We show information technology (in short IT) caused rising monopoly power and rising income and wealth inequality since the 1970's. Our reasoning proceeds in four steps.
step 1 examines surplus wealth - the difference between firm’s wealth (equity and debt) and capital employed. Surplus wealth rose from -$0.59 Trillion in 1974 to $24 Trillion in 2015 which is 82% of total stock market value, reflecting sharply increased monopoly power 1974 - 2015. In step 2 we construct an index to measure proportion of firms transformed by modern IT and then demonstrate a strong association between firms transformed by IT and surplus wealth. Step 3 is theoretical, explaining why economic principles (and empirical evidence) predict IT enables and accelerates erection of barriers to entry and once erected, IT facilitates maintenance of barriers. Step 4 develops a model where firms have monopoly power. Three independent methods estimate the share of monopoly profits in output to be about 21%-23%, rising from 0 in early 1980s and reflecting the rising monopoly power. Using the model we prove that rising monopoly power lowers permanently equilibrium wage rate, investment, capital stock, output and consumption. In an economy with embodied technical change it also lowers the growth rate and natural interest rate.