Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (21 page)

That phrase—the billionaire’s circle—is the key to how the entrepreneurs of finance transformed the wider culture of Wall Street, and thus of the global banking business. Thanks to Jones, Doriot, and Posner, being in the “hundreds of millions” circle isn’t enough. To understand how that sentiment has ratcheted up individual compensation for Wall Street’s salarymen—not just the entrepreneurs who take the risk of going it alone—consider this fact: in 2011, 42 percent of Goldman Sachs’s revenues were spent paying its employees, who earned an average of $367,057. Nor is that princely compensation restricted to the über-bankers at Goldman Sachs. At Morgan Stanley, which made a $4 billion mistake on the eve of the financial crisis and whose recovery from it has been lackluster, compensation accounted for 51 percent of revenue in 2010. At Barclays, which now owns Lehman, the figure was 34 percent; at Credit Suisse, it was 44 percent. To put it another way, on Wall Street, in the battle between talent and capital, it is the talent that is winning. Wall Street is the mother church of capitalism. But its flagship firms are run like Yugoslav workers’ collectives.

T
HE
M
ATTHEW
E
FFECT

Matthew of Capernaum was a Galilean tax collector and the son of a tax collector. He became one of Jesus Christ’s apostles, the patron saint of bankers—and one of the first thinkers about superstars. What he noticed was the ratchet effect of superstardom: “For unto every one that hath shall be given, and he shall have abundance; but from him that hath not shall be taken away even that which he hath.”

The Marshall effect, the Rosen effect, and the Martin effect are all about the ways in which superstars are able to be better paid for the value they create—thanks to richer clients (Marshall), more clients (Rosen), and better terms of trade with their financial backers (Martin). The multiplier effect that Saint Matthew observed is what makes all these drivers of superstardom so powerful: the superstar phenomenon feeds on itself.

We are all familiar with the Matthew effect in pop culture, where it is so apparent that it seems as inevitable and unremarkable as gravity. Celebrities are famous for being famous. And fame is its own achievement and currency. One reason we know that is because of fame production machines, like reality TV shows, and the intense popular desire to participate in them. (In Philadelphia in August 2007, twenty thousand people competed for twenty-nine spots on
American Idol
, a far tougher ratio than being admitted to Harvard.)

Here’s what might surprise you: The intrinsic power of superstardom—making an impact because of who you are, not what you do—operates not only in the skin-deep world of entertainment. It also applies to what we like to think of as the empirical universe of science. In fact, the term “Matthew effect” was coined by sociologist Robert Merton to describe how prestigious awards, in particular the Nobel Prize, influenced the perception of scientific work. Merton discovered that science had its own superstars, and that those stars’ discoveries were considered more important or original just because of who had made them.

Merton found that scientists who published frequently and worked at “major” universities gained more recognition than scientists who were equally productive but worked at lesser institutions. In cases where several researchers made the same discovery at roughly the same time, the more famous scientist was usually credited with the breakthrough while his or her unknown peer became “a footnote.” Writing more than four decades ago, Merton predicted that the superstar phenomenon would accelerate, partly because science was at the beginning of a shift from “little science,” with an investigator and a microscope, to “big science, with its expensive and often centralized equipment needed for research.” The superstars, he believed, would be the only ones to get the tools to do “big science,” giving them a further advantage relative to their less recognized peers.

What is striking about Merton’s scientific superstars is how conscious they are of the inequities of the celebrity from which they benefit. One Nobel Prize–winning physicist pointed out: “The world is peculiar in this matter of how it gives credit. It tends to give credit to [already] famous people.” A Nobel Prize–winning chemist admitted: “When people see my name on a paper, they are apt to remember it and not to remember the other names.” Another physics laureate went so far as to worry he was getting kudos for discoveries made by others: “I’m probably getting credit now, if I don’t watch myself, for things other people figured out. Because I’m notorious and when I say [something], people say: ‘Well, he’s the one that thought this out.’ Well, I may just be saying things that other people have thought out before.”

The scientist who best exemplifies the self-fulfilling power of fame is, ironically, the one most of us would immediately name as the twentieth century’s brightest example of pure intellectual genius: Albert Einstein. Einstein was indeed a groundbreaking physicist, whose theory of relativity ushered in the nuclear age and transformed the way we think about the material world. But why is he a household name, while Niels Bohr, who made important contributions to quantum mechanics and developed a model of atomic structure that remains valid today, or James Watson, one of the discoverers of the double helix structure of DNA, is not?

According to historian Marshall Missner, Einstein owes much of his power as one of the most influential men of the twentieth century less to his theoretical papers and more to the trip he made to the United States in April 1921 as part of a Zionist delegation led by Chaim Weizmann. Before the ship made landfall, Einstein was already known—and feared. His theory of relativity, first put forward in 1905, had been dramatically confirmed in 1919 by the observation of the deflection of light during the solar eclipse in May of that year. The discovery captured the American popular imagination, but not in a good way. The twenties were a fraught decade. The Bolsheviks were consolidating their power in the Soviet Union. Germany was struggling under the weight of punitive World War I reparations. The U.S. economy was still booming, but income inequality was higher than it had ever been and elites were frightened both of homegrown populist protesters and of revolutionary ideas crossing the Atlantic. It was also a time of intense xenophobia and mounting anti-Semitism.

In that climate, America’s arbiters of public opinion decided that Dr. Einstein and his theory of relativity were sinister and subversive. It became a truth universally acknowledged that only “twelve men” in the world understood the theory of relativity. Pundits worried that this small, foreign cabal could use its knowledge to bend space and time and to enter a “fourth dimension” and thereby achieve “world domination.” Even the
New York Times
warned of “the anti-democratic implications” of Einstein’s discovery: “The Declaration of Independence itself is outraged by the assertion that there is anything on earth, or in interstellar space, that can be understood by only the chosen few.”

Then came the Weizmann delegation. Zionism was growing in popularity among New York Jews, and thousands came to the pier to greet the visitors. But the press thought the crowds were Einstein groupies. The
Washington Post
reported there were “thousands at pier to greet Einstein.” The
New York Times
wrote that “thousands wait four hours to welcome theorist and his party to America.” Its interest piqued, the press pack descended on Einstein. Instead of the “haughty, aloof European looking down on boorish Americans” they had expected, he turned out to be a modest, likable guy who “smiled when his picture was taken, and produced amusing and quotable answers to their inane questions.” No longer a threat to the Declaration of Independence, “Professor Einstein,” the
New York Times
editorial page declared, “improves upon acquaintance.” The scribblers loved him, and they loved the frisson of overturning their readers’ expectations, and a scientific legend was born. From that moment on, a great deal of Einstein’s power in the world, particularly outside the lab, but also within it, was derived from his celebrity.

—

You can see the same power of accidental celebrity at work in other fields. One is bestselling fiction. Thanks to the inevitable mistakes in bestseller lists (in 2001 and 2002, 109 books that should have been on the
New York Times
bestseller list according to their sales were left off), Stanford Business School professor Alan Sorensen was able to show that for books of equal initial popularity, being left off the list—not getting the Nobel Prize, not enjoying Einstein’s superstar treatment on that 1921 visit to the United States—meant fewer subsequent sales.

The same is true of classical musicians. The most important contest for pianists is Belgium’s Queen Elisabeth Competition. Looking at eleven years of the competition, economists Victor Ginsburgh and Jan van Ours found that the top three players went on to become successful professional musicians. Less than half of the others were able to find work of any sort as musicians. But is that a reward for talent or for the celebrity of winning the competition? One clue that officially being named a superstar—winning the competition—had more value than pure talent was an unexpected discovery Ginsburgh and van Ours made when they studied the winners. Placing first, second, or third correlated closely with the randomly determined order in which contestants had competed. So, unless you believe that the random order of participating in the competition is linked to talent, the more obvious conclusion is that the music world celebrity brought by winning the Queen Elisabeth Competition, independent of how good you are, has a powerful effect on your professional success as a musician.

But what about the long tail? One of the promises of the Internet has been that it can weaken the Matthew effect: the Web has low barriers to entry, and we all start out equal online. Matthew Salganik and Duncan Watts tested that premise in 2005 on 12,207 Web-based participants. The research subjects were offered a menu of forty-eight songs. Some participants were shown the songs ranked by popularity in the research group and told how often each song had been downloaded. Others were shown the songs in random order. A separate group was shown the songs in a meek-shall-inherit-the-earth order—the least popular songs were presented as most popular and vice versa. The results largely confirmed Merton’s thesis: being presented as popular, whether that information was true or not, strongly increased a song’s subsequent popularity. The impact was strongest for the songs that were the “worst” as measured by the unmanipulated judgment of listeners. Nor was the effect absolute. Even when presented as the least popular in the “inverted” world, the best songs gradually climbed up the rankings. If you are very, very good, you can break into the superstar league, but it’s an uphill battle.

C
APITAL
F
IGHTS
B
ACK

On January 11, 1991, Jeffrey Katzenberg, then CEO of Walt Disney Studios, sent a memo to his thirteen top executives titled “The World Is Changing: Some Thoughts on Our Business.” Despite its bland title, the twenty-eight-page note was instantly leaked to the press, probably by Katzenberg himself, and it swiftly became the most read prose in Hollywood. “We are entering a period of great danger and ever greater uncertainty,” the memorandum began. The change Katzenberg was worried about? The rise of superstars.

In 1984, when Katzenberg and his team arrived at Disney with a mandate to turn around the venerable but troubled moviemaker, Disney had been “the most cost-conscious of all studios.” It had saved money mostly “by avoiding the reigning stars of the moment.” Katzenberg wrote, proudly: “Instead we featured stars on the downward slope of their career or invented new ones of our own. Robin Williams suggested to
Newsweek
magazine that we recruited talent by standing outside the back door of the Betty Ford Clinic. The first instance of this approach to moviemaking was
Down and Out in Beverly Hills
, a film that reignited the careers of its three stars, Bette Midler, Richard Dreyfuss, and Nick Nolte.”

But as the decade progressed, Disney found itself paying its stars more. What particularly distressed Katzenberg was the Matthew effect—paying stars not just for their talent, but also for their fame, something Katzenberg called the “celebrity surcharge”: “In 1984, we paid Bette only for her considerable talent. Now, we must also pay her for her considerable and well-earned celebrity. This is what might be called the ‘celebrity surcharge’ that must be ante’d up when hiring major stars.”

Katzenberg’s biggest complaint was the signal achievement of “talent” in the second half of the twentieth century: the shift from earning a wage to having a stake in the business. Hedge managers and private equity investors call their stake “the carry.” Movie stars call it “participation.” Katzenberg called it “extremely threatening”: “Unreasonable salaries coupled with giant participations comprise a win/win situation for the talent and a lose/lose situation for us. It results in us getting punished in failure and having no upside in success.”

Actors weren’t the only talent Katzenberg worried about. Writers, he complained, were starting to be paid “$2–$3 million for screenplays.” Instead, Katzenberg thought Disney should be paying “young” writers $50,000 to $70,000 or “proven writers” $250,000 to develop a screenplay for an idea suggested by Disney. Katzenberg admitted that in the new world of superstar scripts, persuading writers to agree to these skimpier rations, ideally on long-term contracts, wouldn’t be easy: “I know many will argue that this just isn’t feasible anymore. Agents won’t let their clients sign long-term contracts because the spec script market is too lucrative. All this means is it will be tougher. It doesn’t mean it’s impossible.”