The Other Authoritarianism
These are tough times for democracy. Although it is holding its own in many parts of the world, more than a third (38%) of the global population lives under authoritarian rule. These are systems that concentrate dominion in the hands of a leader or small group of elites who show little or no responsibility for those they supposedly serve. But such power is not limited to governments and afflicts many more people.
Growing numbers of businesses are consolidating control, often at the expense of stakeholders. A study in Review of Finance found that levels of concentration have increased in more than three-quarters of American companies over the past two decades; to the point where the average firm is now three times larger than twenty years ago. And though nations may strengthen their domains by invading other countries, enterprises do so through more benign means like mergers and acquisitions (M&A). In 2021, there were more than 63,000 corporate couplings worldwide, amounting to a record-breaking $5.9 trillion. Moreover, these types of tie ups were especially popular in monopoly industries.
Yet too few of these deals bear fruit. In a recent review of academic research by two Cambridge University scholars, just one-in-five studies concluded that M&As produce healthier profits or more wealth for investors. At best, notes consultancy McKinsey & Company, there is only a coin-flip chance of generating higher shareholder returns.
What can rise considerably, however, are costs to consumers. (Anyone who has bought concert tickets knows this all too well.) Monopolies — compared to more competitive businesses — charge higher prices above their production expenses, while under producing goods and services.
Employees get screwed as well. Contrary to conventional wisdom, most jobs are created by large and established companies rather than by small businesses. Accordingly, dominant firms have the capacity to constrain pay. Despite the current low level of unemployment, wages rose only 1% in the final quarter of 2022, markedly less than the 1.4% at the start of the year. Employers can also curb benefits. Faced with the fact of inflation and the specter of recession, many have reduced spending over the past three quarters. In the matter of paid maternity and paternity leave, for example, the number of companies offering anything more than merely what is required by law has fallen from 53% in 2020 to 35% this year.
Beyond the workplace, market power also translates into political clout. Concentrated industries like pharmaceuticals, health services and airlines are among the biggest spenders on lobbying. Norfolk Southern Railway — one of only seven Class I railroads in the United States — has successfully pushed back against the kinds of safety regulations that could have prevented recent train derailments in Alabama, and in Ohio that wreaked havoc on residents and the surrounding environment.
This type of conduct by corporate autocracies is frequently unbridled and costs the typical household more than $5,000 a year, argues Thomas Philippon, a professor of finance at New York University. And the toll is likely to climb. According to the Council of Economic Advisors, anti-competitive companies invest less, thus slowing productivity, one of the most important determinants of living standards. This is especially the case with respect to research and development. Researchers at George Mason and Indiana universities discovered that the number of business innovations is inversely correlated with concentration, and that “innovation falls as industrial concentration increases.”
High-Tech Autocracy
If there is one industry that has taken authoritarianism to new levels, it is technology. In terms of concentration, Google controls nearly 93 percent of the search market. Android and iOS operating systems run on more than 98 percent of mobile phones. Amazon’s Internet sales are equivalent to those of Walmart, eBay, Apple, Home Depot, and Target combined. Google, Amazon, and Meta collect nearly two of every three dollars spent on online ads.
The three, along with Apple and Microsoft, have also devoured more than 500 companies over the past decade. In horizontal mergers, they remove competitors from the marketplace, thus allowing them to charge more. Vertically integrated acquisitions enable them to close rivals out of parts of the supply chain. And by gobbling up startups they quash threats from potential challengers.
While this is not all that different than what goes on in other industries, scholar Rebecca Giblin and journalist Cory Doctorow have coined the term “chokepoint capitalism” to define tech’s approach. More than simply middlemen between buyers and sellers, they largely govern the entire process, dictating creators’ access to channels and manipulating consumer choice. Their not-so-secret-sauce is data.
Tech companies possess trillions of dollars of data. With that trove they not only rule their own domains, but they can move into new markets with more knowledge and insight than established firms. With great power like that comes great responsibility, which can be misused. Since the demise of Roe, for instance, apps used to monitor women’s menses or identify license plates have been weaponized against those seeking abortions in states that restrict or outlaw the practice. And though violations of privacy are abhorrent to many people, research out of the University of Pennsylvania reports that few citizens understand how their personal details are tracked.
What is more, technology users are often in the dark about their rights as consumers. Buying digital music, books, or software from Apple, Amazon, or Microsoft does not necessarily mean owning them. Rather, what people actually pay for are “non-transferable” licenses that can be withdrawn under certain circumstances. Even when they do own what they buy, there still are limits to what they can do with them. Intellectual property rights enable companies to restrict if and how their products can be repaired, forcing customers to use only authorized dealers who cost more than independent shops or do-it-yourself fixers.
And it is not just consumers whose rights are restrained. Several tech firms operate under dual-class structures that consist of Class A and Class B shares. Corporate bosses are typically given the former with its super-voting stock, which grants them disproportionate or outright control, while public Class B shareholders have little or no say. This is how Mark Zuckerberg’s 54% has allowed him to pursue questionable practices like the metaverse despite investor objections.
Myopic Visionaries
As in politics, where authoritarians often start out as charismatic leaders who are exalted as heroes, their technology counterparts garner comparable reverence. But while it’s usually ordinary citizens follow political populists, it is primarily investors who fall for so-called visionaries like Elizabeth Holmes and Sam Bankman-Fried who promise them the next big thing.
Such techno-celebrities are nothing new and trace their heritage at least as far back as Thomas Edison, who was notorious for hype and grabbing undeserved credit for innovations. Edison was also an unabashed narcissist, a cut-throat competitor, and callous to his employees.
His closest contemporary counterpart is Elon Musk. Though hardly the only tech leader to lay off personnel, Musk has been particularly ruthless. He has let go of more than half his workforce, sometimes with nothing more than an email informing them “this is your last working day at the company,” and firing one disabled executive after publicly mocking his condition. Admonished by many for his behavior, he is, nonetheless, admired by his fellow bosses. They applaud him for striking back at what they see as overpaid, over privileged, and often troublesome employees.
Not that Musk’s abuse is all that unique. Earlier this year, the U.S. Department of Labor cited Amazon for inadequate safety practices that have led to injury rates for warehouse workers that are on average from twice to five times higher than its competitors. This is the same company that has been charged by the National Labor Relations Board with illegally threatening to withhold wages and benefits from workers who have sought to unionize in response to such practices.
Crossing the Line
There comes a time, however, when authoritarians go too far. In the case of the technology industry, its unbridled dominance and adverse impact on society has certainly raised concerns. To that end, a recent YouGov poll found that a bipartisan majority of Americans support a broad array of technology regulations. Election officials on both sides of the aisle are also inclined to rein in technology firms.
Congress is currently considering re-writing US antitrust laws, enacting a federal privacy law, and rethinking Section 230 the 1996 Communications Decency Act, which protects internet platforms from liability for the content they host. Moreover, the Justice Department, which has taken actions against Google and its parent company Alphabet in the past, has joined eight states in suing them for “neutralizing or eliminating ad tech competitors through acquisitions; wielding its dominance across digital advertising markets to force more publishers and advertisers to use its products; and thwarting the ability to use competing products.”
Sadly, the government’s track record in such instances is spotty at best, and it faces formidable resistance. Top tech firms, including Apple, Amazon, and Microsoft, have forked over nearly 70 million dollars to lobbyists to fend off any attempts to curb their power; breaking their previous record.
It’s the Economy, Stupid
Yet perhaps the laws of economics may be more effective than those of politicians in recasting the industry. As companies get older, growth slows and they become less innovative, spending fewer dollars on new ideas than on bureaucratic expenses. According to distinguished physicist Geoffrey West, who has explored life cycles of entities from the simplest organism to the most complex organizations, after adjusting for inflation and factoring in the growth of the market, all mature companies stop growing. Big tech is no exception. Having matured, it can no longer deliver to investors the same kinds of impressive growth it once provided.
Many in the industry have also disregarded the law of gravity as it applies to inflation: what comes down will eventually go back up. During decades of low to near zero interest rates, firms used what was ostensibly free money to spend lavishly on projects and people. But as rates have risen, liquidity and demand have dried, and corporate valuations have fallen. (The mistaken faith in the end of inflation is what brought down Silicon Valley Bank).
Faced with such circumstances, technology firms are doing what most companies ultimately do: become more “efficient.” One way to do so has been to lay off more than a quarter of a million employees since last year, many of whom were hired during the good times. Another has been to ask those who survive the cuts to work as if they were in startups again. In other words, push themselves with “increased intensity” without any near-term payoff.
Granted these steps may initially enable enterprises to save money and impress investors, at least in the short-term. But research published in the Harvard Business Review suggests they belie the longer-term impact of higher voluntary turnover, the loss of institutional knowledge, reduced engagement of those who remain, and less innovation, all of which hit the bottom line.
Still, no matter how well companies succeed, they will do so in a quite different environment. Unlike the internet of things, Web 3, the metaverse, and cryptocurrency, that have yet to live up to their hype, artificial general intelligence (AGI) may likely be a truly consequential game changer. The speed at which it has advanced in just the past couple of years has been breathtaking. Its capacity to penetrate all sectors of society seems unlimited. And its development was led, not by tech giants but by a relatively new startup, OpenAI.
Yet will it also create the next generation of billionaire barons who operate largely unchecked and, like authoritarians elsewhere, may further undermine democracy? OpenAI, which began as a non-profit and is now a for-profit company with all the potential downsides, describes in its charter how it plans to execute its mission: “We commit to use any influence we obtain over AGI’s deployment to ensure it is used for the benefit of all, and to avoid enabling uses of AI or AGI that harm humanity or unduly concentrate power.” That is encouraging. But don’t forget Google’s code of conduct that once proclaimed, “don’t be evil.”
