Book Review: Zero to One [Draft]

Peter Thiel's Zero to One is a revered book in the startup community. It is on every startup reading list that I know and recommended by some very significant people: Elon Musk, Mark Zukerberg, Ben Horowitz, Sam Altman. "Zero to One is the first book any working or aspiring entrepreneur must read—period" is what Marc Andreessen has to say.

So it is with some care that I submit this personal evaluation.

A central thesis of Thiel's is that creative monopolies^[1] are good. Not just for the company, but everyone. "Creative monopolies mean new products that benefit everybody and sustainable profits for the creator." At face value, this is a contrarian take. Monopolies are generally considered undesirable, and we usually try to avoid having them. In contrast, we idealize a competitive landscape. Thiel, on the other hand, believes that competition is detrimental.

Thiel devotes several chapters to exploring these ideas. He presents examples of the benefits of creative monopolies and the perils of competition. He derides economists for being "obsessed with competition as an ideal state." He disagrees with their view that competition is desirable.

I would venture to guess that Thiel's starting point is the undeniable observation that startups are good and necessary and that successful startups are creative monopolies. Since monopolies in this sense are good, then it must imply that competition is bad. This is a compelling narrative.

I agree with Thiel on the importance of startups, and I think he is materially correct about creative monopolies. I do not, however, agree with his characterization of competition. His view that if creative monopolies are good then competition is bad is a false dichotomy. Creative monopolies and competition are good.

Creative Monopolies and the Public Good Problem

To understand this apparent contradiction, we have to start with the idea of private property. A foundational assumption of free-market economics is the robustness of private ownership. People own their labor, and they own their capital. If they engage in an act of production, i.e., they take things that they own and build something out of it that has more value, they own the product. They can then sell it on the market and keep the money they make. It is under this strong assumption that economists derive the result that, in spite of people pursuing their own self-interest, as long as there is competition, the equilibrium state has desirable properties. And correspondingly, in the absence of competition, the equilibrium has undesirable properties.

This analysis fails for creative monopolies because they violate the private ownership assumption. Private ownership is needed for the economic system to work. Without private ownership, people are not incentivized to produce: they don't own the results of their production. When the assumption is violated, so are the results.

So how do creative monopolies violate the private property requirement? In much the same way that inventions do. Inventors challenge the economic model because, depending on how you structure the policy, they break either they competition assumption or the private property assumption. If you allow an inventor to keep their invention a secret, there will be no competition. If you force an inventor to make their invention public, there is no private property, and they are disincentivized to invent anything. Patents offer a compromise in this situation. It offers the inventor a monopoly for a short period of time.

Building a new product is an act of invention, even when it is no underlying invention in the traditional sense. By definition, you are building something that most people don't know is valuable (otherwise, they would have built it), and when it is successful, the knowledge of its value is public. Building a successful company makes public a private piece of knowledge that you own. And you don't get paid directly for it.

So creative monopolies don't satisfy the economic model's assumptions, so their benefit is understandable even though the model predicts otherwise. But understanding why gives us the benefit of evaluating the effects of competition sensibly. We don't need to jump from the observation that creative monopolies are good to the conclusion that competition is bad. To the extent to which the world is engaged in non-novel production, and I would argue that it represents a significant portion of what needs to happen in the world, we absolutely need competition.

Secondary Issues

Given its reputation within the startup community, I was expecting Zero to One to be a well-argued and fundamentally sound book. I was surprised to find it lacking in this aspect. There are many examples, but here is the most egregious one:

So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: [...] Their theories describe an equilibrium state of perfect competition because that's what's easy to model, not because it represents the best of business.

There is a cheap victory to be had here and I will indulge myself: Adam Smith originated this analysis of competition in The Wealth of Nations in the 18th-century. So "copied their mathematics from the work of 19th-century physicists" is a ridiculous claim^[2]. But let us give Thiel the benefit of ignoring this point and move on to the next. Are economists preoccupied with the equilibrium state of perfect competition because it is what is easy to model?

I can't speak to the original intentions of economists, but I would like to argue that they should indeed be preoccupied with the equilibrium state of perfect competition because that is the accurate (albeit simplified) model of the real world. Normally I would need to provide examples to justify such a claim, but as it turns out, Thiel does an excellent job of this himself, so I have the unusual opportunity to use his examples against him.

In fact, he has a whole chapter dedicated to this. In "The Ideology of Competition," the seeks to explain why we compete (and decries it) and, in doing so, makes a compelling case for the claim that we do, in fact, compete. In his words: "We preach competition, internalize its necessity, and enact its commandments." "Our education system both drives and reflects our obsession with competition." He seeks explanations from Marx and Shakespeare for why we compete. I won't go into all the examples, but there are many. It is safe to conclude that Thiel's view of the world is that people compete.

This lands him in the inconsistency of recognizing competition as a powerful description of the world while simultaneously being puzzled that economist model the world as competitive.

Footnotes

[1] By "creative monopolies," he means companies that have achieved monopoly status by virtue of producing something new.

[2] This is famous. How did Thiel get this wrong?