Brian Arthur's research into increasing returns is one of the most important methodologies for anyone trying to understand how technology is reshaping the modern global economy. He argues that as software continues to eat the world the global economy will move from one of decreasing returns to one of increasing returns. His basic premise was that up until about twenty years ago most industries were dominated by labor or the bulk processing of resources, everything from metals to lumber and retail goods to grains. One of the principles of this type of industry is diminishing returns. Diminishing returns hold that companies operating in those resource/labor intensive industries will eventually run into certain natural limitations (capacity or labor problems). Those limitations create what economists call perfect competition or economic equilibrium, characterized by thin margins and multiple competitors.
Arthur goes on to argue that the modern economy is in the midst of a major transformation where knowledge has replaced labor, and where the products and services that get ahead first get even further ahead over time. In Arthur's own words increasing returns
"are the tendency for that which is ahead to get further ahead, for that which loses advantage to lose further advantage. They are mechanisms of positive feedback that operate—within markets, businesses, and industries—to reinforce that which gains success or aggravate that which suffers loss. Increasing returns generate not equilibrium but instability: If a product or a company or a technology—one of many competing in a market—gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company or technology can go on to lock in the market."
You can already see the winner-take-most outcome in action. Search is dominated by Google, online video by YouTube, professional networking by LinkedIn, social media by Facebook & Twitter, mobile OS by Apple & Google, e-commerce by Amazon and eBay. So how does all of this effect wealth inequality?
1) The shift from labor to knowledge-based economies puts a premium on workers who have access to high quality higher education. Those who don't will be faced with fewer employment opportunities and will be forced to have their wages depressed in the face of increasing automation. Although there is already a huge disparity in long-term earnings powers between college and non-college educated workers those differences will be compounded in the new economy.
2) This type of competitive environment will create monopolies across a ton of different industries, which Peter Thiel argues is actually a good thing. While I agree with Peter's argument what happens if the companies grow through the use of AI, replacing human labor?
3) Companies will grow to become much larger today than any other time in history while employing fewer workers. At its peak in 1979, GM employed over 600,000 workers in the US and over 800,000 worldwide. Today, Apple, the world's largest company employs about 98,000 people and generated roughly $182 billion in revenue in 2014. The wages for those highly coveted workers will continue to rise exponentially while the average American will be left with fewer opportunities for stable long-term employment. It won't be long before a one-person start-up is sold for $1 billion.
(I'm sure there are many other effects that I am overlooking)
I see a world with more profits flowing to fewer companies, and where those companies employ a small percentage of the population than in previous years. And as a result of the characteristics that define an economy of increasing returns if will also be much harder for new entrants to compete/dethrone the incumbents. Cynicism aside, it will also be a world in which most humans are better off. Technology is lifting millions of people out of poverty, child mortality rates continue to decrease, fewer people are dying of preventable diseases, per capita GDP continues to rise and billions of people are now coming online, opening the door for an untold number of entrepreneurs to change the world.
Ultimately I believe this will be the defining issues of the next 30 years.