Sometimes geopolitical lessons come from the strangest places. With Eric Schmidt stepping down as CEO of Google and replaced by founder Larry Page, I can’t help but wonder if world leaders are taking note. Google perfected the horizontal business model. To the delight of enthusiasts of David Ricardo, the comparative economist, the company does one thing really well—search—and has built an ecosystem for others to flourish using it as a platform.
Contrast this with IBM and AT&T, long past their expiration dates as successful vertical companies. It’s no coincidence that the Soviet Union and IBM, two raging, top-down, command-and-control systems, collapsed at about the same time. What do I mean by vertical? In its heyday, IBM did everything from soup to nuts. Designed chips, wrapped plastic around them, wrote operating systems and applications, and then sold and serviced mainframes. The giant captured half of computer-industry sales and 80 percent of profits until horizontal companies Intel and Microsoft knocked it out at its knees. AT&T owned phones and switches and long-distance lines until a very horizontal Internet and companies like Skype changed the economics of the phone call.
These same dynamics are now driving the world economy into a productive horizontal enterprise. And it’s about time.
Economies are about increasing the standard of living of their participants. If you don’t have an economic system to create productivity, you end up stealing it from your neighbors. Think Roman Empire. Or the British who colonized large parts of the world to lock up natural resources to plug into their manufactories. Both very vertical.
Hitler had a manufacturing engine, but felt Germans were above toiling in factories. So he chose to increase German living standards by the blitzkrieg process: take what you need by force. Grab territory. Steal their resources. Put them to work. Get rich. Vertical instead of horizontal.
And they lost to a nation that went the horizontal route. America won WWII. Japan and Germany could have been American territories. But the horizontal model kept them independent as trading partners and we bought manufactured goods from partners around the world, especially Japan and Germany. It was better economics to let these countries run at their own pace, and own some horizontal layer (radios, clothes, cars). Today they trade cars and TVs for oil.
The vertical Soviet system lost precisely because it had no productivity. If you just steal resources, there is no incentive for others to create productive solutions.
And what about China? Well, it’s found its place in the horizontal stack. It leverages its cheap labor force and owns the logistic slice. It’s also locking up resources in Africa, trading instead of owning.
As of 1989, the United States of America became the world’s sole superpower. But what is America going to do with this status? Unlike past empires, there’s no incentive to take over the rest of the world. Imperialism is such a hassle. The world economy transitioned from loosely knit but mainly stand-alone industrialized countries through the 1970s to a tightly wound digital ecosystem today. Imperialism and territorialism are increasingly obsolete. Why take over a country and deal with the headaches of a welfare system, and have to fix the plumbing in Uzbekistan, when you can buy its output on the cheap, even ordering its goods over the Web? Despite all the protests, globalization instills peace. Trade now represents 26 percent of world GDP, up from 18 percent in 1990.
Globalization has linked the free world in a smart horizontal alliance. Computers, cell phones, and fiber optics are not made in any single country to be exported worldwide, but instead have components and labor from more than 30 inseparable countries, including China and Vietnam. Horizontal rules!
Without much forethought or planning or a dictator, benevolent or otherwise, the world has structured itself into a horizontal wealth-creating and peace-maintaining system—a productive system that actually increases the standard of living of all the participants, not just those in the United States. America still sits on top of the heap, sure, but wealth has increased for every country, company, and person that contributes. And they get rich not by stealing from the rest of the world, but by adding value to the food chain. Just ask Google.
Kessler is a former hedge-fund manager and now author, most recently, of Eat People: Unapologetic Rules for Game-Changing Entrepreneurs.