Super-Star Based Technological Change

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By David Rotman:

"“My reading of the data is that technology is the main driver of the recent increases in inequality. It’s the biggest factor,” says Erik Brynjolfsson, a professor of management at MIT’s Sloan School. The coauthor, with fellow MIT academic Andrew McAfee, of The Second Machine Age, Brynjolfsson, like Piketty, has recently gained unlikely prominence for an academic economist.

Piketty and Brynjolfsson both earned their degrees in the early 1990s, and both were professors at MIT during the following years. But beyond an agreement that growing inequality is a problem, their thinking could hardly be more different. While Piketty’s writing is sprinkled with references to Jane Austen and Honoré de Balzac, Brynjolfsson talks of advanced robots and the vast potential of artificial intelligence. While Piketty warns against a return to a world where inherited wealth determines social and political fates, Brynjolfsson worries that a growing share of the workforce could be left behind even as digital technologies increase overall income.

Central to Brynjolfsson’s argument is the idea that innovation is rapidly accelerating as trends in computing and networking advance at an exponential rate. Largely as a result of these advances, productivity and GDP continue to increase. But while “the pie is increasing,” he says, not everyone is benefiting. (Brynjolfsson notes that productivity has, according to conventional measurements, grown slowly since around 2005. But he attributes that “disappointing” slowdown to the recession and its aftermath—and, perhaps most important, to the fact that organizations have yet to fully capture the benefits expected to come from digital technologies.)

Brynjolfsson lists several ways that technological changes can contribute to inequality: robots and automation, for example, are eliminating some routine jobs while requiring new skills in others (see “How Technology is Destroying Jobs”). But the biggest factor, he says, is that the technology-driven economy greatly favors a small group of successful individuals by amplifying their talent and luck, and dramatically increasing their rewards.

Brynjolfsson argues that these people are benefiting from a winner-take-all effect originally described by Sherwin Rosen in a 1981 paper called “The Economics of Superstars.” Rosen said that such breakthroughs as motion pictures, radio, and TV had greatly broadened the audiences—and hence the rewards—for those in show business and sports. Thirty years later, Brynjolfsson sees a similar effect for high-tech entrepreneurs, whose ideas and products can be widely distributed and produced thanks to software and other digital technologies. Why hire a local tax consultant when you can use a cheap, state-of-the-art program that is constantly being updated and refined? Likewise, why buy a second-best program or app? The ability to copy software and distribute digital products anywhere means customers will buy the top one. Why use a search engine that is almost as good as Google? Such economic logic now rules a growing share of the marketplace; it is, according to Brynjolfsson, an increasingly important reason why a few entrepreneurs, including the founders of such startups as Instagram, are growing rich at a staggering rate.

The distinction between Piketty’s supermanagers and Brynjolfsson’s superstars is critical: the latter derive their high incomes directly from the effects of technology. As machines increasingly substitute for labor and building a business becomes less capital-intensive—you don’t need a printing plant to produce an online news site, or large investments to create an app—the biggest economic winners will not be those owning conventional capital but, instead, those with the ideas behind innovative new products and successful business models.

In an article called “New World Order,” published this summer in Foreign Affairs, Brynjolfsson, McAfee, and Michael Spence, a Nobel laureate and professor at New York University, argued that “superstar-based technical change … is upending the global economy.” That economy, they conclude, will increasingly be dominated by members of the small elite that “innovate and create.” (