Business, Finance and Technology

The impact of digitization on modern society

Why Is the Digital Economy so Unequal?

The digital economy is taking over. Our biggest corporations are digital—7 of the 10 most valuable publicly traded companies are tech giants. Digital takes up more of our time, our communications, and our media consumption. Almost 40% of Americans aged 18-29 report they are online basically every waking hour of their lives, with 30-49 year olds not far behind at 36%. Digital provides us with more of our news, more of our binge-watching entertainment, and more of the inputs for consumer decision making than ever before.

During this time of digital abundance, the severe economic inequality in developed economies isn’t going away. Yes, tremendous wealth is being created. We’ve recently celebrated our first trillion dollar companies: Apple and Amazon. Real GDP has doubled in the US since 1992. Yet 41 million Americans have limited or uncertain access to adequate food. 44% of Americans do not have the savings to cover a $400 emergency expense. And 25% of Americans have skipped a medical treatment due to cost.

The scale of rising economic inequality in developed economies, but particularly the US, is difficult to comprehend. Roughly 10% of all US national income has shifted from the bottom 90% to the top 1% of households since 1992. That’s about a $2 trillion dollar shift in income every year, or the equivalent of removing $17,600 a year from each of 113.6 million American households, and placing an extra $1.6 million per year in the hands of each of the top 1.25 million households. The shift in household net worth is on a similar scale.

Why is the digital economy so unequal? And what should be done about it?

One explanation is the hollowing out of middle class, and middle-skill jobs, due to technological change and globalization. The standard remedy for skill shortages is education, but the current system of higher education in the US has already massively indebted its own student population.

Another explanation is regulatory regimes that are outdated in the digital era, particularly around taxation and intellectual property ownership. The giant tech companies are skilled at choosing and managing their own regulations, redefining their assets as intellectual property whose profits can be realized anywhere in the world. Increased regulation and accountability is a possible solution here, difficult at the best of times but especially when international cooperation is required. Certainly, if the oft-mentioned solution of a basic income for all is to stand a chance, tax receipts are going to need to dramatically increase, rather than shrink to the level of Apple’s Irish or Amazon’s Luxembourg tax rate.

New technology plays a big role in economic inequality, but not in the way we usually think.

We usually think of the revolutionary effects of technologies that are new and exciting, but still in their infancy—blockchain! AI! The Gig Economy! Robots will replace us! We extrapolate from a few extreme early uses and project it everywhere, without considering its current scale (tiny) and the difficulty of rolling out fragile new technology into a world of messy value tradeoffs and skilled adversaries.

What’s left out is how digital technology transforms our basic economic infrastructure behind the scenes. Digital technology increasingly mediates almost every transaction, communication, and information search that has economic relevance. Google and Facebook didn’t get rich off of robots, or virtual reality. They got rich off of ads—but with a digital twist. These are not the advertisements of old. This is the focusing of attention, with tech giants serving as the digital middleman or gatekeeper for just about everything. It’s a proven business model: put people together, and take a cut. What Uber and Airbnb try to do in limited peer-to-peer markets, the tech giants are doing for the economy as a whole.

When this basic economic infrastructure is digitized, the companies that run these platforms can then deploy the unique powers of digital: the ability to constantly experiment and find ways to induce desirable behavior; the ability to collect uniquely detailed information about every person and thing; and the ability to scale their newfound knowledge to millions or even billions of users almost instantaneously. They can use these new powers in the service of idiosyncratic agendas, or simply to perpetuate the wealth of themselves and their associates.

Getting a handle on economic inequality in the digital era will be difficult until there’s basic visibility, control, and accountability over the fundamental economic infrastructure, steering it towards the goals of shared opportunity and social welfare. Right now, it’s too easy for a very small group of people to game the system, and skew these hidden rules and connections in their own favor.

The digital transformation of business and society creates tremendous value, but there is nothing inevitable about most of that value being captured exclusively by the few.

Jonathan P. Allen is a Professor in the Entrepreneurship, Innovation, and Strategy Department of the School of Management, University of San Francisco, USA. His research interests include the digital transformation of organizations and society, the design and use of open technologies, and digital entrepreneurship.

P_Allen_Technology and Inequality