11/25/2019

The Warren wealth tax, innovation, and consumer surplus

"Let’s put aside the reality of the eye-roll-inducing bit about the “two cents.” What Warren is suggesting is that building a business mostly helps the builder. Everyone else, maybe not so much. That sort of thinking always reminds me of the great paper from Nobel laureate economist William Nordhaus, “Schumpeterian Profits in the American Economy: Theory and Measurement.” In it, Nordhaus takes a stab at determining who really gains from the value generated by innovation, the producer of the innovation or the consumer of the innovation. 

His findings: “We conclude that only a minuscule 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” And by “most,” he means almost all of the benefit with innovators “able to capture about 2.2 percent of the total social surplus from innovation.” Makes a rough sort of sense when you think about it. Consider what Jeff Bezos is worth — a lot — versus the value generated by his nearly trillion-dollar company — a whole lot more."