Why the Massive Wealth of the 1% Could Ruin the Economy

If the tech revolution continues to enrich the superstars and depress the bottom half, both parties might ultimately find themselves working less, leading to a smaller economy

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Technology changes the shares of income for the skilled vs. unskilled, for superstars vs. the rest, and for capital vs. labor. Is this simply a zero-sum game where the losses of some are exactly offset by gains to others? Not necessarily. On the positive side of the ledger, inequality can provide beneficial incentives for skill acquisition, efforts toward superstardom, or capital accumulation. However, there are also several ways it can hurt economic well-being.

First, one of the most basic regularities of economics is the declining marginal utility of income. A $1,000 windfall is likely to increase your happiness, or utility, less if you already have $10 million than if you only have $10,000. Second, equality of opportunity is important to the efficiency and fairness of a society, even if unequal outcomes are tolerated or even celebrated. Equality of opportunity, however, can be harder to achieve if children of poverty get inadequate health care, nutrition, or education, or people at the bottom are otherwise unable to compete on a level-playing field. Third, inequality inevitably affects politics, and this can be damaging and destabilizing. As economist Daron Acemoglu puts it:

Economic power tends to beget political power even in democratic and pluralistic societies. In the United States, this tends to work through campaign contributions and access to politicians that wealth and money tend to buy. This political channel implies another, potentially more powerful and distortionary link between inequality and a non-level playing field.

Finally, when technology leads to relatively sudden shifts in income between groups, it may also dampen overall economic growth and potentially precipitate the kind of collapse in aggregate demand reflected in the current slump.

Consider each of the three sets of winners and losers discussed earlier. When skill-based technical change, or SBTC, increases the incomes of high-skill workers and decreases the incomes and employment of low-skill workers, the net effect may be a fall in overall demand. High-skill workers, given extra income, may choose to increase their leisure and savings rather than work extra hours. Meanwhile, low-skill workers lose their jobs, go on disability, or otherwise drop out of the labor force. Both groups work less than before, so overall output falls.

One can tell a similar story for how super-wealthy superstars, given additional wealth, choose to save most of it while their less-than-stellar competitors have to cut back consumption. Again, overall output falls from such a shift. Former secretary of labor Robert Reich has argued that such a dynamic was in part responsible for the Great Depression, and Nobel Prize winner Joseph Stiglitz has written in detail about how the increasing concentration of wealth in a relatively small group can be corrosive to economic growth.

Presented by

Erik Brynjolfsson and Andrew McAfee

Erik Brynjolfsson is the chair of the MIT Sloan Management Review, where Andrew McAfee is a principal research scientist. They are the co-authors of the new book Race Against the Machine. More

Andrew McAfee, a principal research scientist at the Massachusetts Institute of Technology (MIT), studies the ways that information technology (IT) affects businesses. He coined the phrase 'Enterprise 2.0'; his book on the topic was published in 2009 by Harvard Business School Press. He has also held appointments as a professor at Harvard Business School and a fellow at Harvard's Berkman Center for Internet and Society.

 

Erik Brynjolfsson is the director of the MIT Center for Digital Business, the Schussel Family Professor at the MIT Sloan School of Management, and chair of the MIT Sloan Management Review. His research examines the effects of information technologies on business strategy, productivity, Internet commerce, pricing models, and intangible assets. Brynjolfsson is coauthor of Wired for Innovation: How IT is Reshaping the Economy (MIT Press, September 2009).

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