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Wild animals caught in the headlights of the digital economy

“Who does the world belong to?” Prof. Michael C. Burda answers from the perspective of an economist

Mr Burda, as a professor of economics, what do you think about modern economic developments and the triumph of the digital economy?

One of the questions that I’ve been thinking about: what does added value mean in an economy where you don’t always pay for things? Digitization is the reason for this. We use Facebook and Google every day, but very few of us understand how they work, because the cash flows are invisible to us. Of course, money is still changing hands, since there are still data flows. Sometimes, the data are collected and processed without asking for permission. We depend on these platforms. This means that they have economic value. But there is no market for them, the price that we pay is hidden. My thoughts on this topic are structured by three key elements: algorithms, i.e. decision-making analytics, networks, and new forms of value creation and productivity.

Do these developments mean that our understanding of capitalism has changed relative to thirty years ago?

In my opinion, the basic principles are still the same. The interesting thing about these modern developments is that they are making capital stock less important. We will always need buildings, we will always need machines, but machines are becoming more effective and new types of property are beginning to emerge – intellectual property, in the form of algorithms. There is an economist at one of the big Swiss banks who decided it was pointless to make his customers visit him in person – why not simply represent himself as an avatar instead? Just click on the avatar, and it will tell you the company’s forecasts. The economist doesn’t tell you the forecasts personally, the avatar does instead, on his behalf. And customers pay for it. This leads me to wonder: who owns this economist’s name? Who owns the program? Who benefits from it? On some level, it is the bank that profits. Also, many people assume that these kinds of algorithms are unreliable. But just imagine a bank clerk who wants to sell you a new financial product and who might be trying to rip you off. You buy the product and the bank gets a commission. An algorithm can give you proof that it is not working for a commission. It’s all about fairness, trust, new forms of payment, and the scalability of any given activity. The question is, what should we do with money earned by algorithms? Some people have suggested that we should levy taxes – taxes on assets, algorithms, real estate.

The political thinker Francis Fukuyama famously proclaimed that we are witnessing “the end of history” in 1989, arguing that capitalism is triumphant and has successfully prevailed. He thought that this would lead to stable economic and social conditions. It seems that you take the opposite view, that the dynamics of the modern economy are now intensifying instead?

Yes, I strongly believe that. We are all like wild animals on a road, staring straight into the headlights of a car that is bearing down upon us. You don’t know what to expect and you don't know if you’re in danger. The economy has always changed how we do things and it would be impossible to anticipate every twist and turn. Markets move much more quickly than any single person. Even just keeping track of them is difficult. That’s the original meaning of the problem. In my personal view, capitalism faces greater threats today than thirty years ago. The danger lies in the concentration of wealth. The national economy relies on the idea that market prices are a democratic process. Demand reflects the collective assessment of value. But the digital economy harnesses and in some cases takes advantage of these forces. I think that this is both exciting and a significant threat: algorithms can earn more and more money for the people that own them because they know the history of internet users. The algorithm knows what you do and don’t like, so it can decide to show you only what you want and charge you a premium. Is this fair? Is this right? In any case, it makes digital businesses richer.

In your opinion as an economist, who does the world belong to – today and tomorrow?

We are currently witnessing an accumulation of wealth. The market values of internet companies are unbelievable! Google’s shares are currently valued at 750 billion dollars. That’s more than ten times higher than a more traditional company like Daimler-Benz AG. And the consequences are being felt. Germany is currently unable to compete with these American companies, at least for now. The German software company SAP is already ancient history and a perfect example of what’s currently unfolding.

So would you say that there the digital economy has monopoly problems?

Yes, definitely. There are solutions, but they would require extensive collective action. The EU would need to assemble some sort of unified policy from its ragtag bunch of member states, but this doesn’t seem likely to happen any time soon. Over the next few years, we will probably see capital owners becoming richer and salaried workers becoming poorer, just like in the 1920s – generally speaking, that is. This will lead to collective action by unions, new forms of organization. Unions currently don’t have much power at all, but I wouldn’t be surprised if people started to organize themselves over social networks.

The interview was conducted by Nora Lessing.

Summer Issue: To whom belongs the world?

Volume 1: To Whom Belongs the Sleep?

Volume 2: Water shortage on the islands Tinos and Syros

Volume 3: Some family members are more equal than others

Volume 4: Destructive ownership?