By James Pethokoukis

The value from technological progress is so immense that it’s almost impossible to care too much about. And while this may seem intuitive when it comes to big medical or energy breakthroughs — such as HIV therapies and (hopefully) CRISPR or hydraulic fracturing and (hopefully) nuclear fusion — it’s even true of business innovation. I’ve often mentioned the fantastic paper from Nobel laureate economist William Nordhaus, “Schumpeterian Profits in the American Economy: Theory and Measurement,” where the scholar 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.” 

To see how that plays out in Corporate America, think about Jeff Bezos and Amazon. Although Bezos is worth some $200 billion, the company is worth more than 10 times more. Most of the value created by Jeff Bezos and Amazon doesn’t go to Jeff Bezos. Or look at it this way: As sketched out by the Amazon founder, the retailer created $300 billion of total value in 2020, with just 7 percent of that going to shareholders. And since Bezos owns less than 10 percent of the shares, the value going to the Amazon founder last year works out to about $2 billion, or less than 1 percent of total value created.

Given the benefits, innovation is almost inherently a “market failure” problem, or at least “social failure” problem, according to economist Robin Hanson: “While innovation is the main cause of growth in population, wealth, and satisfaction over time, the people who put in effort to create and diffuse innovations on average gain much less from their efforts than what everyone else gains. So they do too little.”

Maybe we still don’t understand enough about how progress works to really do more. It’s a theory Hanson considers but rejects in favor of an alternate:

Another theory, however, says that we know plenty of other ways to promote innovation, but just aren’t willing to pay their costs. Our world would be more innovate with lower levels of regulation, especially re new products and services. There’d be more innovation with less variety in products, services, languages, and cultures, and with more emphasis on capital and engineering over labor and design. We’d also have more innovation diffusion if we weakened our “not invented here” biases, and other biases to celebrate invention more than diffusion. And if we celebrated innovation more, compared to other accomplishments, such as activism. We know of many ways to make changes in these directions. But for all such changes we have sacred-like values that oppose them, and which we prioritize over innovation. The obvious but hard solution: change our priorities.

Of all these suggestions, celebrating innovators may be as important as any. How many kids are taught about the great inventors and entrepreneurs in American history, other than maybe dismissing the latter as robber barons or some such? That needs to change.

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