Successful Entrepreneurs Make the Rest of Us Richer

Back on December 28, I shared four charts for the explicit reason that I wanted everyone to understand that average living standards in the western world have skyrocketed over the past few centuries.

I could have used that data to clear up myths about “robber barons” or “sweatshops,” but I had a more modest goal. I simply wanted to show that it’s possible for all of us to become much richer if we give the economy enough breathing room.

And that means policy makers should focus on growth rather than inequality (especially since the policies to reduce inequality generally lead to less prosperity).

Some pundits don’t grasp that essential point. Christopher Ingraham of the Washington Post groused in a recent column that Jeff Bezos and Elon Musk became much wealthier in 2020.

Billionaires as a class have added about $1 trillion to their total net worth since the pandemic began. And roughly one-fifth of that haul flowed into the pockets of just two men: Jeff Bezos, chief executive of Amazon (and owner of The Washington Post), and Elon Musk of Tesla and SpaceX fame. …the two men increased their net worth by a staggering $200 billion last year, a sum greater than the gross domestic products of 139 countries. …two men amassed enough wealth this year to end all hunger in America (with a price tag of $25 billion, according to one estimate) eight times over… The evident difficulty of getting billionaire wealth to trickle down to everyone else is a challenge for policymakers in our new gilded era.

Notice, specifically, that Mr. Ingraham ponders the “difficulty of getting billionaire wealth to trickle down to everyone else.”

What he apparently does not understand is that the rest of us don’t lose money when people like Bezos and Musk become richer.

Indeed, it’s far more accurate to say that they actually created wealth for the rest of us.

If you don’t believe me, perhaps you’ll be convinced by Professor William Nordhaus of Yale, who authored a seminal study back in 2004 that estimated producers only capture a tiny slice of the wealth they create for society.

The present study examines the importance of Schumpeterian profits in the United States economy. …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 miniscule 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. …Using data from the U.S. nonfarm business section, I estimate that innovators are able to capture about 2.2 percent of the total social surplus from innovation. This number results from a low rate of initial appropriability (estimated to be around 7 percent) along with a high rate of depreciation of Schumpeterian profits (judged to be around 20 percent per year).

By the way, Professor Nordhaus won the Nobel Prize for his work on climate change, is affiliated with the Brookings Institution, and he supports a carbon tax. So he’s not some fire-breathing libertarian with a mission of defending capitalism.

He simply crunched the data and found innovators produce far more wealth for society than they do for themselves.

In a 2018 article for the American Institute for Economic Research, Professor Don Boudreaux of George Mason University elaborated on the implications of the Nordhaus research.

…each innovator would surely like to capture a much larger share than 2.2 percent, the robust forces of market competition oblige even the most successful of innovators to give the bulk of the benefits of their innovations to strangers in the form of price cuts, expanded outputs, and improved quality. …That’s quite a bargain for humanity! …Bezos alone is responsible for making his fellow human beings nearly $6.5 trillion dollars better off as a group. …Similar calculations can in principle be made for every entrepreneur who has ever succeeded in the modern market economy, from legendary titans such as Bezos and the late Steve Jobs to the far more numerous yet unknown – but as a group no less important – entrepreneurs who innovate in much smaller ways. …It’s as if strangers routinely approach us and, asking nothing in return, hand to each of us a stash of cash. …capitalism works magnificently.

Amen to the final three words.

Back in 2014, I explained that we should be thankful for rich entrepreneurs.

They made the rest of us richer as they became rich themselves. That’s a win-win situation.

I’ll close by citing the words of Joseph Schumpeter. He’s not nearly as famous as other economists such as Milton Friedman or Adam Smith, but I don’t know anybody who was more succinct and more accurate in describing the real-world benefit of capitalism.

P.S. Needless to say, the above analysis gets much weaker if companies such as Tesla and Amazon are benefiting from government cronyism.