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NRO’s domestic-policy blog, by Reihan Salam.

The Lessons of Los Gatos



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Steven Johnson has written an excellent reply to George Packer’s new essay on Silicon Valley. Johnson makes two central arguments, the first of which is that the politics of Silicon Valley are not best described as libertarian but rather as “peer progressive,” a belief system that embraces the virtues of decentralized systems, yet which also emphasizes the importance of collaboration outside of the realm of the market, e.g., participatory democracy.  

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.

Johnson emphasizes that Democrats have fared well in Silicon Valley.

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.

But “peer progressivism” is hardly incompatible with a broadly pragmatic center-right, if not rigorously libertarian, worldview. Rick Perry, the Republican governor of Texas, for example, is one of the leading champions of state-level industrial policy. I can’t say I think this is a good thing, but it has helped chip away at his know-nothing reputation. GOP weakness among the rising information classes has prompted a great deal of soul-searching among conservatives, on issues ranging from same-sex civil marriage to immigration reform, and change is underway. Political identity tends to be durable, and one assumes that Silicon Valley voters will continue to back Democrats in large numbers in the indefinite future. It is at least possible, however, that a pragmatic coastal conservative like Chris Christie could connect with this constituency, provided his Democratic opponent isn’t similarly deft or compelling. 

Johnson’s more important point is that Packer misreads the economic life of Silicon Valley. Rather than see the Valley as an illustration of American inequality at its worst, the widespread practice of distributing meaningful equity to ordinary employees might in fact represent a powerful tool to redress inequality:

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.)

My objection to Johnson’s framework is that Silicon Valley firms are egalitarian for much the same reason that Denmark is egalitarian — both are highly exclusive clubs. Firms that limit their high-low wage ratios might work when virtually all employees are college-educated, or indeed when virtually all employees have even higher skill levels, but flatter hierarchies might be tougher in labor-intensive services that make extensive use of less-skilled labor. The gap between frontline employees and the back office will necessarily be larger in such firms. To suggest that simply flattening the ratio of executive-to-average-worker-pay would make, say, a construction company as successful as a firm that sells knowledge-intensive services and that exclusively employs workers with postgraduate degrees is silly. I don’t doubt that employee ownership might work well in these sectors, but it’s certainly not a no-brainer, as management is a highly specialized skill. 

So while Packer is perhaps too pessimistic about the ominous lessons of Silicon Valley, Johnson is perhaps too optimistic about the applicability of the lessons of Los Gatos to the world of labor-intensive services. One final note: if we’re concerned about the boom in land prices in Silicon Valley — as we ought to be — the obvious solution is to reform the zoning laws and embrace higher density.



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