I am now about two-thirds of the way through Thomas Piketty’s Capital in the 21st Century, and so far I have been struck not just by his arguments about inequality (which are getting all the press) but also about his insights on the importance of old-fashioned capital in the internet age.
In his chapter entitled “The Dynamics of the Capital/Income Ratio,” Piketty makes a pretty amazing statement:
The principal lesson of this second part of the book is surely that there is no natural force that inevitably reduces the importance of capital and of income flowing from ownership of capital over the course of history. In the decades after World War II, people began to think that the triumph of human capital over capital in the traditional sense (land, buildings, and financial capital) was a natural and irreversible process, due perhaps to technology and to purely economic forces…The evolution of technology has certainly increased the need for human skills and competence. But it has also increased the need for buildings, homes, offices, equipment of all kinds, patents and so on, so that in the end the total value of all these forms of nonhuman capital (real estate, business capital, industrial capital, financial capital) has increased almost as rapidly as total income from labor (p.234).
After laying out this eyebrow-raising conclusion, Piketty hones in for the kill:
If one wishes to found a more just and rational social order based on common utility, it is not enough to count on the caprices of technology (Ibid).
What does this all mean, you may be asking? What it all means is that the idea thrown around so much since the advent of the internet — that technology was making “human capital” much more important than old-fashioned land-based wealth or the infamous “bricks and mortar”– is simply wrong. Warehouses full of grain have been replaced by warehouses full of servers. Huge buildings housing metal fabrication machines have been replaced by huge buildings housing data centers. And in the case of Amazon, huge retail stores selling thousands of items a day have been replace by huge material handling facilities shipping thousands of packages a day.
Old-fashioned, 18th-century capital, then, has basically maintained its importance in the overall economy of developed nations, but this conclusion has a startling consequence for human beings: technology has made the value of humans working in these new business models higher but the overall need for them has decreased. In other words, one-hundred years ago a large capital-driven facility at a company like Ford typically created employment for thousands of (low-skilled, low-paid) workers. Today, the same level of capital deployed by a company like Google creates only a handful of jobs for (highly-skilled/highly-paid) workers. The result is that the information age has created a few winners and many, many losers. It has also created a paradox in the high-skilled labor pool: each of those workers is paid more but is, each day, less valuable as computers and robots take over more and more work. Piketty here just puts into black and white what every “knowledge” worker has lived in the last three decades.
Looking forward, if the trend Piketty describes holds true, then we can predict a future where inequality continues to grow, precisely because technology creates a few winners (Facebook, Amazon, Google, etc.) but many more losers (Borders, Staples, Sears, etc). The winners in the 21st century apparently need much less “human capital” than the losers. For every worker, then, being the best “human capital investment” a firm can make, just became even more important. This point, which is not so often touched on in comments on Piketty’s book, is a thrilling thought to those who will reap a greater share of rewards in the future and disheartening conclusion to those who won’t.