The Warren wealth tax, innovation, and consumer surplus

By James Pethokoukis.

"Elizabeth Warren’s new campaign ad returns fire on American billionaires who’ve criticized her wealth tax idea. Her counter attack: “All we’re saying is when you make it big, pitch in two cents so everybody else gets a chance to make it.”

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.

Many wealth inequality worriers are probably unaware of this research as they fret how superentrepreneurs aren’t giving enough back to the society that paid for paving roads, building bridges, and educating kids. But as economist Donald Boudreaux write a few ago about the Nordhaus study:

His findings show that successful entrepreneurs have already, in the very process of succeeding in the market and becoming wealthy, increased the wealth of ‘society’ – have ‘given’ to others – far more than each successful entrepreneur has increased his or her own individual wealth.  This process of enhancing the economic well-being of countless others through successful market innovation is neither intended nor choreographed by government, but this fact doesn’t make the results any less real or significant.

Learn more: OK, billionaire? Actually, billionaires are OK. | Here’s just how big a risk Elizabeth Warren and The New York Times want America to take | Europe’s tech entrepreneurs tell America: 'Don’t be like Europe'"