Arnold Kling  

Entrepreneurs and "giving back"

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Tim Worstall comments on a paper by William Nordhaus on the private vs. social returns of innovation.


As a factor of production, the entrepreneur class (and yes, we have been considered for decades to be a factor of production to go alongside the more traditional land, labor and capital) is getting a raw deal and it's about time that the world in general realized it. What I really want is a more robustly Anglo-Saxon two-fingered (perhaps middle-fingered for the colonial cousins) response to criticism of the wealth that the more successful among us accumulate. That pitiful 2.2% of the wealth that we create.

What Nordhaus found is that of the total gains from innovation, only 2.2 percent accrue to the innovating firms. The rest is enjoyed by consumers and other producers. Thus, Nordhaus argues, "Schumpeterian profits" (the profits from creative destruction) are small for individual firms relative to the benefits to society at large.

I am not sure how startled I am by Nordhaus' result. Corporate profits are only about 10 or 15 percent of GDP to begin with, and a lot of that goes to the return on "ordinary" investment in plant and equipment. So you would not think that there would be a whole lot left to be counted as returns to "innovation." I cannot say that I follow how Nordhaus works his way to the 2.2 percent number, but I doubt that you would want to carve that figure in stone. My guess is that it would be more appropriate to cite a range of estimates, but I do not know what that range ought to be.

UPDATE: More , from Tyler Cowen, on international innovation spillovers.

For Discussion. Why do people praise entrepreneurs who "give back to the community?" When people compliment me like that for my volunteer teaching, I respond, "What makes you think I took something in the first place?"


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TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/138
The author at BUFFALOg in a related article titled Giving Back writes:
    A friend of mine doesn't patronize a certain neighborhood bar because the owners don't "give back" to the community meaning that they don't sponsor softball teams, make a big show of contributing to local charities, or provide a day of free food for ... [Tracked on October 9, 2004 12:57 AM]
COMMENTS (8 to date)
Jason Ligon writes:

Ayn Rand said many things I don't agree with. Her obervations about the generally destructive nature of altruism are bulletproof, though. We live in a time when our evolved intuitions of the 'right thing to do' for the tribe were invalidated centuries ago by the wealth producing social structures we have since adopted.

A.West writes:

You've got that right "Give back to the community" is about as vicious a concept as you can get. First, as you point out, it presumes that entrepreneurs took something in the first place. Second, if people understood the nature of capitalism, they'd realize that when the entrepreneur was creating the values that produced his wealth, that's when he was providing the most benefit to the well being of "the community." The charitable stuff is usually a step down in terms of utilitarian benefit, and is usually a consumption-oriented sort of activity, and may well be devoting resources to less than their highest uses. It's good for someone to spend their time advancing a cause that's of interest to them, I just think it's terrible to characterise it as paying off an upaid debt to society.
A donation to the Ayn Rand Institute is one of those few charitable efforts that would most likely provide a very strong and positive return on investment for those wanting to reinvest in the "community".

Brad Hutchings writes:

I agree fully. There is a need to assert that contribution is not a function of guilt, nor of humility, but of choice. The guilt/humility expectation is a pretty universal notion, spanning the religious right, the Catholic center, liberal Jews, and the secular left.

But let me play devil's advocate... What did you do for the community before you were successful? If nothing or little, then you're in the boat with a lot of successful people who really do think (or give lip service to the the thought) that they are "giving back". I have a friend who has been very successful who tells me it's his Christian duty to volunteer and give money. OK, whatever. He seems happy. No harm in that, except in creating expectations for the rest of us, but don't we all contribute to that particular perceived negative externality in everything we do?

I think you need a less confrontational answer because your answer talks past the "give back" people right through their cores. Something like...

I do this because I enjoy this. I spent X years "working hard" (key election year catch phrase) Y hours a week to produce the wealth I now have, employ Z people, turn W of them into wealthy entrepreneurs, and create a product that revolutionized the way people do whatever. That was a lot of fun, but in this stage of my life, I am enjoying working with kids and I don't have to worry about the financial end of it.

Maybe throw in something about legacy... I hope to be remembered both as a doer and a real mencsh. Wanting a positive legacy seems to be a universally acceptable form of selfishness, strangely enough. Perhaps because it subtlely tips a hat toward things that endure beyond our earthly existence, even if they are non-spiritual (i.e. material or people-based).

Boonton writes:

Let me play devil's advocate here against the Ayn Randers. How many people who 'strike it rich' did so because of exceptionally hard work? I'm not talking about only being successful but I'm talking about ending up far on the tail end of the bell curve.

Take Bill Gates. Is luck really no element of his success? I suspect that in a million other alternate timelines Gates was maybe a modestly successful businessman, maybe making a few hundred thousand a year. There was an element of luck in being at the right place at the right time to make him a billionare.

Is he really that different than the hunter who went out in the primitive tribe and stumbled upon the mammoth while the other hunters found only rabbits?

Bill Fellers writes:

Boonton makes a good point about Bill Gates. The guy bought QDOS from some smart programmer for something like $50,000 and turned it into billions. He's a smart and ruthless business man, but there was a large element of luck in his rise. Nonetheless, I have a lot more respect for Gates than all the lazy losers I new back in the welfare community where I grew up. Why the hell the liberals lionize these people I'll never understand. These people are selfish takers, not givers. They are the worst socialists of all. The take and take and take and never contribute anything to the advancement of the species. I suspect that most liberal pols don't really know any poor folks well, or they are just using them for political cannon fodder.

Jason Ligon writes:

The Gates argument Boontown makes reflects the bias of the engineer. "Doing something important" may sometimes involve the creation of a good or service from scratch, but that is not to say that everyone else is free riding or just got lucky. A very great many advancements are made by those who recognize potential and take the risks necessary to change something raw into something phenomenally useful. Who was the guy who sold DOS to Gates for $50,000? What was DOS doing when he sold it for so little? Potential is all around you, and it is not luck that realizes it.

Additionally, I don't follow the argument "X got lucky, therefore X owes the less fortunate." You are in Vegas at the roulette wheel. You hit a single number and color on your first bet, colleting a huge payout. How much do you owe the guy next to you that has been at the wheel all night and only lost? My point here is that the word 'owe' is used incorrectly in this context. What we are getting at is the idea that it would be nice if the wealthy helped other people become more wealthy. It is not at all clear to me that the best way to do that is by direct charitable contributions as opposed to investments.

Boonton writes:
The take and take and take and never contribute anything to the advancement of the species.

Gee, now I'm obligated to 'advance the species'? What exactly does that mean? How is that different than 'giving back to the community' except for the social darwinist flavoring?

A very great many advancements are made by those who recognize potential and take the risks necessary to change something raw into something phenomenally useful. Who was the guy who sold DOS to Gates for $50,000? What was DOS doing when he sold it for so little? Potential is all around you, and it is not luck that realizes it.

Additionally, I don't follow the argument "X got lucky, therefore X owes the less fortunate." You are in Vegas at the roulette wheel. You hit a single number and color on your first bet, colleting a huge payout.

Let's go back to the first comment here by Jason Ligon. The 'giving back to the community' meme is said to have developed from our tribal past. There's some sense in that. Imagine every day the hunters go out in all directions. There's an element of luck in which hunter will stumble upon prey. That being the case it makes sense for all the hunters to share the food at night time. Of course, this is simplistic. Hunting takes great skill and I'm sure primitive tribes developed ways to reward skilled hunters.

Now flash foward to our new modern age, so divorced from those primitive ancestors of ours. Is every successful person really the result of hard work and skill? Is Bill Gates really 100 times smarter than Steve Jobs? 100 times harder working? Willing to take risks 100 times more often?

I'm not saying that the Bill Gatess of the world have done nothing more than win a lottery. I think they are usually above average in many respects. That's why I said that in many alternate universes I'm sure alternative Gates's probably make above average income & are generally successful...but its silly to say that dumb luck has been entirely banished from our rational age.

triticale writes:

Microsoft was already a powerhouse years before MS-DOS. Their first product, MS BASIC for the ALTAIR, was built on code Bill Gates had himself written.

Tim Paterson wrote QDOS for Seattle Computer Products as an adjunct to their 8086 board for the S-100 bus, which was the product they thought to make money from. He has since gone to work for Microsoft, and has earned far more than $50,000 there. I have earned far more because of the environment M$ created than they ever got from me or from my employers for software on the computers I use.

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