While many traditional sectors of the economy have succumbed to secular stagnation, a new form of value creation has expanded since the 1970s as part of the Third Industrial Revolution.
The digitization of the economy has left few elements of our social and economic environments untouched. Today, more and more of our devices are connected to electronic networks and to other devices. All content, in whatever format, can be digitally recorded. And the pace of the digitization process is expected to accelerate.
Over time, the Internet of Things will guarantee that almost no product or consumer is beyond its reach.
Variant 4: Digital Capitalism — A Data-Centric Model
That means our devices and digital footprints, and, by extension, our lives will no longer belong entirely to us. Through regular mandatory “upgrades,” tech firms optimize the customer lifetime value (CLV). They don’t make switching platforms and transferring personal files especially easy. In a tech-centric economy, product “ownership” resembles leasing or renting rather than outright purchase.
Big Tech wants more than a share of our economic activity. It seeks to model our social assets by tracking and tracing our consumer tastes, purchasing behaviors, ancestry, medical history, intimate relationships, political affiliations, religious beliefs, cognitive biases, personal interests, careers, and much else. It superimposes an economic scorecard on our social graph and psychological constructs, mapping out all our commercial activity and interactions. Companies gather, store, analyze, share, and market this data through a few lines of code.
Digital capitalism has transformed our lives into a new commodity: personal data.
Decentralization helped propel this evolution. Deregulated markets have opened the door for intermediaries to access our financial assets just as web-based solutions have given tech firms control over our digital assets. Neither fund managers nor tech firms have to pay for this window into our data. On the contrary, they are often free to analyze and sell it.
While we used to store our personal data on home computers, such desktop solutions have given way to cloud-based applications. Microsoft Office programs like Excel and PowerPoint were once part of a PC’s standard package, but now most of their functionalities, including backups and upgrades, reside in the cloud. Indeed, Google Docs, the key challenger to MS Office, was cloud-based from the outset.
The implication of this “convenient” solution is that the service provider can control, process, and repackage our data without much supervision. While cloud-computing critics have focused on security and privacy risk, the associated financial rewards pose a larger issue.
In capitalism, those that control the assets glean the best economics. As industrialists in an earlier age gathered wealth by owning the means of production, today’s tech alchemists are building vast moats around data.
Mining for Digital Gold
Digital capitalism is in no way revolutionary. Its techniques are reminiscent of those used by the mining and oil sectors in the 18th and 19th centuries.
Success in such extractive industries is driven largely by securing exclusivity. Prospectors seek out long-term concessions, licenses, and leases. William Knox D’Arcy and the co-founders of what would become British Petroleum, for example, secured a 60-year “special and exclusive privilege to search for, obtain, exploit, develop, render suitable for trade, carry away and sell natural gas, petroleum” and derivative products from the Shah of Persia.
Technology firms didn’t need any head of state’s permission before metaphorically drilling for data and selling it. Such unrestricted and indefinite command over it makes digital mining even more lucrative than mineral extraction. Seven of the 10 largest market capitalizations in the world are technology companies that derive at least some of their value from customer data, though to be sure, natural resource monopolies still have some resilience: Aramco, Saudi Arabia’s oil and gas concern, is among the two non-tech firms in the top 10.
Drilling for digital resources is as speculative as digging for the mother lode in the mining industry. But in both cases, striking real or figurative gold comes with a payoff. Hence the phrase: “Data is the new oil.”
Just as mineral explorers and geologists can identify a promising natural gas field in Qatar, oil deposit in the North Sea, or iron ore seam in Western Australia, tech firms can prospect for data from various sources: Google, Facebook, and Amazon, for example, have zeroed in on search, social media, and consumption, respectively.
Thanks to the strength of its Middle Eastern concessions, the United Kingdom won the battle for oil during the first part of the 20th century. And it jealously protected its turf. A leading UK industrialist wrote to Prime Minister Winston Churchill in 1944: “Oil is the single greatest post-war asset remaining to us. We should refuse to divide our last asset with the Americans.” Silicon Valley gives the United States a similar comparative advantage. Access to data could produce an unbridgeable moat for any country or corporation that secures it.
The Data-Centric Model of Value Creation
In a digital capitalist system:
- Profit accumulation is endogenous to the means of production, following the classical capitalist model. However, value is created through online and mobile activity rather than labor.
- Data production often depends on user cooperation. Tech firms compel us to submit our data through a quasi-contagious Pavlovian reward mechanism of clicks and ratings, and by getting us hooked. Alternatively, they harvest our data surreptitiously.
- Revenues are driven by marketing data to advertisers and service providers and by charging users for subscriptions. This model relies on leveraging our digital assets and the commodification and commercialization of user data.
- Profits are optimized through monopolies by disrupting existing industries and intermediaries. Digital platforms become the new — algorithmically automated — agents.
- Capital does not accrue to users but is shared among entrepreneurs and early-stage investors. Stock watering methods and supervoting rights rather than dividend distribution capture the most value.
- Technologists are long-term investors and are fully cognizant of the effect compounding exponential returns has on wealth, particularly when many markets have gone ex-growth.
- With this long-term value mindset, start-up investors will willingly fund operating losses, for a decade or longer, to blitzscale tech pioneers into monopolistic positions. In this economic model, as in financial capitalism, fund managers do not assume the accumulated losses. Such small, individual investors as retirement plan holders and crowdfunders do.
Digitization and Disintermediation
Today, Big Tech’s data mining runs in tandem with Big Capital’s financial engineering. Until now, the two have had little interconnection or overlap, though Acxiom in the United States and Experian in the UK, among other analytics firms, have sourced and marketed credit information and other socioeconomic data for ages. But the profit-maximizing and capital-accumulating compulsions of these two models are now converging. With the meteoric rise of crypto-assets, decentralized finance (DeFi), electronic payment solutions, and other fintech innovations, contemporary capitalism’s two most powerful actors could be on a collision course.
DeFi and digital platforms could disrupt financial intermediaries, further concentrate power among a handful of technology monopolists, and dilute the market position of traditional banks and asset managers.
Thanks to digitization, the pace and extent of value accretion is unparalleled. Social and economic data flows and the volume of financial transactions have expanded. Digital — and financial — assets can be readily accessed with the use of distributed clusters of data centers.
No individual, corporation, or transaction can escape modern extractive mechanisms. Fees, whether on a voluntary (subscription), obscure (performance-related), or coercive (proprietary, monopolistic) basis, are comprehensively levied and are a vital source of sustainable income, as are commissions. Indeed, their pervasiveness is integral to financial and digital solutions.
Value Creation from All Economic and Social Activities
In modern capitalist economies, most shareholder value is derived from non-work-related activities. Less wealth accrues to traditional industries as technological disruption speeds them along the road to obsolescence.
The obvious takeaway is that, in today’s dual financial-cum-digital system, profits and capital are no longer primarily produced in the workplace, but rather in the marketplace — through consumption, credit, investments, and savings — and in cyberspace, through internet and mobile usage, social networking, and gaming. That is why some believe that users and consumers should be paid for their data just as workers are paid for their labor.
In capitalism’s classical model, the feedback loop exists chiefly within the business and to the benefit of the industrialist, who controls the means of production, and to the detriment of the labor force.
Modern capitalism is a more comprehensive process of value-capture, as the graph below demonstrates. People perform other economic functions beyond work and consumption. We apply for mortgages, save for the future, and spend time online — all activities that generate wealth for financial and tech firms.
Variants of Modern Capitalism
An All-Encompassing Intermediated Business Model
In today’s economy, capital’s true owners are always at least one step removed from that capital. Intermediaries are the real custodians of other people’s commercial and social assets.
Financial capitalists are not just managers and lenders of productive assets. Through portfolio companies, they can also act as employers and landlords. Capital accumulation occurs partly to the detriment of pensioners, depositors, and other real asset owners and not just at the expense of the workforce and consumers.
Digital capitalists, by contrast, accumulate wealth by managing third-party digital assets. As users and consumers, we do not have sole title to our personal data. And because of embedded, programmed obsolescence, we don’t strictly own our automobiles, PCs, and smartphones, either. And if Alphabet, Meta, and Microsoft have their way, augmented reality platforms may soon lay claim to our facial expressions and overall personae as well.
Blockchain technology may restore some of our autonomy as part of a fully decentralized internet, or Web3, but until then, we are part of an emergent capitalist system. This modern or post-modern iteration not only draws profits from land and labor as in earlier models. But digital and financial engineering complement that conventional model and generate value from any economic transaction, social interaction, or human emotion.
Big Capital and Big Tech are making capitalism viral and omnipotent.
If you liked this post, don’t forget to subscribe to the Enterprising Investor.
All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Image credit: ©Getty Images / Witthaya Prasongsin
Professional Learning for CFA Institute Members
CFA Institute members are empowered to self-determine and self-report professional learning (PL) credits earned, including content on Enterprising Investor. Members can record credits easily using their online PL tracker.