Steve Jobs: Innovator

Joseph Schumpeter, in his book, The Theory of Economic Development, makes the distinction between invention and innovation.  Inventions are scientific and technical discoveries whereas innovations are the result of entrepreneurial actions that bring new products and production processes into the economy.  You can’t use an invention.  But you can use the innovations that are developed from inventions.  Innovation  does not necessarily follow from invention.  Entrepreneurs must take those inventions and use them to develop new products and production processes.

Steve Jobs was an innovator.  He didn’t invent the technological advances that went into his products, but he found ways to use the inventions of others to bring products to market that consumers wanted, and his entrepreneurial innovation resulted in benefits for everyone.

As one measure of the value Jobs created, the company he and partner Steve Wozniak started from nothing now has a market capitalization of $354 billion, the day after Jobs died.  But that is only a partial measure.  The users of Apple products reap the benefits of Jobs’ entrepreneurial innovation every day, as do the users of competing products.  Jobs jump-started the personal computer industry with the Apple II, he redirected the way recorded music is distributed with iTunes, and more recently the iPhone and iPad have created whole new classes of products.  The many competing products now in those markets would not be there if Jobs hadn’t created those markets to begin with.

Jobs was an entrepreneur without equal, but he was not the only entrepreneur in the economy.  On a smaller scale, the entrepreneur who opens a new restaurant or auto repair shop, the person who starts a lawn care service, or opens a commercial website, are all looking for opportunities to offer goods and services to people that customers will value more than the cost of producing them.  When this happens, the entrepreneur makes a profit.

Profit is the difference between the cost of production and the value of the output produced.  The more profit an individual or business makes, the more value that person or business is creating for the economy.  In a market economy, people earn their incomes by producing value for others.  So, it is worthwhile to look at Senate Majority Leader Harry Reid’s proposal to place a surtax on incomes over $1 million.  For most people, the proposal is abstract in the sense that they don’t know many people who make $1 million a year, nor do most people see any possibility of making that much themselves.  But with Steve Jobs’ passing, one way to personalize that proposal is to note that it would be a tax on people like Jobs.

In other words, the tax is an attempt to make it less profitable to do what Jobs did.  Although most entrepreneurs will not operate at the same level as Jobs, entrepreneurship at any level involves taking risks.  If tax policy reduces the reward to risk-taking, the economy will be less entrepreneurial.  And because entrepreneurship is the engine of economic progress, economic progress will slow.

Steve Jobs was such a remarkable person that the world hasn’t seen many innovators of his stature in its history.  Meanwhile, his government is trying to design its tax policy to make it even more unlikely that another entrepreneur like Steve Jobs will come along.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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