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April 2021  
  
Every year since 1982, _Forbes_ magazine has published a list of the richest
Americans. If we compare the 100 richest people in 1982 to the 100 richest in
2020, we notice some big differences.  
  
In 1982 the most common source of wealth was inheritance. Of the 100 richest
people, 60 inherited from an ancestor. There were 10 du Pont heirs alone. By
2020 the number of heirs had been cut in half, accounting for only 27 of the
biggest 100 fortunes.  
  
Why would the percentage of heirs decrease? Not because inheritance taxes
increased. In fact, they decreased significantly during this period. The
reason the percentage of heirs has decreased is not that fewer people are
inheriting great fortunes, but that more people are making them.  
  
How are people making these new fortunes? Roughly 3/4 by starting companies
and 1/4 by investing. Of the 73 new fortunes in 2020, 56 derive from founders'
or early employees' equity (52 founders, 2 early employees, and 2 wives of
founders), and 17 from managing investment funds.  
  
There were no fund managers among the 100 richest Americans in 1982. Hedge
funds and private equity firms existed in 1982, but none of their founders
were rich enough yet to make it into the top 100. Two things changed: fund
managers discovered new ways to generate high returns, and more investors were
willing to trust them with their money.   
  
But the main source of new fortunes now is starting companies, and when you
look at the data, you see big changes there too. People get richer from
starting companies now than they did in 1982, because the companies do
different things.  
  
In 1982, there were two dominant sources of new wealth: oil and real estate.
Of the 40 new fortunes in 1982, at least 24 were due primarily to oil or real
estate. Now only a small number are: of the 73 new fortunes in 2020, 4 were
due to real estate and only 2 to oil.  
  
By 2020 the biggest source of new wealth was what are sometimes called "tech"
companies. Of the 73 new fortunes, about 30 derive from such companies. These
are particularly common among the richest of the rich: 8 of the top 10
fortunes in 2020 were new fortunes of this type.  
  
Arguably it's slightly misleading to treat tech as a category. Isn't Amazon
really a retailer, and Tesla a car maker? Yes and no. Maybe in 50 years, when
what we call tech is taken for granted, it won't seem right to put these two
businesses in the same category. But at the moment at least, there is
definitely something they share in common that distinguishes them. What
retailer starts AWS? What car maker 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're all companies that venture capitalists would
readily invest in, and the others mostly not. And there's a reason why: these
are mostly companies that win by having better technology, rather than just a
CEO who's really driven and good at making deals.  
  
To that extent, the rise of the tech companies represents a qualitative
change. The oil and real estate magnates of the 1982 Forbes 400 didn't win by
making better technology. They won by being really driven and good at making
deals.  And indeed, that way of getting rich is so old that it predates the
Industrial Revolution. The courtiers who got rich in the (nominal) service of
European royal houses in the 16th and 17th centuries were also, as a rule,
really driven and good at making deals.  
  
People who don't look any deeper than the Gini coefficient look back on the
world of 1982 as the good old days, because those who got rich then didn't get
as rich. But if you dig into _how_ they got rich, the old days don't look so
good. In 1982, 84% of the richest 100 people got rich by inheritance,
extracting natural resources, or doing real estate deals. Is that really
better than a world in which the richest people get rich by starting tech
companies?  
  
Why are people starting so many more new companies than they used to, and why
are they getting so rich from it? The answer to the first question, curiously
enough, is that it's misphrased. We shouldn't be asking why people are
starting companies, but why they're starting companies _again_.   
  
In 1892, the _New York Herald Tribune_ compiled a list of all the millionaires
in America. They found 4047 of them. How many had inherited their wealth then?
Only about 20%, which is less than the proportion of heirs today. And when you
investigate the sources of the new fortunes, 1892 looks even more like today.
Hugh Rockoff found that "many of the richest ... gained their initial edge
from the new technology of mass production."   
  
So it's not 2020 that's the anomaly here, but 1982. The real question is why
so few people had gotten rich from starting companies in 1982\. And the answer
is that even as the _Herald Tribune_ 's list was being compiled, a wave of
_consolidation_ was sweeping through the American economy. In the late 19th
and early 20th centuries, financiers like J. P. Morgan combined thousands of
smaller companies into a few hundred giant ones with commanding economies of
scale. 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."   
  
In 1960, most of the people who start startups today would have gone to work
for one of them. You could get rich from starting your own company in 1890 and
in 2020, but in 1960 it was not really a viable option. You couldn't break
through the oligopolies to get at the markets. So the prestigious route in
1960 was not to start your own company, but to work your way up the corporate
ladder at an existing one.   
  
Making everyone a corporate employee decreased economic inequality (and every
other kind of variation), but if your model of normal is the mid 20th century,
you have a very misleading model in that respect. J. P. Morgan's economy
turned out to be just a phase, and starting in the 1970s, it began to break
up.  
  
Why did it break up? Partly senescence. The big companies that seemed models
of scale and efficiency in 1930 had by 1970 become slack and bloated. By 1970
the rigid structure of the economy was full of cosy nests that various groups
had built to insulate themselves from market forces. During the Carter
administration the federal government realized something was amiss and began,
in a process they called "deregulation," to roll back the policies that
propped up the oligopolies.  
  
But it wasn't just decay from within that broke up J. P. Morgan's economy.
There was also pressure from without, in the form of new technology, and
particularly microelectronics. The best way to envision what happened is to
imagine a pond with a crust of ice on top. Initially the only way from the
bottom to the surface is around the edges. But as the ice crust weakens, you
start to be able to punch right through the middle.  
  
The edges of the pond were pure tech: companies that actually described
themselves as being in the electronics or software business. When you used the
word "startup" in 1990, that was what you meant. But now startups are punching
right through the middle of the ice crust and displacing incumbents like
retailers and TV networks and car companies.   
  
But though the breakup of J. P. Morgan's economy created a new world in the
technological sense, it was a reversion to the norm in the social sense. If
you only look back as far as the mid 20th century, it seems like people
getting rich by starting their own companies is a recent phenomenon. But if
you look back further, you realize it's actually the default. So what we
should expect in the future is more of the same. Indeed, we should expect both
the number and wealth of founders to grow, because every decade it gets easier
to start a startup.  
  
Part of the reason it's getting easier to start a startup is social. Society
is (re)assimilating the concept. If you start one now, your parents won't
freak out the way they would have a generation ago, and knowledge about how to
do it is much more widespread. But the main reason it's easier to start a
startup now is that it's cheaper. Technology has driven down the cost of both
building products and acquiring customers.  
  
The decreasing cost of starting a startup has in turn changed the balance of
power between founders and investors. Back when starting a startup meant
building a factory, you needed investors' permission to do it at all. But now
investors need founders more than founders need investors, and that, combined
with the increasing amount of venture capital available, has driven up
valuations.   
  
So the decreasing cost of starting a startup increases the number of rich
people in two ways: it means that more people start them, and that those who
do can raise money on better terms.  
  
But there's also a third factor at work: the companies themselves are more
valuable, because newly founded companies grow faster than they used to.
Technology hasn't just made it cheaper to build and distribute things, but
faster too.  
  
This trend has been running for a long time. IBM, founded in 1896, took 45
years to reach a billion 2020 dollars in revenue. Hewlett-Packard, founded in
1939, took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm
for fast-growing companies is 7 or 8 years.   
  
Fast growth has a double effect on the value of founders' stock. The value of
a company is a function of its revenue and its growth rate. So if a company
grows faster, you not only get to a billion dollars in revenue sooner, but the
company is more valuable when it reaches that point than it would be if it
were growing slower.  
  
That's why founders sometimes get so rich so young now. The low initial cost
of starting a startup means founders can start young, and the fast growth of
companies today means that if they succeed they could be surprisingly rich
just a few years later.  
  
It's easier now to start and grow a company than it has ever been. That means
more people start them, that those who do get better terms from investors, and
that the resulting companies become more valuable. Once you understand how
these mechanisms work, and that startups were suppressed for most of the 20th
century, you don't have to resort to some vague right turn the country took
under Reagan to explain why America's Gini coefficient is increasing. Of
course the Gini coefficient is increasing. With more people starting more
valuable companies, how could it not be?  
  
  
  
  
  
  
  
  
  
  
  
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