My friend, McGill University Professor of Economics, Reuven Brenner once wrote that prosperity is the consequence of one thing and one only: matching talent with capital, and holding both sides accountable. To prosper, people must indeed have access to capital. The key word in Brenner's definition is accountability. Prosperity will be short lived unless the two sides of the prosperity equation, talent and capital, recognize their respective rights and duties to each other. The failure of this mutual recognition always leads to disastrous outcomes. Brenner's simple equation furnishes a nice lens trough which one can observe episodes that have marked the history of prosperity. For the sake of simplicity I single out what I call the physical capital episode, the financial capital episode and, last but not least, the digital capital episode.
Let's start with the late 19th century, the century of the Carnegie, Rockefeller, Morgan, Vanderbilt etc. This is a time when capital was almighty. This is the era of physical capital, an age when capital was written with a huge capital C and talent with a small t. If you had talent, there was no other solution than to work for one of the ruling tycoons. They controlled the business game. At one point in time Rockefeller controlled 90% of the world's oil supply. Their power was such that they were accountable neither to talent nor to the rest of society. Their rules were the rules. Their grip on the economy was such that they were nicknamed "the robber barons". An article of an old issue of the Atlantic Monthly leaves no ambiguity on how they were perceived. Linda F. Baldwin writes:
"We hear now on all sides the term "robber barons " applied to some of the great capitalists. When it began to be generally so applied several years ago it had to my ears an oddly familiar sound. Suddenly it flashed upon me one day where I had heard it, and I turned to the old Atlantics. There stood this sentence in the issue for August, 1870: "The old robber barons of the Middle Ages who plundered sword in hand and lance in rest were more honest than this new aristocracy of swindling millionaires."
The nickname is not flattering to say the least. It derives from the medieval German aristocrats who levied excessive and illegal tolls on the Rhine river and on the roads crossing their lands. The late 19th early 20th century business practices of the American tycoons were not that different. They amassed amazing wealth through low wages, government bribery, competition destruction, control of natural resources etc... Accountability was not a priority. It would have slowed the pace of their wealth accumulation. As a result, their wealth did not translate into general prosperity and this was an issue of concern for Henry George, an American economist and popular author and speaker. In 1879, Henry George authored a book entitled, Progress and Poverty, in which he wrote
"the promised land flies before us like the mirage. The fruits of the tree of knowledge turn, as we grasp them, to apples of Sodom that crumble at the touch... So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury, and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent."
Accountability was eventually restored through, among other things, antitrust regulation and the emergence of powerful trade unions. It took a whole new social organization to match the power of the robber barons. Mass strikes and social revolts were needed to get there. The New Deal in the US and the Front Populaire in France are landmark steps in the rebalancing of accountability.
Let's now jump to the next historical episode that spans the late 20th century and early 21st century. The hallmark of this period is the financial deregulation, the surge of global financial capitalism. Capital markets were liberalized, banks were deregulated (The Glass Steagall act was suppressed) and derivatives instruments blossomed. Capital became more easily available to talent. To simplify this greater capital availability fueled the first Internet wave and the subprime mess. Needless to say that accountability issues struck back. Neither the new robber barons, the banksters, nor the managers played fair. The banksters forced us in a deadly head and tail game where they won upon head and we lost upon tail. Managers were loaded with stock options to ensure that they would maximize shareholder value. Although their knowledge of derivatives was close to nil, managers understood quite well that the higher the volatility of their stocks the higher the value of their stock options. Banksters and managers had no skin in the game (no credible downside) and a bet on the upside. The worst was to be feared, and the worst did happen. We still try to recover from it.
The last episode slightly overlaps with the second. It spans the early 21st century. Let's call it for the sake of simplicity the Google / Facebook episode. This is the era of digital capitalism. Digital capital is cheap. It is abundant. It takes the form of computers, software and robots. It is cheap because it can be easily duplicated, copied and pasted. The first unit of digital capital is costly but once the initial cost has been incurred the cost of production is the cost of reproduction, namely a marginal cost close to zero. As we have seen earlier this peculiar cost structure leads to winner-takes-all / superstars effects. Digital capital is controlled by the few, by a new breed of robber barons. I call them the robber robot lords. The Economist called them silicon sultans. They control firms like Google (now Alphabet), Microsoft, Amazon, Apple, Facebook, Twitter and the like. Google controls 70% of the search market in the US and a whopping 90% in Europe. Apple and Google control 90% of the phone operating system market. Again accountability issues strike back as digital capital diverges from the rest of the economy. This divergence has already been observed in the past when capital was not digital. Indeed, French economist Thomas Piketty recently wrote a very successful book, Capital in the 21st century, in which he rings the divergence bell. According to him, we have returned to the level of inequalities that prevailed during the robber barons era. The main culprit according to Piketty is the decoupling between the growth rate of capital and the growth rate of the economy. Capital has grown faster than the rest of the economy making those owning the capital richer and richer. The situation is worse with digital capital owners. Because Piketty has investigated a time period when digital capital was not in full traction yet, his diagnosis underestimates in my view the reality. Digital capital with its increasing returns to scale, its concentration in a few hands and the race of labor against robots may deepen the inequalities even faster than Piketty thinks. We cannot preclude the possibility that the ultimate outcome of the digital gilded age might be a small minority of huge winners (the robber robot lords) and a large number of losers. It is of course true that entrepreneurial luck can knock at anybody's door, and through winner-take-all effects put him or her in a dominant position. The question however is whether this entrepreneurial demography will be sufficient to go head to head with the powerful robber robot lords in place or even overturn them. This may indeed be enough if we do not let the current robber robot lords shape the world as they find fit. Sadly enough they have already started.
Indeed, although they keep on pretending they are not evil, they do exactly what the other robber barons did before them. They run firms that devote significant resources to tax avoidance. They exploit any loophole they can find not to pay their duties to the rest of society. But, guess what, at the same time they cheat, they create charities and foundations such as the Robin Hood Foundation. They tell the press and the rest of us that their immense wealth will be donated to foundations dedicated to its charitable management. This rather surprising "rob-redistribute" combination prompted American author Lynn Stuart Parramore to write an article titled "Meet the hedge funders and billionaires who pillage under the shield of philanthropy." The odds are indeed fairly high that the money that gets distributed by theses charities and foundations is far less than the money that should have been paid in taxes but was not. The robber barons discard these criticisms. They claim they are far more efficient at managing money than the government is. They supposedly know better how to spend in healthcare, education or poverty reduction. This is a well-known anthem that Carnegie was already singing in his times when he wrote that
"the man of wealth (is) becoming the mere agent and trustee for his poorer brethren, bringing to their service his superior wisdom, experience, and ability to administer, doing for them better than they would or could do for themselves."
This was in 1889! British novelist Anthony Trollope was not fooled by the philanthropists of his time. In 1862, he wrote a book, North America, he which he said "I have sometimes thought that there is no being so venomous, so bloodthirsty as a professed philanthropist." Nothing has changed except that the situation is getting worse in the digital gilded age. I must confess that this decoupled attitude of the robber robot lords (and of the robber barons in general) leaves me speechless. If they are men and women of experience and talent how come they do not share them in helping improve our governments and their agencies instead of robbing them in the first place! Shall we still have faith in the "we are not evil" gospel? Shall we trust the robber robot lords the same way we trusted the banksters and the ones supposed to regulate them? The answer is of course a resounding no. As Financial Times Chief Economics Commentator Martin Wolf wrote in the July/August 2015 issue of Foreign Affairs
"Techno-feudalism is unnecessary. Above all, technology itself does not dictate the outcomes. Economic and political institutions do. If the ones we have do not give the results we want, we will need to change them."
Still a lot of people disagree with Wolf. They do not ignore (how could they?) the misbehavior of the robber robot lords, but they underline that it is the price to pay for the robber barons' great achievements and contributions. 200,000 miles of rail tracks were laid down by Leland Stanford and E.H. Harriman connecting the West coast to the East coast of the US. Henry Ford transformed the automobile industry with the introduction of assembly lines. Bill Gates brought the PC everywhere. Google's Larry Page and Sergey Brin made information available a mouse click away. Mark Zuckerberg united friends all over the world. In short, we should all be happy to have (had) these heroes among us. Without their impressive talent and stamina, the world would not be the same. MIT Technology Review Amanda Schaffer writes that the great-man myth is enduring. This myth is rather strange as it fails to give full account of the amazing mix of ingredients it takes for a success story to materialize. Amanda Schaffer has a nice way of summarizing the great-man myth:
"He no more produced the technological landscape in which he operates than the Russians created the harsh winter that allowed them to vanquish Napoleon."
She talks about Elon Musk, CEO of Tesla Motors. Musk seems to think very highly of himself. He views himself as the man of impossible things. Musk simply forgets (to mention) that none of what he does would have been possible without public support to science and research from NASA to National Science Foundation. Steve Jobs, another deity of the Silicon Valley, is another case in point. But, as stressed by Mariana Mazzucato, Professor of Economics at the University of Sussex, in her book, The Entrepreneurial State, "There is not a single key technology behind the iPhone that has not been state funded." It is true that Apple did recombine these technologies in a smart way. However, recombination was made possible because the government did fund the necessary (prior) research efforts. Musk, Jobs and the like are after all tremendous surfers riding the waves of major state investments. There is nothing wrong with this. On the contrary. What is wrong is when we are mislead to believe that Musk, Page, Jobs, Gates are out of the box revolutionaries while no full credit is given to the box! What is wrong too is tax avoidance by these "geniuses" as if nothing or nobody was to be paid back. Robber robot lords are fast at internalizing a lot of things especially those they did not fund directly and as fast shipping to the rest of us their negative externalities. They have a peculiar view on taxes. Taxes should go one way only: in their pocket not out of their pocket!
Let's be serious. There is no such man as a corporate hero who drives it all, without whom life would be less prosperous. The famous Isaac Newton was a lot more modest than today's robber robot lords. In a 1676 letter to Robert Hooke, he wrote "If I have seen further it is by standing on the shoulders of Giants." Robber robot lords are so convinced of their superiority that they have a hard time giving full credit.
The hyper dominance of robber robot lords and the myths they surround themselves with should be taken very seriously. Otherwise, Jaron Lanier may indeed be right. They may own the future, and I do not know of any worst inequality than the one that separates those who own the future from those who don't. I do not know of any bitter feeling than losing a battle while all the planets were almost aligned (cheap digital capital, increasing returns to scale etc...) for it to be won. In 1905 a similar bitterness was strongly felt by Jack London when he wrote his short essay entitled Revolution:
"The point, however, is not that the mass of man kind is miserable because of the wealth the capitalist class has taken to itself. Far from it. The point really is that the mass of mankind is miserable, not for want of the wealth taken by the capitalist class, but for want of the wealth that was never created. This wealth was never created because the capitalist class managed too wastefully and irrationally. The capitalist class, blind and greedy, grasping madly, has not only not made the best of its management, but made the worst of it. It is a management prodigiously wasteful. This point cannot be emphasized too strongly."
In London's times planets could have aligned, but they did not:
"A wonderful era was possible for the human race. But the capitalist class failed. It made a shambles of civilization."
London is right: Too much power in too few hands is a sure recipe disaster especially when power inflates at digital speed!