STANFORD – Although democracy has been in retreat worldwide for at least a decade, Donald Trump’s re-election and chaotic first months back in the White House have put the United States squarely at the center of this global crisis. It may even mark a tipping point. The flood of analyses of this authoritarian turn in the US has been all too predictable, with many people blaming the Democratic Party because it lost touch with American workers.
Some commentators, however, point to cultural factors, such as race, abortion, or so-called “woke ideology,” as central causes of the country’s social and political polarization. Others argue that US politics has lost its civic voice, that democratic norms have deteriorated, or that economic policy has come to serve only the interests of the rich.
Though all these perspectives contain a glimmer of truth, they mainly describe symptoms of a declining democracy, rather than offering a convincing diagnosis. Why has American democracy lost its civic voice? Why do politicians break democratic norms? Why does economic policy serve the interests of the rich and not others? If we cannot answer these questions, we cannot develop a coherent policy road map to restore democracy’s legitimacy.
Two forces have driven democracy’s retreat. The first is the information technology (IT) revolution that began to reshape the economy in the 1970s. The second is the free-market policy agenda initiated by President Ronald Reagan’s administration in 1981. Until 2020, Republican and Democratic administrations alike supported this agenda, which was exported worldwide under the banner of the “Washington Consensus.”
The combination of these two forces concentrated enormous wealth and political power in the hands of a very few, and not for the first time in our history. However, while previous rounds of technological change provided considerable benefits and enabled upward mobility for workers, the past four decades have been different. During this period, technology and policy were especially destructive of the jobs held by less-educated workers, who comprise 62% of the US labor force.
Because economic and technological forces explain the decline of democracy, reversing the trend requires drastic changes in public policy. The first several months of the second Trump presidency have further underscored this conclusion. The sight of the world’s richest person, an unelected high-tech oligarch, gloating at the side of the elected president speaks for itself.
Monopolistic Impunity
Everyone knows that the US economy has generated vast private wealth. But how was it created? In my 2023 book, The Market Power of Technology: Understanding the Second Gilded Age, I show how innovations and new technologies – the source of economic progress – also result in rising market power: the ability of a firm to charge a price higher than the incremental cost of producing the product, resulting in monopoly profit. Because an innovative firm is awarded ownership of its technology, it has an advantage over competitors who cannot avail themselves of the same innovation. This monopoly is then leveraged to gain market power over the price of any commodity whose production requires the proprietary technology.
My analysis shows that under a free-market economic policy, the initial market power awarded to innovators becomes a permanent feature of the economy. Innovators who win a technology race may use a wide variety of strategies to lock in their initial success and build up their market power.
They may use technology updates, such as when a firm creates an interrelated patent system that extends the duration of the monopoly power granted by earlier patents. They may leverage scale economies and network effects that are unavailable to new market entrants. They may acquire competitors or their technologies. They may harvest information about customers and suppliers that competitors cannot access. And they may intimidate would-be challengers with threats to offer a low-cost competing product even at a loss, frivolous legal suits, public shaming campaigns, and more subtle tactics like supply-chain manipulation.
Moreover, an exemption of technology-based monopolies from antitrust law facilitates the increase in market power. The exemption is supposed to prevent a contradiction between antitrust and patent law, but it ultimately negates the purpose of antitrust. After all, technology is the source of most monopoly power, and reaping monopoly profits is the primary motive for most business innovations.
Another key fact is that, contrary to Silicon Valley’s constant talk of “disruption,” technological competition does not eliminate market power. All research on the matter concludes that an incumbent technological monopolist will defend its market segment, and that it will be challenged only very rarely. Instead of competing, technology-based companies frequently cooperate by pursuing joint projects or delegating research and development to small firms that are acquired if successful.
Virtually every Silicon Valley startup plans, from its inception, to develop its new idea up to some level and then be acquired by a leading firm. This preference reflects the fact that while price collusion is illegal, technological cooperation is not. Consider OpenAI. It has the potential to become a competitor to the software leader Microsoft. But instead of competing, OpenAI secured an investment of $13 billion from Microsoft, becoming a partner of the much larger firm. All other young AI firms are doing the same.
No Contest
These economic and technological dynamics explain the rise of today’s multitrillion-dollar firms. Their high rate of acquisition of smaller firms explains how they became corporate empires spanning many technologies. Because innovations arrive in waves, market power accrues simultaneously to multiple firms, creating an economy in which one or two large firms with monopoly power dominate each market segment. In some segments, a few weak firms, existing only on the margins, may offer cheaper versions of the product.
Innovation is the source of monopoly profits, the greatest share of which goes to those who own a significant fraction of the firm that is created to market the innovation: the early investors, financial advisers, and venture capitalists who acquired the firm’s initial shares at very low prices. If the innovation is successful, the firm’s stock becomes publicly traded, its value rises sharply, and the owners become wealthy overnight.
This explains how most billionaires are created. As the firm grows, the risk declines, and the general public also starts buying its shares, but at much higher prices. Meanwhile, ownership of the wealth created by the initial innovation remains highly concentrated among the very wealthy. Hence, most monopoly profits, and the wealth created by those profits since the 1980s, have benefited only a small minority of Americans.
That is what happens when firms can freely use the market-consolidation strategies noted above, and when low corporate and individual taxation allows the wealthy to keep their gains. Such were the conditions during the two American Gilded Ages – the first from 1870 to 1914, and the second from 1981 to the present.
Fundamentally different conditions prevailed during the New Deal era that began in the 1930s. While inequality was very high in the 1920s, the Great Depression destroyed a significant amount of wealth, reducing economic inequality and undermining the credibility and social stature of the wealthy. The view at the time was that wealth inequality had contributed to the depression, and that America should set an upper limit on anyone’s after-tax income. Based on this egalitarian thinking, the top marginal income-tax rate was set at 79% in 1936.
Then, in his 1942 message to Congress, President Franklin D. Roosevelt proposed a top marginal income-tax rate of 100% on income over $25,000 (about $510,000 in 2025 dollars), but Congress set it at 94% for incomes over $200,000. Nonetheless, a high rate of 91% was retained after World War II until the 1960s, and 70% until 1981. The mega-crisis of the Great Depression and WWII, along with the New Deal antitrust and regulatory regime, had renewed American social cohesion, promoted patriotism, and established the credibility of democratic government during the half-century from 1933 to 1981.
Private Power in a New Gilded Age
How do rising market power and massive accretions of private wealth threaten democracy? The first direct effect is rising economic inequality. Market power originating in technological domination leads to monopoly pricing on products whose production requires that technology. The resulting monopoly profits are extracted from the market at the expense of others.
As Silicon Valley technologists and their associated investors earn rising monopoly profits, they suppress the shares of income earned by both labor and capital, including income flowing to retirees and other savers. Hence, I estimate that monopoly profits were less than 5% of total income created by US corporations in 1980, compared to about 25% in 2019. Today, the share is even larger.
Monopoly wealth is the component of stock prices created by monopoly profits. Since a stock price is determined by investors’ expectations of future profits, monopoly wealth is the market valuation of the monopoly profits that stockholders expect to receive. Total monopoly wealth in the US stock markets was close to zero in 1980, but by 2019 it had risen to more than $25 trillion, and probably exceeds $35 trillion today.
Since most of this wealth went to a relatively small segment of American society, it has contributed decisively to rising income and wealth inequality. From 1980 to 2019, US per capita inflation-adjusted income grew by 97.3%, while manufacturing workers’ real wages rose by 4.8% – an annual rate of 0.12%. Manufacturing workers generally do not have college degrees, which implies that workers without a college degree gained little from rising productivity after 1980.
But most importantly, vast economic inequality leads to vast political inequality, which undermines democracy because rising private wealth increases private power, which is the ability to impose one’s will on other people. Although power originates from different sources, private wealth is the standard tool for gaining private power, which erodes democratic institutions founded on the principle that private power should be limited to the right to vote.
In the first Gilded Age, a few robber barons gained the power to control the nomination of presidents. In the second Gilded Age, vast wealth inequality has allowed a few Americans to exert outsize influence through lobbying, campaign contributions, and threats to finance challenges to incumbents. They have had a significant impact on policy formation, legislation, and regulation. The US has become an oligarchy, headed by the wealthy individuals whom Trump appointed to top positions, the billionaires who lined up at his inauguration, and the wealthy CEOs who have supported him.
Individuals like Miriam Adelson, Marc Andreessen, Michael Bloomberg, Elon Musk, the Koch brothers, George Soros, and Peter Thiel have demonstrated publicly how wealth is translated into political power, and many other wealthy Americans regularly use their wealth to exercise power and impose their will on politicians through donations and other means. Elon Musk’s Department of Government Efficiency is merely the latest and most grotesque example of such a transaction. Since the origin of much of this wealth is the market power of the underlying firms, DOGE accentuates the fact that market power and economic inequality drive political power and political inequality. Such inequality erodes the political power and civic participation of ordinary citizens and causes many middle and lower-income citizens to lose faith in their democracy.
The Crucial Role of Technology
None of this could have happened without a free-market economic policy. Such a policy also reflects a desire for individual freedom and the conviction that people should be responsible for their actions. In its pure form, such a policy rejects all public safety-net programs, including those geared toward retraining or otherwise supporting workers whose jobs are destroyed by technology or free trade.
American politicians often express an Ayn Rand-like reverence for heroic individualism, but this dispensation has far-reaching consequences. A free-market, technology-based economy enables some people to profit and others to be harmed by innovation. The required self-reliance results in those who are harmed being left to their own devices, creating the political problem of angry people who are victims of a policy they consider unjust. The actual outcome is a weakened democracy.
The key variable here is the impact of technological change on worker skills. In the early twentieth century, the major innovative technologies were electricity and the internal combustion engine, but the one that really launched American industrialization was the assembly line (invented by Ransom Olds in 1901 and perfected by Henry Ford, who developed the moving assembly line in 1913 to produce the Model T). This method of mass production destroyed some skilled jobs, but, unlike today’s technologies, it created many higher-productivity jobs for workers without college degrees.
The moving assembly line cut costs by breaking down complex operations into simple, repetitive tasks, enabling Ford to hire unskilled workers with the ability to perform such tasks on a sustained basis. He rewarded those who could endure assembly-line work by raising their wages higher than those of ordinary unskilled workers, thereby creating the traditional “blue-collar worker” who could pursue the American Dream without a college degree.
Over time, blue-collar workers emerged in other industries, performing different repetitive tasks to mass-produce many different goods. Many white-collar jobs, such as bookkeepers and checkout cashiers, were also transformed into repetitive work.
Thus, workers without a college degree – accounting for about 85% of the US labor force in 1920, and still more than 65% in 1950 – were the primary beneficiaries of twentieth-century technologies. They received on-the-job training, and they earned enough to educate their children, access medical services, take vacations, and develop self-esteem as members of a vibrant American labor force and a rapidly expanding middle class.
The IT revolution and globalization destroyed all that. IT-based automation displaced workers who had prospered under the prior technologies, because it replaced jobs requiring the performance of repetitive tasks. Many of the previously thriving blue-collar workers were forced to take lower-paying jobs, a trend that destroyed many vibrant communities and drove a breakdown in family life and health, and an increase in what Anne Case and the Nobel laureate economist Angus Deaton call “deaths of despair” (from suicide, drug overdose, and liver disease).
The Underside of Globalization
Free-market globalization after 1981 was the other major source of significant job losses. Although international trade is theoretically beneficial, it does inflict costs on some groups that exceed the benefits. The opening of trade with China, for example, eliminated about 2.4 million US jobs from 1999 to 2011.
While workers under the age of 39 found alternative jobs, most older workers, whose specialized skills did not fit the industries they would need to enter, could not adjust to the “China Shock” and left the labor market. And, because the trade-induced displacements tended to be geographically concentrated, initially isolated job losses eventually led to regional economic decline and then further job losses. This regional decline was intensified by the shift of some Northern manufacturing to the non-union South, and the outcomes have been long-lasting, with research conducted in 2019 showing almost no recovery in the affected regions.
The adverse effects on workers without a college degree have been unprecedented in scale. The US economy was growing, but the majority of American workers were being harmed by the nature of the growth experienced. Free-market policy and technology destroyed the proud culture of the blue-collar worker, and while this destruction was unfolding, America’s educated elites ignored the problem, insisting either that the market would take care of it or paying lip service to occupational retraining for displaced workers. When this process turned into a populist political storm, most Americans, especially elites, were taken by surprise.
We now know the outcome: the rise of Trump’s MAGA movement and the decline of democracy. Ignored by democratic institutions for two generations, workers without a college degree lost hope. When given a chance, they rejected what they have come to regard as a corrupt elite that has used false scientific arguments to justify the policies that harmed them. From their perspective, if the past four decades are what “progress” looks like, they have no use for it.
It isn’t easy to estimate the number of people sympathetic to this point of view, but we can try. In my forthcoming book, Private Power and Democracy’s Decline: How to Make Capitalism Support Democracy, I arrive at two figures. One is the 40 million Americans whose economic conditions were directly affected by the job displacements of the last half-century. This includes workers, their family members, and extended family who experienced declining living standards. It also includes local workers and family members who lost their jobs in declining regions, owing to the same forces.
The second figure consists of the first group, plus workers without college degrees who have lost faith in the possibility of upward mobility in America for those who work hard. My estimate is 110 million Americans, with the difference of 70 million comprising a large number of workers, including young ones, who are concerned about their future. They reflect the high and rising anxiety in the American labor market about the potential impact of future technologies, particularly AI, which may also threaten the jobs of educated people.
These estimates include elements of the various culture-based anti-democratic forces (such as fundamentalist religious groups and various racist and extremist movements) that have always been present. Their small number meant they could never win elections. But when combined with workers who considered themselves the economic victims of liberal democracy, they achieved a critical mass.
This is what Trump did when he formed the MAGA coalition in the 2016 election. The implication is that cultural factors, though exploited by politicians to attack their opponents and promote their own agenda, do not explain the rise of MAGA. Their marginal contribution certainly made a difference in 2016 and 2024, but the main force advancing MAGA is the large number of workers without a college education who turned against liberal democracy.
The forces driving the decline of democracy in the US are evident in other countries, but vary with local conditions. In particular, the severity of democratic backsliding depends on the extent of countries’ policy efforts to help workers cope with the impact of major economic changes. Scandinavia, Germany, and Japan present examples of such an explicit policy effort.
Saving Democracy
We can have democracy or a free-market economic policy, but we cannot have both. The restoration of democracy requires achieving two central goals: The first is to suppress private power and eliminate the extreme economic and political inequality that has turned the US into an oligarchy. The second is to ensure that the benefits of innovations and economic growth are more equally shared, so that no group is left behind and forced to pay the price for gains enjoyed by others.
The good news is that rising market power and the high economic and political inequality that accompany it are not inevitable. Policy reforms can reverse it. The New Deal era demonstrated that active antitrust policy and enforcement can prevent large firms from acquiring small ones, and that a combination of antitrust and taxation can hold market power in check.
A strategy for controlling private power can be broken down into five essential reforms. The first is to update the Sherman Antitrust Act so that it states explicitly that public policy aims to control market power while preserving the incentives to innovate. Today’s antitrust policy has been restrained by legally conflicting arguments about the act’s intent.
Second, we need to prevent technological concentration by tightening restrictions on acquisitions. Technological concentration is as anticompetitive as concentration in product marketing, since both lead to monopolization. Beyond some specific minimal size that varies by industry, acquisitions that result in higher technological concentration should be prohibited.
Third, patent law should be reformed to prevent firms from using intellectual-property protections as a strategy to build market power. We should strengthen the novelty requirement for patents and distinguish between truly innovative primary patents and secondary patents whose description depends on a primary patent. Secondary patent protections should be granted only for half the life of primary patents.
Fourth, taxation must be viewed as a tool to counter private power. The corporate income tax rate should rise to 45%, and the top personal marginal income tax (above $1 million per year) should be increased to 60%.
Lastly, policymakers should eliminate legal restrictions on unionization, while also requiring stringent public audits of unions’ financial accounts and governance to prevent corruption. Since unions strengthen workers’ agency and help to improve the balance of power in the market, they also advance the second policy goal: leaving no one behind.
This brings us to the second component of democratic restoration: more equal sharing of the benefits of technology and growth. This means that America needs a new policy approach toward innovation and growth that prevents massive numbers of people from losing their livelihoods whenever a significant technological change occurs. The prevailing free-market approach is promoting such outcomes, when policymakers should be ensuring that winners share some of their gains with those who lose out.
Again, we can break the solution down into its components. For starters, the federal minimum wage should be raised to $15 and benchmarked to the consumer price index. Going further, the US should establish a federal right to livelihood restoration. Such a policy means that each worker displaced by an economic or market development that has been supported by public policy should be guaranteed restoration of his or her family’s livelihood.
Support would take the form of fully subsidized retraining, retirement funds (if retraining is not feasible), income to replace lost wages while being trained, medical care in the transition period, moving costs (if needed), and social services to preserve family life. Such policies are standard in Scandinavia, Germany, and Japan, with variations among countries. The program would be financed through taxation on newly introduced products and technologies.
The US should also introduce a subsidy to promote the invention of easy-to-operate and easy-to-maintain AI-based products and services, thus creating more advanced technology jobs that do not require college degrees. No-cost training and skill-development programs would also make it possible to expand the range of good jobs available for workers without college degrees. This requires investing more in trade schools, community colleges, and apprenticeship programs.
Cooperation between labor and management is essential. Given the complexities of current and anticipated technologies, collaboration would be more constructive and would lead to higher productivity. With a tax-financed livelihood-restoration policy in place, firms would have greater freedom to adjust their technology and labor force, and this economic flexibility would ultimately benefit employers and workers alike.
Trump’s increasingly brazen lawlessness highlights the urgency of the challenge that Americans face, as oligarchy consolidates its grip on the US. If we want a just democratic society, we must confront private power and the monopoly profits that feed it. True, much will have to change to bring to power a coalition that will restore democracy. But such a change is becoming inevitable because the Trump administration will not improve the lives of the workers who brought it to power.
