THE old foundations of success are gone. For all of human history the source of success has been controlling natural resources -- land, gold, oil. Suddenly the answer is "knowledge." The king of the knowledge economy, Bill Gates, owns no land, no gold or oil, no industrial processes. How does one use knowledge to build wealth? How do societies have to be reorganized to generate a wealth-enhancing knowledge environment? How do they incubate the entrepreneurs necessary to bring about change and create wealth? What skills are needed? The knowledge-based economy is asking new questions, giving new answers, and developing new rules for success.
THE rich see opportunities to work and invest in situations where great disequilibriums -- imbalances or openings in the economy created by new circumstances -- exist. Something, usually a new technology, has opened up opportunities to jump to new products with very different capabilities or to new processes with much higher levels of productivity. This was as true for John D. Rockefeller as it is for Bill Gates. For both of them lifetime savings constituted a small fraction of total wealth. Carefully saving money and investing in normal equilibrium situations can make one comfortable in old age but never really wealthy.
In what will come to be seen as the third industrial revolution, new technological opportunities are creating fortunes faster than ever before. The United States has created more billionaires in the past fifteen years than in its previous history -- even correcting for inflation and changes in average per capita gross domestic product. Bill Gates might spend close to $100 million on his house and still have only the second most expensive house under construction in the United States. The thirteen billionaires of 1982 had by last fall been joined by 176 others. Together these 189 people have well over a trillion dollars in wealth. An additional two dozen people would have been on the list if the assessments had been made in July rather than October, and with the recovery in the stock market they were probably back on the list by the end of the year. To be among the fifty wealthiest Americans last year required a minimum of $2.9 billion. The richest Americans don't hide their wealth; they actively seek to get their names on the list, and produce their financial records to prove that they belong there. They want to be seen as economic winners.
The slightly less wealthy exhibit their wealth in other ways. Conspicuous consumption is rising. Whereas since 1993 general consumption is up 29 percent, adventure travel is up 46 percent, sales of gourmet chocolates up 51 percent, pearls 73 percent, luxury cars 74 percent, and yachts 143 percent.
This wealth explosion isn't usual in America. In the 1950s, 1960s, and 1970s the economy was growing much faster (twice as fast from 1950 to 1970 as from 1970 to 1998), and average wealth was going up, but great wealth was not erupting. America did not suddenly give birth to a generation of super Americans. Americans in the fifties, sixties, and seventies were no less talented, no less inventive, no less ambitious. Our political and economic systems -- democracy and capitalism -- were not different. The opportunities to become wealthy simply weren't there.
What we are seeing in America today was last seen in the 1890s, during the second industrial revolution. Two innovations were changing the nature of economic advancement then and opening up opportunities to build great wealth.
The first was the birth of the corporate research laboratory. In creating its chemical industry Germany established the concept of systematic industrial research and development. Technological advances did not just randomly happen; they could be systematically invented. Previously the economy had advanced on the brilliance of what we might call great entrepreneurial tinkerers -- James Watt, Henry Bessemer, Richard Arkwright. Technological advances were not closely coupled to scientific advances. Bessemer, for example, never knew what chemistry made his blast furnace work. He just fiddled around until it worked.
Electricity was the other element behind the second industrial revolution. Electrification allowed a whole new set of industries to emerge (telephones, movies), and radically altered the production processes of every old industry. In the steam era a giant engine powered a central rotating shaft, and machine tools ran off pulleys in long linear factories. In the new electric model of production, small motors could be attached to each machine tool, and very different, more productive configurations of machinery could be arranged on the factory floor. It was an early industrial version of what is known today in the computer industry as distributive processing.
With the electric light bulb, night became day. The price-performance curve for the light bulb looked like the price-performance curve for today's computer. The lighting that can be had for thirty-three cents in a 100-watt bulb from Home Depot would have cost $1,445 in 1883 (adjusted for lumens emitted, length of bulb life, inflation, and changes in per capita income).
Being able to do something after dark changed basic habits. People had slept an average of nine hours a night; now they slept slightly more than seven hours. With electricity came transportation systems -- underground and street railways -- that allowed the emergence of the modern metropolis. Electricity powered the telephone communication system that allowed small local markets to become big national markets.
The second industrial revolution created a sharp discontinuity in economic affairs and opened up opportunities to do things never done before. Old things could also be done in new ways. The smart and the lucky did not have to content themselves with highly competitive businesses producing commodities that earned bond-market "equilibrium" rates of return. In the jargon of economists, high "disequilibrium returns" replaced low "equilibrium returns." America's first set of billionaires (in inflation-corrected dollars) -- Rockefeller, Carnegie, Mellon, Morgan, Schwab -- emerged.