by Chris Hughes
In the decades following the Great Depression, the size and power of government consistently grew, even under Republican presidents like Richard Nixon. Government was largely perceived to be a trusted force for good, a powerful institution increasingly able to guarantee civil rights and provide critical social services like broader access to education and health care. While Nixon’s record on social issues like crime and race mean that we remember him as a serious conservative, he energetically competed for the political center on economic issues, overseeing the biggest increase in domestic spending in decades. He created new government agencies to protect the environment and to expand workplace safety. When he resigned in disgrace over the Watergate scandal, government spending as a percentage of GDP was at an all-time high, more than it had been even during the fiscal stimulus of the Great Depression.
As government expanded, even under a Republican president, corporations felt their interests increasingly marginalized. After several years of new regulations and more taxes, businesses began to self-organize in the mid-1970s to fight back against the Washington elites who they believed were neglecting their interests. Wealthy companies across industries coordinated to create the largest lobbying effort ever seen in the United States, which eventually became a permanent fixture in our politics. Just under 200 firms had registered lobbyists in 1971, but a decade later, nearly 2,500 did. Meanwhile, corporate political action committees, known as PACs, increased their expenditures in congressional races fivefold in just a decade. Alongside these new PACs and lobbying outfits, businesses transformed small, sleepy think tanks like the American Enterprise Institute and the Heritage Foundation into ideological juggernauts to provide an intellectual justification for a new brand of conservatism that could go toe-to-toe with the domestic liberal consensus of the time.
These new organizations helped to fundamentally shift the nature of our economy. Right off the bat, they managed to kill the creation of a new consumer advocacy organization, the banner proposal of Jimmy Carter’s first year as president. A year later, they blocked new labor protections and cut taxes on the investment income of the wealthy, while increasing payroll tax rates that ordinary working Americans pay. They were just getting warmed up. Over the following decades, Ronald Reagan and George H. W. Bush’s administrations oversaw the deregulation of major industries, reductions in tariffs that allowed for rapid increases in globalized trade, and deep tax cuts that disproportionately benefited the wealthy. The top tax rate of 75 percent in 1968 dropped to 28 percent by 1988. In the midst of deregulation and the across-the-board reduction in taxes, the one place they did invest was in the Department of Defense.
All these changes laid the groundwork for three forces—rapid advances in new technologies, globalized trade, and the rise of finance and venture capital—that made Facebook possible.
It’s obvious Facebook wouldn’t exist without the Internet, but few people know that the Internet itself was the direct result of government-funded research. A major beneficiary of the increase in defense spending was ARPANET, which established the early protocols that enabled computers to speak to one another. The National Science Foundation later invested to create national supercomputing centers at major colleges and universities, and the early Internet connected them to one another by 1986. Within a few years, commercial Internet service providers emerged, and people began to use the World Wide Web, the usable interface for today’s Internet.
The Wild West structure of the early Internet enabled a few companies to corner very large markets. The early web was flat and open: no global authority regulated the Internet, outside of how the address system worked. Web users could move about anonymously, and the lack of regulatory structure made for a kind of chaotic freedom. One voice on early message boards was just as loud as any other, and someone with a good idea and a small bit of tech savvy, like us in our college dorm room, could throw up a website and access millions of people willing to try out anything new.
But the openness also allowed early entrants to enjoy first-mover advantages that latecomers could not recapture. Just like in any land rush, whether in nineteenth-century America or the economy in post-Soviet Russia, after a brief period of seemingly egalitarian chaos, a few major players consolidated power. Four companies now control the vast majority of our interactions on the web. The real land rush on the Internet did not happen in the late 1990s when early users began to trickle in, but a decade later in the 2000s, the exact moment when we started Facebook.
When Mark coded the first lines in the early days of 2004, only a third of people in the developed world were using the Internet at all. Today over 80 percent are, and Facebook was perfectly poised to capture nearly all of them. Like Google and Amazon, which had a few years’ head start on us, Facebook began operations in this sweet-spot period in history when the size of the web was modest and quickly growing. The largest firm founded since Facebook is Uber, valued at only a tenth of Facebook’s size. We started Facebook just in time to ride the wave of the web’s explosive growth.
The lowering of tariffs and the embrace of a globalized market was the second force behind Facebook’s rise. Because Washington had relaxed trade rules decades before, it became possible for companies to manufacture smartphones cheaply, driving a dramatic increase in Internet users. Millions of people who couldn’t afford a home computer came online with iPhones and similar devices. Businesspeople had been using smartphones for years, but as the phones became more affordable and popular, the amount of time mobile users spent on Facebook surged quickly past the time spent on computers. There are over 2 billion smartphone users in the world today, and for most people, it’s the primary way they access the Internet and use Facebook.
The early growth of the iPhone—the first mass smartphone—is entirely a result of this global market. Apple strategically used the lack of tariffs and cheaper and more efficient transportation networks to build an expansive network of suppliers across the globe. To build an iPhone, the company sources precious minerals from the Congo and touch-screen glass from Taiwan, imports camera lenses from Japan and circuit boards from Malaysia. It buys accelerometers from Germany and optical sensors from Austria. The company assembles all of these parts with labor in China and designs the devices from its headquarters in California. The price of the introductory model today runs $14 a month with a two-year contract, making it affordable for almost all Americans.
The explosion of mobile has been the biggest and most important event in Facebook’s success, but at first, it didn’t seem like a sure bet. I remember an early set of conversations between Dustin and Mark in 2007, when Dustin pushed Mark to prepare faster for the tsunami of mobile users just around the bend. Mark was skeptical, and Dustin couldn’t manage to convince him. Dustin’s prediction was a little early, but Facebook was indeed caught flat-footed when the surge in mobile users arrived in 2011. As late as that year, Facebook had only a handful of engineers focused on its mobile products, but it immediately pivoted to capture the emerging market, yielding enormous returns. Facebook went from zero mobile advertising revenue at the time of its initial public offering in 2012 to $22 billion a year by 2016. This kind of hockey stick revenue growth is indicative of what happens when a company has already cornered a market so clearly that nearly all it has to do is flip a switch and the money comes pouring in. Facebook had already locked virtually every Internet user into its walled garden, giving them a massive edge to take advantage of the mobile market when it emerged.
Facebook today works almost like the telephone lines of the past, particularly when you take into account its messaging services. The average user spends nearly an hour a day on the platform, more time than most people spend reading or exercising, and nearly as much time as the average person spends eating and drinking. This does not include the time spent on WhatsApp, the world’s largest messaging platform, or Instagram, the world’s largest photo sharing app, both owned by Facebook. Billions of peo
ple rely on Facebook’s backbone to stay in touch, the culmination of Mark’s early ambition to create a “social utility” to wire the world. It is the primary means for new parents to announce the births of their children and the first place we go in the case of a natural disaster to make sure our loved ones are okay. All told, nearly 80 percent of all the world’s social traffic is routed through Facebook’s servers.
But even with all of these unprecedented opportunities, a third force fueled Facebook’s rise: the massive amount of financial capital made available to us by venture capitalists. A historically unprecedented run-up in the markets—combined with historic lows in tax rates—put large amounts of capital in the hands of high-net-worth individuals, pension funds, and university endowments in the 1980s and 1990s. Venture capital firms in particular promised high-net-worth individuals and institutions eye-popping returns from high-risk, low-tax investments, for a not-so-small fee. Venture capitalists plan for seven out of ten of their investments to fail, two to break even, and one to explode in value, wiping out all of the other losses and guaranteeing a high return. That’s the theory; in reality, in the past 15 years, most venture capital firms have not posted much better returns than the public markets. Investors poured tens of billions of dollars into venture firms in the late 1990s and early 2000s, and that money was invested in companies like Facebook. (They’re still going—venture capitalists and independent early stage investors invested $80 billion in new companies last year alone.) There is no historical precedent for this amount of capital being invested in risky early stage ideas.
To my inexperienced eyes, the amount of money invested in Facebook in the early years was jaw-dropping. In the spring of 2005, I visited the offices of Accel Partners on University Avenue in downtown Palo Alto. At Facebook, we were crammed into a smelly office sublet a few blocks away, but here, everything was calm and clean. Pristine marble and orchids lined the library-quiet space. I marveled that the little website we were running from our dumpy office moved these kinds of people to invest over $12 million, only a year after we started the company. That investment decision changed my life personally, and the lives of the other co-founders. Mark, Dustin, and our then president Sean Parker pocketed a million each from that one investment round, regardless of whether Facebook succeeded or flopped. I got $100,000, a windfall that gave me basic security unlike anything I had ever experienced. A year later, all of us were finally 21 years old, and we could celebrate with champagne when other firms invested another $28 million in the company. In total, financial firms invested over $600 million in Facebook while it was still private.
Because of outdated SEC regulations, most companies prefer to wait as long as possible to go public to avoid the regulations and public oversight that come with being traded on public markets. The effect of these policies is that no average American has any way to buy shares in the early days of the lives of valuable companies, but the networked ultra-wealthy are able to get a slice of them through these firms. In Facebook’s case, they were handsomely rewarded.
The growth of venture capital is a small piece in a much larger story of the rise of finance over the past few decades. As more money pools in the bank accounts of the rich, private equity firms, venture capital groups, and hedge funds have more capital to invest. The effect of this gargantuan financial sector is that nearly limitless capital is available to young entrepreneurs, regardless of their long-term performance, and less money in the pockets of working people, as we will see.
Facebook would not exist, at least in the form it is today, without major advances in technology, globalized markets that made smartphones possible, or venture capital. Alan Krueger, the former chair of the Council of Economic Advisers and an award-winning economist at Princeton, uses the term “winner-take-all” economy to describe the state we live in today. “Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress,” Krueger argued in a 2013 speech. “The lucky and the talented—and it is often hard to tell the difference—have been doing better and better, while the vast majority has struggled to keep up.” The term winner-take-all, first used to describe today’s economy by Robert Frank and Philip Cook in the 1990s, is purposefully broad, a way to characterize the effects of a collection of diverse economic forces, including automation and globalization.
In a winner-take-all world, a small group of people get outsized returns as a result of early actions they take. These small differences that later yield big successes are often called luck, but luck isn’t really the right word. It implies that no work happens or that success is completely untied from effort. Mega-successes are almost always the result of a blend of fortune and effort. J. K. Rowling, the first billionaire author in history, had her Harry Potter novel rejected by twelve publishers, before a thirteenth gave it a shot. Her success was earned—her persistence paid off—and was the result of a small decision by the thirteenth publisher that changed her life. In my case, the chance that Mark Zuckerberg and I ended up roommates changed my life. I had worked hard to get to Harvard, and I played a meaningful role in the early days of Facebook. But the combination of those small events led to outsized and historically unprecedented returns thanks to the magnifying power of today’s economic forces.
Michael Lewis, now one of the best-selling nonfiction authors in the world, similarly benefited from a blend of fortune and hard work. A couple of years after he graduated college, he was coincidentally seated next to the wife of a Salomon Brothers executive at a dinner party. As Lewis tells the story, the woman, won over by his charm, convinced her husband to offer him a job trading derivatives, at the exact moment that those complex and risky new products were beginning to transform Wall Street beyond recognition.
He spent three years trading, making quite a bit of money, and then, at age 28, published Liar’s Poker, his account of the turbulent epoch he had just lived through and witnessed firsthand. It was a massive hit, and it brought him a tidal wave of attention. In 2012, he gave the commencement address at his alma mater, Princeton, on the topic of his luck:
All of a sudden people were telling me I was born to be a writer. This was absurd. Even I could see there was another, truer narrative, with luck as its theme. What were the odds of being seated at that dinner next to that Salomon Brothers lady? Of landing inside the best Wall Street firm from which to write the story of an age? Of landing in the seat with the best view of the business? Of having parents who didn’t disinherit me but instead sighed and said “do it if you must”? Of having had that sense of must kindled inside me by a professor of art history at Princeton? Of having been let into Princeton in the first place?
Saying people get lucky is not a denial that they work hard and deserve positive outcomes. It is a way of acknowledging that in a winner-take-all economy, small, chance encounters—like who you sit next to at a dinner party or who your college roommate is—have a more significant impact than they have ever had before. In some cases, the collections of these small differences can add up to create immense fortunes.
Last spring, Mark Zuckerberg returned to our old stomping grounds to give a commencement speech of his own. He spoke a stone’s throw away from where we had negotiated ownership stakes in Facebook thirteen years before. In his speech Mark wondered whether the hard-working young graduates before him sufficiently appreciated the role that chance and good fortune have already played in their lives. “We all know we don’t succeed just by having a good idea or working hard. We succeed by being lucky too,” he said from the august lectern. “If I had to support my family growing up instead of having time to code, if I didn’t know I’d be fine if Facebook didn’t work out, I wouldn’t be standing here today. If we’re honest, we all know how much luck we’ve had.”
But luck doesn’t just happen. We have created an economy dominated by forces that reward luck in an o
utsized way. Some of these changes might be desirable and some not, but they are all the result of political decisions that we purposefully make as a society. There is no invisible hand creating a winner-take-all economy in which luck takes on this disproportionate role. We are its authors and enablers.
The natural result of our collective decision-making over the past decades is an economy in which a small number of people hit the jackpot each year. I’m not talking about the local dentist, lawyer, or doctor, the kind of rich folks I grew up around in North Carolina. I am talking about the families in households of the top one percent by income or wealth. Families that have more than $10 million in assets. By contrast, the average doctor in my hometown last year made $189,000, and like most wealthy Americans, was assuredly not part of the one percent. The people I’m talking about are people like me and my neighbors in Manhattan. They are CEOs at S&P 500 companies who, on average, are paid 347 times more than the typical worker at their company, a remarkable increase from the historical average of 20 to 60 times. They are superstar athletes, real estate agents and developers, and blockbuster lawyers, the most elite in each of their fields. They are also overwhelmingly not diverse: 96 percent of the ultra-wealthy one percent are white.
The result is an unprecedented collection of wealth controlled by a small number of families. A single family, the Waltons, all of whom inherited their wealth from the Walmart empire, now controls as much wealth as the bottom 43 percent of the country combined—137 million Americans. Just the top 0.1 percent of our population—the 160,000 or so families who have $20 million or more—control the same amount as the entire bottom 90 percent of Americans combined. The chasm between the rich and the poor has not been so wide since 1929, the year of the biggest collapse in Wall Street’s history.
The problem isn’t that our new economy has fueled the rise of Facebook and mega-winners. It’s that the growth of the ultra-wealthy has come at the expense of everyday Americans. Rapid technological advances, globalization, and financialization are pulling the rug out from under the middle class and lower-income Americans. The same forces that enabled the rise of Facebook, Google, and Amazon have undermined the stability and economic opportunity that most Americans have a right to expect.