Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else

by Chrystia Freeland

  This contrast between the Moscow smellies and the elite European bankers of Zurich, Frankfurt, and London isn’t confined to CSFB. Jennings argued it was an example of the wider difference between emerging markets entrepreneurs, whose defining characteristic was their ability to respond to revolution, and the slower-moving corporate princes of Western multinationals.

  “Slow or hesitant business leaders are quickly weeded out in high-growth emerging markets. The survivors are typically able to think on a big canvas, to make bold decisions and have the resilience to withstand extreme volatility and market setbacks,” he explained. “It is virtually impossible for multinationals to operate in this manner. . . . Their advantages in terms of know-how and capital have been neutralized by their inability or reluctance to grow explosively in complex, foreign environments. . . . Their key decision makers usually live in a distant part of the world; they think they fully understand the risks but cannot grasp the upside.”

  One of the rising emerging markets champions that Jennings cites is Mittal Steel. Aditya Mittal, son of Lakshmi, the company’s founder, and his partner in business and heir apparent, describes an embrace of change that dovetails with Jennings’s theory of the case.

  “Some people, when the trends are smacking them right in the face, they don’t wake up and realize it,” Mittal told me. “When I was head of M&A [mergers and acquisitions] and focused on expanding in Central and Eastern Europe, where there were a lot of good opportunities, I kept thinking, when is everyone else going to wake up and start competing with the U.S. for these assets, particularly the other European steel companies. But I didn’t have competition for five years. I was like, ‘What is wrong with these guys?’ I’m in their backyards buying steel companies in Poland, the Czech Republic, Romania, and they are nowhere to be seen.”

  For Mittal, crisis is always an opportunity: “Historically we’ve found opportunity from a crisis. . . . A crisis doesn’t change the long-term trajectory that the economies will industrialize, right? And if they are not performing well for a short time, that’s when you go and buy them, and not cloud your judgment of the future. Provided you’re confident in the medium- to long-term investment case and you are confident you can create value for shareholders, then it can be a good thing to do. That’s what we’ve done in the past and it’s what we’d do again in the future if we saw the right opportunities.”

  Responding to revolution is how you become a plutocrat. “Change is great,” Mittal told me. “Change is fantastic. That’s how you create value because you participate in the change that you see. Now, it can be wrong, or it can be right—that is your own judgment call. But change is how you create value. If there is no change, how else do you create value?”

  It is back to Budapest in 1944. In some environments—like today’s emerging market economies—not acting is the greatest risk. You may not need to be bold to survive, but you certainly must be bold to thrive.

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  Jennings was selling his countrymen on the rewards of jumping into the emerging markets—his speech was titled “Opportunities of a Lifetime.” But the risks are real, too. Six months before his triumphant hometown lecture, Jennings’s firm was on the brink of bankruptcy. To survive, he had to sell a 50 percent stake at a fire sale price to Russian oligarch Mikhail Prokhorov.

  Lai, the Xiamen entrepreneur who gloried in the moneymaking opportunities in 1980s China, spent a decade evading Beijing in Canada, but was finally deported back home in 2002. In 1999 China accused him of smuggling, bribery, and tax evasion in one of its periodic high-profile anticorruption campaigns.

  “If Lai Changxing were executed three times over, it would not be too much,” Zhu Rongji, the former premier who led the attack, said after the verdict. Mikhail Khodorkovsky, the biggest winner in the loans-for-shares privatization and in 2003 the richest man in Russia, has been in jail, mostly in a Siberian labor camp, for nearly a decade.

  This volatility at the top is a defining characteristic of the new plutocracy and one reason it is less secure and less homogeneous than its bank balances might suggest. The biggest winners in today’s economy are the experts in responding to revolution, but that means that they live in a world in which, as another Hungarian adept famously put it, “only the paranoid survive.”

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  Yuri Milner is another smart, driven Russian who missed out on the privatization windfall. He suffered from the Bendukidze problem. Like the Georgian industrialist, Milner didn’t think he knew enough to succeed in an advanced capitalist economy. So after graduating from Wharton, where he was the first non-émigré Russian to get an MBA there, instead of returning home, he went to Washington to work for the World Bank. Unfortunately for him, his job in America—a position whose perks and prestige would have been unmatchable just five years earlier—coincided with Russia’s privatization bonanza. He calls that period his “lost years.” By the time Milner got back home, the choicest spoils had been divided. Instead of becoming an oligarch, he went to work for one: Mikhail Khodorkovsky.

  But the experience taught Milner the value of capitalizing on paradigm shifts, and he began to look for the next one. He found it not in a political revolution but in a technological one. Milner was one of the first Russians to understand the impact of social networks. His first step was the classic developing market technique of copying what was working elsewhere: he bought and invested in Mail.ru, the Russian equivalent of Hotmail, and Odnoklassniki, Russia’s Facebook. The Cyrillic alphabet, which had sometimes been a barrier to Russia’s success in the global economy, turned out to be a boon for Milner, making it harder for Silicon Valley to conquer his domestic market.

  But winning in the Russian technology market wasn’t enough for Milner. He decided that his failure in Russia had taught him to be faster and hungrier than the Americans he had met at Wharton. Now that he understood how to respond to revolution, he would take that talent to the place where the biggest transformation in the world was happening: Silicon Valley. Milner was the first major outside investor in Facebook, a coup he pulled off in May 2009 by agreeing to terms that seemed ridiculous to the Valley: $200 million for a 1.96 percent stake, valuing the five-year-old company at more than $1 billion, and with no board seats. When Facebook made an initial public offering in 2012, Milner’s stake was valued at more than $6 billion. The day the Facebook investment was announced, one of Milner’s colleagues approached the founder of Zynga, the online gaming company, at a conference; a few months later Digital Sky Technologies led a $180 million investment round. Groupon was easier—by the time the online coupon company was looking for investors, Milner’s prescience with Facebook and Zynga had made him a prestige investor.

  In the United States, the technology revolution is the radical paradigm shift that is yielding windfalls for those with the skill, the luck, and the chutzpah to take advantage of it. The scale of the change is tremendous. Randall Stephenson, the CEO of AT&T, told me the shift was the biggest economic change since the discovery of electricity and the internal combustion engine.

  And like Russia’s transition from communism to capitalism, the technology revolution is driving a paradigm shift that creates the opportunity to reap a windfall. Dan Abrams, founder of the Mediaite group of Web sites, describes it as a frontier moment. Whoever has the courage and the vision to claim that frontier, he believes, will lay the foundation for the business empires of the future. Actually, the opportunity is even richer and more complicated: the technology revolution isn’t a single moment of revolutionary change, the way Russian privatization was. Instead, like the industrial revolution, it is a series of paradigm shifts, each of which offers a financial windfall for those who are in the right place at the right time—and who have the ability to respond to revolution.

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  One example is the generation of app inventors who made a fortune by riding on Facebook’s coattails. In 2007, as that social network was taking off, it threw its platform open to developers as a way to multiply its o
wn reach. That approach worked so well that by 2009 Facebook decided to close the floodgates a little bit, by controlling how apps spread virally. But for the developers who got their timing right, it was a windfall.

  “There was a period of time when you could walk in and collect gold,” B. J. Fogg, a specialist in technology and innovation who taught a class at Stanford in the fall of 2007 that challenged students to build a business on Facebook, told the New York Times. “It was a landscape that was ready to be harvested.” And as Mike Maples, a Silicon Valley investor, told the reporter, “The Facebook platform was taking off and there was this feeling of a gold rush.”

  Another wavelet is the shift from broadcast and cable television to Web-based video. Now that we have seen what the Web has done to the print and music businesses, that revolution seems inevitable. But to capitalize on it, the big question is timing. In 2011, when YouTube announced a big push to open up its platform to producers of Web-based videos, Michael Hirschorn, a writer and former head of programming at VH1, decided the digital television revolution was about to begin—and he was determined not to miss out. “I felt, having been late to several revolutions previously, that we needed to go all out for this,” Hirschorn told a journalist. He called his future partner and insisted, “We need to start a company now!”

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  If you have a PhD in math or statistics, the revolution you are probably trying to capitalize on today is big data—a term for the vast amounts of digital data we now create and have an increasing ability to store and manipulate.

  If wonks were fashionistas, big data would be this season’s hot new color. When I interviewed him before a university audience in late 2011, Larry Summers named big data as one of the three big ideas he is most excited about (the others were biology and the rise of the emerging markets). The McKinsey Global Institute, the management consultancy’s research arm and the closest the corporate world comes to having an ivory tower, published a 143-page report in 2011 on big data, touting it as “the next frontier for innovation, competition, and productivity.”

  To understand how much data is now at our fingertips, consider a few striking facts from the McKinsey tome. One is that it costs less than six hundred dollars to buy a disk drive with the capacity to store all of the world’s recorded music. Another is that in 2010 people around the world stored more than six exabytes of new data on devices like PCs and notebook computers; each exabyte contains more than four thousand times the information stored in the U.S. Library of Congress.

  McKinsey believes that the transformative power of all this data will amount to a fifth wave in the technology revolution, building on the first four: the mainframe era; the PC era; the Internet and Web 1.0 era; and, most recently, the mobile and Web 2.0 era.

  Big data will create a new tribe of highly paid superstars. McKinsey estimates that by 2018 in the United States alone there will be shortfall of between 140,000 and 190,000 people with the “deep analytical talent” required to use big data. And it will probably create a handful of billionaires who understand and capitalize on the revolutionary potential of big data before the rest of us do—indeed, one way to understand Facebook’s $100 billion market capitalization is as a bet on big data.

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  The technology revolution isn’t just about the nerds of the West Coast. We think of the computer revolution as a Silicon Valley phenomenon. But while most of the technology is invented there, many of its biggest beneficiaries are on Wall Street. Here is how Larry Fink, the billionaire founder of BlackRock, the world’s largest asset manager, with nearly four trillion dollars under management in the spring of 2012, described the impact of computers on finance.

  “People have always asked me, ‘What happened in ’83? Why in ’83 did all of this intellectualism create mortgage securitization?’” Fink explained to me in his office just off Park Avenue in a 2010 conversation. “It was the technology revolution, which put computers on our desks. . . . It was really the advent of the PC and the availability of having individuals to use a computer, the capabilities of computers to analyze securities, risks, a lot of data . . . And that had never happened before. . . . And in my mind that was the beginning of the trading desk becoming more profitable. If you start looking at the profitability of Wall Street, Wall Street was never that profitable before ’83.”

  And when computers arrived on traders’ desktops, Wall Street understood the rise of the knowledge worker had begun in earnest and went out to get the best ones. “Most of what Wall Street did is they understood,” Fink told me. “So where did they go? They went to the top schools, they went to engineering. They got these really smart quants. . . . They got some really smart people who could intellectualize a lot of data and come up with trends and formulas. To me a lot has to do with that.”

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  The Citigroup analysts writing about “plutonomy” describe it as the triumph of the “managerial aristocracy,” and that is certainly true. But, at its apex, the plutonomy is even more about the triumph of the entrepreneurs—a 2011 Capgemini/Merrill Lynch report estimated that 46 percent of the world’s high-net-worth individuals had founded their own businesses.

  And while these individualists are fewer in number than the company men, their gains are much more spectacular—and their windfalls are one reason the super-elite are pulling away so sharply from the merely affluent. Richard Attias, a Moroccan-born French businessman who got his start in computer hardware and is now working to create a New York–based equivalent of the World Economic Forum, describes it this way: “It used to be that the big ate the small; now the fast eat the slow.” Sull, the London Business School professor, thinks it is hard for established companies—the big—to be fast, at least in a way that is effective. The problem, his research suggests, isn’t that companies don’t realize the world has changed. They do. But instead of changing their behavior, Sull has found that the most typical corporate reaction is “active inertia”—businesses do what they always did, only more energetically than before. Their vested corporate interest in the existing order is so great, they have a hard time giving up today’s certain profits in the hope of earning a bigger windfall—or avoiding a significant loss—tomorrow.

  Sull’s favorite example of active inertia is Firestone. The company’s founder, Harvey Firestone, was adept at responding to revolution. Firestone began producing tires in Akron, Ohio, in 1900. He saw the potential in Henry Ford’s pioneering mass production of automobiles, and in 1906 Firestone was chosen by Ford to supply the tires for the Model T. But in 1988, Firestone was acquired by Bridgestone, a Japanese competitor, for a fraction of its market capitalization a decade and a half earlier. Firestone, like so many strong legacy companies, was undone by the emergence of a new, disruptive technology—the radial tire—that had been introduced to the U.S. market. When Firestone tried to play catch-up, manufacturing radial tires in plants designed to produce the old bias-ply tire, disaster struck. Eventually, Firestone was forced to recall millions of tires and, in congressional hearings, was found at blame for thirty-four deaths.

  “Firestone’s historical excellence and disastrous response to global competition and technological innovation posed a paradox for industry observers,” Sull wrote. “Why had the industry’s best-managed company turned in the worst performance in a weak field? Closer analysis reveals that Firestone failed not despite, but because of, its historical success.”

  Firestone had been built to prosper in the stable postwar United States. According to Sull: “An ossified success formula is just fine, as long as the context remains stable.” But in a period of revolutionary change—which is what many industries, countries, and the world economy as a whole are experiencing today—“ossified success formulas” aren’t enough, and the outsiders who are good at responding to revolution can outflank the establishment.

  Firestone’s fate, as explained by Sull, is a cautionary tale of what Jennings, from his frontier market vantage points, warned the cozy Auckland elites might ha
ppen to them: “Basically, we are living in a world that is more competitive than any other era, where change is faster and less predictable, and where long-established orders—whether they are economic, political, or industrial—are being challenged and supplanted. In this world, the difference between ‘success’ and ‘failure’ is greatly magnified. This applies to specific labor market skills, businesses, industries, and entire countries.”

  And Firestone, with its active inertia, sounds a lot like Wall Street in 2007 and 2008. Many—even most—of the leaders of the country’s big financial companies knew their businesses were built on a bubble. But the structure of their companies and of their industry made it impossible to pull back.

  In early July 2007, on a visit to Tokyo, Chuck Prince, then CEO of Citigroup, gave an interview to journalist Michiyo Nakamoto. Credit markets had not yet frozen, but there were enough signs of trouble to prompt Nakamoto to ask Prince about the turmoil in the U.S. subprime mortgage market and difficulties financing some private equity deals. Prince believed the ocean of cheap, globalization-fed money Citi was then still sloshing around in would eventually dry up: “A disruptive event now needs to be much more disruptive than it used to be. . . . At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way.”

  Today, those remarks read like a prescient description of the overnight collapse in lending triggered by Lehman’s bankruptcy just over a year later. But even though Prince thought a “disruptive event” was inevitable, he also believed we hadn’t reached “that point” yet. In the meantime, it was his job to keep on doing business as usual: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”