Winner-Take-All Financial Incentives, Steve Jobs, and the Living Standards of Ordinary Americans

I’ve just finished Walter Isaacson’s fascinating book on Steve Jobs’ fascinating life. Among the many intriguing things about Jobs’ story is that it may shed some light on a particular interpretation of America’s economic performance over the past generation.

Between 1979 and 2007, inflation-adjusted hourly wages for Americans at the median and below were essentially flat. Household incomes in the lower half increased, but not very much. Both wages and incomes for many ordinary Americans trailed far behind growth of the economy. At the same time, the earnings and incomes of those at the top exploded (see here, here, here, here).

One story sometimes told about the 1980s, 1990s, and pre-crash 2000s links these two developments to offer an optimistic verdict on the evolution of living standards for America’s lower half. The story goes something like this: A winner-take-all economy reduces income growth for low-to-middle Americans. But it nevertheless produces a substantial rise in living standards for them. It does so by increasing financial incentives for inventiveness and hard work, which yields leaps in consumption that aren’t reflected in the price data used to measure changes in the cost of living.

To put it more precisely, the story has four parts:

1. Returns to success soared in fields such as entertainment, athletics, finance, and high tech, as well as for CEOs. These markets became “winner-take-all,” and the amounts reaped by the winners mushroomed.

2. For those with a shot at being the best in their field, this increased the financial incentive to work harder or longer or to be more creative.

3. This rise in financial incentives produced a rise in excellence — new products and services and enhanced quality.

4. These improvements haven’t been satisfactorily captured in the price index by which we assess changes in the cost of living. Watching Michael Jordan or LeBron James play basketball is a qualitatively superior experience relative to what came before in a way that isn’t reflected in the price of a ticket or of a cable TV subscription. Similarly, the Macintosh, iPod, iTunes, iPhone, and iPad are so different from and superior to anything that preceded them that what they add to living standards isn’t likely to be adequately measured.

I think there’s a good bit of truth to parts 1, 2, and 4 of this story. But I’m skeptical about part 3.

This brings me to Steve Jobs. Apple and its delightful, user-friendly, (eventually) affordable gadgets play a key role in this story. The question is: Would Jobs and his teams of engineers, designers, and others at Apple have worked as hard as they did to create these new products and bring them to market in the absence of massive winner-take-all financial incentives?

In the things-have-improved-more-than-the-income-data-make-it-seem story, the answer is “no.” The financial incentive is the critical spur to inventiveness and hard work.

But I don’t find anything in Isaacson’s account of Jobs that supports this view. Jobs himself seems to have been driven mainly by a passion for the products, for winning the competitive battle, and perhaps for status among peers. The satisfaction of achieving excellence and of beating one’s opponents appears to have been far more important than monetary compensation. Excellence and victory were their own reward, rather than a means to the end of financial riches. In this respect Jobs was little different from scores of inventors and entrepreneurs over the ages, or for that matter from Bill Russell, Larry Bird, and Michael Jordan.

The rise of winner-take-all compensation occurred simultaneously with surges in innovation and productivity in certain fields, but that doesn’t mean it was the cause of those surges.

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