Mythology of Big Tech

“Everyone seems to agree … that these companies are fundamentally different … [and] the old rules of capitalism simply do not apply to them”
—Economist Thomas Philippon, author of “The Great Reversal:How America Gave Up on Free Markets”

The public face of American capitalism is Big Tech. Its constituent firms — Apple, Amazon, Google and Microsoft, to name a few — seem unique in US history. Awash in profits (Apple earned nearly $60 billion in 2018), they’re the economy’s driving force. That’s the consensus.
But it may be wrong.
In a new book, Thomas Philippon challenges the conventional wisdom on numerous grounds. It turns out that the profitability of these mega-companies — called “superstars” by Philippon and other economists — isn’t that different from the superstars of the past.
Philippon, who teaches at New York University, examined the profitability of the five largest US corporations for each decade since the 1950s. Profitability was measured by the companies’ profits divided by their sales. From the 1950s through the 1980s, there was stability. In the 1950s, the average profitability of the five largest firms was 20%; in the 1990s, the average was 19.5%.
Likewise, there was enormous stability in the companies that made the top five. General Motors, Exxon and AT&T were in the top group for every decade from the 1950s to the 1980s. To be sure, there were sometimes outliers. In the 1960s, AT&T’s profitability was 30.9%, but it was mostly offset by Exxon’s 13.5% in the same decade.
It was only in the new century that Microsoft, Apple and Google pushed aside these traditional corporate leaders. What has changed, Philippon says, are corporate taxes. As late as 1980, they were about 50%, he says. Now, they’re around 20%. The result is that, although pre-tax profitability is stable, after-tax profits have risen.
Philippon is also contemptuous of the idea that the rapid growth has sustained the rest of the economy. “The notion that the biggest tech firms are somehow the pillars of the US economy is false on its face,” he writes. The reason: Today’s superstar firms hire less and buy less from the rest of the economy compared with earlier decades. Therefore, their stimulus for the rest of the economy is less. Since the 1950s, the share of employment represented by the top five companies has dropped from 2.59% to 0.44%.
Regular readers of this column may remember that I have already written once on Philippon’s book. That column focused mainly on the state of competition in the US economy. I judged then (and still do) that squeezing both ideas into one column would have short-changed one or perhaps both.
Philippon objects to the “unwarranted hype that these companies have generated. There is no doubt in my mind that [today’s superstar companies] are genuinely impressive companies, but so were GM, GE, IBM and AT&T before them. They are not special and should be treated with the respect and circumspection that other companies receive,” he writes.
That’s the crux of Philippon’s thesis. It may or may not be correct. It needs to be checked and double-checked to see whether the facts and the logic hold up against intense scholarly and practical examination. If it does prove true, it would change our view of how the economy works by emphasising the importance of competitive markets as a source of national strength.

—The Washington Post

David Ignatiusis is a journalist for The Washington Post, where he has written about business and economic issues since 1977. He was a columnist for Newsweek magazine from 1984 to 201