The K-economy Dilemma

Economists and technologists often tell us that innovation creates new opportunities and improves living standards for everyone. Yet behind that story of technological progress of the past 50 years lies a troubling reality. The benefits of modern technologies appear to have flowed disproportionately to owners of capital, while workers have received a shrinking share of the gains.

Case in point: American workers just took home the smallest share of capital since 1974. And we are experiencing a record divide between corporate profits and worker pay.

For several decades after World War II, innovation largely focused on improving daily life. New household appliances saved time, reduced labor within the home, and increased convenience, giving these technologies mass appeal and adoption. The wealth that cascaded from these technologies spanned far beyond the companies themselves, raising living standards broadly, putting homes in reach for more people, and spurring the Baby Boom.

Beginning in the early 1980s, the nature of innovation changed. Whereas companies had previously focused on conveniences and quality of life improvements, new innovations became increasingly focused on transforming the production of goods and services.

Advances in automation, computing, and global communications dramatically increased corporate efficiency and profitability. This marked the beginning of an era in which capital expanded its advantage over labor. Whether through automation or the relocation of manufacturing to lower-cost countries, labor gradually took a back seat to capital. Since then median wages have struggled to keep pace with inflation, yet trillions of dollars in wealth have been created.

The concentration of economic gains becomes especially clear when examining profits per employee—an ever-changing metric that, at a given time, can reveal a lot about the differences among industries. Here’s today’s snapshot:

• Apple has 166,000 employees worldwide and generates around $600,000 profit per employee annually.

• Alphabet has 194,668 employees worldwide and generates around $400,000 profit per employee annually.

• Microsoft has 228,000 employees worldwide and generates around $300,000 profit per employee annually.

• Ford has 169,000 employees worldwide and generates $24,000 profit per employee annually.

• GM has 156,000 employees worldwide and generates $62,000 profit per employee annually.

The disparity is even more pronounced when measured by market value. Apple, Alphabet, and Microsoft each command more than $15 million in market capitalization per employee. Ford, at $350K market cap per employee and GM, at $470K, lag very far behind. This shows the extraordinary ability of software, intellectual property, and digital platforms to create wealth without a proportionate increase in labor.

In the current economy, technological innovation allows capital to scale far more efficiently than labor.

A steel mill, automobile factory, or appliance manufacturer requires large workforces to generate profits, while a software platform can reach a global market with a comparatively smaller number of highly skilled employees. The rewards flow disproportionately to investors who own the underlying intellectual property and digital infrastructure, as well as to the specialized technology workers who help create it and employees whose compensation includes some form of ownership.

The result is what economists call the “K-shaped economy.”

Those at the economic top are growing greater wealth. Some in the white-collar middle, most particularly financial and technology workers, are also increasing their incomes and wealth. At the same time many, in the white-collar and blue-collar middle are falling further behind. As more families struggle, the burden falls on the government (read: taxpayers) to support basic lifestyles.

History suggests that innovation typically produces a period of job destruction followed by job creation. Perhaps it is more accurate to describe this process as a rotation from the jobs innovation eliminates to the jobs innovation creates.

The challenge today is that our leading technology companies can scale up with significantly fewer workers than our legacy goods production and services economy. In addition these new technologies also seem set to reduce jobs in those traditional industries. Consequently labor’s share of economic gains has been losing ground to capital since these new technologies began penetrating our economy in the 1980s. AI suggests this trend will continue, and quite possibly with even greater momentum.

If labor continues to be disadvantaged, one of two outcomes appears likely: Either owners of capital will voluntarily share more of the gains innovation creates (there’s some evidence of this potential), or workers will increasingly push politicians to redistribute those gains.

When economic imbalances become sufficiently large, the ballot box often becomes the mechanism through which society attempts to restore equilibrium. Mayor Mamdani’s win in NYC last fall, followed by socialist candidates unseating progressive incumbents across several states in recent primaries signals many voters have reached a point of demanding dramatic change.

As Newton’s Third Law says, for every action there will be an equal to and opposite reaction. Labor…voters in a free society…are going to voice their opinions. Expect a rise in socialist support should technology continue to threaten people’s economic security.