One of the major big-picture stories of 2016 is the way that technological disruption has threatened the social status of working and middle class workers the Western world, creating the conditions for widespread populist rebellions on Left and Right.The next round of tech-fueled creative destruction, however, looks likely to impact people higher up on the socio-economic ladder. Information technology has the potential transform the legal sector, reducing the number of seven-figure jobs available to New York City corporate lawyers. And as Noah Smith observes in a new column at Bloomberg, the ruthless logic of algorithmic efficiency is starting to threaten traditional Wall Street business models as well:
The biggest force putting pressure on asset management is new technology. Electronic trading has made it easier to exchange assets in bulk and manage diversified portfolios such as exchange-traded funds. Cheaper diversification means more investors will diversify — a move aided by the general shift to passive investing. Instead of picking stocks, many asset managers will now just stick their clients’ money into a basket of ETFs and index funds, and let it stay there. […]Fee compression will drive asset managers to become larger-volume, lower-margin businesses—a common result in many industries disrupted by technology and restricted by regulation. That implies a lot of wealth management firms bite the dust as the industry consolidates.
Bernie Sanders might not like to acknowledge it, but in the long run, technological innovation and entrepreneurship is the most powerful force working against the relentless expansion of the finance as a share of the U.S. economy. The competitive market is likely to shrink banks’ profit margins on its own. In some cases, financial regulations have the unintended effect of stymieing this process by raising barriers to entry to new firms.The trends in the financial sector are a reminder that full impact of the information revolution is only beginning to be felt in the U.S. economy. So far, new technologies are associated with weakening the position of workers in less-skilled industries even as the upper-middle class does better than ever. In the long run, however, algorithms are likely reduce the market power of industries like finance, law and consulting while reducing costs for consumers. The next information age may turn out to be more democratic than previously thought.