Jeff Bezos celebrating after his spacecraft landed. Photo: Xinhua / Alamy Stock Photo

Inequality just went stratospheric. Can we bring it down to earth?

A tiny elite is hoarding the gains of a digital economy. Could a radical idea help broaden economic growth?
July 23, 2021

“You guys paid for all of this.”

Cue a ripple of awkward laughter.

It’s hard to imagine a more fitting image of 21st-century inequality. The world’s richest man, his face still flushed from a private trip to space, tells his workers and customers they paid his billion-dollar airfare.

It was awkward, of course, because Jeff Bezos was right. We all paid for his ticket to space. The fortunes amassed by today’s tech billionaires reflect an undeniable fact: the profits of the digital economy are being captured by a narrow elite, rather than broadly shared.

So what can be done about this new form of inequality? I’ve spent a lot of time exploring this question, which forms the backbone of my book End StateIt’s a public debate that often leads us straight to arguments about tax (why do billionaires evade it?) or redistributive benefits (why do governments cut them?). But here I want to speak directly to the heart of the issue: the extraordinary profits amassed by firms like Amazon, Google and Facebook. What allows such a small set of companies—and their founders—to accumulate such astronomical wealth? And how could we open up access to this prosperity, so that more people can enjoy the ride?

Modern monopolies

These questions can take us in a few directions—how we equip people with digital skills, for example, or how we guide norms over pay. I’ll focus further upstream: on the rules we use to govern markets, to make sure they stay healthily competitive.

It’s now clear that digital platforms like Amazon are monopolies—and this isn’t because they’re run by megalomaniacs, or because (or not just because) regulators have taken their eyes off the ball. It’s because of a deeper, structural change in the way markets work.

Digital markets are different from traditional markets, in that they tend to be “winner-takes-all.” While market dominance in itself is nothing new—in the past, some companies bludgeoned their way to a commanding position, or entrenched themselves using the benefits of scale—in the digital economy, these effects seem to be more systemic, thanks to self-amplifying feedback loops.

The first of these loops relates to data. The more data a company like Amazon accumulates, the better its product gets, and so the bigger the company gets, and the more data it accumulates. The second loop relates to network effects, which particularly benefit marketplaces like Amazon. The more buyers who visit Amazon, the more companies want to sell their products there, and this attracts more buyers. This latter effect is known in the industry as a “flywheel”—and kick-starting it is every start-up’s dream. The result is an explosive cycle of growth and, ultimately, a situation in which the winning company gets ever bigger, and ever harder to dethrone.

By now this analysis is pretty uncontroversial, and in the last five years the attention of economists has shifted to the implications of these winner-takes-all dynamics. So what does the data say?

The signs of monopoly are there wherever you look. Since the late 1990s, market concentration—a measure of market capture by dominant firms—has risen in four out of five sectors of the US economy. Average markups have risen too: from 21 per cent above marginal cost in 1980 to 61 per cent now—and, tellingly, this growth has been driven mainly by firms at the top, while markups at median firms have flat-lined. We see the same pattern in the share of overall profits. One study by McKinsey found that the top 10 per cent of firms globally now capture 80 per cent of profit, while the top 1 per cent account for 36 per cent of all profit. The total profit made by the middle 60 per cent of firms in the sample was, in the study’s words, “near-zero.” The evidence of big tech’s monopolistic hold is now so strong that even regulators—not prone to hyperbole—name it directly. In one study of Google and Facebook, the CMA (the UK competition authority) concluded that the two companies now have “entrenched market power” based on forces that are “wide ranging and self-reinforcing.”

There are also hints that these companies are monopolies in the way they behave. Google has been fined repeatedly for anti-competitive behaviour, with the European Commission judging that the company unfairly privileged its own shopping service (€2.4bn), search engine (€4.3bn), and online advertising service (€1.5bn). Facebook has been accused of curtailing access to its developer ecosystem as a way of controlling its patch, revoking access to firms that become competitors. Amazon itself has been accused of using data to monitor the success of competitor products on its platform, and then undercutting those products with its own. The companies, of course, have a different take on these cases; they say they’re just trying to meet their customers’ needs, or protect customer data.

This all helps pay Bezos’s airfare, since a monopoly position is what enables Amazon and other digital platforms to capture an excess share of prosperity, to be channelled into private fortunes.

Still, why do we care? Is this all just chagrin that some rich people are doing well? And haven’t these companies’ services made our lives better, justifying their incredible wealth?

I happen to think that Amazon, Google, and the rest have hugely improved our lives. Their products have become ubiquitous for a reason, and being reluctant to admit this only inhibits a proper treatment of the issues. While accepting this, however, we can worry both about the disproportionate gains that flow from a monopoly position, and about what happens next. Will Google and Facebook, in their dominance, prevent the next Google and Facebook?

To see the issue, consider the flow of innovation from start-ups. Facebook has made over 90 major acquisitions, some of well-known and established firms like WhatsApp, but most (Giphy, Dreambit, CrowdTangle, Pebbles) of much smaller or earlier stage start-ups. Google, meanwhile, has acquired more than 270 firms. None of these acquisitions were ultimately blocked by competition authorities - and barely a handful were even investigated—at least in part because they didn’t flash the traditional warning lights that regulators look out for. These tend to relate to scale—when a big supermarket buys another big supermarket, for example, so that their combined market share is significant. In general, however, the big tech platforms don’t wait for their competitors to grow before they take them over: they eat them when they’re babies. The goal is both to pre-empt future competitors and to ingest and assume their qualities, from ideas to patents, brands, data and people. As one UK government review into digital markets put it: “New entry may still be possible in some markets, but to the degree that entrants are acquired by the largest companies—with little or no scrutiny—that channel [of competition] is also not operative.”

As well as snuffing out future competitors, there’s also a more general sense of hoarding implicit in the way big tech uses data, which risks starving the wider economy of oxygen. Google, Amazon and other major platforms now sit on so much data that even their brilliant engineers can’t hope to make full use of it. Since data is the lifeblood of innovation in a digital economy, and since these firms hoover up more data with every product and company they add to their private ecosystems, that dominance—and the waste that flows from it—will likely become increasingly problematic. It’s as if big tech companies have found a warehouse of alien technologies, full of as-yet-undiscovered innovations that could drive the economic growth of the future—from the next game-changing product to cures for disease—and while they’re piecing through that warehouse as best they can, and pocketing the proceeds, the rest us of stand outside.

Rusty old policy levers

So where does this all take us in policy terms? Like so many of the problems that are emerging from the digital economy, the first response of politicians has been to reach for old levers.

In the case of anti-monopoly policy, the go-to legacy is that of Teddy Roosevelt and the great “trust busters” of the late 19th and early 20th century—a time when, like now, inequality and monopoly were top issues of public concern.

Back then, the public policy response was pretty emphatic: governments took a sledgehammer to big firms like US Steel, smashing their monopoly positions by breaking the companies up.

Enticed by these historical echoes, many politicians—particularly on the left—have called for a return to the breakups of the past. Senator Elizabeth Warren has harked back to the Gilded Age policy response, when “Republican and Democratic reformers pushed to break up these conglomerations of power.” In July 2020, Congressman Jerry Nadler said the problem with digital platforms “is not unlike what we faced 130 years ago, when railroads transformed American life—both enabling farmers and producers to access new markets, but also creating a key chokehold that the railroad monopolies could exploit.” The Biden administration itself has been bullish, appointing celebrated anti-monopoly academic Lina Khan to run the US competition watchdog, and hiring Tim Wu, long-time anti-monopoly advocate and writer, as an adviser.

For sure, breakups have an intuitive appeal as a weapon against monopolies like Amazon. But when you talk with experts about these issues—including fierce anti-monopoly activists—it’s interesting how quickly breakups lose their appeal. Once we see digital platforms for what they are—not a return to the monopolies of the past, but a whole new species of monopoly—it becomes clear that breakups are at most a small part of the answer. In some cases they could even be harmful.

Why so? In part, because breaking up big tech companies doesn’t solve the underlying problem: if we don’t tackle those winner-takes-all dynamics, digital monopolies will simply grow back.

Breakups also sit awkwardly with the role big tech plays in our lives. Do we really want the big tech companies we rely on to be replaced by lots of smaller firms, each running separate products? Would our lives be better if our friends were split over more social media accounts? If we had to try out several search engines to make sure we’d covered all the results? Or if our favourite apps all had different back-end systems so that none of them integrated with each other?

And then there’s that awkward truth: most of us love the products these companies provide. Digital monopolies are, in this sense, very different to old-school monopolies—United Airlines springs to mind—in which customers feel forced to use a poor product or service because they have no real choice. Ninety-one per cent of Americans have a favourable opinion of Amazon and 90 per cent of Google, while Apple and Google rank first and second as the most-loved brands in Europe. When journalist Kashmir Hill ran an experiment to cut Google out of her life, she found it close to impossible—not just because Google is hard to avoid, but because “Google is really damn good at a lot of the things it does, and I miss those things.”

While the Luddite instinct to smash things up is tempting, that instinct shouldn’t be followed. So what could be bolder than breakups?

A radical idea

There is an answer to that question—and one that’s gaining traction among forward-thinking regulators and academics. To find it, we need to start from a different premise: the problem with digital platforms like Facebook and Amazon isn’t their size, but their status.

As things stand today, we treat the world’s biggest digital platforms as nothing more than private companies. In legal terms, they’re in some respects no different to a corner shop. What’s become clear in the last five-to-10 years—and what we’re starting to pay the price for—is that this classification has no bearing on reality. The decisions made by a company like Google or Facebook can snuff out a family business or reshape an entire market overnight. And their decisions can also swing elections and determine who can and cannot speak. Even when we support these decisions—blocking Donald Trump, for example—it feels icky. Should a private company really be making these calls?

This all leads to the radical alternative to breakups: don’t break up big tech companies, open them up—with a new legal status and new responsibilities, reflecting their economic and social significance.

What does that really mean? Here are three concrete examples.

First, major digital platforms should be required to make their top-line data open by default. To be clear, that doesn’t mean sharing information on individual customers, only high-level anonymised datasets. Even at this aggregate level, this data is innovation gold dust. Who knows what discoveries it could yield? By opening it up, we throw open the doors to that alien technology warehouse. For anyone interested in the history of tech monopoly debates, it would be a similar moment to the opening up of Bell Lab’s patents, giving other companies and start-ups access to a huge source of productive potential.

Second, we would push for interoperability. It’s an ugly word, but an important one when it comes to tackling digital monopolies. New rules would require digital platforms to make their private ecosystems more permissive, so that we could move more easily between them. You would be able, for example, to invite your Facebook friends to join you on another platform (they’re your friends, after all), and you’d be able to cross-post from one platform directly onto another. The goal here is to break down those private walls that big tech companies have built around their fortresses, and make it harder to defend a monopoly position.

Third, there’s what we could call a digital rule of law. As Mark Zuckerberg himself has said, “In a lot of ways, Facebook is more like a government than a traditional company.” He’s both right and wrong about this: as things stand, companies like Facebook are less like modern states and more like capricious medieval monarchs, able to use their power in unpredictable ways for private gain.

What the online world is still missing are adequate rules to govern big tech’s behaviour—rules that reflect its unprecedented power, and that are not just written by big tech companies themselves, like kids writing rules for the sweetshop. Tech giants should not, for example, be able to charge exploitative prices to other companies, or to effectively ransom us for our data, when their platform is the only game in town; they should not be allowed to calibrate their platforms to favour their own products ahead of those of competitors; and they should not be allowed, without due process, to cut off access to their data or platforms in ways that can destroy livelihoods.

Stepping back, what this all amounts to is a fundamentally new way to think about digital platforms. They become less like funnels, channelling prosperity into private pockets, and more like digital public assets, sharing prosperity out. That’s not, to be clear, a story of nationalisation; they would still be private entities, but of a new, 21st-century type. The goal, after all, is not to destroy these incredible creations, or to fragment them into pieces, but to make them more open and permissive; more like a national park or a thriving public marketplace, and less like a high-walled private estate.

Would this solve stratospheric inequality? Not on its own. That will require similarly bold ideas on issues like wage inequality and redistribution—issues I also cover in End State. But by making innovation more vibrant—and its proceeds more inclusive—a fresh anti-monopoly agenda could at least temper inequality’s rise.