Power, skill & wealth

Does wealth flow to skill, invention and service to others - as neoclassical economists maintain - or is it instead a rent extracted by the powerful (pdf), as various heterodox economists claim?

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.

 - in crony capitalism (the only capitalism we have), profits go to firms that can use their connections to win juicy state contracts or protection, not necesarily to the most efficient. 

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.

Comments

[JamieSW]

Have you read 'Capital as Power' by Nitzan and Bichler? (http://bnarchives.yorku.ca/259/) Any thoughts?

[Zorblog]

I had long believed that neoclassical economics was right to ignore such considerations because they were marginal side-effects that could easily be eliminated with a bit of political will.
The financial crisis made plain clear that those effects are not marginal, and at the core of the system rather than on the side. Still, I thought neoclassical economics was naive (like Baylis).
Now I've started to believe that neoclassical economics is just here for justifying the balance of power (and it works!), very much like the catholic church successfully did for centuries.

[Rich]

It seems more likely this is someone whinging that they deserve to get paid for a rather minor innovation, someone who failed in competition with another company selling much the same thing.

Chris -- why don't you point out that patents are just government granted monopolies, often on the obvious or hardly novel?

[Luis Enrique]

I dunno. Mainstream economic encompasses public choice, models of lobbying etc. the idea of politicians giving cosy contracts to supportive corporations is hardly heterodox thinking. I agree thought that too often some economists over emphasise ability, which I guess is what it boils down to.

P.s. if the banks had not been bailed out, do you think more or fewer innocent workers would have lost their jobs in the recession? Do you really think banker power is the main reason the banks got saved when HMV doesn't?

[Alex]

You could actually argue that patents don't even benefit powerful companies, never mind small inventors: Bessen and Meurer calculate that the cost of patent litigation exceeds the profits from patent licencing for all but the pharmaceutical industry. (http://arstechnica.com/features/2008/07/book-review-7-08/) So it's the lawyers (and 'patent trolls' who are winning.

Naturally this is disputed:
http://gametimeip.com/2012/07/30/patent-scholars-challenge-bessen-meurers-bogus-29-b-npe-costs-figure/

[Walt French]

Stateside, anyway, the cozy relationship between the Federal Reserve Bank and the industry has been sanctioned for about a century now.

It was NEVER popular, and only a weird compromise allowed it to come into being. Populists — or more accurately, I claim, “demagogues” — ran hard against the US Fed in the last presidential campaign.

Certainly the Bush and Obama Administrations claimed, consistently with Orthodox Economics, that a collapse of the banking system could have shut down the entire economy, and that even a small probability of such a collapse was enough to justify the efforts they undertook.

Imagine going about your day with the ATM's all bearing “Sorry! Temporarily Not Available!” notices on-screen, and your merchants all posting “Cash purchases only” signs. My personal opinion is that the risks of this scenario were quite a bit higher than the maybe 1% that would've justified the undertaking.

Not that we should love it, but we might look at it as other than a power play.

[aragon]

Intellectual property is not just non-rival. but copyright and patents makes it excludable.

A combination of anti-rival but excludable is a licence to print money for the most sucessfully marketed products (marketting trumps merit e.g. movies).

Anti-rival and non-excludable become public goods.

Bill Gates ?

Bill Gates wrote a Basic (computer language BASIC) Interpreter.

http://spectrum.ieee.org/computing/software/did-bill-gates-steal-the-heart-of-dos/0

"Because DRI was late in porting its system to that processor, SCP hired programmer Tim Paterson to create one. It called this system QDOS, for “Quick and Dirty Operating System.” Gates bought the rights to QDOS for $75 000 and hired Paterson to modify it into MS-DOS; that’s what he licensed to IBM for its PC as PC-DOS."

Microsoft
Not bad for 75,000USD and a contract with IBM, and better marketing than IBM (Windows vs OS/2).

See also:

http://www.cringely.com/

http://www.cringely.com/2013/01/31/accidental-empires-reboot/

Chapters 2 and 3 are online

[ricketson]

To extend the prior comments on the bank bailout, I agree that the bailout was primarily about maintaining core infrastructure for the status quo, and also that the bankers have extracted rents due to their control of that infrastructure.

We may have been better off to allow the banks to collapse, but it would have been a radical move and the mainstream opponents of the bailout seem to deny the radicalism of their preferred policy.

[Jeremy Scott Wings]

Reliable supplier, best source and discount price.

[Tammly]

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.

And speaking as an inventor, I can attest that that's exactly as it is. A shame perhaps, but the stark and unvarnished nature of human society. This article omits that other aspect of the subject, immorality and criminality which also is a large factor in the mix that is 'Power, skill and Wealth'.