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The rise of Big Tech cements the fall of the US economy

While the US economy is going through its worst crisis in the last eight decades, with small businesses shutting down en masse and millions of Americans losing their jobs, one wouldn’t know anything is wrong solely from looking at the largest US companies. The crisis, triggered―but not caused―by the COVID-19 pandemic measures, has enabled some of the world’s largest corporations to amass record profits. It allows them to capture ever-larger shares of a market that is increasingly monopolised. How could that happen and what will it lead to?

The widening gap between the Big Five and the rest

It is no secret that Amazon has done well throughout the pandemic, with both the company’s profits and Jeff Bezos’ personal wealth shooting up to record highs in the middle of one of the worst recessions the US has ever seen. While brick-and-mortar retailers have suffered tremendous damage as a result of the measures implemented in response to COVID-19, Amazon has thrived off the accelerated shift to online services.

And it is not alone in this: The so-called US tech companies―also referred to as the Big Five―have all managed to keep increasing their profits while the US economy is contracting. Apple, Alphabet (Google’s holding company), Amazon, Facebook, and Microsoft saw their combined pre-tax profits rise by an annualised 5% in the second quarter; starkly contrasting profits of the rest of corporate America, which fell by an annualised 27% (excluding finance).

A company experiencing profits growth during a recession is highly unusual, and the Big Five’s outperformance has led to a dramatic increase of their share in total non-financial profits made by US companies. Having already risen from 4% in 2011 to 11% in 2019, the Big Five have increased their slice of the pie to 16% in the first half of this year.

To put this into perspective: The concentration of US non-financial profits in the top five companies has historically been around 7-9% while the current top five, which includes three of the large tech companies, accounted for an astounding 19.3% in 2019. Since the onset of the pandemic, this figure is estimated to have risen further to 25%. This would mean that five companies now receive one quarter of all non-financial profits made in the US.

Profits of financial entities are excluded here because we are examining the production side of the US economy. But Wall Street, too, is an almost insane case of monopolisation and control over public policy that might be explored in another article.

A long-standing trend of market concentration

There is no question that the pandemic measures have accelerated the ever-widening gap between the Big Five and the rest, but at the same time it cannot be ignored that the US economy has seen a long-standing trend of market and profits concentration. Even before Big Tech came along, many of the major industries, ranging from beer to healthcare, had already seen the emergence of oligopolies (a few dominant firms), duopolies (two dominant firms) and even monopolies (one dominant firm).

A prime example is the case of high-speed internet provision in the US, for which the market is almost completely controlled by the three telecom giants AT&T, Verizon, and Comcast. By carving up the market, they have avoided competing in the same regions, forcing as many as 75% of US households to ‘choose’ from just one provider. Health insurance is another industry for which the market has been sliced up by the companies who dominate it, ensuring that competition is avoided as much as possible. As a consequence, in many states 80-90% of the health insurance market is controlled by just two companies.

Capitalism is a system in which competition drives innovation and growth. The natural strategy for a company to become dominant in an industry is to outcompete its rivals by producing better and cheaper products―i.e., by innovating. The problem in the US today is that more often than not, it has been a lack of competition which has allowed for high levels of market concentration and abnormally high profit margins in the US.

But it wasn’t always like this. The US government used to pay great attention to market concentration and threats to competition, which was why they had created antitrust regulation in the first place around the turn of the 20th century. According to Jonathan Tepper and Denise Hearn, who documented the vast extent of uncompetitive and increasingly concentrated industries in the US in ‘The Myth of Capitalism’, point to the dismantling of antitrust regulation since the 1980s as one of the major causes for the growing degree of what they refer to as ‘industrial concentration’.

An illustration of when antitrust was still applied in full force is the case of IBM in 1969. The US government brought an antitrust lawsuit to PC maker IBM who held 70% of the market at the time. The lawsuit instigated IBM to make its hardware compatible with software other than the programmes it sold itself, allowing for new companies such as Microsoft (founded in 1975) to emerge and produce software for IBM machines and, eventually, for those produced by other companies.

In 1998, when the number of antitrust cases was already much lower than before, the US government brought an antitrust lawsuit against Microsoft because it was starting to monopolise the PC software market. The tech giant was using its popular Windows operating system to favour its own programs such as the Internet Explorer. And with the internet on the rise, the company was also well positioned to block competitors from areas such as search engines. The lawsuit helped curb Microsoft’s growing power and allow other software companies to compete. Perhaps more importantly, it also allowed tech startups―such as a little company called Google―to grow.

The Big Five and the abandonment of antitrust regulation

The irony of Google owing its existence to antitrust is that the tech giant is currently one of the largest violators of antitrust principles, which appear to no longer be enforced by the US government. Apart from being a monopoly in the market for search engines, Google together with Facebook controls the market for online advertising with both companies actively barring new entrants to the industry. When Facebook bought social media rival Instagram in 2012, there was not a single antitrust case brought against them to block the acquisition.

Buying the competition certainly has been a favorite tool for retaining dominance. Since 2005, the Big Five have acquired 549 companies, which in many instances were direct competitors. From 1985 to 2017, the number of mergers and acquisitions completed annually rose from 2,308 to 15,361 nationwide. Unsurprisingly, Tepper and Hearn are able to show that the rise in acquisitions has a clear inverse relationship with the number of antitrust cases.

On top of acquisitions, the Big Five have found other ways to cement their market dominance. As US President Donald Trump correctly pointed out, Amazon is subsidised massively by their exclusive access to state-owned US postal services (USPS) at cheap rates. It is estimated that the USPS undercharges Amazon by $1.47 per package―no wonder Amazon accounts for more than 43% of online retail sales.

Boosting profits without being more competitive

Highly concentrated industries allow for two major distortions that boost corporate profits without the dominant companies having to be more competitive: price gouging and suppressing wages.

For price gouging, the internet provision industry serves as a good example. New York University economist Thomas Philippon found in a 2019 study that prices for a monthly broadband connection were almost twice as high in the US than in Europe or South Korea. Similar price differences were observed for air travel in the US when compared to Europe. Flights in the US are dominated by four major airlines that often enjoy regional monopolies and have solidified their market dominance since the US deregulated the airline industry in 1978. Having been fairly stable until that point, inflation-adjusted flight prices jumped by 50% in the first ten years after deregulation.

Being often one of the few employers (in some cases the only employer) in small-town America, monopolies also hold significant power over labour, which they exert through lobbying for laxer labour laws, inserting non-compete clauses in labour contracts, and consequently depressing wages. Marshall Steinbaum, Ioana Marinescu and Jose Azar found that wages are typically 10-25% lower in a ‘highly concentrated’ industry than in a ‘very competitive one’. Overall, wages adjusted for inflation have been stagnant in the US since the 1970s.

The suppression of wages has no doubt elevated profits margins, as Tepper and Hearn show in an almost perfectly inverse relationship between the two. What they further show is that the income distribution to the lower percentiles has a remarkably close correlation to union membership, the latter of which has been on a steady decline since the 1960s, implying that the large US corporations have successfully worn down the power of labour.

The consequences of not having to compete

Higher prices and lower wages are the reason for the exorbitant profit margins we see in today’s economy. But apart from that, they also lead to a complete loss of the capitalist drive that usually spurs companies to innovate. This decline in innovation is for a large part indicated by the number of US-American start-ups―which usually account for a large portion of total innovation―having fallen by nearly half since the 1970s.

What’s more, the large companies that dominate their industries are themselves not driven to innovate anymore. Instead, they have found a new way to inflate the value of their company: share buybacks. A study conducted by the Harvard Business Review found that between 2009-2018, companies listed on the S&P500 spent $4.3 trillion, or 52% of net income (profits), on share buybacks and $3.3 trillion, or 39% of net income, on dividends. This increases the wealth of both owners and managers, but does not make the company any more productive as little capital remains for research and development (R&D). In 2018, only 43% of all companies listed on the S&P500 index invested in any R&D.

Of the Big Five, the loss of competitiveness is perhaps the clearest in the case of Apple. The American electronics manufacturer that once pioneered and dominated the smartphone market for almost a decade has been knocked to the fourth place in global smartphone sales, losing out to East Asian competitors Samsung, Huawei and Xiaomi. The only market Apple still dominates is the US, although it is worth wondering whether this would be the case if Huawei were allowed to sell its phones in the American market.

It is not to say innovation in the US has completely left the scene (for instance, the US is still a leader in microprocessors), but that the dynamism that once allowed for rapid technological change and global dominance is in decline. Tesla is another good example of a monopoly born in the US and having received billions worth of government support (see Mazzucato’s 2013 book ‘The Entrepreneurial State’) that now has increasing difficulty remaining competitive in an international setting.

The concentration of profits in the largest US companies and their dominance of entire sectors is essentially not a reflection of their superior competitiveness, but the result of a system benefiting them disproportionately while allowing them to accumulate wealth without becoming more competitive.

The lack of innovation is significant because an economy thus hollowed out of its productive capacity is bound to crumble, and, in the case of the US, allow a new power to rise and take its place in the global economy. There is only one reason that the loss of international competitiveness has not yet fully translated itself into a deterioration of living standards for Americans: the Dollar.

Further reading

  1. Jonathan Tepper (2018): Why American Workers Aren’t Getting A Raise: An Economic Detective Story. https://www.mythofcapitalism.com/worker-s-wages
  2. Jay Shambaugh, Ryan Nunn, Audrey Breitwieser, and Patrick Liu (2018): The state of competition and dynamism: Facts about concentration, start-ups, and related policies. https://www.brookings.edu/research/the-state-of-competition-and-dynamism-facts-about-concentration-start-ups-and-related-policies/
  3. Patrick Bet-David and Jonathan Tepper (2019): The Missing Link To Modern Day Capitalism. https://www.youtube.com/watch?v=HTGzUVH9LsA
  4. John Coumarianos (2019): How corporate monopolies fuel wage stagnation, inequality, and populism. https://www.marketwatch.com/story/how-corporate-monopolies-fuel-wage-stagnation-inequality-and-populism-2019-05-06
  5. Walter Frick (2020): Big tech’s 15-year acquisition spree had a hidden cost. https://qz.com/1883377/how-big-techs-acquisition-strategies-suppress-entrepreneurship/

This article was originally published on Kapital Economics, the platform for evidence-based economic analysis.

Josephine Valeske

About the authors:

Josephine Valeske holds a MA degree in Development Studies from the ISS and a BA degree in Philosophy and Economics. Apart from contributing to Kapital Economics, she currently works for the research and advocacy organisation Transnational Institute.


Bram Nicholas holds an MBA from the University of Western Sydney and is in the process of writing a PhD on the subject of exchange rates and forex markets at the University of Colombo. He is the founder and CEO of Kapital Economics and currently lectures at HUTECH, Vietnam.

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Are we ready for the robotic revolution? by Oane Visser and Pieter Medendorp

Japan has a hotel where guests are served by robots, and in Australia self-driving tractors autonomously harvest crops, day and night. Robots help with care for residents in some Dutch nursing homes; once in your house, they can order you a taxi, order your food, or mow your lawn. Robots of all shapes and sizes are beginning to penetrate our lives. Do they generate smarter, happier lives? What are the implications of a robotic revolution for our freedom and autonomy? 

For long, views on future robotisation in films, novels and public debate have been divided between utopian and dystopian visions. In 1921, robots appeared in the play R.U.R. (Rossum’s Universal Robots) by Karel Čapek; the word is derived from the Czech word ‘robota’, which translates to ‘toiling and servitude’. In ‘I, Robot’—Isamov’s classic 1969 science fiction novel—robots start off as a helpful comrades, but end up controlling humans.

Discussing the positive effects of robotisation, next to convenience—such as robots taking over household chores—medical applications come to mind. Robot radiologists could be analysing your X-rays possibly much better than your doctor. Robotic surgery is already common practice, easing a surgeon’s work. Rehabilitation robotics makes good progress and helps the paralysed to walk. New research shows paralysed patients who steer robotic arms and legs with their thoughts, based on the decoding of the neural signals that are converted into robotic guidance. Concurrently, advances in robotisation cause concerns about the expansion of surveillance and the erosion of (mental) privacy and identity.

When discussing societal impacts of robotisation, two starting points could be helpful. First, we should look beyond visible incarnations of automation-like robots. The algorithms within robots are increasingly central in everything we do online, as well as within the internet of things, from machines, cars, refrigerators to smart cities—everything gets connected and exchanges data. Second, a distinction between a person’s role either as consumer, employee, or citizen facilitates the categorisation of the manifold effects of such automation.

Algorithmic society

As (online) consumers, we tend to be winners. An ever-increasing range of products is just a mouse click away due to the rapid sophistication in online ordering algorithms and the massive investments in the ‘last mile’ of consumer product logistics. ‘The client is king’ already seems outdated; the consumer is turned into an ‘emperor’. The flipside of this apparent consumer Valhalla with almost real-time delivery constitutes the worsening labour conditions of workers in the value chains enabling it. In the distribution centres of companies like Amazon, underpaid workers often operate under a regime of unrealistic work targets, rigid digital surveillance, and a work pace that is set by robots. Even farms are affected—in India, the rise of e-agriculture has been found to contribute to agrarian distress (Stone 2011).

As citizens, our agency and physical and mental privacy seems to be increasingly under threat as both Big Tech and governments try to target or nudge citizens with algorithms which are unregulated and lack transparency. Think about the targeted advertisements in your web browser for weeks after visiting once an online shoe store. It is increasingly difficult to escape individual media bubbles or corporate surveillance, let alone the mass surveillance of those living under authoritarian regimes. In such an algorithm-led society, will people end up as emperors without clothes?

2018: a watershed year

Looking back, 2018 seemed a watershed in the public debate. It shifted from Tech companies as drivers of technological innovation (for consumers) and subsequently freedom (benefiting us as citizens), to these companies’ troublesome record in preventing fake news, let alone respecting privacy and democracy. With a recurring pattern of irresponsible conduct regarding privacy and fake news, Facebook has come to symbolise the downsides of an algorithm-led society.

Regarding the impact on us as employees, international agencies like the OECD recently issued unsettling reports on the effects of automatisation for labour, which are likely to exacerbate inequalities both within countries as well as between the Global South and North. Finally, policy action has been stepped up in the past year, with the EU taking the lead for instance with the GDPR regulations on privacy and law proposals to curb the excessive power of Big Tech.

Robotisation has arrived and will continue to change the way we consume, work, and live. As with all technologies, it can be used for good and for bad. Robotisation can be used to augment us, help us innovate, and can help address many of society’s grand challenges, yet it can also put us in undesirable competitions, eroding privacy, dignity, and identity. To make robotisation, algorithms, and data science beneficial and inclusive, it is time that governments, tech companies, civic organisations, hospitals, ethicists, and (social) scientists start having a serious dialogue on how to make this digital revolution ‘the best rather than the worst thing, ever to happen to humanity’.[1]

[1] We loosely paraphrase Stephen Hawking [hyperlink: https://www.cam.ac.uk/research/news/the-best-or-worst-thing-to-happen-to-humanity-stephen-hawking-launches-centre-for-the-future-of%5D

Image credit: Franck V. on Unsplash

About the authors:

Photo_PieterMedendorp_sept2018Prof. dr. Pieter Medendorp is a professor of Sensorimotor Neuroscience, Donders Institute for Brain, Cognition and Behaviour, Director Centre for Cognition, Radboud University Nijmegen, The Netherlands.


Foto-OaneVisser-Balkon-1[1]Dr. Oane Visser (associate professor, Political Ecology research group, ISS) leads an international research project on the socio-economic effects of -and responses to- big data and automatization in agriculture.