by Ray Keating
Prominent businessmen don’t always understand how the economy actually works. That’s been evident on the presidential campaign trail this year, with Donald Trump leading the Republican field and Michael Bloomberg’s brief flirtation with jumping into the race as an independent. Trump and Bloomberg clearly are clueless on a host of issues – such as Trump on trade – regarding how the economy functions and how policy impacts the economy. But, of course, there are many business leaders who understand how the economy works, and even offer some rather unique insights. That’s the case with Peter Thiel and his book “Zero to One: Notes on Startups, or How to Build the Future.” The following review ran as a Long Island Business News column of mine in October 2014 …
I recently headed west to Silicon Valley for a gathering focused on technology policies. At the start of that journey, standing in an airport bookstore, I decided to get the full Silicon Valley techie experience, and picked up Peter Thiel’s new book “Zero to One: Notes on Startups, or How to Build the Future.”
It’s a valuable, quick read that provides fascinating insights on thinking about entrepreneurship and the economy, and what’s needed to start up a business.
Thiel was a co-founder of PayPal, and has been an investor in a variety of startups, including Facebook. His perspectives on how businesses function in the economy are drenched in a refreshing economic reality.
The central theme of Thiel’s message is the need to create new things. He points out, “Doing what we already know how to do takes the world from 1 to n, adding more of something familiar. But every time we create something new, we go from 0 to 1.” He warns, “Unless they invest in the difficult task of creating new things, American companies will fail in the future no matter how big their profits remain today.”
One would expect Thiel to declare that the word for “0 to 1 progress is technology.” However, he quickly adds that it’s not all about computers: “Properly understood, any new and better way of doing things is technology.” Another word for that is innovation.
For Thiel, building the future and creating new things is accomplished by monopolies. What? How can that be? Well, he has a better grasp on how the economy actually works than many economists. Thiel correctly rejects the concept of “perfect competition” that is taught in all Economics 101 classes, whereby undifferentiated firms and homogeneous products sell at the market price, and economic profits are competed away. That’s not how the economy works, nor quite frankly, does it help students to understand the market process.
But what about this monopoly thing? Thiel writes: “To an economist, every monopoly looks the same, whether it deviously eliminates its rivals, secures a license from the state, or innovates its way to the top. In this book, we’re not interested in illegal bullies or government favorites; by ‘monopoly,’ we mean the kind of company that’s so good at what it does that no other firm can offer a close substitute.”
While he does not put it exactly this way, what entrepreneurs and businesses are doing within a competitive environment is investing and innovating to create what effectively are temporary monopolies that allow profits to be maximized. And the longer a firm excels at providing something that consumers cannot get elsewhere, the longer the business can maintain that temporary monopoly. That’s quite different from the government-protected or created monopoly, for example, that grows fat, lazy and rips off consumers.
As Thiel proclaims, “Creative monopolists give customers more choices by adding entirely new categories of abundance to the world.”
Thiel’s subsequent advise and ideas for those looking to start up new businesses spring from this basic understanding of what entrepreneurs and businesses need to do – that is, to create something new and better – if they seek bold success. And he offers many valuable insights on that process. But among my favorite bits of wisdom tie in to how to think about business and career – one has to do with chance and the other secrets.
On business success being all about chance, Thiel counters that if that were the case, we would not see the successful serial entrepreneurs that we obviously do. He adds: “Learning about startups is worthless if you’re just reading stories about people who won the lottery.”
And on creative secrets, he provocatively but accurately writes, “The best entrepreneurs know this: every great business is built around a secret that’s hidden from the outside. A great company is a conspiracy to change the world; when you share your secret, the recipient becomes a fellow conspirator.”
So, here’s to those creative, conspiratorial monopolists who change the world.
Mr. Keating is an economist and novelist who writes on a wide range of topics. His Pastor Stephen Grant novels have received considerable acclaim, including The River: A Pastor Stephen Grant Novel being a finalist for KFUO radio’s Book of the Year 2014, and Murderer’s Row: A Pastor Stephen Grant Novel winning Book of the Year 2015.
The Pastor Stephen Grant Novels are available at Amazon…