always fail when their industries are confronted with disruptive new technologies or markets. And that is not, he argues, because their managers are dumb or lazy. It is because what works in ordinary times is a recipe for disaster in revolutionary ones. “These failed firms,” he writes, “were as well run as one could expect a firm managed by mortals to be—but there is something about the way decisions get made in successful organizations that sows the seeds of eventual failure.”
The rare ability—like Soros’s—to spot paradigm shifts and to adapt to them is one of the economic forces creating the super-elite. That’s because moments of revolutionary change are also usually moments when it is possible to make an instant fortune. And, thanks to the twin gilded ages, we are living in an era of a lot of revolutionary shifts.
One set of changes is in the emerging markets. The broad secular trend since the late 1980s has been for authoritarian regimes to give way to more democratic ones and for closed, state-controlled economies to become more open. Sometimes the transition happens with a bang, as it did in Eastern Europe in 1989 and North Africa in 2011; sometimes it happens more gradually, as in India, China, and parts of sub-Saharan Africa. But in much of the world, the late eighties and the nineties were a time of privatization, deregulation, and the lowering of trade barriers. The result was economic windfalls for the locals and foreigners with the skills, the smarts, and the psyche to take advantage of them.
A second set of revolutions is in technology. New technologies, especially computers and the Internet, then mobile and wireless, are disrupting existing businesses and opening up the chance to create new ones. Like the industrial revolution, which started with mechanization of the textile industry, then the invention of the steam engine, followed by the combustion engine and electricity, the technology revolution isn’t a single discovery; it is wave after wave of related transformations. In 2012, the hot new areas were big data—our ability to collect and analyze massive amounts of information—and machines talking to machines, creating what W. Brian Arthur, the economist who studies technological change, describes as the second, digital economy—“vast, silent, connected, unseen, and autonomous.”
Finally, these two big revolutions, together with a broader global trend toward more open markets in money, goods, and ideas, combine to reinforce each other and create a faster-paced, more volatile world. Twitter and Facebook are the offspring of the technology revolution, but they turn out to have made political revolutions easier to organize. Before the invention of the personal computer, the securitization of mortgages—which turned out to be part of the kindling for the financial crisis—would not have been possible. Nor would the algorithmic trading revolution, in which machines are replacing centuries-old stock exchanges and a couple of lines of corrupt code can trigger a multibillion-dollar loss of market value in moments, as occurred during the “flash crash” on May 6, 2010.
Revolution is the new global status quo, but not everyone is good at responding to it. My shorthand for the archetype best equipped to deal with it is “Harvard kids who went to provincial public schools.” They got into Harvard, or, increasingly, its West Coast rival, Stanford, so they are smart, focused, and reasonably privileged. But they went to public schools, often in the hinterlands, so they have an outsider’s ability to spot the weaknesses of the ruling paradigm and don’t have so much vested in the current system that they are afraid of stepping outside it.
Facebook’s Mark Zuckerberg (New York State public school, Harvard), Blackstone cofounder Steve Schwarzman (Pennsylvania public school, Yale undergraduate, Harvard MBA), and Goldman Sachs CEO Lloyd Blankfein (Brooklyn public school, Harvard) are literal examples of this model. Most of the Russian oligarchs—who were clever and driven enough to get degrees from elite Moscow universities before the collapse of the Soviet Union, but were mostly Jewish and therefore not fully part of the Soviet elite—have a similar insider/outsider starting point. Soros, the worldly and well-educated son of a prosperous Budapest lawyer, who was forced by war and revolution to make his own way in London and New York, is another representative of the genre.
The Citigroup analysts who coined the term “plutonomy” go one step further. They argue that responding to revolution is a biological trait, genetically inherited, and that one way to be sure your society is good at it is to open your borders to immigrants, on the theory that moving to a new country is an example of responding to revolution. They write, “Dopamine, a pleasure-inducing brain chemical, is linked with curiosity, adventure, entrepreneurship, and helps drive results in uncertain environments. Populations generally have about 2% of their members with high enough dopamine levels with the curiosity to emigrate. Ergo, immigrant nations like the United States and Canada, and increasingly the UK, have high dopamine-intensity populations.” Responding to revolution—and the economic rewards it brings today—they argue, isn’t just something we can learn by reading the works of business school professors like Christensen or Sull, or the result of an insider/outsider background. It is, they believe, hard-coded in our DNA.
The economic premium on responding to revolution not only helps to create the super-elite, it is one of the forces widening the gap between the super-elite and everyone else. The revolutions that those Harvard public school kids capitalize on create outsize rewards for the winners and, in the medium term, usually make the world a better place for everyone.
But in the short run, they also create a lot of losers: new technologies destroy old jobs and, according to extensive research by MIT’s David Autor, have significantly hollowed out the U.S. middle class; Russia’s market transition created seventeen billionaires in a decade, but also led to a 40 percent drop in GDP; Soros profited from the 2008 crash and it made John Paulson a billionaire, but millions lost their jobs, homes, and retirement savings. For the winners, revolutions can bring a windfall; for the losers, disaster.
By any measure, private equity tycoon David Rubenstein is a plutocrat.
One afternoon in 2007, when Rubenstein noticed that the last privately held copy of the Magna Carta was being auctioned off by Sotheby’s, he was suddenly struck by the idea that the Magna Carta wasn’t just the founding document of Britain’s constitutional monarchy, it was the founding document of American democracy, too. The United States, he thought, really should have its own copy of this seminal agreement. So he bought it. For $21.3 million. When he tells this story, with a mixture of pride and lingering incredulity at his own impetuosity, Rubenstein’s favorite moment is talking to his wife at the end of the day and offering a humdinger of a punch line to the classic conjugal question “What did you do today, darling?” Rubenstein’s answer: “I bought the Magna Carta.”
All of which is to say that Rubenstein is no stranger to super-wealth. But the first time I met him, he was fascinated by the years I had spent chronicling the rise of the Russian oligarchs. Now that, he told me, was a time and place where you could make some real money.
Rubenstein is right. Responding to revolution has been particularly profitable in those parts of the world where there has been a real revolution, either overthrowing the ancien regime, as in the former Soviet bloc, or just a shift in the economic system, from central planning to the market. The most dramatic transition—and the biggest opportunity to earn a windfall—was in Russia, where twenty years of capitalism has created around a hundred billionaires, 8 percent of the world’s total. The personal wealth of this group of Russians could buy roughly 20 percent of their home country’s annual economic output.
Russia, of course, gives plutocracy a bad name. The Kremlin version of capitalism has been exceptionally good at producing billionaires—Russia has the world’s highest ratio of billionaires relative to the size of the economy—but the country’s overall performance has been less impressive. The economy shrank by 40 percent in six years and male life expectancy dropped nearly to the levels of sub-Saharan Africa in the 1990s—the decade when most of today’s oligarchs got their start. It has been growing more robustly for the past ten years, but has been outpaced by China, India, and Brazil, and remains largely dependent on natural resources. By 2011, per capita income was $12,993, well above emerging markets like China and India but below Lithuania, Chile, and Barbados, and male life expectancy is a mere sixty-two. Russia remains a tough place to do business: the World Bank rates it at 120, below Nicaragua, Yemen, and Pakistan.
But, as Rubenstein recognized, if you knew how to respond to revolution, there was no better place to be than Moscow in the 1990s. The conventional wisdom, even in Russia, is that the winners of the great privatization
