Rising Market Power of Technology Increases Inequality and Destroys Democracy
High inequality has torn the fabric of American society and weakened its democracy. The most extreme form it takes are the large number of billionaires in America and the extraordinary compensation of CEOs. In 2020 Elon Musk’s compensation was $6.7 billion and Mike Pykosz, the CEO of Oak Street Health earned $568 million. Such compensations would not be possible without their firms making extremely high profits and\or their stock having very high values because they are expected to make very high profits in the future. What has caused this sharp rise of inequality?
Since the 1980s, a drastic rise in corporate market power enabled corporations to increase their profits by charging prices sharply higher than cost, while greatly suppressing wages and interest income of retirees and other low-risk investors. This market power is fueled by two forces: By technological innovation planting new seeds of monopoly power, awarded innovators over their technologies, and by a passive, free markets, economic policy that facilitates and even encourages the rise of this market power. We need to explore these two factors.
Innovation awards initial monopoly power, supported by patents and other intellectual property rights. This advantage enables innovators to consolidate their market power and expand it with many strategies – technological updates, layers of interrelated patents, acquisition of competitors, impeding innovations of competitors, and other strategies. To identify its unique nature, I call it the market power of technology. Once consolidated, it continues to rise, and if not limited by active economic policy to contain the growth of market power, it rises to a degree that far exceeds the level intended by patent laws. It becomes concentrated in the hands of a declining number of very strong firms that own an ever-growing range of technologies. That is, under a free, laissez-fair, policy that does not regulate the market power technology, it rises to very high levels with overwhelming negative effects: higher prices, inefficiency and wasted resources, rising inequality and weakening of democratic institutions.
Especially problematic is the effect of rising market power of technology on creating, what I call, a Patent Paradox. We promote innovations to improve our lives, so we support innovators by giving them monopoly power over the innovated products. But the more we need the product, the longer we must wait to benefit from it because the initial price they set is so high as to render inaccessible the product whose public need was the reason for the policy to begin with. In the case of vital medicines, this delay may become a question of life or death. And while we wait, the inequality produced by technological market power drastically impacts a majority of Americans.
The market power of technology is different from textbook monopoly power which is enabled by active barriers to free entry of competitors. If this power increases, it does not mean a firm with such power violates the law. The firm operates in markets that are free for competitors to enter, as required by antitrust laws. For example, Apple Inc. is not a monopolist in the smartphone market: the iPhone accounts for only 14% of world unit smartphone sales in 2021 and the market for such phones is open to anyone. The point is that entering competitors cannot use Apple’s technology and to beat Apple they must invent new technologies to outsell Apple’s iPhone. Consequently, Apple dominates the top-quality segment, charges prices far above cost and earns such high profits that it controls almost 60% of total world revenue.
Before the 1980s, economic policy restrained market power by employing high personal and corporate income tax rates, strong pro-labor policy and strong antitrust actions that limited firms’ use of the strategies listed earlier to expand market power. President Reagan’s era placed individual incentives at the center of his policy, championing the pursuit of private interests. In the 1980s, he initiated a free, laissez-faire, economic policy to promote business by reducing taxes, eliminating regulations and essentially ignoring antitrust because the market power gained by innovations is legal and since firms with market power have the best technologies.
This policy, combined with the IT revolution that began at the same time, enabled firms to grow their market power of technology, causing a dramatic rise in income and wealth inequality. The share of monopoly profits (earned by charging prices higher than incremental cost) in corporate income rose from about 6% in the 1980s to about 24% in 2019. But this combination of technology and policy creates more than monopoly profit – it generates monopoly wealth. Whereas monopoly profit is the surplus income a company earns, monopoly wealth is the market value of future monopoly profits. Monopoly wealth was essentially zero in the 1980s and reached $25.1 trillion in 2019. In that year 75% of the value of stocks traded on U.S. public exchanges was monopoly wealth.
Most monopoly profits and the resulting executive incomes earned today, as well as monopoly wealth created since the 1980s, have benefitted a small minority of Americans who made vast gains while most Americans have experienced a declining or slowly rising real incomes. To understand why, note that most stocks and bonds are owned by a small segment of the population and among these, the proportion of people who invest in risky startups or in firms engaged in risky innovations is very small. Those who benefit most from a new innovation are the innovator and a small circle of investors and financial advisors who purchase initial shares at very low prices. When a new innovation is successful these stock holding rise sharply. This is why Forbes 2022 World’s Billionaires list includes 735 billionaires in the U.S.
Rising market power of technology causes a relative decline of labor and capital incomes as well as lower output, consumption and investment. All these result from prices that are higher than they should be, consumers’ demand for final goods that is too low, and producers’ demand for labor and capital that are also too low. With lower demand, the economy produces less and the income of labor and capital is lower. This shows that in an advanced capitalist economy the market power of technology enables technology to exploit both labor and capital. So, Karl Marx had it all wrong: in an advanced capitalist economy it is not capital that is exploiting labor, it is technology that is exploiting capital and labor!
Why does competition among firms who conduct corporate research not remove the market power of technology? When many firms are engaged in technological competition by using R&D, the winner is the one with the best technology. In almost all situations there is only one winner, though in some cases there are two or three who survive. Furthermore, once established, a technological leader is so strong that competitors who innovate something new find it more profitable to be acquired by the leader and cash in, rather than go to war with a strong adversary.
Rising market power of technology also suppresses wages, and combined with common labor-saving innovations, they sharply lower labor income, particularly of unskilled labor that accounts for 60% of the American labor force. To understand the significance of this fact, note that today is not the first time that technology transformed the job market. The invention of electricity, the combustion engine and the assembly line created jobs for workers without college education. These jobs were repetitive, required an ability to follow exact rules, and could be learned by experience. They gave rise to mostly white and productive blue-collar workers who earned middle-class incomes. Consequently, the middle class was strong in most of the 20th century.
The computer and robots have had the opposite effect of replacing those high-paying blue-collar jobs. Instead of accessible, learnable work, the IT revolution ushered in demand for educated skilled labor. Not only did blue-collar workers lose their middle-class lifestyle, they also lost their life-long accumulated human capital acquired by experience and were forced into low paying jobs of unskilled workers. Many left the labor market, ended up with broken families, alcoholism and drug addiction, leading to a life of despair. This hollowed the middle class with devastating political consequences. It created a large class of bitter Americans who were promised the American Dream if they do their part and work hard. They found out that working hard would not prevent a small group of Americans from becoming extraordinarily wealthy at their expense. Left behind they feel betrayed by the American democracy, and lose faith in it.
And yet it doesn’t have to be this way. Restraining the superstar firms like Apple or Amazon gives other firms a chance to develop their technologies, increases the number of products available to consumers, increases average productivity, and increases social welfare. Restraining the market power of the superstar firm is then a desirable social policy.
For capitalism to be compatible with democracy, we must have a stronger and more egalitarian public policy that restrains market power and aims to limit technology’s negative impact on society, while preserving the incentive of people to innovate.
Written by Mordecai Kurz.
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