Peter Thiel co-founded PayPal in 1998. The intention was “to create a new internet currency to replace the U.S. dollar … [with] a digital currency that would be controlled by individuals instead of governments.” After selling the company to eBay, he became a very successful venture capitalist, including being the first outside investor in Facebook. Another startup in which he has invested is SpaceX, the private space flight company whose reusable rockets are “the key to making human life multi-planetary,” according to the company’s website. He is now a billionaire.

Thiel is also an avowed libertarian. He expounded his version of libertarianism in “The Education of a Libertarian,” published in the April 2009 Cato Unbound. Unlike most Silicon Valley entrepreneurs, his political contributions go to Libertarian and Republican candidates. He has financially backed the Seasteading Institute, which aims to create autonomous communities on man-built structures at sea.

Now he has published Zero to One, a book in which he offers insights into business innovation and economic growth. It is more than the typical billionaire’s ghost-written book: it is based on the notes taken by a student—Blake Masters, the book’s co-author—in a class Thiel gave at Stanford University in 2012.

In the book, Thiel explains how successful startups—those that change the world—are created and managed. He argues that they are monopolies and that, in terms of economic growth, monopolies are preferable to market competition because successful monopolies typically create completely new goods. Instead of merely “adding more to something familiar,” of going from one to some finite number on an allegorical scale of innovation, they go from zero to one, approaching infinite growth.

Entrepreneurial reflections / Business management theory is a very soft field, often based on slogans and fads. Looking over the past decades, think of such management-techniques-cum-mantras as “management by objectives,” “the pursuit of excellence,” “employee empowerment,” “business process engineering,” “core competencies,” and “six sigma,” not to mention the Japanese model, business ethics, “corporate social responsibility,” and corporate governance.

Thiel should not be held to standards that full-time management gurus do not reach. Moreover, he is more interested in entrepreneurship and the creation of new businesses than in dry management of established dinosaurs. The entrepreneurship he practices and preaches resembles the Kirznerian type (after Austrian School economic theorist Israel Kirzner), defined as the mysterious alertness and ability to see opportunities that nobody else notices. You need to “have secrets,” writes Thiel—that is, “specific reasons for success that other people don’t see.”

It follows that entrepreneurship is not teachable: “The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist.” It is no surprise then that Zero to One has problems explaining it.

Thiel’s musings are often original. For example, “a valuable business must start by finding a niche and dominating a small market.” Grand missions and big plans are necessary. Founders should be “unusual individuals” who “lead companies beyond mere incrementalism.” But even if an entrepreneurial company should mimic a cult, “you also need a structure to keep everyone aligned for the long term.” “A bad plan is better than no plan” (emphasis in original).

The reader may find some of Theil’s management principles a bit too obvious, like “sales matter just as much as products,” or “creating value is not enough—you also need to capture some of the value you create.” But perhaps obvious things need to be repeated.

Yet Thiel yields to the management guru’s temptation. He has seven questions that, if all answered positively, will ensure that you “master fortune and succeed.” His venture capital fund claims to “never invest in a tech CEO that wears a suit.” (Applicants for Thiel’s venture money take notice!) In a new venture, “working remotely should be avoided.” He postulates that “a startup messed up at its foundation cannot be fixed.” Obscure rhetoric is just around the corner: “no company has a culture; every company is a culture.”

Sometimes, he pushes his ideas too far and spreads them too thin. He seems to favor a very nonevolutionary vision of progress: “How can the future get better if no one plans for it?” He criticizes the use of Darwinist evolution “to build a better society,” apparently unaware of Hayek’s argument that Darwin borrowed the concept of evolution from social scientists, not the other way around.

It is fashionable to criticize economists and they sometimes deserve it. Thiel falls prey to a strand of libertarian thinking that rejects rational choice. “In economics,” he argues, “disbelief in secrets leads to faith in efficient markets.” He ignores that markets tend to be efficient precisely because intuitive and enthusiastic entrepreneurs go against conventional wisdom, incorporate new information in prices, and push the market closer to its equilibrium.

He also seems under the influence of another, sometimes parallel, strand of populist libertarianism that rejects the usefulness of formal, standardized learning in favor of practical deeds and traditional knowledge. He offers fellowships that pay chosen students not to go to college. There may be a contradiction here between the espousal of populism and the implicit elitism of contrarian entrepreneurs and thinkers, but Thiel does not explore the issue.

Competition and monopoly / Thiel, whose formal training is in law, seems to hold economics in high suspicion. He gets many things right when he stays close to what he knows—when he defends the usefulness of technological progress, for example. But economic analysis would have saved him from some errors—or, at least, would have helped him argue his case better.

Consider his take on competition, monopoly, and capitalism. We can summarize his argument in four points:

  • Economics puts too much emphasis on competition, “the ideal and the default in Economics 101.”
  • Monopoly, not competition, is the goal of business: “Monopoly is the condition of every successful business [emphasis in original]. … All failed companies are the same: they failed to escape competition.”
  • “Most businesses are much closer to the extreme of monopoly than we commonly assume.”
  • “Capitalism and competition are opposites.”

These statements are either incomplete or incorrect, for the following reasons:

Not all of economics overemphasizes competition. Many economists, no doubt, have mistakenly taken the explanatory model of perfect competition as an exact ideal to be imposed onto real markets, as in antitrust crusades. Yet, there is a positive reason for sticking to competition as an explanatory model: it often provides the best model to describe what happens in the real world, just as a Euclidian line with zero thickness is useful to measure real-world lines. At the normative level, competition does have large benefits: the tendency toward a competitive equilibrium allows consumers to get what they want at the lowest possible price.

Perhaps it is true that monopoly “can allow a business to transcend the daily brute struggle for survival.” But a free economy works for the benefits of consumers, not producers. Of this, the competitive model serves as a constant reminder.

It is because businesses want monopolies that competition exists. Thiel himself seems to understand this: “The dynamism of new monopolies itself explains why old monopolies don’t strangle innovation.” So why the criticism of competition? When “monopolies” compete or face potential competitors, we have a competitive system, not a monopolistic one.

There are no monopolies on a free market. The problem with Thiel’s focus on monopolies might be a matter of definition. But some definitions are more fruitful than others. It is useful to view a monopoly as a single firm protected from competition by legal constraints to entry in its industry. Thiel correctly opposes such constraints and emphatically states that the good monopolies he argues for are not the state-protected variety. But then he tends to forget that there is no monopoly when many firms compete, even if they are not equal.

There is a more fundamental argument against seeing monopolies everywhere. As Thiel himself suggests (without following through on the idea), determining whether there is competition or monopoly depends on how one defines the relevant markets. Google has 68 percent of the search-engine market, which it uses for advertising, but only 3.4 percent of the global advertising market and only 0.24 percent of the consumer tech market (the figures are from Thiel). How one defines a market is essentially arbitrary, so each firm can be thought of as either a tiny monopoly or an atomistic competitor in the larger market. What Thiel call “monopolies”—Google, Apple, PayPal, etc.—are only large companies that have dominant positions in some markets.

The opposition of capitalism and competition is not useful. One can define capitalism and competition as one wants, including in opposition to each other. But defining capitalism as an economic system where there is no competition easily leads to many errors. One is to forget the consumer in favor of the producer. Another error is to underplay the importance of freedom to enter markets and freedom to compete—those freedoms being what really matters if we are interested in economic efficiency and consumer welfare.

Poor economics / In his 1973 book Capitalism and the Permissive Society, Samuel Brittan expressed dismay at how inefficient capitalists were at defending capitalism, but noted that “businessmen are paid to operate the system rather than understand or expound it.” I would add that great entrepreneurs get their money for the new opportunities they offer to consumers, but their economic and social theories are not necessarily outstanding.

Zero to One does have the benefit of emphasizing entrepreneurship, but one would not use the book to teach either political philosophy or economics. Consider the nature of value. Why does something have value? Thiel makes the strange claim that Google creates less value than the airlines. To reach that conclusion, he equates a firm’s value with its revenues or profits. A few centuries of economic analysis teach that value is the “utility” (satisfaction of preferences) that individuals get from exchange. If we use a partial equilibrium framework, we can (conceptually) calculate value as the consumer surplus—that is, the difference between what consumers would have been willing to pay for something and what they actually have to pay. Profits or rents translate into value only because they allow their recipients to get their own consumer surpluses when they spend their money as consumers. It is thus very likely that Google creates much more value than Thiel assumes.

To take another example, he compares the revenues of venture capital–backed companies with gross domestic product, of which the companies represent “an astounding 21 percent.” This is only astounding because it compares revenues (total sales) of some companies with value added (profits) in the whole economy, GDP being the sum of the latter, not of the former.

Zero to One is a small, easy-to-read book in which the reader will learn about what a great entrepreneur and libertarian visionary thinks. Some of this is interesting but intellectually light. There is not a single footnote in the book, so the reader cannot check sources. On the positive side, Tyler Cowen endorsed the book. But I suggest that it will, at best, only take your social and economic understanding from more than zero to less than one.