My guest this coming week on Masters in Business is William Bernstein, someone whose work I have long admired. Our 2019 MiB is here. Below is a discussion loosely adopted from Bernstein’s new book, The Delusions Of Crowds: Why People Go Mad in Groups.
If anyone has captured the capitalist spirit of the digital, post-fossil fuel age, it’s Elon Musk, who within a few short decades has founded more successful firms, in more diverse arenas, than most industrialized nations manage in a century, from SpaceX to Neuralink to The Boring Company to, of course, Tesla, which is not so much a vehicle as a religion.
Economic history, alas, is replete with similar capitalist icons, and their stories often do not end well.
Start, for example, with John Law, whose early eighteenth century Mississippi Company and Banque Royale made him the toast of the Continent. So sought after was his presence that Rue de Quincampoix, on which sat his house, was thronged night and day with crowds anxious for a personal sighting, and the remote chance of acquiring a few shares of the Company. Wrote the wife of the regent, “Law is so run after that he has no rest day or night. A duchess kissed his hands before everyone, and if duchesses kiss his hands, what parts of him won’t the other ladies salute?” Law’s scheme brought prosperity to all of France—for a while—but when the bubble collapsed, he barely escaped the mob to die penniless in his beloved Venice.
A century later a magnate named George Hudson achieved similar acclaim by single-handedly building much of England’s rail network. Newspaper reports gushed at his stakhanovite schedule and on how he would throw back his head, cover his eyes, and accurately predict the dividend of an as-yet-unfinished line, or intensely engage in two conversations simultaneously. When his empire imploded, he avoided prison through the immunity conferred by his seat in Parliament, seeking shelter abroad when it was not in session.
Taking leave of Manby was a shabby man of whom I had some remembrance, but whom I could not get into his place in my mind. Noticing when we stood out of the harbour that he was on the brink of the pier, waving his hat in a desolate matter, I said to Manby, “Surely I know that man.” “I should think you did,” said he; “Hudson!” He is living—just living—at Paris, and Manby had brought him on. He said to Manby at parting, “I shall not have a good dinner again, till you come back.”
A century after that, Samuel Insull, a protégé of Thomas Edison, was celebrated from coast to coast for assembling the first regional-level electric utilities, which powered thousands of factories and lit millions of homes, his face twice gracing the cover of Time. Alas, several years later, his face again appeared on Time’s cover, this time shielded by his hands as he was led into court. Like Law and Hudson, he too eventually beat the jailer only to die in poverty, dropping dead with a few francs in his pocket in the Paris metro, which his wife told him to avoid because of his bad heart.
And the beat goes on: in recent decades GE’s Jack Welch went from being the second coming of Thomas Edison to a mere balance sheet manipulator, Ken Lay’s Enron became a paragon of innovative prowess, as did Elizabeth Holmes’s Theranos; Lay escaped jail only by dying just before sentencing, and whether Ms. Holmes avoids orange and the new black is anyone’s guess.
There are few things more corrosive to self-awareness and ethics than a steady diet of adulation. As memorably put by Edward Chancellor, “[The great industrialist’s] ambition becomes limitless, a chasm opens up between the public appearance of success and universal adulation, on the one hand, and the private management of affairs, which become increasingly confused and even fraudulent.”
The erstwhile Mr. Musk seems to fit the hero-to-zero mold to a tee. Obviously, though, not every hailed industrial champion comes to grief: Steve Jobs’ legacy remains secure, and farther back, John D. Rockefeller and J.P. Morgan, whatever their monopolistic tendencies, committed no great frauds either.
Still, Mr. Musk’s recent behavior raises red flags: hobnobbing with Kanye West, sucking a doobie on live TV, slandering a Thai cave rescuer as a “pedo guy,” and, of course, what exactly does “Gamestonk!!” mean? His dislike of short sellers is well known, but you don’t need a Ph.D. in finance to know that a successful short squeeze in no way means that a stock isn’t overvalued in the first place, or that short squeezing the illiquid shares of an obscure gaming company is slightly different than doing it to one with one of the world’s largest market caps.
More seriously, in 2018 the SEC fined him $20 million and forced him to step down as chairman for three years after tweeting that he had secured funding for a private takeover; he then taunted the Commission after the share price rose, acts that do not inspire great confidence in his judgment.
So which trajectory does Mr. Musk’s follow? That of Morgan, Rockefeller, and Jobs; or that of Law, Hudson, Insull, Lay, and Holmes? Much will depend upon the outcome of Tesla’s high-wire corporate financing and the sales and performance of its automobile. I haven’t the foggiest, but we should not be totally surprised if his legacy winds up a sorry one.
Bill Bernstein is a recovering neurologist who co-founded Efficient Frontier Advisors and has written several titles on finance and economic history. Although his early formative training in economics was confined to brief stints in the US Postal Service during college Christmas breaks, his three finance books, The Intelligent Asset Allocator, The Four Pillars of Investing, and The Investor’s Manifesto, as well as the content on his Website, efficientfrontier, have made him uncomfortably popular with the press.
Bill is a big believer in the value of the creative nonfiction process in helping to organize his leisure-time reading. During the past two decades, he has written two volumes of economic history, The Birth of Plenty (McGraw-Hill, 2004) and A Splendid Exchange (Atlantic Monthly Press, 2008), the former about the economic growth inflection of the early nineteenth century, and the latter a wide-angle look at the history of world trade. Two more history books, Masters of the Word and The Delusions Of Crowds, also from Grove/Atlantic Press, explore the effects of access to technology on human relations and politics and the history and social psychology of mass manias. His ultimate life goal is being able to convey a suitcase full of books and a laptop to Provence for six months and call it “work.”