"Arguing in my spare time" No. 22

by Arnold Kling

Sept. 18, 1998

May not be redistributed commercially without the author's permission.



Late in 1994, I was trying to sell some executives at a major bank on the idea of using the Web to attract mortgage customers. At that time, I had to give a pretty basic introduction to the Internet and how it worked. One of the executives kept coming back to the question, "But who owns it?" He would not buy in to my assertion that the Internet is primarily a set of standards and protocols that everyone can use. He was much more comfortable thinking of the Internet as a communication infrastructure owned by a company like AT & T.

More recently, I was having a "meaning-of-life" conversation with a young computer consultant who has developed some interesting software. At one point, he said,

"We live in a capitalist system. Either you work for somebody else or somebody else works for you."

This is not your father's definition of capitalism. Around 1980, when I was this consultant's age, the opposite of working for someone else was known as "unemployment," and there was quite a bit of it. Note that there is nothing in his definition that refers to capital in the sense of concrete, steel, machine tools, etc. Traditionally, what capitalists owned was what Karl Marx called "the means of production," which today we call plant and equipment.

This difference in the meaning of ownership is one of the components of the generation gap. Owners used to allocate capital. Now they allocate talent.


In old-fashioned capitalism as we thought we understood it, productivity gains come primarily from investment in physical capital. Individuals who spend less than they earn provide the financial capital that enables corporations to purchase physical capital. This in turn contributes to economic growth. The thrifty savers end up wealthy, due to their accumulation of ownership rights to this physical capital.

David Halberstam's book, "The Fifties," devotes a fair amount of space to describing the origins of some of the great business franchises that arose in that period, such as McDonald's and Holiday Inn. The builders of such businesses come across as having strong command of logistics (not unlike the generals who were successful in World War II), a feel for working-class and middle-class tastes, great self-discipline, and persuasive ability with banks in order to gain financial backing. One would not describe these men as highly-educated, well-read, or contemplative.

The characteristics of business executives and entrepeneurs are changing. Although I have not seen any data on the subject, my impression is that the proportion of business founders and leader with Ph.D's is dramatically higher today than it was in the 1950's. Even those without advanced degrees appear to be far more studious and analytical than their 1950's counterparts. No one believes that Bill Gates dropped out of college because he could not handle academic work.

Will the evolution of ownership be limited to the increase in academic skills among owners and executives? It may go further. Today, as my computer consultant understands, talented people who are employees earn less than talented people who are employers. What I want to suggest here is that this may be an accident of cultural history, rather than a long-run equilibrium.

Today, there are many ways to make money starting a business.

1. You can go public, generating wealth by selling shares.

2. You can sell your small business to a larger business.

3. Your business actually can make a lot of profits

It used to be the case that nearly every successful business was characterized by (3). In fact, without (3), it was very difficult to get (1) or (2). But in today's environment, all three methods seem to be working. In traditional economic jargon, there has been an expansionary shift in the demand curve for small businesses. The large rewards available to small business owners will serve to induce more people to start small businesses.

At the same time, salaries for technical workers have not adjusted to equilibrium levels, leading to the short-run "labor shortage." I have argued in a previous essay that this shortage reflects an artificially low wage rate.

If wages are too low, and the rewards of ownership are perhaps excessive, what do we expect to occur? Talented workers will leave their jobs to start new businesses. That is where the incentives lead.

A computer programmer earning $50,000 a year in the Dilbert sector can earn $100 an hour ($200,000 a year) as an independent consultant, often working on the exact same project for the same exact firm!

The point to make here is that there are other ways to equilibrate the market for talent. It is possible that the new equilibrium will involve much lower price/earnings ratios for companies and much higher salaries for talented employees than what we observe today. Dilbert-sector companies may come to realize that wasting their talented employees is very costly. Talented individuals will realize that "working for someone else" does not automatically put you at the bottom of the economic ladder.

In the short run, our economy is underpaying people as workers and over-paying them as entrepeneurs. In the long run, these pricing relationships may change. Eventually, the question of who gets paid a healthy amount to work in a business could be less tightly coupled to the question of who owns the business.