The Internet's greatest disruptive innovation: Inequality

The logical consequences of Silicon Valley capitalism: Social stratification and class antagonism

Published July 19, 2013 11:45AM (EDT)

      (Salon/Benjamin Wheelock)
(Salon/Benjamin Wheelock)

Call it the Silicon Valley Manifesto. On July 4, NPR quoted Sarah Lacy, the editor in chief of the tech news publication PandoDaily, explaining why the BART strike in the San Francisco Bay Area had ruffled feathers in Silicon Valley.

“People in the tech industry feel like life is a meritocracy. You work really hard, you build something and you create something, which is sort of directly opposite to unions.”

Shrapnel from Lacy’s class warfare bomb ripped through the world of tech media. Many commentators, including myself, saw Lacy’s words as a clumsy admission of arrogant Silicon Valley entitlement. But her declaration also touched on something deeper. Because, when you stop to think about it, Lacy was not wrong. She summarized, in just two sentences, the fundamental challenge posed to society by the ongoing economic transformation unleashed by the Internet. The innovations pioneered in SiliconValley do reward “merit” -- if by merit we mean what economists like to call "skill-based knowledge work."

That's a big deal, with consequences that most start-up entrepreneurs probably don't spend much time thinking through. Unions and Silicon Valley occupy opposite ends of a spectrum, and not just because the former are in decline while the latter strides the earth like a Colossus. Unions are a means for redistributing wealth from capital to labor. Strong unions reduce income inequality and contribute to a thriving middle class. Silicon Valley, we are coming to learn, does the opposite. Over the past three decades, the spread of technologies associated with the silicon chip and the Internet has been accompanied by growing income inequality and an increasingly squeezed middle class.

Naturally, conservatives, libertarians and technology optimists disagree. From their perspective, unions are a drag on the economy that lowers all boats. Even if they will concede that inequality is growing in the short term, they are confident that the productivity gains associated with technological innovations will result in accelerated economic growth benefiting everyone. That’s how it has always played out in the past, anyway, and we’re still just in the early days of the newest technological revolution. Heck, if governments and BART employees just get out of way, we’ll soon be knocking on the door of a future of unimaginable affluence, one in which intelligent machines will do all the work necessary to keep the economy humming while we humans spend our copious free time perfecting craft-brewed beer and creating great works of art.

Maybe! That would be awesome. But that’s not the world we live in, today. And if you want to understand why, right now, Silicon Valley’s “we are changing the world for the better” rhetoric is falling increasingly flat, a close look at the data offers a partial explanation. Tweney years after the Internet first started significantly transforming how we live, society has become more unequal and polarized. There’s really no way around it: The productivity gains created by the Internet are not being widely shared. At least not yet.

That’s not a change for the better. That’s a recipe for trouble. And if current trends continue, it will require a political response that enforces some kind of redistribution of wealth. Chew on that irony for a second. The success of Silicon Valley will inevitably demand a socialist response!

* * *

The crucial mystery facing anyone who wants to evaluate Silicon Valley’s contribution to the general welfare  is this: Why hasn’t the productivity boost from so much dramatic technological change lifted the standard of living for everyone?

From the moment we all started emailing each other like crazy, the U.S. economy has registered robust productivity gains that most economists attribute to sustained innovations in information and communication technologies (ICT). But over that same period income inequality has been growing, steadily.

According to a study published by the Kansas City Federal Reserve, from 1996-2006, “low-income households have seen no increase in real income, and at most, only the top 10 percent of the household income distribution experienced real income growth equal to or greater than average labor productivity growth.”

Since at least 2000, moreover, the long-standing connection between productivity gains and employment growth has been essentially broken. After 2006, the situation gets a little muddied by the Great Recession, but the overall picture is grim. In 2012, average household income was lower than 1997, and “wages as a share of G.D.P. are now at an all-time low, even as corporate profits are at an all-time high,” MIT professors Erik Brynjoflsson and Andrew McAffee, authors of “Race Against the Machine,” wrote in a New York Times Op-Ed last December.

"The fact is," says Paul Krugman, "that incomes have stagnated and economic security declined near the middle of the income distribution."

This, of course, has all happened at the same time as the world embraced email and Amazon and smartphones and Google Maps and everything else that most of us cannot imagine living without. And there’s the rub: The very innovations that have created so much wealth for Silicon Valley and penetrated so deeply into society at large offer a partial answer to our mystery.

"I think very few people would deny that technology has played a really important role in growing inequality," says MIT economist Daron Acemoglu, the co-author of  "Why Nations Fail: Origins of Power, Poverty and Prosperity."

Acemoglu cautions that technology is far from the only reason why the preponderance of wealth created in recent decades has accrued to households at the top end of the economic spectrum. There are many interrelated factors at play, including the decline of unions, changes in tax structure dating back to the 1980s and globalization. But a growing body of research makes a strong case that advances in information and communication technologies have clearly contributed to what economists call "job polarization." At the top, so-called skill-based knowledge workers are doing just fine. There are also plenty of "complementary" low-paying jobs at the bottom.

But the middle is collapsing. It’s just too easy to replace human labor with computer-driven automation.

"A lot of the technologies that we have seen over the last 30 years that are associated with the Internet – or the silicon chip -- have involved replacing tasks that were performed by low- and middle-skilled workers -- especially middle-skill workers," says Acemoglu. "And as a result they have only created limited benefits and sometimes losses for the workers that were previously associated with these tasks."

In the first decade of the new millennium, the numbers are stark. A January report by the Associated Press offered a preliminary tally:

In the U.S., more than 1.1 million secretaries vanished from the job market between 2000 and 2010, their job security shattered by software that lets bosses field calls themselves and arrange their own meetings and trips. Over the same period, the number of telephone operators plunged by 64 percent, word processors and typists by 63 percent, travel agents by 46 percent and bookkeepers by 26 percent, according to Labor Department statistics.

Acemoglu hastens to note that negative consequences of technological progress for some workers doesn’t mean that the Internet has no value. The mere fact that we have  spent umpteen billion dollars buying 250 million iPhones is the clearest proof any economist needs that people are getting utility from their connected lives. And the corporate cost-savings generated by all those vanished secretaries may well be put to more productive uses. That should, in theory, be good for the overall health of the economy.

"Saying the Internet is not going to be as transformative as some of its greatest proponents are arguing in no way implies that it has not contributed to our wellbeing and our productivity and our social fabric," says Acemoglu. "But it is not at all consistent with that argument that those gains are going to be widely shared."

According to standard economic theory, the productivity gains from new technological innovations should translate into new job opportunities in other sectors of the economy. Those secretaries and telephone operators and travel agents should be the modern-day equivalent of the farmers who had to find jobs in the manufacturing sector in the early 20th century, or the manufacturing workers who were forced to migrate to the service sector in the late 20th century.

But in today’s increasingly stratified economy, if you don’t have the skills to move up to higher-value jobs, you are more likely, it appears, to sink down than to move laterally. Opportunity is not necessarily expanding. Competition is getting tougher. Everybody has to figure out how to provide something really useful, or resign themselves to flipping burgers.

Previous technologically driven transformations expanded opportunity to broader classes of workers, argues Acemoglu. Early on in the Industrial Revolution, the workers put most at risk by new technologies were what we would now call “skilled” workers. The Luddites who smashed the new weaving and threshing machines were artisans who correctly feared that their hard-won craftsmanship would be replaced by factory floor jobs that anyone could fill.

So what? You can’t make an omelette without breaking eggs, right? The Industrial Revolution may have crushed artisan earning power, but in terms of social impact, it more than made up for that downside by opening up mass opportunities for the unskilled. The middle class, more or less, was made possible by the Industrial Revolution.

Today, the more skilled you are, the more you benefit from new technology. There is no question that for those with talent, drive and access to education, the connected society offers practically unlimited opportunity. But if you are not so skilled, it’s a different story.

As advances in machine intelligence continue, warn some observers, the scope of jobs threatened by technological change seems bound to grow. Digital labor always gets cheaper. So stratification gets starker.

Silicon Valley and its defenders scoff at the doom scenarios. Economist Don Boudreaux, a libertarian-leaning economist at George Mason University, told me that "economic history is littered with concerns of ‘this time the job losses are different.’ I see no reason why we should take such worries today more seriously than such worries should have been taken in 1800 or 1900 or 1950 ... Technology has never yet in human history caused permanent significant unemployment."

Tim Worstall, a columnist at Forbes who regularly tangles with critics of the Valley, went even further. "I … insist that we don't care about people having jobs. Nor do we care about incomes. The real thing that we care about is that people are able to consume. And if everything, as it's made by machines, is cheap as spit then what's the problem?"

Worstall acknowledged that disruptions and massive unemployment are likely to follow in the wake of any great technological transition, but insisted the chaos should only be temporary. The real danger, he warned, is that governments intent on protecting the status quo will end up preventing Silicon Valley from building the cornucopian future.

”Just look at Uber,” says Worstall. “One of their apps is just an electronic method of hailing a cab. They're having 12-month, 18-month fights in each and every major city just to be allowed to introduce this. This sort of protectionism of incumbents runs right through the economy. It's one of the things that slows economic growth. It's largely left liberals who are concerned about the unemployment that will arise from the transition. It's also largely the left liberals who support the regulatory state that limits economic growth. Thus we have the same people worrying about future unemployment and also supporting the system that will make it worse."

Martin Ford, author of “The Lights in the Tunnel: Automation, Accelerating Technology and the Economy of the Future,” is a software developer and Silicon Valley start-up entrepreneur who has been one of the loudest voices warning about the negative consequences of technological change for employment and inequality. But he readily acknowledges that previous generations have rung similar alarm bells – and been wrong.

"It is definitely true that there is a ‘little boy who cried wolf’ effect here,” said Ford. “This issue has been raised again and again going back to the Luddites. There was also lots of concern in the '50s and '60s. I think those arguments were simply premature, given the technology available at the time. The irony is that now the technology is finally arriving -- and the concerns have largely been dismissed.”

"It seems funny that technology-oriented people put so much faith in the idea that ‘it has never happened in history.’ After all, in the realm of technology, things that have never happened before happen every day! I don't think there is an economic law which stipulates that machines can never destroy jobs. Ultimately it will come down to whether or not technology is sufficiently advanced to compete with people. It is primarily a technology issue -- not an economics issue.”

Ford’s point is worth mulling. The vast wealth and self-serving rhetoric that is inseparable from Silicon Valley in 2013 sometimes obscures the fact that the advances in information and communication technology that we’ve witnessed over the last 30 years are truly amazing. Breathtaking, even. Fifty percent of all Americans now own a smartphone – a device that to all practical purposes didn’t exist seven years ago. We take an astonishing variety of things for granted that previous generations would consider utteryly mind-boggling.

Both the creators of that technology and the people who can effectively deploy that technology are certain to reap rewards. That’s the “meritocracy” of Silicon Valley. Engineers, scientists, software developers, the highly educated in every field – there will always be a place for them in a society that has so many tools available for the highly skilled to leverage their talents with.

But ultimately, one has to wonder how sustainable increasing stratification and inequality will be in a democratic society. The backlash that is starting to rumble now will certainly get louder if the current job polarization trend continues.

What is to be done, then? Deregulate everything, automate all the annoying union jobs, and let the social Darwinist chips fall where they may? That might be President Rand Paul’s approach.

Another possibility is that New Economy class antagonisms sharpen to the point that more aggressive government solutions become feasible. Martin Ford advocates a long-term policy proposal that he describes as “essentially a guaranteed minimum income," with built-in incentives that reward educational attainment. Daron Acemoglu believes we will have to invest far greater sums in education and job training programs.

Obviously, the political obstacles to any such schemes, in the world we are living in today, will be immense. But the reason why a growing chorus of voices is increasingly critical of Silicon Valley is precisely because the evidence that the world is getting better for everyone, as a result of so much innovation, is hardly overwhelming. If the current trends persist, the political push to redistribute wealth in some form seems bound to rise. Sure, such a future would be anathema to the current owners of capital, to the latter-day Silicon Valley robber barons who are being so well rewarded by an economy built on the silicon chip.

Bu that’s the beautiful irony of the new economy. If the logical consequences of Silicon Valley capitalist disruption entails a society in which a minority reap disproportionate gains while the majority struggles ever more ferociously to find a survivable niche, in the long term, a politically explosive response will be inevitable. Redistribution will happen.

Somewhere, Karl Marx is stroking his beard, and nodding: See, I told you so!

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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