or
income statistics. So the nature of employment in these organizations tended
to yield falsely low numbers about economic inequality. But even accounting
for that, the big companies paid their best people less than market price.
There was no market; the expectation was that you'd work for the same company
for decades if not your whole career.   
  
Your work was so illiquid there was little chance of getting market price. But
that same illiquidity also encouraged you not to seek it. If the company
promised to employ you till you retired and give you a pension afterward, you
didn't want to extract as much from it this year as you could. You needed to
take care of the company so it could take care of you. Especially when you'd
been working with the same group of people for decades. If you tried to
squeeze the company for more money, you were squeezing the organization that
was going to take care of _them_. Plus if you didn't put the company first you
wouldn't be promoted, and if you couldn't switch ladders, promotion on this
one was the only way up.   
  
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. From their point of
view, as big company executives, they were high-ranking officers. They got
paid a lot more than privates. They got to have expense account lunches at the
best restaurants and fly around on the company's Gulfstreams. It probably
didn't occur to most of them to ask if they were being paid market price.  
  
The ultimate way to get market price is to work for yourself, by starting your
own company. That seems obvious to any ambitious person now. But in the mid
20th century it was an alien concept. Not because starting one's own company
seemed too ambitious, but because it didn't seem ambitious enough. Even as
late as the 1970s, when I grew up, the ambitious plan was to get lots of
education at prestigious institutions, and then join some other prestigious
institution and work one's way up the hierarchy. Your prestige was the
prestige of the institution you belonged to. People did start their own
businesses of course, but educated people rarely did, because in those days
there was practically zero concept of starting what we now call a _startup_: a
business that starts small and grows big. That was much harder to do in the
mid 20th century. Starting one's own business meant starting a business that
would start small and stay small. Which in those days of big companies often
meant scurrying around trying to avoid being trampled by elephants. It was
more prestigious to be one of the executive class riding the elephant.  
  
By the 1970s, no one stopped to wonder where the big prestigious companies had
come from in the first place. It seemed like they'd always been there, like
the chemical elements. And indeed, there was a double wall between ambitious
kids in the 20th century and the origins of the big companies. Many of the big
companies were roll-ups that didn't have clear founders. And when they did,
the founders didn't seem like us. Nearly all of them had been uneducated, in
the sense of not having been to college. They were what Shakespeare called
rude mechanicals. College trained one to be a member of the professional
classes. Its graduates didn't expect to do the sort of grubby menial work that
Andrew Carnegie or Henry Ford started out doing.   
  
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 II veterans to college. Few thought of
it in these terms, but the result of making college the canonical path for the
ambitious was a world in which it was socially acceptable to work for Henry
Ford, but not to be Henry Ford.   
  
I remember this world well. I came of age just as it was starting to break up.
In my childhood it was still dominant. Not quite so dominant as it had been.
We could see from old TV shows and yearbooks and the way adults acted that
people in the 1950s and 60s had been even more conformist than us. The mid-
century model was already starting to get old. But that was not how we saw it
at the time. We would at most have said that one could be a bit more daring in
1975 than 1965. And indeed, things hadn't changed much yet.  
  
But change was coming soon. And when the Duplo economy started to
disintegrate, it disintegrated in several different ways at once. Vertically
integrated companies literally dis-integrated because it was more efficient
to. Incumbents faced new competitors as (a) markets went global and (b)
technical innovation started to trump economies of scale, turning size from an
asset into a liability. Smaller companies were increasingly able to survive as
formerly narrow channels to consumers broadened. Markets themselves started to
change faster, as whole new categories of products appeared. And last but not
least, the federal government, which had previously smiled upon 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 the vertical.
He wanted to do everything himself. The giant plant he built at River Rouge
between 1917 and 1928 literally took in iron ore at one end and sent cars out
the other. 100,000 people worked there. At the time it seemed the future. But
that is not how car companies operate today. Now much of the design and
manufacturing happens in a long supply chain, whose products the car companies
ultimately assemble and sell. The reason car companies operate this way is
that it works better. Each company in the supply chain focuses on what they
know best. And they each have to do it well or they can be swapped out for
another supplier.  
  
Why didn't Henry Ford realize that networks of cooperating companies work
better than a single big company? One reason is that supplier networks take a
while to evolve. In 1917, doing everything himself seemed to Ford the only way
to get the scale he needed. And the second reason is that if you want to solve
a problem using a network of cooperating companies, you have to be able to
coordinate their efforts, and you can do that much better with computers.
Computers reduce the transaction costs that Coase argued are the raison d'etre
of corporations. That is a fundamental change.  
  
In the early 20th century, big companies were synonymous with efficiency. In
the late 20th century they were synonymous with inefficiency. To some extent
this was because the companies themselves had become sclerotic. But it was
also because our standards were higher.  
  
It wasn't just within existing industries that change occurred. The industries
themselves changed. It became possible to make lots of new things, and
sometimes the existing companies weren't the ones who did it best.  
  
Microcomputers are a classic example. The market was pioneered by upstarts
like Apple. When it got big enough, IBM decided it was worth paying attention
to. At the time IBM completely dominated the computer industry. They assumed
that all they had to do, now that this market was ripe, was to reach out and
pick it. Most people at the time would have agreed with them. But what
happened next illustrated how much more complicated the world had become. IBM
did launch a microcomputer. Though quite successful, it did not crush Apple.
But even more importantly, IBM itself ended up being supplanted by a supplier
coming in from the side — from software, which didn't even seem to be the same
business. IBM's big mistake was to accept a non-exclusive license for DOS. It
must have seemed a safe move at the time. No other computer manufacturer had
ever been able to outsell them. What difference did it make if other
manufacturers could offer DOS too? The result of that miscalculation was an
explosion of inexpensive PC clones. Microsoft now owned the PC standard, and
the customer. And the microcomputer business ended up being Apple vs
Microsoft.  
  
Basically, Apple bumped IBM and then Microsoft stole its wallet. That sort of
thing did not happen to big companies in mid-century. But it was going to
happen increasingly often in the future.  
  
Change happened mostly by itself in the computer business. In other
industries, legal obstacles had to be removed first. Many of the mid-century
oligopolies had been anointed by the federal government with policies (and in
wartime, large orders) that kept out competitors. This didn't seem as dubious
to government officials at the time as it sounds to us. They felt a two-party
system ensured sufficient competition in politics. It ought to work for
business too.  
  
Gradually the government realized that anti-competitive policies were doing
more harm than good, and during the Carter administration it started to remove
them. The word used for this process was misleadingly narrow: deregulation.
What was really happening was de-oligopolization. It happened to one industry
after another. Two of the most visible to consumers were air travel and long-
distance phone service, which both became dramatically cheaper after
deregulation.  
  
Deregulation also contributed to the wave of hostile takeovers in the 1980s.
In the old days the only limit on the inefficiency of companies, short of
actual bankruptcy, was the inefficiency of their competitors. Now companies
had to face absolute rather than relative standards. Any public company that
didn't generate sufficient returns on its assets risked having its management
replaced with one that would. Often the new managers did this by breaking
companies up into components that were more valuable separately.   
  
Version 1 of the national economy consisted of a few big blocks whose
relationships were negotiated in back rooms by a handful of executives,
politicians, regulators, and labor leaders. Version 2 was higher resolution:
there were more companies, of more different sizes, making more different
things, and their relationships changed faster. In this world there were still
plenty of back room negotiations, but more was left to market forces. Which
further accelerated the fragmentation.  
  
It's a little misleading to talk of versions when describing a gradual
process, but not as misleading as it might seem. There was a lot of change in
a few decades, and what we ended up with was qualitatively different. The
companies in the S&P 500 in 1958 had been there an average of 61 years. By
2012 that number was 18 years.   
  
The breakup of the Duplo economy happened simultaneously with the spread of
computing power. To what extent were computers a precondition? It would take a
book to answer that. Obviously the spread of computing power was a
precondition for the rise of startups. I suspect it was for most of what
happened in finance too. But was it a precondition for globalization or the
LBO wave? I don't know, but I wouldn't discount the possibility. It may be
that the refragmentation was driven by computers in the way the industrial
revolution was driven by steam engines. Whether or not computers were a
precondition, they have certainly accelerated it.  
  
The new fluidity of companies changed people's relationships with their
employers. Why climb a corporate ladder that might be yanked out from under
you? Ambitious people started to think of a career less as climbing a single
ladder than as a series of jobs that might be at different companies. More
movement (or even potential movement) between companies introduced more
competition in salaries. Plus as companies became smaller it became easier to
estimate how much an employee contributed to the company's revenue. Both
changes drove salaries toward market price. And since people vary dramatically
in productivity, paying market price meant salaries started to diverge.  
  
By no coincidence it was in the early 1980s that the term "yuppie" was coined.
That word is not much used now, because the phenomenon it describes is so
taken for granted, but at the time it was a label for something novel. Yuppies
were young professionals who made lots of money. To someone in their twenties
today, this wouldn't seem worth naming. Why wouldn't young professionals make
lots of money? But until the 1980s, being underpaid early in your career was
part of what it meant to be a professional. Young professionals were paying
their dues, working their way up the ladder. The rewards would come later.
What was novel about yuppies was that they wanted market price for the work
they were doing now.  
  
The first yuppies did not work for startups. That was still in the future. Nor
did they work for big companies. They were professionals working in fields
like law, finance, and consulting. But their example rapidly inspired their
peers. Once they saw that new BMW 325i, they wanted one too.  
  
Underpaying people at the beginning of their career only works if everyone
does it. Once some employer breaks ranks, everyone else has to, or they can't
get good people. And once started this process spreads through the whole
economy, because at the beginnings of people's careers they can easily switch
not merely employers but industries.  
  
But not all young professionals benefitted. You had to produce to get paid a
lot. It was no coincidence that the first yuppies worked in fields where it
was easy to measure that.  
  
More generally, an idea was returning whose name sounds old-fashioned
precisely because it was so rare for so long: that you could make your
fortune. As in the past there were multiple ways to do it. Some made their
fortunes by creating wealth, and others by playing zero-sum games. But once it
became possible to make one's fortune, the ambitious had to decide whether or
not to. A physicist who chose physics over Wall Street in 1990 was making a
sacrifice that a physicist in 1960 didn't have to think about.  
  
The idea even flowed back into big companies. CEOs of big companies make more
now than they used to, and I think much of the reason is prestige. In 1960,
corporate CEOs had immense prestige. They were the winners of the only
economic game in town. But if they made as little now as they did then, in
real dollar terms, they'd seem like small fry compared to professional
athletes and whiz kids making millions from startups and hedge funds. They
don't like that idea, so now they try to get as much as they can, which is
more than they had been getting.   
  
Meanwhile a similar fragmentation was happening at the other end of the
economic scale. As big companies' oligopolies became less secure, they were
less able to pass costs on to customers and thus less willing to overpay for
labor. And as the Duplo world of a few big blocks fragmented into many
companies of different sizes — some of them overseas — it became harder for
unions to enforce their monopolies. As a result workers' wages also tended
toward market price. Which (inevitably, if unions had been doing their job)
tended to be lower. Perhaps dramatically so, if automation had decreased the
need for some kind of work.  
  
And just as the mid-century model induced social as well as economic cohesion,
its breakup brought social as well as economic fragmentation. People started
to dress and act differently. Those who would later be called the "creative
class" became more mobile. People who didn't care much for religion felt less
pressure to go to church for appearances' sake, while those who liked it a lot
opted for increasingly colorful forms. Some switched from meat loaf to tofu,
and others to Hot Pockets. Some switched from driving Ford sedans to driving
small imported cars, and others to driving SUVs. Kids who went to private
schools or wished they did started to dress "preppy," and kids who wanted to
seem rebellious made a conscious effort to look disreputable. In a hundred
ways people spread apart.   
  
Almost four decades later, fragmentation is still increasing. Has it been net
good or bad? I don't know; the question may be unanswerable. Not entirely bad
though. We take for granted the forms of fragmentation we like, and worry only
about the ones we don't. But as someone who caught the tail end of mid-century
_conformism_, I can tell you it was no utopia.   
  
My goal here is not to say whether fragmentation has been good or bad, just to
explain why it's happening. With the centripetal forces of total war and 20th
century oligopoly mostly gone, what will happen next? And more specifically,
is it possible to reverse some of the fragmentation we've seen?  
  
If it is, it will have to happen piecemeal. You can't reproduce mid-century
cohesion the way it was originally produced. It would be insane to go to war
just to induce more national unity. And once you understand the degree to
which the economic history of the 20th century was a low-res version 1, it's
clear you can't reproduce that either.  
  
20th century cohesion was something that happened at least in a sense
naturally. The war was due mostly to external forces, and the Duplo economy
was an evolutionary phase. If you want cohesion now, you'd have to induce it
deliberately. And it's not obvious how. I suspect the best we'll be able to do
is address the symptoms of fragmentation. But that may be enough.  
  
The form of fragmentation people worry most about lately is _economic
inequality_, and if you want to eliminate that you're up against a truly
formidable headwind that has been in operation since the stone age.
Technology.  
  
Technology is a lever. It magnifies work. And the lever not only grows
increasingly long, but the rate at which it grows is itself increasing.  
  
Which in turn means the variation in the amount of wealth people can create
has not only been increasing, but accelerating. The unusual conditions that
prevailed in the mid 20th century masked this underlying trend. The ambitious
had little choice but to join large organizations that made them march in step
with lots of other people — literally in the case of the armed forces,
figuratively in the case of big corporations. Even if the big corporations had
wanted to pay people proportionate to their value, they couldn't have figured
out how. But that constraint has gone now. Ever since it started to erode in
the 1970s, we've seen the underlying forces at work again.   
  
Not everyone who gets rich now does it by creating wealth, certainly. But a
significant number do, and the Baumol Effect means all their peers get dragged
along too.  And as long as it's possible to get rich by creating wealth,
the default tendency will be for economic inequality to increase. Even if you
eliminate all the other ways to get rich. You can mitigate this with subsidies
at the bottom and taxes at the top, but unless taxes are high enough to
discourage people from creating wealth, you're always going to be fighting a
losing battle against increasing variation in productivity.   
  
That form of fragmentation, like the others, is here to stay. Or rather, back
to stay. Nothing is forever, but the tendency toward fragmentation should be
more forever than most things, precisely because it's not due to any
particular cause. It's simply a reversion to the mean. When Rockefeller said
individualism was gone, he was right for a hundred years. It's back now, and
that's likely to be true for longer.  
  
I worry that if we don't acknowledge this, we're headed for trouble. If we
think 20th century cohesion disappeared because of few policy tweaks, we'll be
deluded into thinking we can get it back (minus the bad parts, somehow) with a
few countertweaks. And then we'll waste our time trying to eliminate
fragmentation, when we'd be better off thinking about how to mitigate its
consequences.  
  
  
  
  
  
  
  
**