Productivity and The Distribution of Wealth


Summary

Wealth concentration is structural and computers have led to and sped it up.

Occupy Wall Street: Day 14

The distribution of wealth in the US has been in the news much lately with the Occupy Wall Street movement. The problem is that the top 1% of people control more and more of the wealth and resources. We like to blame the bankers and Wall Street. I'm not about to defend the outlandish salaries and bonuses paid to financial wonks who contribute little of lasting, real value to society. But I don't think we've given enough thought to the people who are really to blame...us.

By "us," I mean technology people. Internet people. People who have created the whole computer revolution.

Here's my reasoning: Suppose you start a company to create accounting software for small businesses. The company is gloriously successful. Who wins and who loses? The investors, founders, and employees of the company win. The accountants and bookkeepers of the world lose. The number of people in the first group is less than the number of people in the latter group (that's called productivity). Fewer people get the money. Wealth is concentrated.

This happens over and over. Right in my building are two examples: SolutionsReach automates reminders for doctors, dentists, and other service providers. A task that people used to do. Property Solutions does rental management software. How long until realtors and other professions we see lots of people doing are disintermediated? Not long, I think.

Now, play this out and compound it over thousands of companies over the last 30 years. The people who win the first round have an advantage when they play the second (e.g. think serial entrepreneurs, venture capitalists, seed investors, etc.) The productivity gains of the computer revolution result in more and more wealth being concentrated in fewer and fewer hands. This cycle is speeding up.

There's another group that benefits in the preceding scenario who we haven't discussed yet: businesses who use the accounting software. They will shift spending from accounting and bookkeeping to something else. That's the upside of productivity gains. Some of the money from the gain will end up in other jobs. Jobs that the bookkeepers and accountants probably aren't trained to fill.

None of this leads to a solution. But I think it's helpful to understand that the problem is structural and not something we can solve with a little more regulation of Wall Street. We'll make a mistake if we legislate against productivity (what Big Labor "solutions" typically come down to).