Critical Mass = Massive Wealth
Nick Carr muses about how technology stimulates economic inequality, with copious quotes from Fed Chairman Ben Bernanke. Using the example of the YouTube founders, he ponders why productivity increases appear to have benefited the rich and super-rich far more than the middle class, whose wealth is apparently growing even more slowly than that the poorest workers.
Bernanke’s analysis looks plausible as far as it goes:
A possible link between technological change and the substantial increases in the wages of the best-paid workers is that some advances, such as those that have swept the communications industry, may have contributed to the rise of so-called “superstars” - a small number of the most-gifted individuals in each field who are now better able to apply their talents in what has increasingly become a global marketplace.
It’s dangerous to base economic conclusions on anecdotal evidence, but this certainly jibes with my experience. People with highly specialized and sought-after skills are better able to monetize these skills, a result of straightforward supply and demand. In the past, a superstar programmer living in, say, Denver would only be able to earn the highest salary that a company in that city is willing to pay. Nowadays, secondary costs (e.g. communication overhead) associated with employing remote workers have fallen to the point that the same programmer can probably earn much, much more working for a company somewhere else in the world who values his or her unique skills more highly. In practical terms, demand for this individual has soared. Globalization has also made it easier for skilled workers to relocate, creating further efficiencies. The Economist recently ran a survey on executive pay (beware of pay wall) that reached a similar conclusion: top executives earn much more nowadays because they have more opportunities to sell their abilities to the company that can best exploit them.
None of this applies to those at the middle of the pay scale. Sure, technology may have made them more productive, but it’s probably done the same for less skilled workers as well. Garbage collectors and construction workers make heavy use of new technology and are more efficient as a result. White collar workers benefit as well, but not in a way that would make them salable on the “global marketplace” that Bernanke refers to.
One point that Nick doesn’t mention with respect to the very richest individuals is the importance of critical mass in making money from technology. The reason that the YouTube guys made so much money is that their business is so dependent on network effects. This leads to a winner-takes-all situation where the first player to reach the requisite tipping point garners the vast majority of rewards for the whole sector. Whether YouTube achieved this through superior skill, luck or timing is largely irrelevant. The fact is that people want to put their videos where the most people will see them and likewise seek videos where they are most likely to find them, a strongly virtuous circle. The same thing happened with Skype, eBay, ICQ and countless others, and as a result their founders all ended up filthy rich.
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Matt,
This seems to me to raise two separate questions. Does technology contribute to wealth inequalities? If so, are critical mass effects part of the reason? I am extremely weary of arguments that technology or productivity gains underlie rising wealth inequalities. This seems to me much more a financial phenomenon. Bankers make more money, relatively to the common man, than they ever did. So do a few CEOs riding high on stock option gains, boards stacked with good old boys and the leveraged m&a game. Technology has little to do with it, and liquidity creation a lot. But ever since Greenspan felt it necessary to prop the tech bubble back in 1999, the Fed has been keen to obfuscate, lest fingers end up being pointed in the right direction as to these politically unwelcome inequalities. So quoting Bernanke would seem to me to add insult to injury if I weren’t one of these fat bankers myself
The critical mass question seems to me the more interesting you raise. I understand it applies in traditional media, because advertising flocks to the networks, whether print, audio-visual or other, with access to the widest public. Perhaps it is not technology-enabled but, again, advertising-based models that thrive on critical mass. eBay, which also bought Skype, may have been an exception. Anyway, shouldn’t you differentiate technological critical mass (adoption of a standard by a public which then becomes captive), and a more traditional customer access effect, which is what was really at play for eBay and for Skype?
Comment by Pierre — 2/11/2007 @ 3:40 pm
To your first point: what is responsible for this increased liquidity in the financial markets, if not globalization and technology?
To your second point, I think you misunderstand the effect of critical mass on products like YouTube. The key here is Metcalfe’s law, which states that the value of a network increases in proportion to the square of the number of nodes. Some have claimed that this under- or overestimates the value of each new node, but in any case it is clear that the delta is much larger than if the increase in value were linear. The reason that YouTube is so successful is not that they have reached some theoretical “critical mass” for advertisers (in fact, there ability to generate real revenues from ads is still unproven).It is rather that videos added to the site have much higher value than on other sites (since far more people will see them) and visiting the site is likewise far more valuable (since there are so many more videos to see). In the case of Skype, to take another example, the product is only as useful as the number of people you can call with it. Since Skype has so many more users than the nearest competitor in the pure-play VOIP space, they have a near lock on the market.
Comment by Matt — 2/12/2007 @ 4:44 pm
The increase in liquidity I am talking about definitely has nothing to do with either globalisation or technology. It is a simple money creation phenomenon, and as such it is a product of central bank policy, via interest rate setting and financial sector regulation.
As to the second point, I do not dispute the value of network effects you very cleverly spellt out. My query was more whether we are talking about technology or old-style media effects, or a mix of both. Point taken with then phone or fax analogy.
Comment by pierre — 2/12/2007 @ 7:50 pm