- New Issue
- Books & Reviews
- About Us
New World Order
Labor, Capital, and Ideas in the Power Law Economy
ERIK BRYNJOLFSSON is Schussel Family Professor of Management Science at the MIT Sloan School of Management and Co-Founder of MIT’s Initiative on the Digital Economy. ANDREW MCAFEE is a Principal Research Scientist at the MIT Center for Digital Business at the MIT Sloan School of Management and Co-Founder of MIT’s Initiative on the Digital Economy. MICHAEL SPENCE is William R. Berkley Professor in Economics and Business at the NYU Stern School of Business.See more by Michael SpenceSee more by Erik BrynjolfssonSee more by Andrew McAfee
Recent advances in technology have created an increasingly unified global marketplace for labor and capital. The ability of both to flow to their highest-value uses, regardless of their location, is equalizing their prices across the globe. In recent years, this broad factor-price equalization has benefited nations with abundant low-cost labor and those with access to cheap capital. Some have argued that the current era of rapid technological progress serves labor, and some have argued that it serves capital. What both camps have slighted is the fact that technology is not only integrating existing sources of labor and capital but also creating new ones.
Machines are substituting for more types of human labor than ever before. As they replicate themselves, they are also creating more capital. This means that the real winners of the future will not be the providers of cheap labor or the owners of ordinary capital, both of whom will be increasingly squeezed by automation. Fortune will instead favor a third group: those who can innovate and create new products, services, and business models.
The distribution of income for this creative class typically takes the form of a power law, with a small number of winners capturing most of the rewards and a long tail consisting of the rest of the participants. So in the future, ideas will be the real scarce inputs in the world -- scarcer than both labor and capital -- and the few who provide good ideas will reap huge rewards. Assuring an acceptable standard of living for the rest and building inclusive economies and societies will become increasingly important challenges in the years to come.
Turn over your iPhone and you can read an eight-word business plan that has served Apple well: “Designed by Apple in California. Assembled in China.” With a market capitalization of over $500 billion, Apple has become the most valuable company in the world. Variants of this strategy have worked not only for Apple and other large global enterprises but also for medium-sized firms and even “micro-multinationals.” More and more companies have been riding the two great forces of our era -- technology and globalization -- to profits.