Entrepreneurs and "giving back"
By Arnold Kling
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?”