What Data Has Done to Capitalism
By: David Leonhardt
I’m regularly frustrated by the process of searching for hotel accommodations for my family of five. We know what we want: a basic suite, like at a Residence Inn, with four beds, two bedrooms and a bathroom off the common area. But we struggle to find it, because hotel search engines make it surprisingly difficult to figure out the specifications of rooms.
Lacking that information, I sometimes end up calling a hotel reservations agent, who typically can’t tell me much more than I can read online. Then I go back to the search engine, make a decision based on price and hope for the best. If someone — either a hotel chain or an aggregator — built a better search engine, I would happily use it. I would also be willing to pay a bit more for the kind of room my family wants, rather than shopping almost exclusively by price.
After reading this new book by Viktor Mayer-Schönberger and Thomas Ramge, “Reinventing Capitalism in the Age of Big Data,” I now have a name for what I’m looking for: a data-rich market. And I’m optimistic that it will one day come to the hotel business. Data-rich markets are sweeping across the global economy. “Until recently, communicating such rich information in markets was difficult and costly. So we used a workaround and condensed all of this information into a single metric: price,” they write. “In data-rich markets, we no longer have to condense our preferences into price and can abandon the oversimplification that was necessary because of communicative and cognitive limits.”
Title: REINVENTING CAPITALISM IN THE AGE OF BIG DATA
By Viktor Mayer-Schönberger and Thomas Ramge
288 pp. Basic Books. $28.
Amazon, with its many product specifications and customer reviews, is often a data-rich market. So are Spotify, Netflix, Lyft, StubHub, Rent the Runway, Tinder and Airbnb (which provides a much better search for lodging than hotels do). These markets aren’t just about first-world convenience, either. In the Indian state of Kerala, among other places, a data-rich market has transformed the fishing business. Fishermen no longer have to guess which seaside market needs their catch. They can use their mobile phones to tell them which markets have a gap between supply and demand.
All in all, the move to data-rich markets is for the good. It is of a piece with the ideals of Francis Bacon, René Descartes and Immanuel Kant. Knowledge spreads, and people are able to act on it. Fishermen sell more fish. Fish eaters have more choice. In one realm after another, people are able to find products and services they want, rather than having to settle for something less useful.
Mayer-Schönberger, a professor at the University of Oxford, and Ramge, a writer for The Economist, explain all of these advantages. To their credit, though, they spend more time in their book on the downsides of data-rich markets. These include the potential to put people out of work and to concentrate corporate power among a small number of firms that control the most valuable data. The book echoes some of the themes of Tim Wu’s 2010 history, “The Master Switch,” which documented the tendency of information technology to produce cartels and monopolies. The only way to avoid this fate, all of these authors agree, is a smart, activist government dedicated to protecting its citizens’ interests.
This new book starts its story with the ancient idea of human coordination. “If there is a single crucial thread that has persisted through human history,” the authors write, “it is the importance of coordination.” Coordination allows communities to accomplish tasks that individuals working alone cannot. People can build on one another’s strengths and make up for one another’s weaknesses. Coordination made possible the library of Alexandria, the Great Wall of China, the Suez Canal and the moon landing. Coordination, in turn, depends on communication — the exchange of information that allows people to work together.
In modern times, the most effective way to coordinate behavior, other than through government, has been through a company, also known as a firm. Firms tend to follow a top-down approach to coordination. A canonical example is Henry Ford’s automobile firm. There, workers were divided into specialized groups. Information flowed up from these groups through a tightly controlled management structure that culminated with an imperial chief executive. Decisions came down from the top.
But the firm is not the only way for the private sector to coordinate. The market offers a different model for doing so, one that both complements and competes with the firm’s hierarchical approach. The market is decentralized. It has no top-down authority. Participants come and go with ease.
In the market, the dominant mechanism for coordination and communication has long been price. It’s simple to understand, often too simple. It is one-dimensional. That’s why firms have long provided a more efficient way for people to coordinate, because they could better synthesize a rich stream of information and then act on it. Today, however, the explosion of computing power has enabled many more people to gather information and analyze it quickly, which has allowed the lingua franca of the market to become more sophisticated. In response, many firms are reorganizing themselves to mimic markets. They have become less strictly hierarchical and spread decision-making power to a larger number of people.
For all their differences, the firm and the market do share a central flaw. They often are not self-correcting. Early winners can use their strength to beat back competition, amassing yet more strength — and ultimately hurting the public interest. It happened with the railroad trusts, Standard Oil and AT&T, and it is beginning to happen with the big winners in today’s data-rich, market-oriented economy. Superstar companies like Amazon, Apple, Facebook and Google earn enormous profits, while employing a surprisingly small work force relative to their scale. They are adept at avoiding taxes. And they continue to amass data about human behavior that will help them grow even stronger.
Mayer-Schönberger and Ramge offer several intriguing ideas for limiting the excesses of data-rich capitalism. One idea is a “robo tax” as a partial replacement for the payroll tax — machines would be taxed more and human employment less. Another idea is mandated data sharing — an echo of the patent system, which also depends on disclosure, the authors note — to allow new entrants a fair chance to compete.
These ideas won’t get much of a hearing in today’s Washington. But the shift toward an information-based economy will outlast the current administration. Eventually, this country will have a government interested in encouraging the best parts of modern capitalism while restraining the worst.