Mordecai Kurz. The Market Power of Technology: Understanding the Second Gilded Age. New York: Columbia University Press, 2023
I was very impressed by this book. I think that Kurz’s treatment of economic inequality rivals in importance works such as Thomas Piketty’s Capital in the Twenty-First Century.
The book is comprehensive in many respects. It is both contemporary and historical, analyzing variations in inequality since the late nineteenth century. It connects the dots between technological innovations, changes in market power, and shifts in public policy. Kurz does not just theorize, but formalizes his theory in a series of mathematical models, runs computer simulations, and matches the results with actual data from various time periods. That enables him to support his claim that similar developments explain both the inequalities of the earlier Gilded Age and those of today’s economy.
The book is very long and highly technical. Fortunately, Kurz is as good a writer as he is an analyst, presenting his ideas in simple prose as well as mathematical formulas. He also suggests a shorter path through the chapters for those who prefer a “nontechnical reading.”
Here I will lay out the basics of Kurz’s theory. In later posts, I will describe how he applies it to different eras of American history and summarize his policy proposals for dealing with what he calls our “Second Gilded Age.”
Technology and innovation
Kurz makes a sharp distinction between “scientific progress motivated by the desire for pure scientific discovery and technological innovations motivated by profits.” The funding for basic scientific research comes mainly from government, not private industry. That is because basic scientific knowledge is too hard to privatize. Many scientists work on the same basic questions, and their findings are too hard to keep secret. No one owns the science of genetics or quantum mechanics. Government has more incentive to fund basic research because of its potential to contribute to collective goals, such as national security or public health. Government support for basic research is also crucial to the economy, since “in the long run it is the rate of scientific progress that is the long-term speed limit on the rate of economic growth.”
The private sector’s contribution to technology is to take basic knowledge and use it to develop commercial applications. To develop a successful product, a private firm relies heavily on basic research funded by government, and also on inventions by innovators outside the firm. Kurz points out that every key component of the Apple iPhone originated as an innovation financed by government. And Microsoft’s famous disk operating system for PCs (DOS) was invented by smaller developers. Microsoft bought it for a mere $50,000, and then made millions licensing its version of it to IBM.
When scientific breakthroughs create an opportunity for new technological applications, many innovators and firms may start out as equals. At first, no one knows who will succeed in their attempts at commercially profitable innovations. Before long, the distribution of market power becomes very skewed, in that “a small number of very large firms dominate both the technology and the market in each industry, and other firms lag behind them significantly.” Kurz sees this as an example of the “cumulative advantage processes” that scientists have identified in a variety of disciplines. The basic idea is that “success breeds success.” In this case, early success in innovating, even if it occurs by luck, increases the likelihood that later innovation along the same lines will also be successful. In addition, the financial strength of the most successful firms gives them a number of ways to “impede the growth of their competitors, consolidate their position, and expand their market power.”
“Monopoly wealth” and profit
Using data from 2019, Kurz looks at what various companies are worth. A comparison of two firms of very different kinds, General Motors and Microsoft, reveals a lot about the connection between new technologies and market power.
Kurz classifies GM as a firm “in decline or slow growing,” since it is an older company whose glory years were in an earlier era of technological change. Its net worth, based on a comparison of its assets and debts, was $64.9 billion. The market value of its equity was only 51.2 billion, suggesting that its earnings outlook was a little low for a company with its net worth.
Microsoft, on the other hand, represents an “advanced sector transformed by IT where most innovations take place.” Its net worth was $310.7 billion, but its market value was $1,023.9 billion or a little over $1 trillion! (To put that in context, annual GDP for the US economy was about $20 trillion.) That gave it what Kurz calls an “excess market value” of $713.2 billion.
EXCESS MARKET VALUE = MARKET VALUE OF EQUITY – NET WORTH
Sometimes a firm’s stock market valuation is much bigger than its net worth because of what Alan Greenspan called “irrational exuberance.” During the “dot-com” boom of the 1990s, many internet companies with uncertain future earnings saw their stock rise to extravagant heights, only to collapse when the earnings turned out to be wishful thinking. But that’s not the issue here, since Microsoft’s market value is supported by a solid earnings record. Here the excess market value reflects the company’s possession of the technical knowledge it uses to maintain market power.
Excess market value makes up most of what Kurz calls “monopoly wealth.” The use of the word “monopoly” here does not mean that Microsoft is the only firm in its markets; it means that it is the sole owner of certain technical know-how that gives it a large advantage over would-be competitors. Monopoly wealth includes something else besides excess market value. Suppose that Microsoft acquires a smaller tech company—let’s call it Upstart. Suppose Upstart has its own excess market value because its stock valuation of $30 billion exceeds its net worth of $10 billion. When Microsoft makes the acquisition, it transfers Upstart’s assets and liabilities to its own balance sheet. But what does it do with Upstart’s $20 billion excess value? It may put it on its balance sheet as “intangible assets.” Then Microsoft has on its balance sheet something very similar to its own excess market value that (by definition) is not on its balance sheet. Therefore, the two should be added together to calculate Microsoft’s total monopoly wealth.
MONOPOLY WEALTH = EXCESS MARKET VALUE + INTANGIBLE ASSETS
In 2019, Microsoft’s actual intangible assets added another 55.3 billion to its monopoly wealth. For the corporate sector generally, Kurz calculated that about 70 percent of monopoly wealth consisted of excess market value and 30 percent intangible assets included in net worth.
Many economists consider intangible assets a kind of capital asset, along with tangible assets like buildings and equipment. Kurz believes that this confuses the analysis and disguises market power. He says, “Intangibles are not like capital inputs because a firm can replicate them at no cost.” A company that adds a new server bears a cost, but it can install a copy of its proprietary software on that server at practically no cost. Unlike tangible assets, intangibles do not have to be financed by capital. Although firms do spend some money on research and development, “the most successful innovations, those that generate market power, higher stock prices, and monopoly wealth, have a relatively small recorded intangible R&D investment.”
The distinction between capital assets and wealth more broadly defined is essential to Kurz’s argument. Because of this distinction, a firm’s revenue stream cannot be divided into just two parts, labor compensation and capital compensation (return on capital). Successful firms have a third part, the profits left over after paying the providers of labor and the providers of capital, such as buyers of corporate bonds. “Today, capital invested in U.S. corporations is mostly financed by bondholders, while stockholders own and trade mostly monopoly wealth.” Returns on capital go mainly to lenders, while profits go mainly to stockholders. In recent years, those profits have been increasing dramatically, while returns to both labor and capital have been falling. And since rich people own most of the stock, they receive most of the rising profits. “The sharp rise of market power since the 1980s increased both profits and monopoly wealth dramatically, and individuals in the top 10 percent of the wealth distribution gained almost all of it.”
Kurz’s argument is essentially that technological revolutions create market power; market power creates monopoly wealth; and the profits from monopoly wealth make the wealthiest households wealthier.
Technological competition and market power
Kurz maintains that technological competition does not fit the traditional model of capitalist competition. In that model, free competition among many buyers and sellers limits the ability of any one seller to set prices or reap large profits. If a firm is making a lot of money with a hot product, other firms will enter its market and reduce its market share. And if it raises prices too much above costs, it will be undercut by its competitors. Free competition tends to drive down profits until firms are making little if anything above the costs of labor and capital.
In technological competition, firms have various strategies for monopolizing their technical know-how and erecting barriers to entry for competitors. They begin by protecting their newly acquired knowledge in two ways:
First, an innovative firm gains experience and an organizational structure that is adapted to the knowledge it has created. It holds both trade secrets and a superior market position, and these provide initial protection against the use of that knowledge by others. Second, our laws and institutions protect intellectual property rights to incentivize future innovation.
Kurz sees technological acquisitions as “the most important weapon in the expansion of market power.” Microsoft acquired 237 other companies between 1987 and 2020. Companies can then reap the profits from developing the smaller companies’ innovations or keep the innovations off the market to reduce competition.
Dominant companies can also create customer dependencies by creating user networks or linkages among products. I have become pretty dependent on Amazon. not only because it is a convenient site for online shopping, but because I subscribe to Amazon Prime for free shipping and music streaming, and I download books onto the Amazon Kindle. Other services might be potentially more economical, but they would have trouble getting me to switch.
The various strategies restrict competition and increase pricing power:
Whatever form that advantage takes, the firm obtains the power to set prices higher than its costs and, because it is a technological monopolist, no competitor will force its prices down. The ability to control the price creates excess abnormal profits and wealth.
Although some firms may also engage in illegal practices to maintain their dominant position, Kurz is talking mainly about strategies that are legal under current law, but have some negative consequences for the economy and society.
Economic and political consequences
Many economists and jurists believe that the benefits of technology are great enough to justify giving free rein to big tech companies, allowing them to dominate markets and accumulate profits. But Kurz identifies several disadvantages from the standpoint of economic growth and political democracy.
Companies with market power can increase their profits not just by expanding output, but by raising prices. That reduces demand and output below what it would have been if the company had no pricing power, as in the traditional model of perfect competition. The lower output lowers the demand for labor and capital goods, hurting both workers and lenders. As profits have risen in recent decades:
[R]ising market power has served as a headwind, slowing gains in the living standards of workers, retirees, and other bondholders. Indeed, while automation and globalization are always cast as the villains in explanations of the plight of American workers, rising market power has been the more significant factor.
By pricing some consumers out of the market for hi-tech products, dominant firms slow down the rate at which innovations could have diffused through the population. We can see this in the poor rural areas, where access to high-speed internet remains limited. For an earlier era, Kunz concludes from his case study of General Electric that its pricing power retarded the diffusion of electricity. Sometimes, firms slow down the rate of innovation itself by keeping competing innovations off the market.
Rising market power also “alters the delicate balance of power in society in favor of the rich and, by awarding their voices more weight, weakens the foundations of democratic institutions.” Corporations and their wealthy stockholders can spend some of their new wealth to lobby against policies that would curb corporate power or benefit larger segments of the population.
Public policy and market power
I will describe Kurz’s specific policy recommendations in a later post. For now, I’ll just emphasize his general observation that public policy has played a large role in either facilitating or impeding the accumulation of monopoly power. Indeed, he believes that “aggressive economic policy to restrain the rise of market power is the only force available to prevent the expansion of such market power and to attain a superior economic allocation and a more egalitarian income and wealth distribution.”
Such policies can take many forms, such as:
- Antitrust legislation to limit market power by curtailing mergers and acquisitions
- Corporate and progressive income taxes to redistribute monopoly wealth
- Pro-labor measures like minimum wages and support for unions
- Public investments for the common good, such as in basic research, infrastructure, health and education, and environmental protection
Kurz argues that the two Gilded Ages of American history, the first in the late 1800s and the second more recently, have had two things in common. Both were periods of spectacular technological innovation, and both were periods of “passive, laissez-faire public policy that allowed the mechanism of growing market power to operate without restraint.” The first Gilded Age ended in a period of social unrest and economic policy reforms. Kurz hopes that the U.S. is about to enter a new era of reform today.
Beneath the Surface 