Gilded Age versus Silicon Valley

0:00- [Instructor] Let's give ourselves a little bit more food for thought on this labor versus capital question. So like we've mentioned 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 capital.

0:18The question is as you produce that output, as you produce that output, or I guess you could say as you produce this aggregate, 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?

0:39If you go back to the Gilded Age, Gilded Age, really the peak of Industrial Revolution, the people who had most of the leverage were the owners of capital, the growth industries, as we've said before. These were railroads, these were manufacturing plants, these were people exploring and finding oil.

0:58And so capital had all 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 to a second Gilded Age because returns on capital are going to be larger than growth, and more and more wealth is going to be going to that.

1:23But to do a thought experiment, once again, this'll give you food for thought, 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 as an example because one could argue that Silicon Valley is maybe most indicative of what 21st century, what the 21st century economy is going to look like and what 21st century industry is going to look like.

1:45So, let's compare the Gilded Age, to Silicon Valley, home of folks like Google and Facebook and Apple. Well, Silicon Valley is it about about capital or is it about labor? Well, the industries in Silicon Valley, they're about creating technology, they're about creating software.

2:03Software, in particular, requires very little capital. You don't need large, a billion dollar manufacturing plants. You don't need a ton of land. You literally can write software in your bedroom. You could do it in your closet. That's how I started. And so Silicon Valley is really much more about labor.

2:22That's not labor, you 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. While in Silicon Valley, it's much more about highly skilled labor.

2:35So 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, a much stronger differentiator for an organization or an individual than capital.

2:57In 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've just put something together in the last few months, and they're valuing it at 10 million dollars or 50 million dollars.

3:14We see organizations like Facebook and WhatsApp getting multibillion 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 in the part that's not considered a commodity.

3:34Office space is a commodity. Servers are a commodity. Highly skilled labor is not a commodity. So, the question to ask yourself is: Well, is this the case? And is the case, will capital, will R be able to stay larger than G? And will more and more capital, more income go to capital?

3:55Or maybe does it go more and more to highly skilled labor? Now, the other question you need to, or the other question that may be going in your mind, is well hey look, Silicon Valley isn't just about software, it's also about hardware. 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.

4:14Their iPhone, the iPad, their computers. What about that industry? Isn't that capital intensive? Well, let's just think about how your iPhone or your iPad gets developed. It gets designed by Apple in Cupertino, California, and that's what they write on their boxes, designed in California.

4:33And then they send the designs over to a bunch of firms. This is just 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.

4:52But 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'll package it, and then market it.

5:14And so, what is the high value aspect of this supply chain right over here? Well, it's clearly the design and the marketing. 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 suppliers right over here.

5:33So, one way to think about it is these are kind of closer to the large scale capital intensive manufacturing plants of the Gilded Age. Although, even here, R and D plays a major component, it did in the Gilded Age as well. And once again, R and D though, is a labor, is a highly skilled labor.

5:54It is less about, there's capital definitely involved, but when you look at the real value created, it's really on the highly skilled labor part, on the designing and the marketing side, the creative aspects of it. Now, just this, if you believe it, and you should come to your own judgements.

6:12This 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 gonna go to capital, it's gonna go to more and more highly skilled labor. And that's a small subset, one could argue, of the entire labor pool.

6:27You 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.

6:42But 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 labor, then potentially this could be a force of convergence.

7:02It could balance things off, and keep us from going into some type of neo-Gilded Age.