COMMENT: Negative side of IT

Income created by firms with monopoly power is divided into three types: labour income, normal interest income paid to capital, and monopoly profits. The data show that in the 1970s and early 1980s, monopoly profits were negligible. But since 1984, the share of monopoly profits has risen steadily; it reached 23% of total income produced by American corporations in 2015. This means that during the three decades before 2015, monopoly power caused the combined shares of wages and normal interest on capital to decline by 23%.

Rising productivity and capital accumulation increases wages and capital income, but monopoly power reduces these income shares. This partly explains why, during the 1985-2015 period, wages exhibited sluggish growth and retirees faced declining interest rates on their savings.

Why, then, has rising monopoly power in the IT sector caused income and wealth to concentrate in fewer hands, leading to an increase in personal income and wealth inequality?

One part of the answer is that rising monopoly power increased corporate profits and sharply boosted stock prices, which produced gains that were enjoyed by a small population of stockholders and corporate management. But, given that many IT entrepreneurs were young at the start of their careers, with limited ownership of stocks, a more refined explanation is needed.

Since the 1980s, IT innovations have largely been software-based, giving young innovators an advantage. Additionally, “proof of concept” studies are typically inexpensive for software innovations (except in pharmaceuticals); with modest capital, IT innovators can test ideas without surrendering a major share of their stock. As a result, successful IT innovations have concentrated wealth in fewer – and often younger – hands.

This was not true in the twentieth century, when major innovations in leading sectors such as automobiles required large investments of risk capital. With more investors needed, the wealth created was distributed more broadly.

The negative side effects of IT are not well understood, and public discussion of how to regulate the sector is urgently needed. Three considerations are critical. First, because most technology-based monopoly power does not violate existing antitrust laws, regulating IT will require new measures to weaken monopolies. New concepts of the public interest are also needed for regulating new public information channels such as social networks. Second, standard views of business income and wealth taxation will need to be adapted to account for IT firms’ monopoly power. And, third, laws intended to protect private information should be reevaluated to ensure that IT companies are unable to profit from exploiting and manipulating it.

Above all, the public must develop a deeper understanding of the economic effects of IT, particularly how technologies that have improved the lives of so many are enriching the lives of so few.

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Mordecai Kurz is Professor of Economics, Emeritus, at Stanford University.

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Copyright: Project Syndicate, 2017.
www.project-syndicate.org