Saturday, November 26, 2011

The Myth of the Entrepreneur

Paul Krugman made some extremely good points about inequality in his Thursday column “We are the 99.9%, saying that it’s the .01% that are the real trouble.  A handful at the top who have taken the lion’s share of the gains, and those pushing for more tax breaks for them are economically irrational, despite cries of “class warfare” whenever their class assault on everyone else is exposed
Krugman is one of our best economists, one who doesn’t buy into conservative woo about the magic of markets. He seems to understand that markets are limited social institutions, tools that might have uses for some purposes and not others, and their functioning depends on a context of public policy. But I would like to add to what he says.
Just as markets aren’t sacred, entrepreneurs aren’t gods. Krugman rightly criticizes the argument that massive salaries are the just due of so-called corporate “entrepreneurs,” who, the claim goes, are so innovative and creative that they personally add millions or billions to the economy. Even many liberal economists buy into this assumption, but it’s bullshit. Krugman is right to point out that most of the top .01% aren’t the entrepreneurs of right-wing myth :

For who are the 0.1 percent? Very few of them are Steve Jobs-type innovators; most of them are corporate bigwigs and financial wheeler-dealers. One recent analysis found that 43 percent of the super-elite are executives at nonfinancial companies, 18 percent are in finance and another 12 percent are lawyers or in real estate. And these are not, to put it mildly, professions in which there is a clear relationship between someone’s income and his economic contribution.
I would like to elaborate on his last point. Even if our captains of industry were all Thomas Edisons and Steve Jobs, disproportional economic rewards for added value would not be justified. I previously discussed how economic production is a cooperative effort and that most value-added is due to this cooperation (something that standard economic theory admits). Since you can’t pin down that cooperative added value to the efforts of any one individual, the only rational distribution is to share the it equally, not to allow the wealthy to extract most of it for themselves. 
This principle also applies to the common assumption that people with some great idea who start companies that then grow explosively deserve the bulk of the credit and pay once they’ve succeeded. Even if someone is very creative and innovative, their idea adds no value to the economy or to society if it stays inside their head. The idea is only the starting point. Once such a person starts a company to make that idea into an material reality widely available to consumers, they still depend on their workers to refine the idea, test it, build or contract out production capacity, establish and perfect production processes, produce the product, produce it in large numbers, market it, distribute it, manage and supervise these complex operations, and perform the administrative tasks that makes all of this possible. No one entrepreneur alone, no matter how creative or genius, adds real value to the economy without the help of thousands, sometimes millions, of other people. Jobs’s recent death not only showed us how creative he was, it also showed how much he depended on a team of other people to correct for his own mistakes and misjudgments: if Apple had relied on his genius alone, apps would never have been part of the iPhone and iPad ecosystems.
We often talk like the CEO of a company does all the work: “Steve Jobs gave us the iPod, iPhone, and iPad,” “Bill Gates made Windows,” “Frank Lloyd Wright built the Guggenheim.” But those sentences are just metonyms: a part is used in speech to represent the whole, in this case the CEO is the company’s public face. The reality is that no company is built by its top executive. It is built by all its workers together, the boss and all the rest, and whatever value it adds, and whatever legacy it leaves on society, is their combined effort. The CEO fills a real function as an administrator and decision-maker. But executives are hardly the over-glorified super-geniuses that they get portrayed as.
Thus Krugman is correct that our current rentier class of executives, financiers, and lawyers don’t deserve millions or billions, this isn’t just because aren’t real innovators; even entrepreneurs don’t deserve such wealth, because economic production is an inherently social activity.  
Additionally, not all value-added fits within the traditional monetary measures of economics. Our system elevates commercial and business activity over other values and activities, such as artistic and literary creation, scholarly work, caregiving, charitable effort, and importantly, domestic labor within the household. The economic system is set up with an inherent bias to reward certain kinds of material production and not others: that which can be organized into hierarchies in factories, farms, and offices operates under a system of financial rewards that is clear and codified by law. Other kinds of human activity that add value to society, such as education, art, or scholarship, either has to beg and struggle for patronage, rely on ever-shrinking public funds, or compel members of the profession to donate their efforts. Most domestic labor doesn't receive remuneration at all. A healthy society would have programs and mechanisms that reward non-commercial activities and values too.
Last, but not least, there are extremely good non-economic reasons to limit accumulations and concentrations of wealth: the preservation and advance of democratic self-governance. Basic justice and democracy require rather narrow boundaries on inequality. Large concentrations of wealth are also large concentrations of economic power, and once they become large enough they transform into political power too. American politics has always been dominated by the rich, but it sometimes gets worse than at other times, as during the Gilded Age and our current period, when we come dangerously close to outright oligarchy. And that is a form of tyranny that in modern times takes authoritarian and eventually fascist form, and we ought to be steering our ship of state away from such storms. 

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