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Harry Bingham

• Publisher: Fourth Estate
• Year: 2010
• Print ISBN: 9780007260171
• eBook ISBN: 9780007375172
• Topic: Economics
• Subtopic: Business General
• Index: Economics

A counter-blast to the bashing of capitalism and a fresh and bold re-evaluation of the fundamentals that turn genius into hard currency.

Harry Bingham used to be an economist and a banker and thought he understood money. Then, in autumn 2008, the world stood on the edge of calamity and Harry realised that all the things he knew had been proven utterly wrong.

So, he decided to go back to first principles, to meet the people who make the money – the entrepreneurs and inventors, the salesmen and financiers. He wanted to find out how the world really worked and what drives the people who make it spin. For the first time he saw that while the economy might be about many things, it is never ever about money.

We all have strong feelings about money. It is the magic of its alchemy that has catapulted the human race from extreme poverty to our world of ever-expanding riches, but it also brings with it economic chaos. But how many of us can say what is it made really made of and how it works?

From billionaire entrepreneurs and Indian shift-workers to small-time manufacturers and conglomerate CEOs, The Root of All Good, is the story of the people who have created the world of extraordinary prosperity that we now live in, and the new system of capitalism they are shaping to recover our future.

PART ONE
The Entrepreneur

ONE
Risk

Men wanted for hazardous journey, small wages, bitter cold, long months of complete darkness, constant dangers, safe return doubtful. Honour and recognition in case of success.

– Advertisement placed by ERNEST SHACKLETON in 1914

It begins with character. Character and a moment of risk.

The risk takes no single form. Perhaps to most of us the moment comes and goes without our even noticing. A conversation overheard; a difficult client with a wild-eyed plan; a death; an idea; a throat irritation.

Most of us, and I include me, look for the life more comfortable. Great wealth would be nice, of course, but we’ve learned by now that wealth doesn’t make home visits. It’s an animal to be hunted, not a guest to be entertained. Our desire for comfort – the regular pay cheque, hearth and home, keeping our capital somewhere safe – may not be an overwhelming compulsion. We may be ocean-sailors at the weekend, even if we’re wage-slaves during the week. But it’s there, the need for security. The poet Philip Larkin called it a Toad, ‘its hunkers…heavy as hard luck, and cold as snow’, a Toad that squats there asking us how we’d feel with our capital committed and our income gone. How we’d feel, talking in the pub with our mates, them with their steady jobs and their career progression, and we with a scheme that looked so smart once and so insanely optimistic now. Accordingly, the moment comes and the moment goes and because we’re not on the lookout for it, we don’t so much as notice its passing.

Most people aren’t like that. One in a hundred? One in a thousand? It’s not that they overcome their Toad, that they wrestle the beast into submission, it’s that they don’t have the Toad at all. William Knox D’Arcy was born to a well-to-do English family in 1849. He was educated at Westminster School, an elite public school located in the rambling embrace of Westminster Abbey, where every British monarch since 1066 has been crowned and the final resting place for seventeen of their kingly souls. In 1866, when their father went bust, the family emigrated to Australia to start all over again. They ended up settling in Rockhampton in Central Queensland, which isn’t exactly a big place now, but back then it must have seemed a million miles distant from the Abbey bells.

The young D’Arcy followed his father into law and joined the family firm. A lifetime of prosperous colonial Toad-following seemed to beckon. Then one sunny day in 1882, three brothers entered D’Arcy’s office. They were rough men, miners, and they had been sent down the road from the local bank. They brought two things, a story and a lump of rock. The story was quickly told. The three men, Frederick, Edwin and Thomas Morgan, had been prospecting for silver in the Dee valley. They had found no silver and, as we now know, there’s no silver there to be found. According to one version of the story, while on the journey back to town, Edwin had felt the call of nature. He walked a little distance from camp and urinated. As he did so, he couldn’t help noticing a peculiar black boulder that had clearly rolled into the valley floor from the slopes above. Being a man and a miner, he idly swung his pick at the stone, thinking no more than that stones were there to be hit and picks had been made to do the hitting. He struck the stone. A chipping flew off and glinted. The rock was – or seemed to be – loaded with gold.

The Morgan brothers believed they had almost literally stumbled on a mountain of money, but they knew they needed help. Legal help, to stake a robust claim. Financial help, to bring capital to bear in exploiting the find. Technical help, to extract rock from the mountain and gold from the rock. Commercial help, to sort out hiring and transport and markets and sales. Their first stop had been the bank, the second stop D’Arcy’s office. (And perhaps it’s worth noting here that there are various different versions of the story in circulation, though the gist of them all is the same.)

Now for just a moment, stop there. Had you been sitting at D’Arcy’s desk that day, gazing out at a dusty street, hearing a commotion outside in the anteroom, seeing these three unconventional clients enter your office, listening to their tale and fingering a tiny chipping of black and gold stone – what would you have done? What would you have said? How would you have proceeded?

Let’s be realistic. At a very minimum, you’d have noticed that you had the scope to charge your services at premium rate. There weren’t so many lawyers in Rockhampton and these three clients were in no position to haggle. If the ore in the rock was gold, then these clients would pay you, and pay you royally, for your legal expertise. That kind of reasoning, however, is amply consistent with being slave to the Toad. No one will pass up a little extra cash, if they don’t have to put anything at risk. So you charge your time at a premium rate, but what else? Do you commit significant time and energy to the project, unsure of whether you’ll receive a penny in exchange? Do you put some of your own money into it and if so, how much?

To answer the question accurately, you need to be careful about details. You are not wealthy. You have a young wife to support. Your start in life accustomed you to a high standard of living and in Rockhampton, Queensland, cash is hard to acquire and easy to lose. I suggest you would do roughly what I would do. Be interested, but evasive. Seek out as many facts as I could, knowing that time is always ticking by and that my main advantage lies in having been just the fifth person in the world to see and handle that little black stone. I’d talk with my wife. Discuss our own capital position, how much we need for the baby, how much we need for our security. Identify a sum that we can afford to gamble. Find a balance between maintaining a regular weekly income and investing time in a scheme that might be hare-brained or might be the best thing we ever did.

I’d speculate, but sensibly.

That’s not how D’Arcy did it. He went in big. Huge. Together with two Queensland entrepreneurs, Thomas Hall and William Pattison, and the miners themselves, he formed a syndicate. The Morgan brothers contributed their mineral rights; the other three would provide a crushing mill for the extraction of the gold. D’Arcy didn’t have huge funds at this point, but he threw his all at the project. He gambled. His future. His wife’s future. Their baby’s future. Everything.

We know this story for one reason and one reason only. The bet paid off. The hill from which that black boulder had tumbled – Morgan Mountain, as it became – was truly a mountain of gold. The entire six man syndicate made a fortune, but D’Arcy made himself richest of all. He returned to England one of the richest men in the world. At its peak, and in present day terms, his wealth ran to several billion pounds. He bought a grand home in town and a magnificent country estate. After his first wife separated from him and then died, he married again and entertained on a prodigious scale.

Character and a moment of risk. Three rough men and a wild story. The spin of a geological wheel. A dazzling outcome.

But perhaps you’re not convinced. You’re there in that Rockhampton office, gazing out at that dusty street. Perhaps you would have gone in big. Perhaps anyone would. Perhaps it’s got nothing to do with character, just a question of being in the right place at the right time. A matter of luck, not temperament.

You might think so, but I haven’t played quite straight with you. There’s more to tell. D’Arcy was a gambler. A provincial solicitor in back of beyond Queensland doesn’t generally have much cash at his disposal. That D’Arcy had enough to make the investment possible at all was because he had already speculated, heavily and successfully, in land. He only possessed the means to bet on Mount Morgan because his appetite for such bets was already strongly evident.

Move the clock forward to the young man’s triumphant return to London. He had no financial need to stake anything on anything. He could have bought art, wined and dined, moved in society, held balls, indulged whims – done whatever he wanted. Yet horses and the racetrack still fascinated him. There were only two private boxes at Epsom race course. He owned one and the Queen owned the other. The thunder of horses’ hooves did what the clatter of a miner’s pick had once done. He needed risk to feel alive.

And one last thing. The main thing. The reason why D’Arcy is an important name and not merely a colonial chancer who came good. In 1900, an emissary from Persia came searching for ‘a capitalist of the highest order’ to invest money in the hunt for Persian oil. The geology was favourable. The oil business had already made fortunes for Rockefeller in the United States and for Marcus Samuel of Shell in Britain. The idea wasn’t crazy and D’Arcy was interested.

Twice already, he had spun the wheel. In land first, then in gold. The horse racing in Britain fed a compulsion but hardly offered stakes large enough to satisfy a gambler’s spirit and Persia offered the largest stakes of them all. A businessman, a real one, the kind used to managing complex corporations and large capital investments, might have looked harder before leaping. D’Arcy certainly made a show of thinking hard. He enquired after the geology, he ordered maps and took advice; but the badness of the advice he was given suggests that there was only one answer he’d ever have accepted.

From the Shah of Persia, he purchased a sixty-year concession to search for oil. The cost was £20,000 up front and a further £20,000 worth of shares in the venture. The cost of the bribes spent to gain the Shah’s agreement was more again. Even the eunuch who brought the Shah his morning coffee got his baksheesh. The cost of drilling two exploratory wells was estimated at £10,000. Real money, even for a prodigiously wealthy man.

His advisers, however, did not spend much time discussing the cultural complexities of the region: the Shiite hatred for political authority, for Christian interlopers, for foreigners. They did not pause to take account of certain technical challenges: the entire country boasted only a few hundred miles of road; the territories which looked most promising for oil lay across wild and mountainous countryside; and the local labour possessed so few technical skills that few of them had even seen a hammer. They did not allow much of a contingency reserve for the mounted tribesmen who would sweep down from the mountains demanding gold to protect the incomers from bandits – that is to say, from themselves. They did not make full allowance for the fact that Persia was so far away from anywhere with anything that the nearest dentist was to be found in Karachi.

When D’Arcy’s men came to drill, the cost of those first two wells was more like £200,000 than the £10,000 predicted. The venture bled money. Drilling started in 1902. In extremely challenging conditions, the equipment continually broke down. As early as 1903, D’Arcy’s overdraft stood at £177,000, or a few tens of millions of pounds in today’s money.^* His bankers had demanded shares in the Mount Morgan mine by way of collateral and, to make matters worse, those shares had fallen to about one eighth of their peak value. Tough times on Easy Street.

Then, in 1904, relief. The drilling team struck oil. The would-be oilman used the news to scour Europe and the United States for new investors, but the well, that had started so promisingly, ran dry. He was advised to shift the exploration effort miles to the southwest. His overdraft grew still further. His bank started to demand the concession itself as collateral. Everything seemed lost.

As things turned out, D’Arcy did succeed in finding an investor, Burmah Oil, whose support enabled the troubled little venture to go on burning cash. By early 1908, however, even Burmah had had enough. It asked D’Arcy to put up more funds or close the whole operation down. He complained, ‘Of course I cannot find £20,000 or anything’, but stubbornly ignored the deadline. He just allowed it to pass without action or comment. The gambler refused to leave the casino.

Burmah, in turn, ignored their partner’s refusal to cooperate and on 14 May 1908 sent a letter to the drilling team in Persia informing them that they should close up shop, sell everything saleable, and come home. The letter took weeks to travel from Glasgow to Persia. And after it was sent but before it arrived, the drilling team struck oil. They hit a gusher so big that the spout of oil jetted fifty feet higher than the steepling drilling rig itself. Shortly afterwards, the second exploration well struck oil too, and also on a prodigious scale. When George Reynolds, the tough, single-minded genius of the drilling team, received Burmah’s communication, he wrote back sarcastically, ‘[Your] instructions…may be modified by the fact that oil has been struck’, and refused to act on them. The age of Middle Eastern oil had begun. D’Arcy recovered the funds he’d sunk into the sands of Persia and received shares worth some £895,000 to boot. The company that emerged went through several name changes since those early days, but is still alive and well today. The company is now known as BP and is worth approximately $175 billion.

I’ve told this story at length because it’s dramatic and because it makes a point. A moment of risk, of opportunity is not enough. Given the right opportunity, any of us may succeed to a certain extent, but the world has not been shaped by those whose ambitions run ‘to a certain extent’. D’Arcy’s ambitions were large when he speculated on land, larger when he speculated on gold, and almost boundless when he speculated on oil. You or I would have needed to conquer our aversion to risk to have done even one-tenth of what he managed. He, however, conquered nothing. He wasn’t averse to risk, he needed it. When he had all the wealth anyone could ever want, he put himself through almost a decade of financial loss and heartache simply to feel the thrill of that spinning roulette wheel one more time.

The need for risk isn’t unique to entrepreneurs, but it’s the mark of the breed, all the same. When speaking to entrepreneurs in the course of writing this book, I’ve asked how much of their capital they put at risk in that first crucial investment, the one that launched them. They all answered the same way: they invested everything they had and in many cases borrowed heavily too. If their business had gone bad, they’d have been wiped out, walked away owning nothing more than fresh air and sunshine. That’s the answer I’m given, but in almost every case I’ve noticed a tiny pause before it comes, one of those micro-habits which supposedly reveal a truth beyond mere words.

What is that hesitation, that nanosecond of delay? I think it comes down to translation. To you and me, who’d much rather not be wiped out, the question about that first investment has many possible answers. For entrepreneurs, that’s not the case. There’s only one first investment you can make, which is as much as you have. That answer is so instinctive, it takes a moment for them to remember that not everyone thinks the same way. They have to translate their answer from Risk-Think into regular Human-Think, and the pause for translation accounts for that micro-delay.

Allied to risk, and inseparable from it, is restlessness. For most humans, comfort is defined in static terms. The log fire. The hot drink. It’s a pastoral ideal, the ideal of a people who will sleep tonight where they slept last night, do tomorrow what they did today. No doubt entrepreneurs like log fires too, but their instincts aren’t remotely pastoral. Modern science has discovered a type of neuro-receptor (called the 7R variant of the DRD4) which seems highly linked to Attention Deficit Disorder, as well as novelty-seeking and food- and drug-cravings. In the modern Western world, this receptor isn’t one you’d want your kids to have. It’s not the sort that promises wonderful educational outcomes or stable career prospects.

People who have this kind of brain receptor, though, aren’t ill. The genes responsible for it are doing their job just as nature intended. Since nature has a tidy habit of ensuring that poorly adapted genes are competed into oblivion, then those genes must once have been doing something useful. The question is what.

Enter the Ariaal – not a misspelled font style, but a tribe of semi-pastoral nomads in Africa. Some Ariaal continue to be true nomads, wandering the arid plains of northern Kenya, herding camels, cows, sheep and goats. Some of their brethren, however, have settled down and become farmers. The two groups are genetically identical; it’s just the lifestyles that have diverged. Scientists have studied the two groups and found that nomads who had the ‘novelty-seeking’ receptor were stronger, healthier, better nourished than nomads who lacked it. Among farmers, however, it was the other way around. The novelty-seekers were worse nourished and less well adapted. In short, if you have a wanderer’s genes, you’ll do well as a wanderer but struggle if asked to settle down.

As far as I know, no one has ever taken cheek swabs from billionaires to conduct the same study, but they’ve come close. Twin study analysis conducted jointly by St Thomas’s Hospital and Imperial College in London and by Case Western Reserve University in Cleveland, suggests that around half somebody’s propensity to become self-employed is attributable to their genes – perhaps a rather lower score than you might expect. (Intelligence, for example, is about 75 per cent genetic.) On the other hand, it’s not clear that twin study tests such as these are methodologically accurate. Nearly all identical twins share an upbringing, so it’s hard to tease out genetic from environmental factors. In a world well set up for such experiments, there would be a plethora of identical twins forcibly separated at birth to make the data analysis easier, but alas such twins are far too rare to generate statistically meaningful results.

What’s more, self-employment is not entrepreneurship. Indeed, much entrepreneurship isn’t really entrepreneurship. A plumber, for example, or a lawyer, or an accountant may be self-employed, and may choose to house their occupation in a wholly owned, legally incorporated company. But neither self-employment nor corporate status is the test. The test is ambition. It’s all very well to start a business in your garage, but unless you start it dreaming of the corporate skyscraper you’ll move into one day, you are not an entrepreneur. (And this, by the way, is the real secret of American enterprise. The United States does create a lot of entrepreneurs, but so do some other countries. Almost nowhere, though, do entrepreneurs dream on a bigger scale, as measured by the employment growth expected by an entrepreneur over the first few years of the business’s life. Those outsize dreams have a lot to do with what makes the United States what it is.)

Other scientific studies have perhaps got closer to the mark. A very intriguing study conducted by Cambridge University studied the brains of 17 ordinary corporate managers and sixteen entrepreneurs, each of whom had started at least two high-tech companies and who therefore passed any reasonable test of entrepreneurship. Asked to make a series of routine decisions, the managers and entrepreneurs scored about the same. These were sensible people, analysing problems in a sensible way. As soon as they were asked to make decisions involving considerable risk, howeve...

Table of contents

• Cover Page
• Title Page
• Dedication
• Table of Contents
• INTRODUCTION
• PART ONE The Entrepreneur
• PART TWO The Money Men
• PART THREE Firms and Markets
• PART FOUR Into Our Heads
• PART FIVE Theories
• PART SIX Genius, Risk and the Secret of Capitalism
• FURTHER READING
• NOTES
• INDEX
• Acknowledgements
• Copyright
• About the Publisher