The Internet Is the Greatest Legal Facilitator of Inequality in Human History

It doesn't have to be.
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Reuters

In the 1990s, the venture capitalist John Doerr famously predicted that the Internet would lead to the “the largest legal creation of wealth in the history of the planet.” Indeed, the Internet has created a tremendous amount of personal wealth. Just look at the rash of Internet billionaires and millionaires, the investors both small and large that have made fortunes investing in Internet stocks, and the list of multibillion-dollar Internet companies—Google, Facebook, LinkedIn, and Amazon. Add to the list the recent Twitter stock offering, which created a reported 1,600 millionaires.

Then there’s the superstar effect. The Internet multiplies the earning power of the very best high-frequency traders, currency speculators, and entertainers, who reap billions while the merely good are left to slog it out.

But will the Internet also create the greatest economic inequality the global economy has ever known? And will poorly designed government policies aimed at ameliorating the problem of inequality end up empowering the Internet-driven redistribution process?

As the Internet goes about its work making the economy more efficient, it is reducing the need for travel agents, post office employees, and dozens of other jobs in corporate America. The increased interconnectivity created by the Internet forces many middle and lower class workers to compete for jobs with low-paid workers in developing countries. Even skilled technical workers are finding that their jobs can be outsourced to trained engineers and technicians in India and Eastern Europe.

That’s the old news.

The new news is that Internet-based companies may well be the businesses of the future, but they create opportunities for only a select few. Google has a little over 54,000 employees and generated revenues of around $50 billion in sales or about $1.0 million per employee. The numbers are similar for Facebook. Amazon is running at a $70 billion revenue rate and had around 110,000 employees or a little over $600 thousand in sales per employee. In the U.S., each non-farm worker adds a little over $120,000 to the domestic output.

That means that in order to justify hiring an employee, a highly productive Internet company must create five to ten times the dollars in sales as the average domestic company.

In the past, the most efficient businesses created lots of middle class jobs. In 1914, Henry Ford shocked the industrial world by doubling the pay of assembly line workers to $5 a day. Ford wasn’t merely being generous. He helped to create the middle class, by reasoning that a higher paid workforce would be able them to buy more cars and thus would grow his business.

Ford’s success trickled down, as other companies followed his lead. Automotive companies not only employed numerous well paid workers but they created a large demand for other product and services that employed millions more—steel, glass, machine tools, auto dealers and dealerships, gas stations, mechanics, bridges, roads, and construction equipment. The workers in those industries purchased homes, appliances, and clothes creating still more jobs.

One reason we are failing to create a vibrant middle class is that the Internet affects the economy differently than the new businesses of the past did., forcing businesses and their workers to face increased global competition. It reduces the barriers for moving jobs overseas. It has a smaller economic trickle-down effect.

Doing some of the obvious things like raising the minimum wage to fight the effects of the Internet will probably worsen the problem. For example, it will make it more difficult for bricks-and-mortar retailers to compete with online retailers.

Surprisingly, the much-vilified Walmart probably does more to help middle class families raise their median income than the more productive Amazon. Walmart hires about one employee for every $200,000 in sales, which translates to roughly three times more jobs per dollar of sales than Amazon. Raising the minimum wage will also make it more difficult to bring manufacturing jobs back to the U.S. The Internet is not the sole force driving income inequality in the U.S. Our languishing education system is a major contributor to the problem. But two things are certain: the Internet is creating many of those in the ultra-wealthy 1%; and it forces businesses to compete with capable international competitors while providing the tools so that businessmen can squeeze inefficiency out of the system in order to remain competitive.

If the government is going to be in the business of redistributing wealth, a better approach would be to raise the earned income tax credit and increase taxes to pay for it. Not only would this raise the income of low paid workers, but also it would subsidize businesses so they would be more competitive in world markets and encourage them to create jobs. Since the minimum wage would not go up, moving jobs overseas would be a less attractive alternative.

If policy makers want to attack income inequality, they must pay more attention to the ways in which the Internet is affecting their businesses. If we ignore the power of the Internet when making policy decisions, we are in danger of allowing it to become the greatest legal facilitator of income inequality in the history of the planet.

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Bill Davidow is an adviser to Mohr Davidow Ventures and the author of Overconnected: The Promise and Threat of the Internet.

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