Monday, July 11, 2016

The Social Value of a Billionaire Entrepreneur, a back-of-the-envelope calculation

What is the value of an entrepreneur to society? Here is a useful way of thinking about this question. Suppose Steve Jobs didn’t really give us the smart phone. All he did was to get us there faster. Other people were working on the technology already. Apple’s employees and Apple’s competitors would have come up with the smart phone. But for Steve Jobs, we would have had smart phones of similar quality; it’s just that we would have gotten them a month later. That makes Steve Jobs’ contribution seem pretty trivial, right?

 Not so fast. Say the average smartphone plan is $40 a month, and market coverage is about half the population of the US. (A bit of Googling tells me that both of these assumptions are conservative, but you can change them however you like.) 330 million people divided by 2, multiplied by $40, gets you $6.6 billion (as the value of 1 months’ worth of smartphone coverage). That’s a very low-bar estimate of Steve Jobs’ contribution to the world, assuming he made this one innovation happen just a single month early. This $6.6 billion figure is low for several reasons. You also have to consider consumer surplus (the difference between what the consumer actually pays and the subjective value she places on the product); someone who spends $40 on a phone plan values the use of the phone at *at least* $40 per month. You also have to consider the value that Steve Jobs’ innovations add to his competitor’s products. (And at this point I’m running the risk of double-counting some of Mr. Jobs’ contributions with my imprecise language.) Apple came out with a product that does a bunch of stuff, and his competitors realize, “Oh, people want that? Okay.” Entrepreneurs don’t just create a product and sell it; they often create innovations that can be copied by competitors. Also, the change to smart phones created a lot of now-useless dumb phones, which the poorest people in the world were eager to purchase. This effect, the spread of technology to poor people, may be the most important contribution of entrepreneurs to society, but it’s a benefit that the entrepreneurs don’t capture in their personal earnings. By and large, entrepreneurs capture a small portion of their contribution to society. For society to purchase the contributions of these folks for a few billion dollars is often an absolute steal.  

(BTW, it doesn’t matter that the market penetration of ½ the population lags the release of the smart phone by a few years. I can simply stipulate that Steve Jobs’ contribution is “everyone with a smart-phone got it a month or so earlier than otherwise, thanks to Steve Jobs.” And it doesn’t meaningfully change the example to point out that a competitor beat him to the market with a similar product. For whatever reason people didn’t want that other thing but *did* want the iPhone, or a Samsung phone or some other similar phone. Don’t put too much stock in the $6.6 billion figure I came up with above; it’s the order of magnitude, not the exact value of the figure, that matters for the sake of my point.)

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