A slow and steady rumble can be felt at the foundation of the modern tech-driven global economy. From Occupy Wall Street to Thomas Piketty’s recent best-selling book “Capital in the Twenty-first Century,” people are realizing that wealth is being concentrated in an ever-shrinking portion of the population. In the developed countries, the gradual erosion of the middle class over the past three decades gave birth to a generation of disaffected youth who are pessimistic about the future. In developing countries like China, strong growth in recent years has led to more inequality and not less.
An important component of this troubling trend is the relationship between technological growth and meritocracy. While both good and desirable in many conventional ways in their own rights, the two factors combined interact powerfully to consolidate wealth in the hands of the financial elites.
The primary role of technology is to expand human capabilities. While good policy and governance promote better distribution of wealth, technology dramatically increases the total sum of wealth by empowering every individual to be more productive. The often overlooked corollary to this is that technology, even in an ideal world of universal access, does not empower everyone equally. Instead, technology enables the most talented or qualified individuals in society to be responsible for a growing slice of the economic niches they occupy. Instead of visiting the thousands of local comedy clubs across the country, we can all go online to watch Jon Stewart. Instead of going to the local electronics store, we can all shop on Amazon.
We find this phenomenon of economic consolidation in every aspect of our lives: 90 percent of media is controlled by six companies, down from 50 in 1983; all of Blockbusters and local video rental stores have essentially been replaced by Netflix; 80 percent of eyewear brands in the world, including Ray-Ban and Oakley, are today owned by an Italian company called Luxottica. In every single slice of our modern economy, there is an on-going process of consolidation enabled by more efficient communication and transportation technology. The long-term business model of almost every successful startup, from Uber to Airbnb, is to simplify fragmented markets by replacing multiple regional players with a single efficient monopoly empowered by technology. When robots replace factory workers, it is technology empowering thousands of engineers to replace the productivity of millions of blue-collared workers.
The reason why free market capitalism has done an amazing job at improving societies is because it rewards innovators who improve on the status quo with market share. Therefore, even in an ideal world absent of cronyism and corruption, it would make sense that the best producers dominate the market when technology exists to allow them to reach every interested consumer in the market. If fewer people are responsible for the productivity of the economy, then the rewards afforded by the market should rightfully go to these people. This is simply meritocracy at work.
The most obvious problem is that extreme inequality leads to poor long-term investments. The power of the free market to make good macro decisions is best realized when every individual actor in the economy gets to vote with his or her wallet. When elites control the bulk of resources in an economy like in feudal and Communist states, the investments they make are less likely to correspond to the broader needs of society. Such societies are often unstable in the long run, even if the elites are initially selected based on some definition of merit as opposed to hereditary entitlement or class.
In a free market, the dominant player that grows complacent and inefficient is eventually replaced by a nimbler challenger. In context of societal inequality, this is the argument that an uneven distribution of wealth is perfectly fine as long as there is robust upward social mobility. This sanguine view of our present circumstances overlooks a crucial result of technology: Competition is becoming zero-sum and winner-takes-all because the most capable players produce most of the value. Instead of a marketplace that rewards both dominant players and numerous smaller competitors, increasingly we pick a single winner and reward them with the entire pie. Instead of a workforce of mostly middle class workers, a minority of talented innovators will reap most of the rewards of the system. This means that there are not enough leftovers to support an ecosystem of runner-ups and future upstarts.
It may sound paradoxical, but when meritocracy rewards the few winners too well at the expense of the many losers, there is an overall net disincentive in even trying. If you know that only a tiny number will succeed, then you either work harder or give up. Increasingly, it seems that more and more people are choosing to give up because the consolation prizes for trying and failing are rapidly vanishing as the winner’s lion share grows ever larger.
It is a basic tenet of the American Dream that if you work hard, you will be rewarded. Today, that is no longer true. As technology continues to widen the gap between the winners and losers of the economic rat race, we need to figure out how to incentivize people to try in spite of increasingly low odds of success.
Contact Raven Jiang at jcx ‘at’ stanford.edu.