Worstall on Wednesday So, that favourite of mine and of Andrew Orlowski, Mariana Mazzucato, has been awarded a prize by the New Statesman in the field of political economy.
Given that her message is that government should be getting more of the pie, that's the sort of political economy you would expect the magazine to like. However, I find there's a gaping hole or two in her arguments. I'll concentrate on just one here: her insistence that all those tech billionaires becoming plutocrats is one reason why we need the State to be taking more of what is rightfully its own as a result of the basic research that those tech billionaires are implementing.
It's an argument that can sometimes be made. Those who lobby to create legislatively crafted and protected monopolies should, to my mind, have that wealth taken off them. That's preparatory to making sure that the State never makes such monopolies again, of course. I'm perfectly happy that when Ferdinand Marcos, the father of me old schoolmate Bongbong, was president/prime minister and carved up the Philippine economy that when he lost power he and his cronies then all lost some of their money.
But that's not quite what is being said here about those tech companies. What is being said is the following:
If policymakers want to get serious about tackling inequality, they need to rethink not only areas such as the wealth tax that Thomas Piketty is calling for but the received wisdom on how to generate value and wealth creation in the first place. When we have a narrow theory of who creates value and wealth, we allow a greater share of that value to be captured by a small group of actors who call themselves wealth creators. This is our current predicament and the reason why progressive parties on both sides of the Atlantic are struggling to provide a clear story of what has gone wrong in recent decades and what to do about it.
Well, yes, possibly, but for that to be true then those innovators she's using as her examples of “wealth creators” would have to be coining it off what they're doing.
So why have we accepted such a biased story of the state’s role when, as the story of Apple shows, it has done so much more than “fix” market failures?
As she's using Apple as an example, then so shall we. And much of her book is directed at her investigation of how all of the technologies that came together in the iPhone had originally been government-funded.
Now there's no doubt that Steve Jobs (and others) did coin it out of Apple. Jobs at death was supposedly worth many billions, not all of which came from Pixar (and he made a lot less than he could have done at Apple as he got caught up in that options repricing scandal. That cost him billions alone in Apple stock*). So, he got billions, yes. But is that a greater share of value? A great share even? Or is it more like a pittance?
Fortunately we've a wonderful paper to tell us the truth here. I've mentioned it before: "Schumpeterian profits in the US economy".
The present study examines the importance of Schumpeterian profits in the United States economy. Schumpeterian profits are defined as those profits that arise when firms are able to appropriate the returns from innovative activity. We first show the underlying equations for Schumpeterian profits. We then estimate the value of these profits for the non-farm business economy. We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.
So WHO is making bank?
These are Schumpeterian profits - that is, the profits from innovation. And the question is: what fraction of the total value created ends up sticking to the hands of the entrepreneurs? No, not the financiers, the stock markets (ie, your and my pension funds) but to the Steve Jobses of this world?
The answer is truly astonishing. It's under three per cent. Of course that's an average, but it's still an astonishing number. And given the size of that number it's really very difficult to say that Jobs's mountain of cash was “large”.
Finance gets a few more per cent of that value created but the vast majority of it flows through to us, the consumers. We might say it's just the satiation of lust that comes from having a new Jesus mobe. More formally, consumer surplus means that value we ascribe to whatever over the price we've had to pay for whatever. But we've also something much more with these new technologies: what we go on to do with them.
For example, with smartphones (and agreed, this is projection, it's all too new to really know yet, but we think the effect will be like that of mobiles a decade and more ago), we're pretty sure that there's going to be a boost to growth in the poorer countries simply because of the existence of smartphones. If it's the same boost we saw with the introuction of basic mobiles (opinion differs, all say it will have some, but more or less than mobiles, well, snarl at each other over that), then for every 10 per cent of the population in a country without a decent computer/internet network, we should expect growth of 0.5 per cent in GDP per annum.
That's simply a vast number. Say the developing world is 10 per cent of the global economy: we're talking about a $35bn addition to human income for every 10 per cent of the population that gets equipped - each year, for every 10 per cent. That Steve Jobs ended up with however many billions it simply a capital sum - a once-off - that simply pales into insignificance beside that.
Or, as we might put it, Professor Mazzucato doesn't seem to understand the economics of who gets the money from innovation - which isn't all that useful an attribute in someone who wants to tell us all about the economics of innovation, is it now?
By the way, no one over on this free market side of the argument is trying to insist that Steve-o deserved all that money, not at all. We're only making the observation that if we allow someone who has increased global growth rates so markedly to keep his pile of cash, then this will encourage the next person with an idea that might boost global growth rates to get on with it. This is not a moral nor justice "deserved rewards" style argument. It's a purely utilitarian one regarding incentives that induce people to try.
And yes, economics is is all about incentives and perhaps we might expect a professor of the subject to grok that. ®
Bootnote
* For those who don't know it, a company can issue options to anyone it likes at any price it likes. However, if those options are in the money at issue (ie, at a lower price than the market stock price) then the amount they are in the money must be an expense against the profit and loss statement of the company (and also taxed as income to the option recipients). But number of companies decided to issue stock options on, for example, 15 Jan, but price them at whatever had been the lowest price of the last 30 days. Apple got caught up in this, issuing in the money options which didn't go through the P&L and didn't pay income tax, Jobs then declined that award of options and that lost him - or rather, failed to earn him - a number of billions.
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