Innovation works in mysterious ways

15th October, 2011

‘I’m surrounded by technology that looks good and works well because others followed where Apple led’

Was it salesmanship or engineering? Creativity or ruthlessness? Or was Steve Jobs simply gifted with vision and impeccable taste? Whatever the true source of his success, there was more than a touch of genius about Jobs. Even his side project, Pixar, was an astounding achievement. His first love, Apple, he built from nothing and then dragged back from the brink to make it the most valuable company in the world. No wonder so many of us felt sad at the news of his passing: surely he had more to offer.

I spend my life in front of a computer, and that life is better because of what Steve Jobs created. But here’s the strange thing: I’ve never owned an Apple product for longer than the two weeks it took to give up and send it back. (Apple’s customer returns department is impeccable, by the way.) My Macbook Air? Glorious hardware, but fussy software and a counterintuitive interface. My iPad? Beautiful – but also heavy, not too fond of wireless, and refused even to turn on until I did some most impertinent things to my Windows laptop.

Apple never made a penny from me. Why, then, do I say that Steve Jobs improved my life? It’s because I am surrounded by technology that looks good and works well because others followed where Apple led. Without Apple’s refinement and popularisation of the WIMP environment (window, icon, menu and pointer), how long would we have waited for a graphic interface from Microsoft – and how awful might it have been? It’s hard to imagine Bill Gates would have shown much interest in fonts without Apple’s beautiful typography. Beyond desktop computers, there’s a similar story to tell: I own an Android phone that owes more than a passing debt to the iPhone; I’m still waiting to own a Windows machine to rival the Mac Air; and every tablet in the world bows to the iPad.

To an economist the lesson is obvious: innovative profits are imperfectly appropriable. In more user-friendly language: when an entrepreneur bakes a cake, he only gets to keep a thin slice for himself. This is worrying if it discourages innovation, and in some industries innovators may be discouraged by the prospect that they must take big risks and sink big costs while society sits back and hopes to reap the benefits. Yet in the computer industry, plenty of entrepreneurs seem happy to take risks for the prospect of a thin slice of the social benefits.

A discussion paper published in 2004 by the economist William Nordhaus attempts to establish exactly how thin that slice is. Nordhaus reckons that innovators capture a “minuscule” 2.2 per cent of the total social benefit of their innovations. The other 97.8 per cent goes to consumers, partly because competitors soon catch on, and partly because no company, even a monopolist, can charge each consumer a price reflecting her individual willingness to pay.

Professor Nordhaus’s estimate can be regarded as, at best, an educated guess, partly because Nordhaus is only able to focus on innovations which lead to lower production costs and thus lower prices. If that’s the metric, developments such as the world wide web or penicillin barely register. Still, I think it’s safe to say that both Tim Berners-Lee (the web) and Alexander Fleming (penicillin) reaped far less than 2.2 per cent of the total value to society of their insights.

Was Jobs an exception? Chris Dillow of the Investor’s Chronicle, who called my attention to the Nordhaus paper, reckons that Jobs’s gift for branding and design helped Apple retain an unusually large slice of the innovator’s cake. Perhaps that’s true. Apple’s shareholders have certainly enjoyed a profitable few years. But the greater benefit has flowed to customers – and not only the customers of Apple.

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