Learning From Los Gatos

Why Silicon Valley is not the second coming of the Gilded Age.

It’s no surprise that George Packer—one of the most gifted writers in the business—has hit upon a fascinating topic in his latest New Yorker piece: the emerging politics of Silicon Valley. While the essay is behind a paywall, it’s definitely worth tracking down if you’re not a subscriber. (Also, hey, it’s The New Yorker — you should be a subscriber!) But for all the richness of the subject matter, in this case I think Packer has failed to capture the complexities of the Silicon Valley scene, in part because he’s using older conceptual frames that don’t adequately explain the phenomena he’s observing.

There is much of Silicon Valley that warrants criticism: the mono-culture now threatening San Francisco’s storied diversity and general weirdness; the anonymous office park sprawl of its built spaces; the male-dominated engineering culture; its assumption that all disruptions are good ones by definition; its casual scorn for older institutions. Packer has appropriately cutting words—and anecdotes—for most of these flaws in his piece. But his two main criticisms—the “prevailing” politics of the Valley and its economic inequality—miss their marks, for slightly different reasons.

The first assumption, cited half a dozen times in the piece, is that the default political framework of the Valley is libertarian. When I was writing Future Perfect—which makes a cameo in Packer’s piece—I spent quite a few pages clarifying that while the new “peer progressive” worldview shared some superficial characteristics with Randian libertarianism, it was in actuality fundamentally different. Yes, people who work in the tech sector today (particularly around the web and social media) believe in the power of decentralized systems and less hierarchical forms of organization. But that does not mean they are greed-is-good market fundamentalists. For starters, almost all of them recognize that their industry itself arose out of government funding (see ARPANET), and some of the most celebrated achievements of the digital culture (open source software, Wikipedia) involve commons-based collaboration with no conventional definition of private property whatsoever. It’s precisely because we lack a new vocabulary to describe this worldview that we end up lumping the tech sector together in the libertarian camp.

You can see this confusion most clearly in a series of datapoints that go amazingly unmentioned in Packer’s piece: namely, the election returns from last fall’s presidential race. As Nate Silver observed in a detailed postmortem on Northern California votes, Obama won Santa Clara county by 42% — more than ten times his margin nationally, and more than twice his margin in the rest of liberal California. (While San Francisco and Oakland have long been hotbeds of progressivism, Reagan won Santa Clara by double digits in both of his successful campaigns.) You would think such a dramatic swing to the left would at least warrant a mention in Packer’s piece, but from reading it, an outsider might reasonably assume that the Valley was a Republican stronghold—a vast army of Koch brothers with hoodies.

The numbers are even more stark when you look at campaign finance. According to Silver’s analysis, Google employees gave more than 97% of their political donations to Obama, with comparable percentages at Apple and eBay as well. If libertarianism is so rampant in Silicon Valley, why are they voting for higher taxes and funding a big government liberal by such overwhelming numbers?

By focusing so much on the libertarian framework, Packer buries (or indeed doesn’t even bother to mention) the lede, which is the stunning advantage that Democrats now have among the rising information classes. The most dynamic sector of the global capitalist economy is now decisively in the camp of the Democrats. How could this somehow go unmentioned in a piece about politics in Silicon Valley? The consequences of this shift are likely to be profound and multifaceted ones. (Silver mentions just one: “Since Democrats had the support of 80 percent or 90 percent of the best and brightest minds in the information technology field, it shouldn’t be surprising that Mr. Obama’s information technology infrastructure was viewed as state-of-the-art exemplary, whereas everyone from Republican volunteers to Silicon Valley journalists have criticized Mr. Romney’s systems.”) The interesting question about the Valley is how it reconciles its fondness for decentralized networks with its progressive political values. I’ve tried to answer that question by proposing the new category of peer progressivism, but whether you buy that answer or not, Packer doesn’t even bother to ask the question.

Then there’s the issue of inequality, which is where Packer starts, observing the rise of homelessness and the staggering cost of real estate in the area. No doubt about it, the explosive rise in wealth and income inequality in the U.S. may well be the single most pressing problem that we face, the slow but steady reversal of the last century’s rising tide. Packer deserves serious props for shining a light on that disturbing trend. But here again, I think he gets the Silicon Valley part of the story wrong, even if his motives are in the right place. Early in the piece, he cites a telling statistic: “There are fifty or so billionaires and tens of thousands of millionaires in Silicon Valley.” Think about that for a second: tens of thousands of millionaires, almost all them created by companies that didn’t exist two decades ago.

Why did that happen? Sure, companies went public or sold for staggering sums, but companies have been going public or selling out for generations without creating tens of thousands of millionaires along the way. The defining difference between Silicon Valley companies and almost every other industry in the U.S. is the virtually universal practice among tech companies of distributing meaningful equity (usually in the form of stock options) to ordinary employees. Before companies like Fairchild and Hewlett-Packard began the practice fifty years ago, distributing stock options to anyone other than top management was virtually unheard of. But the engineering tradition that spawned Silicon Valley was much more egalitarian than traditional corporate culture.

There’s a great book on this topic, called In The Company Of Owners, that documents just how distinct the Valley is from the rest of U.S. corporate culture. The top 100 tech companies granted 19% of their total ownership to non-senior-executive employees (i.e., everyone excluding the CEO and four lieutenants.) For the rest of corporate America, that number was 2%. In other words, when it came time to share rewards with ordinary employees, the Tech 100 were ten times more generous than low-tech firms. This is actually one of the hidden strengths of the tech sector in the US: its companies are much more competitive precisely because they are much more egalitarian in how they share their wealth internally. I would be surprised if there were any new industry in the history of capitalism that distributed its economic rewards to its employees as widely as Silicon Valley has. Billionaire founders or CEOs are nothing new. But multi-millionaire middle-managers? That’s something else altogether.

This is the paradox that Packer elides with his New Gilded Age narrative. The real estate crunch in Silicon Valley ultimately stems from the fact that there are tens of thousands of people living there who can afford to pay five million dollars for a house. Sure, a small elite of younger, hipper billionaire magnates are out there building their own San Simeons. But that’s a California story almost as old as the Gold Rush. What’s different now is that there’s a whole class of software engineers or a designers who can drop seven figures on an unrenovated fifties ranch house. There’s a real estate crisis in Silicon Valley because the companies in the region are much more generous in the way they share the wealth, not less.

Of course, the fact that Silicon Valley companies are more egalitarian than their equivalents in other industries doesn’t help us with the wider problem of inequality. Not everyone can work for Google, and in general, tech sector companies employ fewer Americans than their industrial predecessors. And all those middle-management millionaires make it harder for everyone else to live in the the same region, particularly where real estate values are concerned. For Packer, the lesson seems to be: the excesses of the digital-era super rich give us a case study in the growing problem of inequality throughout the U.S.. But you could reasonably draw the exact opposite lesson: that one way to deal with rising inequality is to make the rest of corporate America act more like Silicon Valley.

There is a growing body of research that shows that companies that limit their high-low wage ratios and distribute generous option plans consistently outperform more traditional, inegalitarian firms. Companies that flatten hierarchies and distribute rewards more fairly are actually more profitable, and not just nicer places to work. They don’t need high-flying IPOs to do this; simply flattening the ratio of executive-to-average-worker-pay creates similar benefits. The movement towards these more egalitarian corporate structures goes by many names: “stakeholder” or “partner” or even “conscious” capitalism. (In Future Perfect, I talk about this as one of the tenets of peer progressivism.) But whatever you call it, the framework has clearly generated its most spectacular results in Silicon Valley.

The whole premise of stakeholder capitalism offers a powerful and distinct message, because it gets at both our desire to be competitive in the global marketplace, but also to be more fair and equitable in the way we share our wealth. True libertarians would be repulsed at the thought, but the success of Silicon Valley even suggests that governments could do much more to encourage these kinds of internal compensation structures, in the name of better business and social cohesion. (Not to mention old-fashioned fairness.)

But to even think about those possibilities, you have to start with the idea that the wealth creation in Silicon Valley might have the seeds of something progressive in it, which Packer seems unwilling to do, unfortunately. The rise of a libertarian geek oligarchy is an easier story to tell, to be sure. But it’s not the most interesting one.