The majority of wealth is now concentrated at the top of the social ladder. This is particularly true in the US, and the gap is widening every year. This, I believe, is because of efficiency, not China. Today the best ideas can efficiently and quickly propagate worldwide, and everyone can efficiently find them and buy them. This makes the owners of these ideas filthy rich, and those ideas that are not the best, can hardly survive. It’s not just transfer of information that is fast; wealth too is transferred very fast and efficiently.
Imagine in the future where we have something like Star Trek’s transporter which would allow us to serve freshly cooked meals to anyone around the world. The efficiency of such a device would probably kill local restaurants that are not the best. The efficiency of the kitchen equipment in the future would allow one chef to serve millions of diners a day. We would probably need just a few chefs per each cuisine in the whole world. The reason why many chefs still have their jobs is because the world isn’t that efficient yet. In other industries, many people have already lost their jobs because of the efficiency that invaded their fields.
When someone owns a means of production that is more efficient, it can eliminate a large number of jobs, and he stands to profit handsomely from the money he saves. In other words, it’s not so much that American jobs are going overseas; those who own efficient means of production are now pocketing the money that they used to spend on hiring people.
Think of journalists. Many are losing their jobs. Newspapers are barely surviving. In the old days, for every news event, there were probably hundreds of journalists writing about the same story for their own local newspapers. Now, because of the efficiency of the Internet and search engines, a few journalists writing about it would suffice for the whole country. People would be able to find them. There is no reason why hundreds of newspapers should write and publish their own versions of the same story. Browse through the same news topic on Google News, you will still find hundreds of slightly different versions of the same story. The journalists who are writing them now will not have their jobs for long.
Corporations are increasingly getting bigger (in terms of market caps), more global, and more powerful, yet they are getting smaller and smaller in terms of the number of people they employ, because they have mastered the art of efficiency. It is cheaper and faster to produce goods at a global scale where the same product is consumed all around the world by billions of people. In the old days, each type of product, like chair, was made by many different people in many different ways at many different places. It was inefficient but it provided jobs for many people. Now the same Ikea chair can be sold worldwide. We don’t need so many people designing and manufacturing chairs. The same is true for things like computer programs, cell phones, McDonald’s hamburgers, and Starbucks coffees. Because of the efficiency, the market will quickly eliminate inferior products, and everyone will efficiently find the superior products and flock to them. So, the few winners win big, and the majority of others fail.
This pattern called “power law” or “80-20 rule” is found everywhere. 20% of people owns 80% of wealth. 20% of websites get 80% of all traffic on the Internet. 20% of the articles on your website gets 80% of your readers. And, so on... The reason why software developers rush to every new market (like Facebook Apps, iPhone Apps, Android Apps, etc..) is because this curve is flatter at the beginning. 20% does not grab 80% of the market because the market is not yet so efficient. Everyone still has a chance to achieve a modest success. But even the time it takes for a new market to reach the 80-20 rule is getting shorter and shorter.
We live in the age where we make a living by doing things more efficiently than others. We blame other countries like China for taking our jobs but we are all doing it ourselves. When you learn how to use computer programs like Excel, Word, and Photoshop, you are eliminating other people’s jobs. What used to require a team of people to produce, you now can do it all by yourself using these programs. In other words, you are profiting from the loss of other people’s jobs. That’s how we survive in today’s world. We struggle every day to avoid being the one whose job is eliminated by the efficiency of someone else.
At the rate we are making everything more efficient, in the not-so-distant future, we would have machines that can produce everything we need. Let’s say one works like a microwave oven; you tell it what you want, and it comes right out. Machines take care of everything, so we don’t need to work at all. Now, here is my question: Who would own these machines? The most obvious answer might be the government. In other words, we all share the ownership of these machines. But that would be pure communism. Marx’s dream come true. The state owning all the means of production. I’m sure you are not ready to admit that you believe in communism. So, we have to let private individuals own these machines, but what does that mean in reality? There would ultimately be one person who owns all the means of production. That is what must happen if we take efficiency to its logical conclusion. Any other competitors who are less efficient would be eliminated by the efficiency of the market forces. But here is the riddle: Who can buy his products or services and with what? If this Warren Buffett of the future owns all the means of production, and if he does not need anyone else to help him, how would other people make money? If other people cannot make money, how can they buy his products or services? He alone can produce food for billions of people around the world, but he has no incentive to produce anything because nobody can afford to buy anything.
We are actually not far from this absurd scenario. Even big corporations are now struggling because the American consumers are broke. This is because the same corporations laid off these consumers. Through efficiency, they eliminated their jobs to increase profits. Ironically, when they eliminated their employees, they also eliminated their customers. In reality, the theoretical conclusion above could never happen because we would have civil unrest, riots, and wars long before we get to that point. So, from the point of view of the wealthy people who own the most efficient means of production, it is a question of how many people (i.e. employees/consumers) they can eliminate through efficiency before they reach a point of diminishing returns. It is becoming clear now that we’ve already reached this point. The problem, however, is that no businesses will stop their pursuit of efficiency, because they all would want someone else to start giving jobs back to the consumers. They do not want to be the ones who make the sacrifice and start doing things inefficiently.
Pursuit of efficiency is a rat race. We all have to join this rat race, otherwise we would not be able to survive. As long as everyone else is racing, we all have to. Otherwise the efficiency of the market forces will swiftly eliminate us. The only way to stop it is to intervene at the government level, and it has to be coordinated globally. Any country who alone tries to stop the rat race of efficiency will quickly perish. We need the governments from around the world to intervene in the global economy and make things more inefficient.
There are many ways to make things more inefficient but one fantasy I have is to abolish public corporations. This will never happen but let me entertain the idea. Public corporations are highly efficient profit-generating machines. CEOs and employees of public corporations must always put profits above everything else. If they were to put their own personal values above profits, they would quickly get fired by the shareholders. Because their stocks are traded so efficiently, the ownership shifts every millisecond. This promotes short-term gains and evasion of accountability. Public corporations are also pressured to keep growing bigger and bigger, more and more dominant, because they have easy access to funding. As they grow, they bulldoze over local small businesses who cannot compete with the efficiency of the big corporations. Yet these large corporations have been hiring less and less people over the years because their own internal efficiency is also increasing.
If we could ban public corporations from the entire world, I would imagine that we would make the power law curve flatter, and give more opportunities to the people in the lower class, even if the GDP goes down. (The problem we should be addressing first is the severe inequality of income distribution; we can worry about the GDP later.) Instead of taxing the rich, my idea is to make things more difficult (inefficient) for people to dominate any market. Don’t provide any tools of efficiency, like public corporation, that encourage pursuit of profit and efficiency at the expense of social welfare. You might say I’m anti-business, but business is not people. If you are taking this personally, you have a wrong idea of what “business” is. This is about social contract, about making compromises so that our society as a whole is generally happy.
Obviously my fantasy will never come true. The more likely scenario is that the economy will be stagnant for a long long time. The rich will squeeze the poor as much as possible without pushing the latter to riots. The US is already at that point. It is still possible to make things more efficient but the economy won’t be able to accommodate more efficiency—It would lead to intolerable suffering at the lower end of the social ladder, and the society as a whole would become dysfunctional. In this sense, economy is indeed a zero-sum game. The rich cannot become richer without the poor enduring more suffering.
Over at Y Combinator, there is an interesting debate about my essay. I want to address some of the comments.
Several people made comments about creative destruction. Their position is that those who lost their jobs can now learn something different and apply their productivity elsewhere. I agree that creative destruction plays an important role in our economies, but my argument is that we have reached a point of efficiency where the degree of creative destruction that one person can cause is too great. The destruction is too efficient for us humans to catch up. We have a rat race of creative destruction where creatively destructing other people’s jobs has become the primary way we survive.
The market cannot accomodate everyone to be the best at something; in fact it is impossible by definition. If everyone is best at something, it’s obviously not efficient as we could not be informed of billions of “best” products and services.
Think about the iPhone App market; only a small percentage of developers at the top make any money. In a sense, the rest of the developers are out of work. If they were to apply their productivity elsewhere, they would need to find a different market. They might try the Android market but there too, only a small percentage of people make any money. There could never be enough markets in the world for everyone to be in the top percentile.
Furthermore, efficiency is an effect of the entire market which collectively identifies the best products/ideas and rewards them disproportionately. We humans individually have physical/biological limitations. We cannot keep increasing our efficiency like robots do. We could not humanly catch up with the rate at which the world is becoming more efficient. By the time we learn a new skill, it is creatively destructed by someone else. It is dehumanizing to expect people to keep learning new skills in order to catch up with the pace of the market. So, I don’t think it is fair to blame those who failed to adapt quickly enough.
Personally, I’m known as a man of efficiency. I’m constantly adapting latest technologies to make my life/business more efficient. But when I look around me, I see many decent people who are not particularly interested in playing this game of efficiency. They are struggling. I believe they are the majority. They feel forced into this game of efficiency by no choice. It’s like dining at a restaurant where everyone else is wolfing down their food as fast as they can. You feel pressured to catch up with them. You cannot enjoy your meal, and suffer indigestion later. I do not feel that those of us who are good at playing this game of efficiency should blame other decent humans for failing to adapt and survive this game.
Here is a related essay I wrote 5 years ago: Economic Treadmill: Why We Are Destined to Burn Out
[10/24/11] One person emailed me about his theory on why we have such a great disparity of income/wealth. He believes public policies such as inflation rate is the primary culprit. I agree that public policies have a lot to do with it. His argument made me realize that income disparity and lack of job opportunities are related yet separate issues. We could for instance have a situation where the unemployment rate is low yet the disparity is great, or vice versa.
My primary concern is the lack of job opportunities. I believe we have a structural problem that would not be solved simply by weathering the current recession.
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