Gilded Age versus Silicon Valley | GDP: Measuring national income | Macroeconomics | Khan Academy

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 you need capital.

So, the 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. If you go back to the Gilded Age, the Gilded Age really was the peak of the 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.

Capital had all of the leverage. Most of the labor that was involved was fairly unskilled and was viewed by the owners of capital as something of a commodity. More and more of the outcome or the income could go to the capital. Now, at least hints that hey, maybe we're going into 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.

But to do a thought experiment, once again, this just gives 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. One could argue that Silicon Valley is maybe most indicative of what the 21st-century economy and what 21st-century industry is going to look like.

So, let's compare the Gilded Age to Silicon Valley, home of folks like Google, Facebook, and Apple. Well, in Silicon Valley, is it about capital, or is it about labor? Well, the industries in Silicon Valley are 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 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.

Now, it's not labor in the sense that 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.

So, let me write that in that blue color: highly skilled labor. It is definitely the case in Silicon Valley that highly skilled labor is viewed as a much stronger differentiator for an organization or an individual than capital. In fact, the dynamics that you're seeing 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 $10 million or $50 million.

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 and the part that's not considered a commodity—office space is a commodity, the servers are a commodity—highly skilled labor is not a commodity.

So, the question to ask yourself is: Is this the case? Will capital, will R, be able to stay larger than G? Will more and more capital accumulate? Will more income go to capital? Or maybe does it go more and more to highly skilled labor?

Now the other question you need to consider—or the other question that might 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. They do write software, but they're known for their hardware products: their 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. Then, they send the designs over to a bunch of firms. These are 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. They say, "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."

Then these folks put it all together, manufacture the pieces, send it back to Apple, who will package it and then market it. What is the high-value aspect of this supply chain? Well, it's clearly the design and the market. 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.

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&D plays a major component. It did in the Gilded Age as well.

And once again, R&D, though, is highly skilled labor. It is less about 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 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 skilled labor.

And so that could drive inequality. But this is where the force of convergence that Pik 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. It could balance things off and keep us from going into some type of Neo-Gilded Age.