Chapter 1: The Foundations of Neoclassical Economics

For nearly two centuries, neoclassical economics has remained a prominent ideology. Its core assumptions, particularly those that go unstated, have shaped our understanding of economic principles. One such assumption is that technology remains constant. However, we currently inhabit a world characterized by rapid technological advancement.

In traditional neoclassical frameworks, output is produced by combining two main factors: capital and labor, according to a predetermined production function. Both of these elements are treated as readily available resources, provided one is willing to pay a sufficient price. The ultimate goal is to achieve market equilibrium, where the prices align such that firms supply precisely what consumers demand. This theoretical model looks appealing, yet it often fails to reflect the complexities of real-world economics.

In reality, the conditions of our economy often render these assumptions outdated. While capital may theoretically be interchangeable, the assets it governs can be scarce. For instance, while I can plan to construct a factory, I cannot instantaneously create one.

Labor encompasses a diverse range of skills and competencies, and no amount of education can fully compensate for certain deficiencies. Acquiring expertise often demands considerable time and resources. The pool of individuals equipped with specific skills can be quite limited; for example, fewer than 1,000 people truly grasp the intricacies of blockchain technology.

In neoclassical economics, labor earns wages while capital receives interest and dividends. Yet in today's landscape, startups are allowing exceptionally skilled individuals to reap substantial rewards through equity, blurring the lines between capital returns and the exceptional skills of a select few. This perspective increasingly obscures the realities we face.

Neoclassical economics acknowledges its limitations, particularly concerning increasing returns to scale—where costs decline as firms expand, undermining its traditional principles. In practice, these increasing returns are prevalent due to technological advancements. A prime example is Amazon.com.

Consider the U.S. equity markets: savvy investors recognize the value of firms with increasing returns and are eager to invest in technology leaders that embody this model. Such returns are a significant contributor to growing inequality, creating a divide between the affluent and the less fortunate.

Neoclassical economics also champions competition as a vital force. Indeed, competition fosters innovation and drives prices down among technology giants, while many other sectors experience stagnation or decline.

Monopolistic practices have been extensively examined within neoclassical economics. There's a widespread consensus that monopolies are detrimental, a belief that dates back to the era of Standard Oil. The Sherman Act, established over a century ago, reflects this understanding. However, monopolies today are not merely about controlling output; they increasingly revolve around talent, a concept that remains elusive for the public and policymakers alike.

Currently, major tech firms like Amazon, Google, Facebook, Apple, and Netflix dominate the landscape, employing a significant portion of the world’s top software talent. They create a self-reinforcing cycle: skilled developers prefer to collaborate with other talented individuals, and these companies offer the most lucrative compensation and stimulating work environments. As a result, other organizations are left with subpar talent.

The use of equity compensation facilitates this dynamic. For instance, Apple’s shareholders recently approved a plan allowing the Board to distribute up to 10% of the company in stock-based compensation, amounting to $100 billion. This reliance on market capitalization has become a formidable barrier to entry for new players.

This trend has persisted in the tech sector for decades. Concerns about IBM led to antitrust actions, and similar issues arose with Microsoft. In both instances, new computing paradigms emerged, creating opportunities for competition and attracting top talent. As a former consultant for the Department of Justice concerning IBM, I witnessed firsthand these shifts.

Is it time to consider antitrust measures against the FAANG companies? Such a move would necessitate new approaches, as traditional metrics may not fully apply. Proving monopolization of talent (and data, which merits its own discussion) would be challenging, despite its reality.

An alternative strategy could involve targeting market capitalization. More firms generally yield better outcomes for society than fewer. Increased competition drives innovation and resilience. A proposed tax on enterprise value could apply to companies exceeding $100 billion, adjusted for inflation. Any entity operating in the U.S. would owe a tax calculated on its enterprise value multiplied by its revenue share from the country.

What should the tax rate be? One possibility would be 1% on enterprise values surpassing $100 billion, escalating to 10% for values exceeding a trillion. The objective is straightforward: to encourage firms to split into multiple successful entities as they grow, rather than creating a massive government revenue source. We should allow capitalism to address its own challenges.

Additionally, I would propose an excise tax on personal income, applying 10% on earnings over $5 million, with incremental increases for higher brackets. Talent has become akin to land in Ricardo's theory, and incomes at this level should be seen as rents rather than wages. Numerous individuals report W-2 income exceeding $1 billion, primarily from hedge fund management (though these figures remain confidential).

These proposals do not advocate for socialism; rather, they serve as a testament to capitalism. If we fail to confront the inequality embedded in our current system, we risk losing the very foundation of capitalism. It is imperative that we strive to preserve it.

The first video, "Saving Capitalism | Official Trailer [HD] | Netflix," provides a glimpse into the pressing issues facing capitalism today, highlighting the challenges posed by technological advancements.

The second video, "Saving Capitalism: For the Many, Not the Few - Robert B. Reich," delves deeper into the systemic inequalities in our economy and offers insights on how to address them.