Gilded Age versus Silicon Valley

let's give ourselves a little bit more food for thought on this labor versus capital question so like we've mentioned many many many times in order to produce anything you need a little bit of both or you maybe need a lot of both you need labor and and you need and you need capital and so the question is as you produce that output as you produce that output or I guess you could say that you produce this this this this aggregate this this product how do you decide how much of it goes to labor and how much of it goes to capital well one way to think about it is which resource has more leverage if you go back to the Gilded Age Gilded Age really the peak of the Industrial Revolution the people who had most of the leverage were the owners of capital the growth industries as we said before these were railroads these were manufacturing plants these were people exploring and finding oil and so capital had all of the leverage that the labor most of the labor that was involved was fairly unskilled and was viewed by the owners of capital as something of a commodity and so more and more of the outcome or the income could go to the capital now Piketty at least hints that hey maybe we're going into a second guilded age because returns on capital are going to be larger than growth and more and more wealth is going to be going to that but I do a thought experiment once again this does give you food for thought and and you come up with your own conclusions let's think about the world that we now live in and I'll give Silicon Valley's an example because one could argue that Silicon Valley is maybe most indicative of what 21st century with the 21st century economy is going to look like and what 21st century industry is going to look like so let's compare the Gilded Age to silicon silicon valley home of folks like Google and Facebook and Apple well in Silicon Valley is it about capital or is it about labor well the industries in Silicon Valley they're about creating technology they're about creating software software in particular requires very very little capital you don't need large billion-dollar manufacturing plants you don't need a ton of land you literally can write software and you or bedroom you could you could you could do it in your closet that's that's how I started and so Silicon Valley is really much more about labor now it's not labor and we know when you think of labor in the Gilded Age Industrial Revolution you're thinking about someone just working on a factory line or doing a repetitive job over and over again well in Silicon Valley it's much more about highly skilled labor so let me write that in that blue color highly highly skilled highly skilled labor and it's definitely the case in Silicon Valley that highly skilled labor is viewed as a much much stronger differentiator for an organization or an individual than capital in fact the dynamics that you're seeing more and more in Silicon Valley is lots and lots and lots of capital which is oftentimes perceived as a commodity pursuing a team of five people who have just put something together in the last few months and they're valuing it at ten million dollars or 50 million dollars we see organizations like Facebook and whatsapp getting multi billion dollar valuations based on really the output of highly skilled labor capital there's some capital necessary you need office space you need servers but it's not like the Gilded Age most of the value is and the the part that's not considered a commodity office space is a commodity the server's are commodity highly skilled labor is not a commodity so the question to ask yourself is well this is this the case and is this the case will will capital will R be able to stay larger than G and will more and more capital accumulate go more and more in a highly skilled labor now the other question you need it or the other question that might be going in your might as well hey look Silicon Valley isn't just about software it's also about hardware most one of the most highly successful companies in Silicon Valley is Apple computers and they do write software but they're known for their hardware products that their iPhone the iPad their their computers what about that industry isn't that capital intensive well let's just think about how how your iPhone or your iPad gets developed it gets designed I Apple & Cupertino California and that's what they write on their box is designed in California and then they send the designs over to a bunch of firms this is just some of some of Apple's suppliers here and these are incredibly capital intensive industries but from Apple's point of view they view them more or less not all of them some of them have differentiated products they make a special type of material or whatever else but many of them are viewed as commodity manufacturers that hey you don't give me the right price you're not giving me the right few pennies per component I'm going to go to the other person who can produce that same entity and then these folks put it all together manufacture the pieces send it back to Apple who will package it and then and then market it and so what is the high-value aspect of this supply chain right over here well it's clearly the design in the market and if you don't believe that you should look at what portion of the output of the income generated by an iPhone what portion of it goes to Apple versus what portion of it goes to the the suppliers right over here so one way to think about it is these these are kind of closer closer to you know the the large scale capital intensive manufacturing plants of the Gilded Age although even here R&D plays a major component that did in the Gilded Age as well and once again R&D though is a is a labor is a is highly highly skilled labor it is less about there is capital definitely involved but when you look at the real value created it's really on the highly skilled labor part on designing and the marketing side the creative aspects of it now just this if you believe it and you should come to your own judgments this by itself doesn't say that we can't worry about inequality because even this might say look more and more income maybe it's not going to go to capital it's going to go to more and more highly skilled labor and that's a small subset one could argue of the entire labor pool you have this highly skilled labor here and so you might have inequality not happening like it happened in the Gilded Age where it's going to owners of capital but now it's going to the owners I guess you could say of highly highly skilled labor and so that could drive inequality but this is where the force of convergence that Piketty talks about could play in and he seems a little bit skeptical of its ability to overweight the forces of capital accumulation but if we can have more people participate in this more highly skilled labour then potentially this could be a of convergence it could balance balance things off and keep us from going into some type of neo Gilded Age