Big Tech has the power to transform jobs, lives.
Have we entered a new Gilded Age, in which tech monopolies wield enormous political and economic power in the same way that Standard Oil did at the end of the nineteenth century? The scale of wealth being produced for a select few, along with the mounting despair of workers who are left behind by technology-driven economic change, certainly suggests that growing monopoly power is strangling parts of our economy. But the monopolies of the Gilded Age were very different corporate creatures from the technology driven monopolies that have arisen in recent decades.
The Gilded Age monopolies were created via collusion, intimidation and bribery by corporate bosses. They were eventually rendered illegal by antitrust laws. Today's monopolies, however, are legal and were created by true innovators who received various forms of legal protection as their firms rose to dominance. John D Rockefeller, J. P. Morgan, Andrew Carnegie or Cornelius Vanderbilt were corporate bosses, not innovators like Jeff Bezos, Sergey Brin, Steve Jobs and Mark Zuckerberg. So, in contrast to the antitrust policy of the past, what is needed today is an approach to monopoly power that relies on policy, which is both subtle and complex. And this requires that we reconsider many of our prior biases and preconceptions about what a "free market" truly means, and about the role of government in that market.
Surprisingly, given Silicon Valley's supposed left-wing political orientation, many intelligent people in Big Tech reject such a principle for public policy, which runs strongly counter to the libertarian ideas that prevail in their industry. Companies, according to this view, have the God-given natural right to engage in "creative destruction," without the government taxing them or otherwise interfering with them to compensate those whose lives are broken by the destructive side of innovation. But the conditions they support, and which prevail in the current labor market, are simply unsustainable, both politically and economically. Changing these conditions will require a better understanding of what a "free market" really is.
Since the 1970s, inequality of income and wealth has increased sharply. Real (inflation-adjusted) wages have risen little, and workers have not shared in productivity gains since 1973. Wage stagnation has been driven by the information technology (IT) revolution, which accelerated automation. Another factor contributing to anemic wage growth, and to declining US manufacturing employment, is the "China shock": the post-2000 period of rapid growth that turned China into the world's IT manufacturing hub.
IT-driven automation proceeded at the same time that corporate market power was rising. Because technological improvements are the crucial engine of rising productivity and growth, IT advances are universally viewed as economically beneficial. But IT has a dark side: by enabling and supporting the rise of corporate monopoly power, IT innovations have caused the rise in inequality and contributed to the slowdown in wage growth.
I use the term monopoly power in its broadest sense to include all forms of non-competitive market power (on the part of sellers or buyers). A firm's monopoly power arises from its ability to block or impede market entry by potential competitors. This power allows the firm, in two possible ways, to increase its profits above levels that would exist under competition. A firm with seller monopoly power can raise the prices that it charges customers for its products above levels that would exist in more competitive markets; and if it has a buyer monopoly power, it can lower wages and the prices it pays.
To be sure, today's leading tech firms make positive contributions to society. And though some use unlawful tactics, it is worth remembering that their IT-generated monopoly power is promoted by policies meant to foster innovations and protect innovators' intellectual-property rights.
Monopoly power enables companies to earn abnormal, uncompetitive profits, which, in turn, cause stock prices to rise above normal competitive levels. Stock prices and corporate profits fluctuate over time. But a case of sustained profits and rising stock prices above normal levels implies that values are not based on purely chance events, but rather on monopoly power.
Monopoly wealth was virtually zero in 1982, but rose dramatically as IT innovations spread. By December 2015, monopoly wealth had reached $23.8 trillion, or 82 per cent of the stock market's total value at the time. Bear in mind that this is the extra wealth gained by stockholders above the wealth increment attained through normal savings and added capital assets such as buildings, factories, and so forth.
Over time, these changes shifted the distribution of income and wealth away from workers and toward the owners of financial assets. But IT innovations also increased income and wealth inequality among individuals. Because IT has caused increased profits and stock prices, monopoly gains have taken the form of large paydays for managers, and dividends and capital gains that benefit only shareholders. And, because a very small proportion of very wealthy individuals owns a very large proportion of all stocks, most gains from corporate monopoly power were received by a sliver of wealthy individuals. And the 2017 tax "reform" that US President Donald Trump signed in December transfers an additional $2 trillion their way.
IT has thus reshaped the US economic and social landscape, both by fuelling the rise of corporate monopoly power and also by undermining the position of labor. It has altered the balance of market power in favour of corporations and against their customers, workers, and suppliers. It has had a profoundly negative impact on lower-skill workers.
Despair in the labour market
In recent years, scholars and policymakers have been paying greater attention to the human costs of technological change and international trade, particularly the costs borne by the 60 per cent of the US labour force comprising workers without a college degree. These costs are even higher for those without high-school diplomas.
In sum, the problem for lower-ranking workers in the US is not just low wages. It is that the IT transformation has made work a source of despair rather than a source of pride and security. In addition to producing economic inefficiencies, these conditions also create political time bombs, because economic insecurity makes voters more susceptible to demagogic appeals. These factors have already had a pivotal effect, visible in the outcome of the 2016 US presidential election.
Towards a new policy
Apart from temporary unemployment benefits, some firms do pay displaced workers severance benefits; but those payments tend to be too small, not least because job destruction usually occurs at declining firms that lack the funds to compensate workers.
In addition to compensating displaced workers, a good policy would aim to reduce workplace stress and improve efficiency. To that end, public policy can contribute in three ways. First, it can make health care universal and less expensive for workers. Second, it can mandate annual paid vacations to afford all workers a period of rest. And, third, it can enforce antitrust laws to prevent practices that restrict workers' employment choices. But the governments itself cannot change workplace culture. Only institutions responding to local needs can have the desired impact on the ground.
Whatever the solution, rising corporate monopoly power and the growing despair of workers, both the result of the IT revolution, can no longer be ignored. The current situation is not just deeply unfair. If unchecked, it threatens to precipitate political strife and economic turmoil. Neither economic efficiency nor democratic stability can be sustained if the wealthiest individuals continue to enjoy, while the vast majority of working Americans live in neglect and despair.
- Project Syndicate
Mordecai Kurz is Professor of Economics, Emeritus, at Stanford University.
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