Zaibatsu vs. Startup
debt vs. equity
Joel Kotkin has a piece up on “The Zaibatzu-ization of America” at American Mind.
Japan had developed an economic model around a handful of large corporate conglomerates called zaibatsu. Organized as a “financial clique,” with a bank at the center, these firms extended their interests into virtually all economic activity. They included Mitsui, Mitsubishi, Sumitomo, and Yasuda.
Kotkin is saying that America is now doing the same thing. We have a few companies — Meta, Google, Apple, Microsoft, Amazon — that seem to be taking over the world.
I don’t like the tech lords either. But I am not as troubled as Kotkin. We’ve seen this before. The big corporations always look like they are going to dominate the market and bribe politicians forever. Until they don’t.
But first, I think that the Zaibatsu model worked well when Japan was playing catchup. See, when you are a “developing country” the whys and wherefores of current technology and manufacturing are known facts. So it makes sense to finance the whole thing with banks and debt instruments. In my study of debt, the most notable thing I figured was that credit is really useful for merchants in trade, getting an advance on the money that you will pretty likely get when the goods arrive at their final destination.
Here we must make the detour to understand the nature of credit, per Walter Bagehot in Lombard Street. To make it real simple a credit system requires that:
All loans must be properly collateralized so that the borrowed money can be recovered if the borrower defaults.
All borrowers must be able to service their loans.
Do you see the ways in which this can go wrong? Suppose the value of the collateral goes down, as in a real-estate meltdown. Then the lenders may not get their money back. Suppose the borrower loses his job and can’t service the loan.
The basic assumption of any credit system is that things are going to be OK. But what if they are not OK? Well, that’s why it’s a good idea not to make 100% mortages on homes. Or spend half of your income on your mortgage payments. Or finance a startup with a bank loan. In a credit system, when things go South they go South suddenly. And the credit system only works if almost nothing goes South.
So you see that the Zaibatsu model worked well for Japan when all it had to do was copy Western technology and banking and industrial organization techniques. But you haven’t heard as much about Japan recently. I wonder why.
Then there is China, which seems to be having a spot of trouble with its own version of the Zaibatsu model. It was fine when China was playing catchup, but now things don’t look so rosy, with Chinese stocks off 50 percent since the beginning of 2021.
I think the same thing will happen to our tech lords and their mega corporations like Meta, Google, Apple, Microsoft, Amazon. Because sooner or later the Next Thing will come along. And all the sweetie-pie wokey employees will be outraged that their secure sinecures are suddenly in jeopardy and that their employers are planning big job cuts. And the second generation of managers will be totally confused that the rules of the game have changed and will not know what to do.
Incidentally that’s why we have outfits like Mitt Romney’s Bain Capital. Bain was in the business of buying failing firms and either fixing them or liquidating them. It takes a different kind of person to do surgery on a sick corporation than to run it when it seems healthy. Hey, someone has to do it.
What will the Next Thing be? I don’t have a clue, but I’ll bet that the venture capitalists are out there looking for candidates. Heck, I have an example. The chap across the street is CEO of a Nuclear Fusion startup, Helion Energy. A couple of years ago he told me how Peter Thiel had invested money in Helion, after sending his guys to look over the plans and the science. Will it work? Who knows, but if it does, my neighbor and Peter Thiel will be making a boatload of money. If it doesn’t work then they lose their money. On to the next thing.
Tech startups and Helion Energy are what we call equity plays. You do not lend them money on collateral, like a mortgage. You invest money in exchange for a share in the company. If the company goes broke, you lose your money. If it goes public, you make a boatload of money. That’s the rules.
Back in the day, the tech companies were startups. They plugged into the Silicon Valley venture capital firms and got startup money in return for a share in the company. There were hundreds, thousands of them. What we see today are the survivors of a brutal survival-of-the-fittest process. And all along, you never know what will happen. I remember thinking about Microsoft in the late 1980s just after it had gone public. But, I thought, it seemed pretty expensive at $40 per share. Well, today MSFT is at $250, and after stock splits that $40 a share is $0.40 per share. So if I had speculated with $5,000 back in the 1980s I would have $3.1 million today. I remember thinking about Apple in 2000 when they had put out the iPod and all the kids were buying it. Yeah, I thought, the kids are into it, but will this really amount to anything? In 2001 Apple was about $0.30 a share, compared to today’s $150 per share.
Do you see the point? Debt and credit are about things that aren’t expected to change. Equity is about things where anything might happen (but usually doesn’t).
The good thing about the tech startup culture and the venture capital industry is that failure is OK. If you are looking for a job in tech world it is a Good Thing to have worked for a couple of failed startups. If you are a venture capitalist you understand that you are not going to hit the jackpot on every startup. But you never know!
So my understanding of the current moment is that the tech corporations are all Zaibatsu, and they will rule the world until the day that they don’t.
Do you see the examples of people using the Zaibatsu model that really shouldn’t? The climate changers for a start. See climate change and clean energy are all startup concepts. Yeah, maybe increased CO2 is a problem, but I wouldn’t bet the farm on it. Maybe clean energy is the future, but I wouldn’t give up on oil and gas just yet. Climate change is an equity play, a high risk proposition and most of the ideas associated with it will turn out to be wrong. But our leaders think it is a sure thing.
Then there is President Xi of China. Back in the day Chairman Mao thought that China could vault into the modern world with a government-directed Great Leap Forward. Not good. Then in 1979 Deng Xiaoping reset China on a market economy model and China shot into the stratosphere. Now we have President Xi that wants to rule forever and direct traffic from the President’s office. Not good, old chap, because nobody knows which way China’s economy should grow, least of all politicians.
So the way to the future is with ten thousand entrepreneurs getting equity funding from venture capitalists to try out their crazy ideas. And five or ten of them will grow into mega corporations.
But people in politics don’t get that; nor do most of the rest of us. We never have, and probably never will. But, in fact, politics is very like the startup culture. There are tens of thousands of politicians around the country with stars in their eyes. But only about three or four in any generation get to be president.
Zaibatsu vs. Startup. Debt vs. Equity. If you understand the difference you will go far in life. Or maybe not.