The risks of capitalism’s technological progress

As with any other economic system, capitalism is capable of creating market failures. With no defined rules, crooked politicians and businessmen can often lead to companies that by definition are very similar to large-scale criminal organizations. This is one of the worst examples, but it is a very human-centric one. In the future the greatest potential to generate even bigger market failures will come from technology.

One of the risks of technological progress is that it has the potential to replace workers across the spectrum. Manufacturing jobs will be lost when robotics begin to usurp workers in factories, and white collar office jobs are also at risk of being replaced by software. The most important question now is what will happen to employment and how will our society adapt to this change?

One idea is the introduction of Universal Basic Income (UBI). UBI was first advocated for by Thomas Paine in the 18th century and involved paying citizens a certain sum of money and providing a basis salary for everyone to live on. UBI is built on the idea that regardless of an individual’s employment status, they will receive a basic income to do with as they like – some will build a business, others will just sit back in the sun and enjoy it for what it is.

One of the benefits of this idea is that it is acceptable to both sides of the political debate. The Right like the idea of giving individuals autonomy and the subsequent gains that can bring to the private sector. The Left, on the other hand, are more aligned with the socialist undertones of the idea itself. UBI is becoming more viable as a model with each technological breakthrough and could be one of the most reassuring ways of keeping a population debilitated by unemployment motivated.

As unemployment continues to increase and company outlooks change, there will be more pressure to explore different ideas such as UBI. Technology, and in particular, artificial intelligence/machine learning, is not only disrupting the economic marketplace on the ground, it is also causing a ‘winner take all’ economy effect across the marketplace as a whole.

A new acronym, FANGs, describes four of the market’s most successful and invested in companies. Facebook, Amazon, Netflix, and Google have been making the most gains over the past five years. One of the reasons they have been so successful is thanks to what economists call ‘network externalities’ – when a transaction between party A and party B influences a third party (party C), who was not involved in the original transaction.

Facebook, Amazon and Google have now amassed $140 billion altogether. Netflix is continuously investing and creating new business and Apple currently has $256 billion. 

To understand this concept more clearly, take Google for example. Google’s clients improve Google’s search engine, as they interact with the platform (A to B) they are generating more data (party C) – and subsequently helping their system to improve. When you have this kind of externality in economics, you have runaway economies and companies that are monumentally ahead of the competition.

This circular recursive phenomenon produces companies that are so ahead of everyone else that in a short time they become monopolies and the ‘winner take all’ economy is realised. This has already happened in technology, but with artificial intelligence, it is likely to become more evident across many other sectors.

Retail, for example, has Amazon. Amazon is home to an “El Dorado of Data” which means that their capabilities are tenfold of that of their competitors. With Alexa, they are still showing that the gap between them and the competition is growing as they continue to reiterate and improve their ecosystem further. History tells us that when companies become so profitable they can also become quite dangerous – as they have a tendency to influence society in unfair ways. Eventually, every sector is going to be dominated by one or two companies. This creates an uncompetitive economy – including all of the high prices and low employment that is synonymous with that.

So what can we do to solve this increasingly emerging problem? Traditionally, what happens in this kind of situation is one of two solutions. One solution is controlling the prices – with the government regulating the prices of the product. This, in theory, could work for a company such as Netflix, but unfortunately, it doesn’t work for Facebook or for Google as they don’t charge for their services.

The second solution is that a government can use is forming anti-trusts – the government splits up a company with too much control into several smaller ones. The most well-known example would be Standard Oil – a company that was once owned by Rockefeller who at the turn of the 20th century held 90 percent of the refining market in the United States. In order to mitigate its monopoly, it was subsequently split into thirty different companies by the government and this helped remedy the market failure for a century.

Established in 1870 by John D. Rockefeller, Standard Oil was an oil producing company but also involved into the transporting, refining and marketing. It was the largest oil company for its time. 

However, this is not really going to work for technology because even if you split a company like Google into thirty companies, eventually one of the ‘new’ search providers will surpass the competition once again thanks to the circular recursive phenomenon. Ten years down the line we will inevitably find ourselves in the same situation.

A different solution, identified by University of Chicago professors Luigi Zingales and Guy Rolnik, could come from more recent history. In the past, we used to have only a few different cellular companies, which meant little competition. The main reason for this was that if you moved from one company to the other you were forced to change your phone number to a new one. Consumers rarely wanted to opt out of their phone numbers, and as such hardly ever switched to different providers. Once the government told companies that the numbers belonged to the clients, competition grew and prices dropped rapidly.

Zingales and Rolnik go on to explain that the same principle can try to be applied to Facebook, Amazon, Netflix, and Google. You can try to legislate an individual’s ‘social graph’ (that is, a map of all of the digital connections a person has made) in such a way that all data and metadata gathered by these giants on an individual belongs to them and them alone. If you want to switch from one service provider to another, then the provider you are already using must surrender all of the information they have on you and give it to your newly selected provider. This porting of data to competitors will strip the ‘winner take all’ giants of their monopolies – providing space for competitors to arise – they could, for example, offer something different such as better or more niche UI design. Such a system would create competition in the sectors we currently see none and provide opportunities for businesses stuck in sectors with decreasing amounts of opportunity.

Ultimately, competition creates more jobs, more innovation and prevents a handful of companies from wielding an unethical amount of power. These principles will, of course, require some form of government sanctions, and it is worth noting that this is also a solution for a predominantly Western, capitalist democracies. However, it is without a doubt obvious that more imaginative approaches are needed to provide solutions to an ever growing problem. A “winner-take-all” economy, with only a few huge corporations dominating sectors, will mark a dark period of economic history. Coming at a time when widespread job loss is likely, it is critical that we find a solution to slow this process down.