Big Tech's big problem – its role in rising inequality


Look around and it seems pretty obvious that technology has made daily life easier.

We can watch almost any film or listen to any song at the press of a button. People pay their bills on their mobile phones. Stressed parents get to dodge trolley tantrums by swapping the supermarket run for online shopping. And let’s not mention all that free online news.

But, for all the convenience that new innovations afford us, what if this rise of technology is actually exacerbating inequality?

There are certainly some red flags right now.

The first warning signs come from financial markets where technology stocks have soared this year. Search engine Google’s shares recently hit a record high of over $700, making it one of the most valuable companies in the world, second only to that other tech giant Apple. The moves have fired up the tech-heavy Nasdaq index and taken it back to the giddy heights of the dotcom bubble 15 years ago.

The problem is not rising share prices per se, but rather what they are telling us about the power of shareholders and the consequences in terms of what is left over to be invested in wages and innovation.

This question of how the profits of technology trickle down is explored in the recent book iDisrupted by economist Michael Baxter and entrepreneur John Straw.

Analysing the economic impact of emerging technologies, they highlight two potential agents for rising inequality.

Firstly, patents, and the way they ensure that profits from innovation accrue to larger companies and their owners.

“The existence of patents may mean that the majority of wealth created from innovations boosts the wealth of the very richest in society, but restricts the extent of trickle down,” they write.

Secondly, the fact more goods are being offered for free online. The problem with this is that just about the only means left to fund digital products is advertising, a sector where revenues are increasingly dominated by a handful of companies such as Google and Facebook.

“Without the enormous volume of content on the internet, there would be little point in either search or social media,” write Baxter and Straw. “Yet the revenue from this content accrues to the companies that provide search and social media, not the producers of content.”

Those two trends play out in the very modern context of lawyered-up, patent-hungry tech giants and the emergence of a free online economy. But at their heart lies a very long-standing tie between ownership and profits.

Indeed, the challenge of fairly sharing the spoils of growth has risen hand-in-hand with shareholder power, according to the Bank of England’s chief economist, Andy Haldane. He concludes that companies are paying out too much to shareholders when they should be investing more. Shareholders are also being put before employees, but there is nothing new there, says Haldane, citing an example from almost a century ago involving the carmaker Henry Ford.

In a speech published last week, Haldane said: “In the US in 1919, a case against Henry Ford was brought before the Michigan supreme court by the Dodge brothers, a minority shareholder. They challenged Ford’s decision to reinvest the firm’s profits to expand the business and pay better wages, which they felt contradicted the purposes of the corporation – maximising shareholder return. The court ruled that Ford owed a duty to his shareholders and ordered him to pay a special dividend.”

There are clearly parallels with the modern-day tension between Apple and its activist investor Carl Icahn, who campaigned to encourage the iPhone maker to increase returns to shareholders.

The authors of iDisrupted also look to Ford in their argument on the importance of profits trickling down. They cite the carmaker’s doubling of wages at his factory to $5 a day and the oft-disputed claim that his motivation was the hope other manufacturers would follow suit and so the potential number of car buyers would rise.

It may be the stuff of myths, but a century later the story provides a neat way of explaining how a rising gap between the few haves and the many have-nots could stop technological advances in their tracks.

Baxter and Straw sum this up: “Those who suggest that technology may create a world of extreme inequality may be right, but equally it may be that unless the profits from technology trickle down, pushing up wages and creating demand, then further technological evolution may be impossible.

“If technology leads to more inequality, it may have the effect of suffocating demand from the economy and can become self-destroying, making further technological evolution redundant as only the few could afford it.”

They are right to worry about the prospects for innovation just as Haldane is right to worry about investment, whether it is in training, innovation or machinery.

You only have to look at the figures on the UK’s woeful productivity performance in recent years. BoE deputy governor Jon Cunliffe underscored these in a recent speech.

“In the 10 years prior to the crisis, growth in the hours worked in the UK economy accounted for 23% of overall economic growth. The mainstay of economic growth, the other 77%, came from growth in productivity,” he said.

“Since 2013, only 9% of UK annual economic growth has come from productivity improvement. The remaining 91% has come from the increase in the total hours worked.”

For companies that want to thrive, the message is clear. For policymakers looking to solve Britain’s productivity puzzle, there are lessons too.

It’s time to ditch the financial engineering and put more into innovation: the swathe of companies using ultra-low interest rates to fund acquisitions would do better to invest in ideas and equipment.

And it’s time to claw back power from shareholders: stop pouring money into dividends and instead let employees share some of the gains.

Powered by article was written by Katie Allen, for on Sunday 2nd August 2015 10.00 Europe/ © Guardian News and Media Limited 2010