The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies (38 page)

Chapter 10
THE BIGGEST WINNERS: STARS AND SUPERSTARS

1.
Nike
—
You Don’t Win Silver, You Lose Gold
, 2012, http://www.youtube.com/watch?v=ZnLCeXMHzBs&feature=youtube_gdata_player.

2. In most cases, the winner does not literally take all of the market. Perhaps ‘winner-take-most’ would be a more accurate description. But for better or worse, in the competition for concept-naming among economists, ‘winner-take-all’ has won almost all the market share, so that’s what we will use.

3. Emmanuel Saez, “Striking It Richer: The Evolution of Top Incomes in the United States,” January 23, 2013, http://elsa.berkeley.edu/~saez/saez-UStopincomes-2011.pdf.

4. “Why The Haves Have So Much : NPR,”
NPR.org
, October 29, 2011, http://www.npr.org/2011/10/29/141816778/why-the-haves-have-so-much (accessed August 11, 2013).

5. Alex Tabarrok, “Winner Take-All Economics,”
Marginal Revolution
, September 13, 2010, http://marginalrevolution.com/marginalrevolution/2010/09/winner-take-all-economics.html.

6. Steven N. Kaplan and Joshua Rauh, “It’s the Market: The Broad-Based Rise in the Return to Top Talent,”
Journal of Economic Perspectives
27, no. 3 (2013): 35–56.

7. David Streitfeld, “As Boom Lures App Creators, Tough Part Is Making a Living,”
New York Times
, November 17, 2012, http://www.nytimes.com/2012/11/18/business/as-boom-lures-app-creators-tough-part-is-making-a-living.html.

8. Heekyung Kim and Erik Brynjolfsson, “CEO Compensation and Information Technology,”
ICIS 2009 Proceedings
, January 1, 2009, http://aisel.aisnet.org/icis2009/38.

9. See Xavier Gabaix and Augustin Landier, “Why Has CEO Pay Increased so Much?,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, May 8, 2006), http://papers.ssrn.com/abstract=901826.

10. Robert H. Frank and Philip J. Cook,
The Winner-take-all Society: Why the Few at the Top Get so Much More Than the Rest of Us
(New York: Penguin Books, 1996).

11. Sherwin Rosen, “The Economics of Superstars,”
American Economic Review
71, no. 5 (1981): 845–58, doi:10.2307/1803469.

12. D. Rush, “Google buys Waze map app for $1.3bn,”
Guardian
(UK), June 11, 2013, http://www.theguardian.com/technology/2013/jun/11/google-buys-waze-maps-billion.

13. You can see the video and data on number of viewings at https://www.youtube.com/watch?v=OYpwAtnywTk.

14. See Roy Jones and Haim Mendelson on this point: “Information Goods vs. Industrial Goods: Cost Structure and Competition,”
Management Science
57, no. 1 (2011): 164–76, doi:10.1287/mnsc.1100.1262.

15. Very low marginal costs can also make massive bundling more profitable. That’s one reason why cable TV tends to be sold in bundles rather than à la carte, and why Microsoft Office was able to win market share from more focused products. Bundling benefits both superstars and niche providers by creating a more complete product offering and increasing sales to consumers with different opinions about the values of the bundled products. But markets in which bundling is common also tend to be winner-take-all markets. See Yannis Bakos and Erik Brynjolfsson,
Management Science
45, no. 12 (1999); Yannis Bakos and Erik Brynjolfsson, “Bundling and Competition on the Internet,”
Marketing Science
19, no. 1 (2000): 63–82, doi:10.1287/mksc.19.1.63.15182.

16. See Michael D. Smith and Erik Brynjolfsson, “Consumer Decision-making at an Internet Shopbot: Brand Still Matters,”
NBER
(December 1, 2001): 541–58.

17. Catherine Rampell, “College Degree Required by Increasing Number of Companies,”
New York Times
, February 19, 2013, http://www.nytimes.com/2013/02/20/business/college-degree-required-by-increasing-number-of-companies.html.

18. We discuss this more in our article “Investing in the IT That Makes a Competitive Difference,” July 2008, http://hbr.org/2008/07/investing-in-the-it-that-makes-a-competitive-difference.

19. Alfred Marshall,
Principles of Economics
, 8th edition, New York: Macmillan, 1947, p. 685.

20. See, e.g., http://www.koomey.com/books.html or http://www.johntreed.com/FCM.html.

21. We discuss this in more detail in a
Harvard Business Review
article (A. McAfee and E. Brynjolfsson, “Investing in the IT That Makes a Competitive Difference: Studies of Corporate Performance Reveal a Growing Link between Certain Kinds of Technology Investments and Intensifying Competitiveness,”
Harvard Business Review
[2006]: 98–103) and a research paper (E. Brynjolfsson, A. McAfee, M. Sorell, and F. Zhu, “Scale without Mass: Business Process Replication and Industry Dynamics,” MIT Center for Digital Business Working Paper, 2008).

22. More formally, power laws are characterized by the formula
f
(
x
) =
ax
k
. For instance, the sales of a book at Amazon,
f
(
x
) are a function of the rank of the book,
x
, raised to the power
k
. A nice characteristic of power laws is that they form a straight line when graphed on a log-log scale, with the slope of the line given by the exponent,
k
.

23. Erik Brynjolfsson, Yu Jeffrey Hu, and Michael D. Smith, “Consumer Surplus in the Digital Economy: Estimating the Value of Increased Product Variety at Online Booksellers,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, June 1, 2003), http://papers.ssrn.com/abstract=400940.

24. In other words, so-called “black swan” events are more common if the underlying distribution is a power law than if it’s a normal distribution.

25. Technically, the bulk of the incomes are best described by a log-normal distribution, a variant of the traditional normal distribution, while the best fit for the top incomes is a power law.

26. Presentation by Kim Taipale at the 21st Annual Aspen Institute Roundtable on Information Technology, August 1, 2013.

27. If you’re a nerd, you may know that in some cases the mean of the power-law distribution is actually infinite. Specifically, when the exponent in the distribution (
k
in the above equation) is less than two, the mean of the distribution is infinite.

28. See “Dollars and Sense Part Two: MLB Player Salary Analysis,”
Purple Row
, http://www.purplerow.com/2009/4/23/848870/dollars-and-sense-part-two-mlb (accessed August 10, 2013). The disparity would likely be even greater if one considered the endorsement deals that the superstars get.

Chapter 11
IMPLICATIONS OF THE BOUNTY AND THE SPREAD

1. “The World’s Billionaires: 25th Anniversary Timeline,”
Forbes
, 2012, http://www.forbes.com/special-report/2012/billionaires-25th-anniversary-timeline.html (accessed August 7, 2013); “Income, Poverty and Health Insurance Coverage in the United States: 2011,” U.S. Census Bureau Public Information Office, September 12, 2012, http://www.census.gov/newsroom/releases/archives/income_wealth/cb12-172.html (accessed August 9, 2013).

2. N. G. Mankiw, “Defending the One Percent,”
Journal of Economic Perspectives
, June 8, 2013, http://scholar.harvard.edu/files/mankiw/files/defending_the_one_percent_0.pdf.

3. Felix Salmon, “Krugman vs. Summers: The Debate,”
Reuters Blogs
—
Felix Salmon
, November 15, 2011, http://blogs.reuters.com/felix-salmon/2011/11/15/krugman-vs-summers-the-debate/ (accessed August 10, 2013).

4. Donald J. Boudreaux and Mark J. Perry, “The Myth of a Stagnant Middle Class,”
Wall Street Journal
, January 23, 2013, http://online.wsj.com/article/SB10001424127887323468604578249723138161566.html.

5. Mark J. Perry, “Thanks to Technology, Americans Spend Dramatically Less on Food Than They Did 3 Decades Ago,”
AEIdeas
, April 7, 2013, http://www.aei-ideas.org/2013/04/technology-innovation-and-automation-have-lowered-the-cost-of-our-food-and-improved-the-lives-of-all-americans/.

6. Scott Winship, “Myths of Inequality and Stagnation,” The Brookings Institution, March 27, 2013, http://www.brookings.edu/research/opinions/2013/03/27-inequality-myths-winship (accessed August 10, 2013).

7. Jared Bernstein, “Three Questions About Consumer Spending and the Middle Class,” Bureau of Labor Statistics, June 22, 2010, http://www.bls.gov/cex/duf2010bernstein1.pdf.

8. Annamaria Lusardi, Daniel J. Schneider, and Peter Tufano, “Financially Fragile Households: Evidence and Implications,” Working Paper (National Bureau of Economic Research, May 2011), http://www.nber.org/papers/w17072.

9. Jason Matthew DeBacker et al., “Rising Inequality: Transitory or Permanent? New Evidence from a Panel of U.S. Tax Returns 1987-2006,” SSRN Scholarly Paper (Rochester, NY: Social Science Research Network, January 2, 2012), http://papers.ssrn.com/abstract=1747849.

10. Robert D. Putnam, “Crumbling American Dreams,”
Opinionator
,
New York Times
blog, August 3, 2013, http://opinionator.blogs.nytimes.com/2013/08/03/crumbling-american-dreams/.

11. “Repairing the Rungs on the Ladder,”
The Economist
, February 9, 2013, http://www.economist.com/news/leaders/21571417-how-prevent-virtuous-meritocracy-entrenching-itself-top-repairing-rungs (accessed August 10, 2013).

12. Daron Acemoglu and James A. Robinson, “The Problem with U.S. Inequality,”
Huffington Post
, March 11, 2012, http://www.huffingtonpost.com/daron-acemoglu/us-inequality_b_1338118.html (accessed August 13, 2013).

13. John Bates Clark,
Essentials of Economic Theory as Applied to Modern Problem of Industry and Public Policy
, (London: Macmillan, 1907), p. 45.

14. W. M. Leiserson,
The Problem of Unemployment Today
31,
Political Science Quarterly
(1916), http://archive.org/details/jstor-2141701, p. 12.

15. John Maynard Keynes,
Essays in Persuasion
(New York: W. W. Norton & Company, 1963), p. 358.

16. Linus Pauling,
The Triple Revolution
(Santa Barbara, CA: Ad Hoc Committee on the Triple Revolution, 1964), http://osulibrary.oregonstate.edu/specialcollections/coll/pauling/peace/papers/1964p.7-02.html.

17. Wassily Leontief, “National Perspective: The Definition of Problems and Opportunities,”
The Long-Term Impact of Technology on Employment and Unemployment
(National Academy of Engeneering, 1983): 3–7.

18. Richard M. Cyert and David C. Mowery, eds.,
Technology and Employment: Innovation and Growth in the U.S. Economy
(National Academies Press, 1987), http://www.nap.edu/catalog.php?record_id=1004.

19. Raghuram Rajan, Paolo Volpin, and Luigi Zingales, “The Eclipse of the U.S. Tire Industry,” Working Paper (Center for Economic Studies, U.S. Census Bureau, 1997), http://ideas.repec.org/p/cen/wpaper/97-13.html.

20. William D. Nordhaus, “Do Real Output and Real Wage Measures Capture Reality? The History of Lighting Suggests Not,” Cowles Foundation Discussion Paper (Cowles Foundation for Research in Economics, Yale University, 1994), http://ideas.repec.org/p/cwl/cwldpp/1078.html.

21. In one paper, Erik estimated that the elasticity of demand for computer hardware was about 1.1, implying that each 1 percent increase in price led to a 1.1 percent increase in demand, so as a result total spending increased as technology made computers more efficient. See Erik Brynjolfsson, “The Contribution of Information Technology to Consumer Welfare,”
Information Systems Research
7, no. 3 (1996): 281–300.

22. This is an example of Say’s Law, which states that demand and supply are always kept in balance.

23. John Maynard Keynes, “Economic Possibilities for Our Grandchildren,”
Keynes on Possibilities
, 1930, http://www.econ.yale.edu/smith/econ116a/keynes1.pdf.

24. Tim Kreider, “The ‘Busy’ Trap,”
Opinionator
, June 30, 2012, http://opinionator.blogs.nytimes.com/2012/06/30/the-busy-trap/.

25. Nobel Prize winner Joe Stiglitz has argued that rapid automation of agriculture, such as via gasoline-engine tractors, is part of the explanation for the high unemployment of the 1930s. See Joseph E. Stiglitz,
The Price of Inequality: How Today’s Divided Society Endangers Our Future
(New York: W. W. Norton & Company, 2013).

26. Wassily Leontief, “Technological Advance, Economic Growth, and the Distribution of Income,”
Population and Development Review
9, no. 3 (September 1, 1983), 403–10.

27. Michael Spence,
The Next Convergence: The Future of Economic Growth in a Multispeed World
(New York: Macmillan, 2011).

28. D. Autor, D. Dorn, and G. H. Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,”
American Economic Review
(forthcoming, December 2013).

29. J. Banister and G. Cook, “China’s Employment and Compensation Costs in Manufacturing through 2008,”
Monthly Labor Review
134, no. 3 (2011): 39–52. A closer look at the Chinese statistics suggest that the classification methods have changed somewhat over time, so the exact changes in employment may be somewhat different than reported, but the general trend seems clear.

Chapter 12
LEARNING TO RACE WITH MACHINES

1. “Computers Are Useless. They Can Only Give You Answers,”
Quote Investigator
, November 5, 2011, http://quoteinvestigator.com/2011/11/05/computers-useless/.

2. D. T. Max, “The Prince’s Gambit,”
The New Yorker
, March 21, 2011, http://www.newyorker.com/reporting/2011/03/21/110321fa_fact_max.

3. Garry Kasparov, “The Chess Master and the Computer,”
New York Review of Books
, February 11, 2010, http://www.nybooks.com/articles/archives/2010/feb/11/the-chess-master-and-the-computer/.

4. “Chess Quotes,” http://www.chessquotes.com/player-karpov (accessed September 12, 2013).