Peter Thiel’s Zero to One: the manifesto for a new economic theory of capitalism
A new chapter of The Wealth of Nations appears, to oppose the pessimism and nihilism of Thomas Piketty.
Zero to One, the new manifesto on entrepreneurship by PayPal cofounder, Facebook investor and Silicon Valley ‘don’ Peter Thiel, has stirred controversy for its defence of monopoly and attack on the model of perfect competition in neoclassical economics. According to Thiel, the goal of capitalism is not to create a perfectly competitive market, as economic theory claims should be the goal of an economy, but to create and exploit a monopoly. For only monopolies produce profits, and only monopolies induce the accumulation of capital.
At first view, there is little sense in arguing that this is an attack on the economic model of perfect competition, since Thiel relies on the model’s conclusion, that all profits are eliminated with competition, to build his argument for monopolies. What Thiel is actually denouncing is the pursuit of competition, as in his Wall Street Journal op-ed, Competition Is For Losers. Thiel is actually proposing that business engage in an activity that is completely absent from mainstream economic theory: the creation of a new market where none exists.
That is the meaning of the title. From zero market existing for a product or service, the company has created one market. This act of creation, of monopolization, is beneficial for the economy by creating value where none existed. The harder it becomes to substitute this market for another market in the fulfillment of consumer needs, the more important of a monopoly it is and the more important its creation is for the economy, justifying the enormous capital values of otherwise loss-producing startups, and the enormous capital investments they are engaged it.
In a sense, Thiel is proposing an economic theory of the future, one that is distinct from time preference theory which determines interest rates on savings. Thiel describes how new markets are created and what the value of creating these new markets is (the basis for the venture capital industry, betting on the emergence of new billion-dollar markets).
This is no less an important economic theory than Karl Marx’s, and its contemporary acolyte Thomas Piketty’s, as it thoroughly refutes the idea that capital will concentrate over time by some inexorable law. Thiel’s theory of new monopoly creation indicates that capital will explode where the right catalysts are assembled, and this new theory successfully explains the sustained extraordinary success of Silicon Valley and its venture capital ecosystem.
In social terms, this implies that the capital explosions will continuously erode the wealth of all members of society, rich to poor, as their old monopolies are competed away by new ones. This also implies that monopolistic competition has a direction. While, for instance, users of MySpace were migrating to Facebook, no Facebook users were migrating to MySpace. MySpace was engaged in capital-destroying perfect competition with Facebook, while Facebook felt no competition from MySpace. This is, in other words, the theory of disruptive innovation in the context of neoclassical economic models.
Finally, Thiel’s economic argument is aligned with his ultimate thesis and purpose — that modern society has accepted stagnation and decline, and that he intends to shake it out of this mindset. Explosive monopoly theory is indeed the right vision to get everyone out of academia and into action in the real world, yet the radical nature of the proposal is going to create a lot of violent reactionary responses. By building what could stand as a new chapter of The Wealth of Nations, it will certainly realign the proponents of capitalism behind a new theory of wealth-creation and its distribution, proponents who have felt helpless to justify their policies in the world of permanent stagnation created by the collapse of financial capitalism into a series of ever-larger bubbles. With so much success to show for it, it will be a hard theory for proponents of socialism to oppose.
It will also, I expect, realign the world stage. Where once nations were categorized as developed and developing, a new category will be created of leader-nations: the innovating world. The innovating world will be the part of the world where new markets are rooting, from where they are globalized into other nations. This innovating world will stand in contrast to the globalizing world (India, China, Brazil) where capital is being accumulated due to underexploited resources, and the stagnating world (Europe, Japan) where no economic growth is taking place due to the absence of new capital explosions.