In many cases, it's hard to say because the two are very similar. Skill is scarce and scarcity is a source of power, so returns to skill and returns to power are often the same thing. For example, if you want an iPod as distinct from other MP3 players, Apple has power to charge a premium price. But this power lies in an ability to design a desireable product.So, are Apple's profits a return to invention, or to power?
Luckily, we have a case to adjudicate between the two hypotheses.Trevor Baylis, inventor of the wind-up radio and undoubtedly a great contributor to human well-being, is potless:
Due to the quirks of patent law, the company he went into business with to manufacture his radios were able to tweak his original design, which used a spring to generate power, so that it charged a battery instead. This caused him to lose control over the product.
This vindicates the heterodox economists against the neoclassicals.
You might object that Baylis was naive. Maybe. But an economy in which people distrust each other will be a poorer one, and one in which everyone bones up on the details of the law is one in which they have less time to devote to their true specialism, with the result that we have less division of labour and lower productivity.
Of course, drawing strong inferences from Mr Baylis's case alone would be committing the journalist's fallacy. But his case is not wholly atypical.William Nordhaus has estimated that "only a miniscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers". This suggests Trevor Baylis is more typical than Bill Gates.
And this is not the only way in which wealth flows to power rather than ability, at least as widely understood:
- Why did bankers get a bail-out when HMV staff didn't? It's because bankers had the power to persuade the state that hand-outs were necessary to stave off disaster, whereas HMV workers didn't.
- Moshe Adler has shown (pdf) that relatively ordinary people can get superstar-style incomes if they go viral and get widely talked about: think of Dan Brown, Kim Kardashian, and linkbait journalists. The power (or luck) to get yourself talked about matters more than talent.
- CEOs' high pay is the result of power - an ideological structure which presumes that the ability to manage companies is a scare talent requiring huge "compensation", and a power to extract rents.
- Where skill can only be revealed by working with expensive resources - such as film actors or CEOs - employers will often prefer the known mediocrity to able people who lack the power to prove their talent.
We have enough cases here to show that power matters more than neoclassical economics would have us believe. In many cases, the idea that financial success is a reward for ability and service to others is just a fairy tale.