The Corner

Economy & Business

Automation and Employment: The Narrowing Path

As promised/threatened, more from that fascinating article on Silicon Valley by Joel Kotkin in Newgeography.

I don’t agree with everything that he has to say, but this, I think, is close to spot on:

Americans justifiably take pride in the creative and entrepreneurial genius of Silicon Valley. The tech sector has been, along with culture, agriculture, and energy, one of our most competitive industries, one defined by risk-taking and intense competition between firms in the Valley, and elsewhere.

This old model is fading. All but shielded from antitrust laws, the new Silicon Valley is losing its entrepreneurial yeastiness—which, ironically enough, was in part spawned by government efforts against old-line monopolists such as ATT and IBM. While the industry still promotes the myth of the stalwart tinkerers in their garages seeking to build the next great company, the model now is to get funding so that their company can be acquired by Facebook or one of the other titans. As one recent paper demonstrates, these “super platforms” depress competition, squeeze suppliers and reduce opportunities for potential rivals, much as the monopolists of the late 19th century did (PDF). The rush toward artificial intelligence, requiring vast reservoirs of both money and talent, may accelerate this consolidation. A few firms may join the oligarchy over time, such as Tesla or Uber, but these are all controlled by the same investors on the current Big Five.

This new hierarchy is narrowing the path to riches, or even the middle class. Rather than expand opportunity, the Valley increasingly creates jobs in the “gig economy” that promises not a way to the middle class, much less riches, but into the rising precariat—part-time, conditional workers. This emerging “gig economy” will likely expand with the digitization of retail, which could cost millions of working-class jobs.

For most Americans, the once promising “New Economy,” has meant a descent, as MIT’s Peter Temin recently put it, toward a precarious position usually associated with developing nations. Workers in the “gig economy,” unlike the old middle- and working-class, have little chance, for example, of buying a house—once a sure sign of upward mobility, something that is depressingly evident in the Bay Area, along the California coast, and parts of the Northeast.

Certainly the chances of striking out on one’s own have diminished. Sergei Brin, Google’s co-founder, recently suggested that startups would be better off moving from Silicon Valley to areas that are less expensive and highly regulated, and where the competition for talent is not dominated by a few behemoths who can gobble up potential competitors—Instagram, WhatsApp, Skype, LinkedIn, Oculus—or slowly crush them, as may be happening to Snap, a firm that followed the old model and refused to be swallowed by Facebook but went through with its own public offering. Now the Los Angeles-based company is under assault by the social media giant which is using technologies at its Instagram unit, itself an acquisition, that duplicate Snap’s trademark technologies and features.

Snap’s problems are not an isolated case. The result is that the number of high-tech startups is down by almost half from just two years ago; overall National Venture Capital Association reports that the number of deals is now at the lowest level since 2010. Outsiders, the supposed lifeblood of entrepreneurial development, are increasingly irrelevant in an increasingly closed system.

… Unlike [the] often ruthless and unpleasant 20th century moguls, the Silicon Valley elite has done relatively little for the country’s lagging productivity or to create broad-based opportunity. The information sector has overall been a poor source of new jobs—roughly 70,000 since 2010—with the gains concentrated in just a few places. This as the number of generally more middle-class jobs tied to producing equipment has fallen by half since 1990 and most new employment opportunities have been in low-wage sectors like hospitality, medical care, and food preparation.

So what to do? In an age of rapid technological change, what seems like an invincible market position may be anything but, and it remains the case that it is better for the invisible hand to shake things up than heavy-handed state intervention. It also remains the case that the pace of innovation from within these  tech giants remains, at times, astounding. To break up the existing ‘big five’ would be to risk a  disruption that simply laid waste to an American success story for only very limited return, if any. There’s no easy answer, especially as whatever constellation of enterprises that might emerge from an AT&T-style break-up would–automation does what it does- be unlikely to reverse the growing structural problem in the job market (a problem that is of underemployment as well as straightforward unemployment) with all that it entails for wage rates, household formation and, ultimately, the maintenance of a property-owning democracy.

History would suggest that new, good jobs will eventually replace the old. But history also suggests that process can take some time. What happens in the interim is unlikely to be pretty, economically – or politically.

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