Entrepreneurship and inequality

So I was reading Felix Salmon’s account of a debate here in Toronto between Paul Krugman and Larry Summers. I guess it was supposed to be an insider-outside type divide. I was struck by this passage.

Summers also tried to defend inequality, at least in part, by saying that “suppose the United States had 30 more people like Steve Jobs” — that, he said, would be a good thing even as it increased inequality. “So we do need to recognize that a component of this inequality is the other side of successful entrepreneurship; that is surely something we want to encourage.”

Now there is nothing new in this view. It is an argument for inequality that reminds me of Ted Baxter (from the Mary Tyler Moore Show) who intended to have six children in the hope that one of them grows up to solve the population problem. The inequality version is that we accept inequality in the hopes of getting the fruits of entrepreneurship.

So no one disagrees with encouraging entrepreneurship. And we could also speculate on whether money and wealth buy it — the Steve Jobs case is not a case in point here for the money crowd. But when we link it to inequality in this way we are asking whether the poor would be supportive of being without so that entrepreneurs receive a reward. In a strict economic sense, we are asking whether the poor (or middle class) are happy outsourcing knowledge creation and are each willing to pay a bit to see that happen.

Seen in this light, the problem of inequality is a design problem. This is something that Jean Tirole and Glen Weyl have recently investigated. They ask a related question: when is it a good idea to confer entrepreneurs with market power (as a reward)? The answer turns out to be, when the government does not know much about the nature of demand for innovative products. In this world, by exposing entrepreneurial rewards to what they can get through monopoly pricing, we screen for innovations that maximise the gap between innovative benefits and innovative costs. The implication here is that if we outsourced innovation to creative geniuses, we would do it in a way that allows them to charge high prices.

But does that carry over when there is real inequality? Let’s face it, the actual products Steve Jobs produced were not priced for the poor. The best we can say is that when they were imitated the poor received some benefits (which may also be arguable). So is it really the case that poorer people would be willing to be taxed more (by government or through monopoly pricing) in order to bring out more people like Steve Jobs? Instead, the Steve Jobs argument is surely one for a lateral wealth transfer from those with wealth — innovators or not — to be more concentrated amongst those who innovate. It is inequality in talent and skill and its mismatch to wealth that drives the argument not inequality in wealth.

9 Replies to “Entrepreneurship and inequality”

  1. I’m not sure you’re completely accounting for the reach of the products that Jobs helped develop. For example, some iPod variations sell new now for US$50 — hardly priced for the wealthy, but arguably not priced for the poorest in society. In my experience, however, a lot of those products don’t fail within the first few years, which leads to a good possibility of resale. That, coupled with technology’s inflation-busting pace of development, could make a good number of Apple’s innovative products available to most above a subsistence level (and even those might be gifted one).

    Of course, this doesn’t affect the main thrust of your argument, which was an interesting way to view the disparity.

  2. What a stupid quip by Larry Summers. No one has a problem w/ Steve Jobs or Bill Gates becoming rich or with a neurosurgeon who makes a couple million bucks a year. It’s the guys running casinos (not generating any net benefit to society) making $10M/yer is what people have a problem with. What an idiot. The whole point is that were losing many of our best and brightest to economically unproductive work on Wall Street when we’d like to see more of them go to Silicon Valley, Austin, Rte 128, etc.

  3. Why are you so convinced that entrepreneurship is only guided by the prospect of being one of the lucky 1%?
    Let’s imagine a world where there is full transparency on salaries. Let’s imagine that some clever innovator develops an app that gives consumers an indicators of how unequal is the salary distribution of the manufacturer selling the gadget (scanning the barcode with your funky new iPhone for example). This way consumers could choose to buy from the manufacturer that shows the least unequal salary distribution (other things being equal).
    Now, are you sure that the rate of innovation in this economy is bound to be lower? Think about it carefully, starting perhaps from the dynamics in the labour market at all hierarchical levels …

  4. This defense of inequality seems to assume that people like Steve Jobs are driven entirely (or at least primarily) by the desire to get extraordinarily rich. In the specific case of Steve Jobs, and every other successful innovator I’ve met or read interviews of, this doesn’t seem valid. Take Linus Torvalds (the creator of Linux). While he no doubt makes a comfortable living, he willingly passed on millions of dollars he could have made from commercializing Linux because he was more interested in the social value of his product.

    I’ve never seen anything that would lead me to believe true innovators (e.g. Steve Jobs) would be less innovate if there was a little more wealth distribution…obviously not absolute wealth distribution. On the other hand, people who ARE driven primarily by greed, like the people in finance who chose that career path over something they really loved because they wanted to make as much money as possible, probably will be discouraged from their socially destructive behavior. Seems like a win all around.

  5. This old argument make the error to assume that DESIRE to become Steve Jobs is alone enough (assuming that the promise of unlimited material wealth is enough to instill such desire and ambition). There is also the question of capability and access.

    The whole point of reducing inequality is that you vastly increase the capabilities and access of the entire population.

    Let’s assume that in today’s world that 10% of young people have the upbringing, drive, financial flexibility, inherent intellectual gifts, and education to even have a remote shot at being a successful entrepreneur (much less one as big as Steve Jobs).

    The majority in today’s world don’t get a decent upbringing because both parents are so crushed from at least 50 hours of work that home cooked nutritious meals and proper parenting go out the window in favor of bad foods and the TV.

    Financial flexibility is gone because of general financial pressures plus healthcare, medical debt, and the costs of education, so who can take the financial risks to be an entrepreneur, even assuming you have to raise no capital?

    Most people don’t have the drive and would rather have a simple 9-5 job (if they can get one), and no amount of promise of future income will change that for most.

    Inherent intellect isn’t something that we can change, although proper upbringing and early education can spark curiousity that can blossom into increased intellect in adulthood.

    Education is, as mentioned, expensive, and even that isn’t as important as the other elements – just look at Steve Jobs and Bill Gates.

    So do we try to move the needle on entrepreneurship by increase the apparent drive and ambition a fraction of a percent, for the few who even make that cut? Or, do we improve the chances for a good upbringing, financial stability, intellectual development, and education for the masses?

    To me, it’s simple math. And the kicker is that to most people, the insane rewards scheme that we have now is irrelevant to most entrepreneurs from modest backgrounds. By the time they make their (b)millions they are happy to give back. They worked hoping for and expecting success, but not necessarily THAT level of financial reward, and they give back (Gates, Zuckerberg). They enjoy rising to challenges as much as anything else. That’s the mark of an entrepreneur.

    Contrast that with Wall Street titans, who ENTER the system in the beginning EXPECTING the lavish rewards. It’s their SOLE reason for doing so. They are the ones that are really fighting for the continuation of massive inequality, and they are the ones creating these false narratives as well.

  6. As we are seeing, inequality, even to such degree as we are experiencing now, takes money away from the middle class, the entrepreneur’s primary market, and shrinks that market. This lack of a market reduces the possibilities open to entrepreneurs, and discourages entrepreneurship. So inequality hinders growth and innovation and slows the technological advance of society. Inequality has grown to such a stage that any further increase in inequality will cause most people to become absolutely worse off.

    The banking ‘intustry’ has become a cancer on society.

  7. “But when we link it to inequality in this way we are asking whether the poor would be supportive of being without so that entrepreneurs receive a reward.”

    I don’t think this is Summers’ argument at all. Rather, it’s a combination of the independence of irrelevant alternatives (why care if there’s a multibillionaire like Jobs) with Pareto Efficiency (every member of society is weakly better off by the existence of Steve Jobs); or at least compatible with Utilitarianism (on average, we’re better off by the existence of Steve Jobs). Summers’ argument doesn’t require that the poor subsidize the rewards for the rich, unless you make the big assumption that the orginal position is that rewards are already there, and that the multibillionaires are appropriating it.

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