The Fangs
The new work by Fabio Menghini “Le FANGs: Facebook, Amazon, Netflix, Google. The large groups of the new economy in the age of economic stagnation” (ebook: €4,99; book: €10,99) which is the second book of a trilogy on digital disruption. Indeed, in 2016 “Disruptive innovation: economy and culture in the era of start-ups” was released. Menghini is currently working on the third volume which will investigate the conditions of the sectors and companies of the old economy that have been disrupted by the digital disruption. This is an issue that made its first appearance in the American presidential elections and now also in the French ones with the socialist candidate Benoît Hamon who has included it among the central points of his political agenda.
Giulio Sapelli found Fangs "beautiful, very useful, clear and tremendous for its truth about the big groups of the new economy".
Fabio Menghini studied economics with Giorgio Fuà and his students in Ancona, where he currently teaches Industrial Strategies and Corporate Finance in the Master's Degree Course in Economics and Financial Sciences.
Below we publish an intervention by the author on the relationship between great stagnation and the new economy, a topic that permeates his research work.
If we consider that the financial crisis of 2007 (from which the beginning of the "great stagnation" is often given) was preceded by the speculative real estate crisis of 2003-2007 and even earlier by the Internet bubble, we have been living for more than fifteen years in a condition of weak recoveries followed by periods of stagnation without credible signs of a real trend reversal.
At first, any slowdown in GDP growth was seen as merely transitory. The economic cycle, it was said, has its ups and downs.
Slowly, first with astonishment and then with increasing awareness, the world today is instead slowly getting used to the idea that it is possible to live in an economic system without growth.
The growth phase is probably over
Robert J. Gordon, an American economist at Northwestern University, illustrated this condition effectively by stating: there was no economic growth in the eight centuries between the fall of the Roman Empire and the Middle Ages. Real output per individual in Britain, among between 1300 and 1700 it barely doubled in four centuries, unlike Americans who in the twentieth century were able to benefit from a doubling of per capita product every thirty-two years.
Of course, the stagnation in which the world finds itself today after a period of about two centuries will make it necessary to revise many of those that for decades were considered certainties. From the continuous growth of productivity, employment and consumption, to the reduction of income inequalities.
Regarding inequalities, Thomas Piketty observes: In Europe, the XNUMXth century produced a total transformation of society: property inequalities, which on the eve of the First World War were not dissimilar from those of the ancien régime, fell to a level never reached in previously, to the point that almost half of the population was able to access a minimum of assets and was able to own a significant share of the national capital for the first time as a whole. After the XNUMXs that seemingly irresistible march towards social progress stalled.
As Stiglitz comments, the economy and society as a whole pay dearly for the growth of inequalities.
Starting with weaker aggregate demand. In fact, those at the bottom of the social pyramid spend a higher fraction of their income than those at the top (as they have a higher marginal propensity to consume).
Finally, societies with the greatest inequalities are typically those with the least ability to make public investments that improve productivity, such as transport, infrastructure, technology and education.
The temptation to use old tools (of analysis and intervention)
In this new and in many ways unexpected scenario, governments and politicians are moving with growing difficulty and anxiety.
What were the buzzwords of fifty years ago, born and shared in times of optimism and development, today seem obsolete and threatening. From globalization to the consequent free movement of goods and people.
And on closer inspection, Trumpism, although destined to create nervousness for a long time to come among the chancelleries of European governments and beyond, seems to have the advantage of expressing its inspiring principles with naive clarity.
Since there are no clear ideas on why the economy has stopped and even less reliable tools for interpreting the current "new economy", it is better to all go back to the better known and more reliable "old economy" which among its tools included, why not, even tariffs and tariffs, as well as investments in highways, bridges and railways.
Will it be the right way? It's hard to predict.
Certainly the contribution of authors such as Gordon and Piketty have helped us to reinterpret the history of development as a path where alongside some isolated peaks (and we have just climbed over the last one), a flat plain extends for centuries. And this obviously does not comfort us.
What could be done in addition to the initiatives announced by Trump?
A reliable prompter, because he lived in the era of the Great Depression, is certainly the economist Alvin Hansen, who coined the term secular stagnation, now back in the limelight. According to Hansen, therefore, economic development is driven by three main drivers: a) inventions, b) the discovery, development of new territories and the exploitation of new resources, c) population growth.
Now, since it appears quite evident that the second and third drivers have long since exhausted their driving force, the first would remain: inventions.
The conditional is obligatory because by now it seems rather well documented (and see Gordon's monumental work in this regard), that after the advent of the ICT which probably exhausted no later than the seventies, perhaps the eighties, its effect positive on productivity, we have entered a kind of famine of innovations.
The discussed role of digital technologies
And the Internet, one might ask? In reality, the major impact of the Internet has already been acquired and is now concentrated on people's leisure time, from social media to travel sites, etc., nothing that can generate economic momentum.
Today we talk about the Internet of things, big data and artificial intelligence, many names where there is still little behind it, also because research funding is expensive and few companies are doing it worldwide (among these, despite what you think, big players in the new economy are in the bottom group in terms of R&D investment). So Hansen's third driver could also be called out.
And in the meantime, what is happening inside the real economy, in sectors, in companies?
There is no doubt that if economists are skeptical about identifying positive effects of the internet on productivity, there have been many (and not always positive) in other contexts.
First of all in moving the entire developed world from manufacturing to services (and this is no small matter, because productivity has suffered. Much higher than the manufacturing average, in services only a few advanced sectors keep up with industry).
And then in changing the way of working. Today millions of individuals work at the same time writing strings of software or participating in conference calls, connected from many different parts of the world, the vast majority now working from home.
And the content of the work itself has changed. Little valuable work, that of a few thousand highly paid IT geniuses, that of millionaire CEOs obviously and then a multitude of anonymous jobs without much added value. For whom there is little wage and even less bargaining power. Because once out of the large global network to which you connect every morning with your own token ring, only traditional service jobs remain, which, curiously, grow in this scenario: fast food waiters and shop assistants, this is where it comes from most of the recent Obama-stimulated job growth came from.
Today the gig economy is celebrated as an innovative fact and few feel they recognize it for what it is: a form of labor exploitation, a condemnation to precariousness in an era of endemic unemployment.
The great paradoxes of the new economy
Nonetheless, today there are big players, who have grown in this recent era at a speed that has no comparison in history, making gigantic gains, dragging the world stock exchanges. The Economist observes, citing a research by Bain, that today large groups climb the Fortune 500 rankings at more than double the speed of companies twenty years ago.
The FANGs (Facebook, Amazon, Netflix and Google), just to give an idea, since 2014 alone have achieved more than 90% of the increases on the total capitalization of the S&P 500.
Unfortunately, unlike the large groups of the last century, the wealth they generate does not spread, it remains in the hands of a few. And the economy won't restart.
While the problems that these transnational giants generate in terms of tax evasion, avoidance of anti-trust laws, respect for the privacy of billions of consumers and citizens around the world are now evident.
Finally, yet another paradox, these great protagonists of the Internet age, who have actively destroyed entire sectors of the "old economy", in fact base their success on business models that have nothing new: advertising and retail, seasoned with new media and technologies, along with violations of state and regional laws, dumping policies, underpaid and demeaning employment relationships.
There is enough to think that new and imperious tasks are facing national governments today. The sooner they are able to free themselves from traditional paradigms, from old interpretations and interventions regarding both the old and the new economy, the better they will be able to design new and more effective intervention measures to support the economy and society .
