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.)


  1. Maybe these are naive objections, because I don't know any economics, but it seems like there are a couple of key things wrong here.

    - didn't many people work to make that one-month advance happen? The marketing people came out with a campaign a month early; the engineers finished designing and arranging the components a month early; the devs finished the os a month early; so on and so forth.

    - Disregarding the objection above, is Steve Jobs really contributing $40 per customer-month of value to the world? It seems more like he's generating $40 per customer-month of revenue for Apple. Revenue for Apple is not the same as profit for Apple, much less overall utility for the world economy.

    - Don't a lot of high-paid people fuck up really bad all the time? Is there any reason to suspect that paying them more would make them less incompetent?

    Thanks for your consideration!

  2. Fair questions.
    Yes, many people work to make the once-month advance happen. But if we stipulate that *but for* Steve Jobs the world would have gotten smartphones one month later, than one extra month of smart-phone use is Steve Jobs’ unique contribution. He should be paid something comparable to “the value to society of one month of smart-phone use.” One can imagine Apple trying to choose a CEO who will add one month’s worth of smart-phone profit to their bottom line and paying him something between zero and that value. And you can imagine smart-phone users collectively “hiring” Apple to make smart-phones come to market. For the various reasons I mentioned in the post, I think “one month’s worth of smart-phone use” is a low-ball estimate for Jobs’ value added.
    Admittedly my example was a little bit sloppy. The $40/month is not the value of a months’ worth of smart-phone use. You’d want to somehow measure the consumer’s and producer’s surplus. Maybe the consumer really values a $40/month plan at something like $50/month, and it only costs the producer $20 to produce a $40 monthly service. Adding the surpluses in this (contrived) example gets $30 ($10 consumer surplus + $20 producer surplus, aka profit). I’m not married to any particular figure here, but I’m pretty sure that the total surplus is some large fraction of the purchase amount.
    Regarding screw-ups, this is actually an argument for paying out big to get the right person. I argue in another post: Perhaps the very best possible CEO has a 1% chance of completely destroying the value of a billion dollar company, but the various runners-up have a 2% chance of doing the same under their tenure. It’s worth paying $10 million to get the top guy *rather than the runner up* on this consideration alone. When managing highly valued assets (like a multi-billion dollar company) small differences at the top justify very large salaries and bonuses.