How to Succeed in Business

During the past fifteen or twenty years, after several decades in which the distance between America’s rich and poor was relatively narrow, the distribution of wealth has again skewed dramatically in favor of the rich. One percent of Americans today account for some 40 percent of the nation’s personal wealth, about the same proportion as at the end of the Roaring Twenties. (In the early 1970s, the top 1 percent had only half that share.) Wealth in the US is now the most unevenly distributed in the advanced world.¹ When Forbes magazine first published its list of the 400 richest Americans in 1982, one needed a mere $100 million to qualify. Last year, the poorest of the 400 was worth more than $340 million. Consumer prices on average rose by only about 60 percent over this period, so inflation has accounted for only a small portion of this increase in individual wealth.

Unlike earlier periods of great wealth accumulation, however, these years saw the American economy grow unusually slowly. The moguls of the 1970s and 1980s became extraordinarily rich while productivity, or output per hour of work, which is the foundation of economic growth, rose at less than half the rate it had risen on average since 1870. Revised data show that it will have risen in the 1990s only marginally faster than it did in the 1970s and 1980s. Productivity has never risen so slowly over a twenty-year period since the Civil War. In addition, average real wages paid to American workers (discounted for inflation) have stagnated since the early 1970s and have fallen sharply by some measures, especially for those workers with only high-school educations. In the past, average real wages for all US workers had always risen during times of great wealth accumulation, if not so fast as the incomes of the wealthiest.

Before the 1970s, America’s greatest fortunes were rarely made by investing in financial markets. J.P. Morgan, who was not only an investor but built a large bank as well, accumulated a net worth of less than $1 billion in today’s dollars. Andrew Carnegie reportedly said on Morgan’s death that he hadn’t known Morgan wasn’t a rich man. ² Instead, America’s richest people typically drew their wealth from owning natural resources or real estate, or from having started companies that eventually became giants. These tycoons made autos, steel, paper, food products, cigarettes, machinery, and, later, computers, and created the great oil companies, department-store chains, banks and insurance companies, railroads, airlines, and the print and electronic media. They typically hired thousands of workers, and their companies or property holdings long survived most of them.

Many of America’s greatest fortunes over the last two decades of exceptionally slow economic growth have been made not by builders of companies but, for the first time on such a scale, by professional investors. Rarely have these men and women created a new company. They could close down the businesses that made them their fortunes and few would ever notice. They do not have to be able to mobilize a huge work force or influence the nation’s way of life. A modern-day financial tycoon can remain a private person, taking advantage of recent electronic technology in the solitude of his office, and make an enormous fortune without having to hire or fire more than a handful of workers or convince one American consumer to buy his product or service.

The richest of these men (there are no self-made women high on this list) are Warren Buffett and George Soros, who are widely regarded as perhaps the most canny investors of the post-World War I era. If one had placed $1,000 with Buffett thirty years ago, it would have been worth $1.13 million at the end of 1994, an average annual rate of return of nearly 27 percent a year compared to 9 to 10 percent for stocks in general. An investor who placed $1,000 in Soros’s Quantum Fund when it was started in 1969 would have $2.15 million, an annual compound rate of return of nearly 35 percent a year. Only a few other professional investors would claim to match their performance. According to Forbes’s estimate of last autumn, Buffett’s shares in his main investment vehicle, Berkshire Hathaway Inc., are worth more than $12 billion, making him the nation’s second richest person, behind Microsoft’s William Gates, whose stock is worth more than $15 billion. Forbes reports that Soros is worth more than $1 billion, ranking his with America’s sixty-five or so largest fortunes, but the figure is probably substantially understated. Barron’s has recently called him a billionaire several times over, and in 1993 alone he made a pre-tax profit of $1 billion.

Regardless of the particular talents of Buffett and Soros, the times have been especially favorable for making money in the financial markets. This is largely, in my view, a result of the unforeseen consequences of inflation in the late 1970s and early 1980s, and the dramatic, turbulent expansion of international markets for capital over the past twenty years. The quadrupling of oil prices by OPEC in 1973 and 1974 set off several rounds of inflation that pushed up interest rates to unusually high levels. In such a risky period, investors were not about to buy a company’s equities when they could buy its debt at interest rates of 12 to 14 percent a year or more. The prices of stocks fell dramatically, often well below the cost of rebuilding the company from scratch, and created exceptional opportunities for those who believed that the US economy would eventually return to normal. The hostile corporate takeover movement got started in those years, and leveraged buyouts soon followed, earning takeover buccaneers, investment bankers, LBO specialists, and risk arbitrageurs unprecedentedly high incomes, high enough to place several of them among the Forbes 400.

At the same time, financial markets became more complex. International currencies had been set free to fluctuate according to market demands; new financial instruments deriving from the Bretton Woods agreements on exchange rates had been created to contain risk and volatility, and markets had become global. According to one estimate, 90 percent of all international financial transactions were once related to actual trade or long-term investment compared to only 10 percent in today’s explosively growing markets, which are dominated by short-term investments in currencies, futures, “derivatives,” and other investments.³ In the 1960s, twelve million shares traded hands on the New York Stock Exchange on an active day; by the 1980s, hundreds of millions of shares might be exchanged on an average day. The new complexity, breadth, and global nature of trading created opportunities for those who understood how to exploit them.

When inflation at last began to subside after the deep 1982 recession, and interest rates started to fall, financial markets were the great beneficiaries. Stocks especially began to make up lost ground, rising much faster than corporate profits, even though those profits were in part fattened by overseas subsidiaries located in countries whose economy and productivity grew faster than those in the US. Profit margins were also aided by the ability of corporations to keep wages down through union-breaking and other streamlining efforts. Still, corporate profits have about tripled since their lowest levels in the 1982 recession, while stock prices, measured by the Dow Jones industrials, have risen by more than six times.⁴

There are, of course, many other factors that might also have contributed to rising stock prices. Growing confidence in the stock market encouraged more investing, for example. Pension funds and investors in mutual funds poured billions into the financial markets. Some contend that lower inflation and interest rates led to more sustainable economic expansions. But for most of these years, the stock market didn’t merely reflect the state of the American economy, or even the renewed health of the increasingly international corporate sector; it was also recovering from the inflation and the high interest rates that had left it far behind in the 1970s.

Because falling inflation and interest rates benefit stocks, a strong bias among Wall Street professionals has developed in favor of economic policies that foster only slow economic growth. (The recent fall in the market at the news of rising employment figures for February 1996 is a case in point.) Faster growth might improve profits still more; but if it also risks higher inflation, and therefore higher interest rates, stock prices might suffer. Slow growth also keeps downward pressures on wages, and this improves profit margins. In such a slow-growth environment, the wages of the lowest paid are often the last to rise when an economy expands, and may not rise at all if the economy does not expand sufficiently rapidly.

The times may well have been right for Warren Buffett and George Soros, but these two men were also unusually capable of taking advantage of the times, not merely because of their talents and ambition but also because of their personal idiosyncrasies and their obdurate confidence in their own convictions.

Roger Lowenstein’s diligently researched, well-told biography partly traces Buffett’s obsession with accumulating money to the difficulties suffered by his father’s brokerage firm in Omaha, Nebraska, early in the Great Depression, when Buffett was a child. His father’s business survived, but its near-failure seems to have impressed the young Buffett with a need to earn and save as much money as possible. This cannot be the whole explanation, but Lowenstein does not explore the formation of Buffett’s character much further. Buffett was selling Coca-Cola to his friends for a profit by the time he was six. He bought his first shares of stock—three of them, at $38 each, in a company called Cities Service—by the age of eleven. As a student he was exceptionally gifted in mathematics, which may, I think, partly account for his considerable confidence. He was always figuring the odds as a boy, and even devised a horse-betting scheme with a friend. He entered the University of Pennsylvania’s Wharton School, but left to attend the University of Nebraska. After graduate school in New York, Buffet again returned to Omaha, where he apparently found the sort of down-home comfort he needed. There he has lived in a middle-class house until this day, spending little money on himself or his children; any expense today, he figures, is forgone investment profits in the future. The penuriousness has not abated even as his fortune has risen into the billions. Lowenstein points out how little Buffett has given to charity compared to the size of his fortune. Though he has said he will leave practically all his money to charity after he and his wife die, one can only speculate how much good that money could do today to ameliorate the problems, such as the population explosion, that particularly concern him.

While at the University of Nebraska, Buffett started several businesses which eventually produced an investment stake of $10,000. After graduation, he enrolled in Columbia Business School and encountered the most important influence of his professional life, the legendary finance professor Benjamin Graham. Graham believed in only buying a stock when it was considerably undervalued compared to the company’s earnings, dividends, and assets. His best-known work, Security Analysis, written with David Dodd and first published in 1934, was designed, Lowenstein writes, as a criticism of the excessive speculation that led to the Great Crash. Buffett found Graham’s bargain-basement investment strategy especially congenial, and received the only A+ the professor ever gave a student.

After graduating, Buffett worked for Graham. Meanwhile, he invested on his own over the next five years so successfully that his original $10,000 stake grew to $140,000. He opened his own partnership in 1956; in 1962, he began buying shares in a textile company, Berkshire Hathaway Inc., which he has used as his vehicle for investment ever since. In 1967, Berkshire bought an insurance company, National Indemnity, that from then on provided Buffett with an ample cash flow each year with which to invest in other securities.

By then, Buffett’s philosophy had broadened beyond Graham’s. While he still liked stocks that were selling very cheaply (his cautiousness about high prices deterred him from buying what would turn out to be high-flying stocks such as Xerox and Control Data), he also looked for companies that had so dominant a position in a business that they were difficult to compete against. He was drawn to companies such as American Express, which controlled most of the market for traveler’s checks and charge cards, or newspapers, such as The Washington Post, which monopolized a single city. One of his most successful investments was GEICO, the insurance company, which, by selling mail-order insurance across the country, could maintain the lowest operating costs in the industry. As Lowenstein writes, these were franchises which had a “lock” on their markets. And Buffett expected to retain his investments for the long run.

Buffett’s strength lay not only in his ability to recognize such franchises before others did; he was also willing to invest heavily when he believed he was right. He defied the prevailing “efficient markets theory,” which maintained that a prudent investor should diversify his or her holdings among a wide range of stocks because no one could outperform the market averages over time. Buffett was convinced the stock market was often wrong, and he would gladly buy large shares in companies when nobody else wanted them. He took his position in American Express in 1964 when it was in the midst of a financial scandal, for example. Its stock prices had fallen from $60 a share to $35, yet Buffett invested one quarter of his assets in the security. Similarly, he made an enormous investment in a GEICO stock offering in 1976, when the rest of Wall Street shunned the company because it had just been forced to take more than $125 million in losses. His total $43-million investment in GEICO grew to a value of $1.7 billion by 1994, and this January he paid $2.2 billion for the 49 percent of the company he didn’t already own. After he had a similar success with such companies as Capital Cities Communications, Walt Disney Productions, and See’s Candy Shops, some academic theorists started to come around to his point of view. One recent study found that simply investing in cheap stocks over time could produce returns substantially higher than investing in other kinds of stocks.⁵

Buffett went on a buying spree in the 1970s, when stocks were uncommonly cheap. But what also accounts for his superior performance are the times when he didn’t buy. He avoided the financial fads of the 1960s, when prices escalated wildly. For the three years between 1983 and 1986, when prices soared before collapsing in the 1987 market crash, he bought no stocks at all. In fact, in his most recent annual letter to his Berkshire shareholders he writes that the company’s own shares may be overvalued. Because he rarely sold off a holding, Buffett’s performance was also aided by the fact that he could defer paying taxes on his gains. In one of his earlier annual letters, which are well known for their frankness, Buffett argued that the growing tax liability was not a danger, but “an interest-free loan from the U.S. Treasury.”⁶

Buffett has made mistakes. Many have criticized his investment in the airline USAir, which is still losing money, and his relationship with Salomon Brothers, for which he acted as chairman after its management scandal in 1991. Salomon was once consistently one of four leading investment bankers and it now ranks much lower. But for the most part, Buffett’s record has been remarkable. If he has not built any companies from scratch the way some electronics and media moguls have in the past twenty or thirty years, he has rescued several companies, such as GEICO, with injections of capital, and he has provided useful strategic advice over the years for such companies as The Washington Post. He also protected managers he had faith in from hostile corporate raiders by taking large positions in their companies that he refused to sell to the outside bidder. (He sometimes, as with Gillette, got preferred terms for these deals.) In this way, he helped to create a stable environment that enabled some of his favorite companies, such as Capital Cities, to thrive in the long run. Capital Cities eventually bought the network ABC and was acquired by Walt Disney in 1995.⁷

It would be hard to argue that George Soros’s investment activities have made a serious contribution to the American economy other than to provide more liquidity to markets that already had an ample amount of it. When it comes to making money, Soros shares only two characteristics with Buffett: the conviction that prices set in the financial markets are often wrong and the courage to invest heavily when he believes he is right. Otherwise, his investment strategy could hardly be more different. Unlike Buffett, who usually holds on indefinitely to the securities he buys, Soros is essentially a trader, entirely willing to sell in the afternoon what he bought in the morning. He seeks discrepancies between how the market values a security—a stock, bond, currency, commodity, or other more exotic financial instrument—and what he thinks its value really is. When the market values are significantly out of line and he is confident that his assessment is the correct one, he will borrow up to ten times his capital, and possibly more, to take a position.

As a businessman, Soros, by his own admission, is an opportunist. Yet he has testified before Congress in favor of regulating the financial markets in which he operates; and he has been a persistent critic of laissez-faire economics. “Where I am at odds with the latter-day apostles of laissez faire,” he says in Soros on Soros, “is that I don’t believe markets are perfect. In my opinion, they are just as likely to lead to unsustainable excesses as to equilibrium.” Like Warren Buffett, the homespun billionaire who lives in a modest house in Omaha, George Soros is a more paradoxical figure than might be expected.

Little information is available about the young Soros, and he himself is reticent about his early years. Born in Budapest, he was forced as a teenager into hiding from the Nazis during World War II. He was saved from the camps only by a resourceful father who found a dozen different hiding places for the family and provided them false identities to disguise the fact that they were Jewish. Soros says he revered his father, and in his new book, Soros on Soros, he recalls this wartime experience romantically. “For a 14-year-old, it was the most exciting adventure that one could possibly ask for…. I learned the art of survival from a grand master.” And indeed, what has largely set Soros the investor apart from his peers has been his willingness to take risks. “There is nothing like danger to focus the mind,” he says, “and I do need the excitement connected with taking risks in order to think clearly.”

This is perhaps the most revealing comment Soros has made about his aggressive investment strategies. Most of the financial analysts I know would agree that his 1987 book, The Alchemy of Finance, in which he describes his investments over a sixteen-month period, is too obscure to be useful, while Soros on Soros is less an account of his investment strategy (to which only about a third of the book is devoted) than of the personal philosophy that underlies not only his career in finance but also his decision to be a philanthropist and, in his words, “a stateless statesman.”

Despite the comfort that his billions give him, Soros seems determined to live by ideas. His interest in philosophy was kindled at the London School of Economics, where he enrolled after World War II. There he fell under the influence of the philosopher Karl Popper, whose book, The Open Society and its Enemies, was to have a lasting hold on him. (Popper was also a severe critic of the neoclassical economic theory to which most main-stream economists subscribe.)⁸ In his lively but ultimately not very revealing biography, Robert Slater claims that Soros’s grades weren’t good enough for him to become the philosopher he wanted to be, so he got a job in a London investment house instead.

He moved to New York in 1956, where he found work in international arbitrage. This was a natural training ground for him. An international arbitrageur seeks discrepancies in the prices of the same or similar securities that are traded on different exchanges, and invests heavily to take advantage of the miniscule difference between them, buying the cheaper security on one exchange and simultaneously selling the dearer one on the other. After years of analyzing a variety of investments, Soros devised a model portfolio that convinced institutional investors that his ideas would make money. He started a fund in 1969 for his firm which enabled him to sell securities short—that is, to sell securities he didn’t own but had borrowed with only a certain percentage of money down, in effect betting on their decline—and to “leverage” his capital, or use it as security to borrow large sums for additional investment. Such funds are called “hedge funds” because they enable the manager to reduce risk by profiting regardless of whether markets move up or down. In 1973, Soros set up his own fund, eventually named the Quantum Fund, which was based outside the US so as to avoid US income taxes.

Unlike Warren Buffett, Soros will invest in almost anything. Slater’s book offers a useful if not comprehensive summary of his winnings. In the early 1970s, he began to invest in the relatively immature stock markets of Japan, Canada, the Netherlands, and France, whose economies, he realized, were beginning to grow rapidly. At one point, Slater reports, one fourth of the fund’s assets was invested in Japan. With the help of Jim Rogers, his research associate, Soros and the Quantum Fund made profits in the 1970s in the stocks of oil companies, banks, defense companies, and agricultural companies, almost always purchasing them when they were out of favor. When the stock market fell dramatically in 1973 and 1974, Soros’s fund made money by having sold short such high-priced stocks as Avon. By 1980, the Quantum Fund had more than $380 million in assets. Soros, according to Slater, retained 15 percent of the profits, re-investing much of his earnings in the fund.

The biggest killings were yet to come. Soros realized that the excessive borrowing of the US government had forced American interest rates, and consequently the value of the dollar, to unsustainable heights. Making use of leverage, Soros invested about double the value of his fund and bought $1.5 billion worth of the under-valued German mark and Japanese yen. Many other currency traders were doing the same thing, but none on the same scale. When the leading Western nations agreed in 1985 to coordinate efforts to force the dollar down, the Quantum Fund earned about $150 million, according to Slater. For the year, Quantum earned $500 million and Soros himself earned an estimated $100 million.

Soros has not always been right. Quantum lost money in 1981. And Soros consistently lost money investing in international currencies between 1981 and 1985. He did not foresee the stock market crash in 1987, expecting instead a crash in Japan. Still, his profitable decisions have far exceeded his losing ones. His most controversial investment was when he bet against the high British pound in 1992, netting for his fund a profit of $1 billion from the rise of the deutsche mark and other currencies relative to the pound. Countless hedge funds had by then been established worldwide, their total assets running in the tens of billions of dollars, and many had taken the same position against the pound. But no one had put $10 billion of leveraged capital on the line the way Soros had. The hedge funds, and Soros in particular, were widely accused of forcing the British government to devalue its currency after it had wasted billions trying to defend it. Soros argues convincingly that, in view of British economic policy, the pound’s collapse would have occurred anyway.

In 1993 Quantum made a lot of money again. After the fall of the pound, Soros’s influence was so great that he could move markets—which some believed he did intentionally—by announcing his investment decisions, and he became the subject of widespread critical scrutiny. But early in 1994 the fund lost $600 million when Soros guessed the wrong way on the Japanese yen, a misfortune which he went out of his way not to hide and which helped to quiet his critics.

The core of the view expounded both in The Alchemy of Finance and in Soros on Soros is that people habitually misperceive the world around them and either are unable or refuse to acknowledge this fact. In the financial markets—which are, of course, a natural laboratory for examining misperceptions—investors’ often superficially arrived-at beliefs about market tendencies are reinforced when the market price goes their way when they buy or sell. They gain confidence in their mistaken notions and push prices even further in the same direction. This feedback, or what Soros calls reflexivity, is to him a natural law. Thus, prices typically run up too high or stay low for far too long, because people become fixed in their partial convictions. Soros has been especially adept at exploiting both the upturns and downturns in financial markets.

But I do not think Soros successfully broadens this rather narrow idea into a systematic philosophy. Again and again the unanswered question is just how Soros arrived at an accurate perception when others were reinforcing their incorrect ones. Misperception has been a central issue in philosophy since before Plato put forward his image of the cave in The Republic. Soros makes almost no references to this vast literature in order to substantiate his ideas, and he frequently admits his frustration with explaining what he means. (One chapter of Soros on Soros is called “The Failed Philosopher.”) He might do better to discuss more specifically and analytically the various kinds of misperception he has observed among other investors. He might also try to show just what is characteristic of his own different kind of financial analysis that enables him to avoid the reflexivity trap. In fact, a good many other investors have been consistently successful, if not as spectacularly as Soros, who has been willing to risk much larger sums than most of his competitors. Just what kinds of insights and calculations explain his success remain elusive; the reader cannot tell where instinct, talent, and analysis intersect.

In the series of questions and answers that makes up Soros on Soros, Soros also discusses his charitable activities at length. Here he is down to earth and makes a strong case for the projects he has financed. He says he has tried to advance the goals of Karl Popper’s Open Society—by which Soros essentially means constitutional democracy—and indeed he has done so with extraordinary generosity and, I think, sincerity and ingenuity. In Eastern Europe in the early 1980s he began to support independent writers and human rights organizations, and to provide scholarships. He originally opened offices in many of these countries to provide information of use to dissidents at a time when his making a heretofore forbidden photocopying machine available could be of enormous help to them. With the fall of Communist governments he shifted from efforts to help members of the democratic opposition to various kinds of humanitarian and technical assistance. There are now Soros organizations in some two dozen countries and several have become the intellectual centers of their countries, as has the Central European University he has endowed in Budapest. Since 1992 alone, he has contributed hundreds of millions of dollars in humanitarian aid and educational support in Russia, the former Yugoslavia, and most of the Eastern European countries. In Sarajevo he sponsored desperately needed repairs to the city’s water and gas systems.

It is true that some of Soros’s foreign policy ideas seem naive—many would question, for instance, whether large-scale Western financial assistance in 1988 would, as he argues, have materially slowed the disintegration of the Soviet Union. But as a pragmatic, capitalist advocate of democracy and free speech, Soros has done much to counter the tendency both within and outside the former Communist countries to criticize democratic government as posing obstacles to economic growth.

In our electronic era, moguls like Buffett and Soros needn’t have the expansive personalities that were usually required to make a fortune in an earlier age. Ted Turner, however, might well have made the equivalent of a couple of billion dollars at any time in America’s history. He is the sort of entrepreneur who has become familiar in American economic history—brash, forceful, and provocative. And, indeed, Turner built a large company, not simply an investment portfolio. Essentially he is a man of action who only in his later years developed interests other than sailing, women, and generally having a good time. As a boy he was goaded to compete hard by a physically abusive, alcoholic father who, before he committed suicide, made a small fortune in the billboard advertising business. For Ted Turner, as for his father, victory was everything. He won sailing’s America’s Cup in 1977 by single-minded determination, and that was the way he made his fortune as well. His biographers say that he has been taking medicine for depression for several years.

Robert Goldberg and Gerald Jay Goldberg’s Citizen Turner and Porter Bibb’s earlier It Ain’t As Easy As It Looks cover much the same ground. The Goldbergs, father and son, concentrate mainly on the personal life of Ted Turner and his associates; Bibb’s book is better organized and more perceptive about Turner’s financial career. Both books treat the suicide of Turner’s father as a turning point for the son. Ed Turner shot himself just as he was about to complete a risky financial transaction—a leveraged buy-out of sorts—that he feared might eventually bankrupt him. Often to his own detriment, his son has refused to back away from deals simply because they were risky.

Ted expanded his father’s billboard business by buying first radio and then television stations. He had a flair for deciding what would work on TV, particularly old movies and fluffy sitcom reruns. He was never much interested in more serious television until, in 1978, he perceived the money-making possibility of starting an all-news cable service, which eventually became CNN. Once he saw the opportunity, he won out over all his competitors. He did so by keeping his overhead low (he based CNN in non-unionized Georgia instead of in the much more expensive New York, for instance), by relentlessly courting cable-system operators (whose loyalty to him has allowed CNN’s audience to grow from 1.7 million households in 1980 to seventy-five million worldwide today), and, finally, by being willing to risk bankruptcy rather than be undercut by a rival. (He won an almost ruinous subscriber price war with ABC-Westinghouse’s Satellite News Channel in 1983, then bought it out.)

Turner built CNN into a unique international news service, employing several thousand people and earning operating profits of more than $200 million last year; the major networks are only now about to imitate it. But his intense desire to acquire more television stations and other businesses, including MGM/United Artists, caused him to pile up huge debts. As a result he had to get the approval for major decisions from a board of directors on which his largest investors were represented. He has never been able to acquire the TV network he so badly wants, although he almost won a hostile takeover battle for the much-larger CBS in 1985. He recently sold out to Time-Warner with the understanding that he would continue to run part of the business, but his status in the merged company is as yet unclear.

For all his brashness, Turner is no more or less aggressive than Buffett or Soros or such seemingly mild-mannered electronic billionaires as Microsoft’s Bill Gates, who is under investigation by the Justice Department for possible anti-trust practices. In his manner, however, Turner is a throwback to more freewheeling days and his success helps us to understand how the times both have and haven’t changed. It is true that he pioneered in launching a new, electronic medium, but he built a large company not through analytic shrewdness but by traditional entrepreneurial aggressiveness.

That Buffett, Soros, and Turner have all made serious contributions to improving society is a fair conclusion to draw from their biographies. Many other investors have no doubt made enormous amounts of money while contributing much less. Books about a few tycoons who seem genuinely interested in the world around them tend to obscure the toll that financial speculation can take—environmental damage, destabilized economies, wasted investment, and an increasing gap between the rich and the poor. Yet at the same time it would be a mistake to argue that the increasingly unequal distribution of income and wealth in America today is the only, or even the principal, cause of our economic slowdown. Rather, I think it is a symptom of a more complex change in our economic circumstances, which involves expanding international competition, a shift away from the traditional systems of mass production and mass marketing that America once dominated, an increase in economic uncertainty, and a consequent softening of capital investment.

Having said that, however, I would also argue that the widening distribution of income and wealth will exacerbate these tendencies. That wages are stagnant for so many workers dampens the overall demand for goods and services. It also reduces the beneficial effects of mass buying power, particularly the lower production costs that occur when there are increases in output—so-called economies of scale. And it heightens the risk of political instability, so that concerted efforts to improve our circumstances are more difficult to carry out.

To rectify these problems would require faster growth, much more attention to improving productivity, larger capital investment, and changes in the attitudes of management toward workers. Wall Street has contributed to the country’s economic health by encouraging, in many cases, both the restructuring of American businesses so that they are more efficient and the expansion of international trade. But its growing financial power—what has made so many speculators so rich—has also had harmful consequences. It has contributed to the excessive ease with which businesses now cut wages and fire workers, the tendency of business to concentrate on short-term, low-risk capital investments, and the siphoning of valuable investment funds into speculative fads such as leveraged buyouts.

We have always admired the rich in America, and part of our national orthodoxy is the belief that through hard work practically anyone has the chance of one day becoming one of them. But that so many have grown immensely rich during two decades of sluggish economic growth and stagnating wages poses a central issue for Americans, one that still has not been engaged in our national political life.