Tag: Return to entrepreneurs

A View of the Wealthy in a 1930’s Mystery Novel

Image generated by ChatGPT

The period between the two World Wars—the 1920s and 1930s—is often called the Golden Age of Mystery Novels. Authors such as Agatha Christie and Dorothy Sayers in the United Kingdom, and Ellery Queen (pen name of cousins Frederic Dannay and Manfred B. Lee) and Mary Roberts Rinehart in the United States, topped the bestseller lists and are still read today. 

One of the attractions of mystery stories from this period is the, often accidental, insights they give into life during those times. Some customs differ sharply from those of today. For instance, absolutely everyone—man or woman—both smokes and drinks alcohol. Racial attitudes were far from enlightened. For a particularly shocking example, search online for the original title of the Agatha Christie novel now published as And Then There Were None.  Attitudes toward women were at least somewhat less problematic in part because some of the most widely read mystery writers were women. 

But in some respects, the attitudes of characters in these novels could be surprisingly contemporary. British writer Freeman Wills Crofts wrote a series of mysteries featuring the Scotland Yard Chief Inspector Joseph French. The following appears in Crofts’s novel Fatal Venture, first published in 1939:

“Generally speaking, the deceased was not popular. … He was also a keen and successful businessman, and, as the Chief Inspector knew, one man’s gain meant another man’s loss and there must have been many financial casualties who had no cause to love him.” 

As a side note, if you had to be a character in a Golden Age mystery, you absolutely didn’t want to be an unpleasant, older, wealthy man. The half-life of such characters was generally measured in hours. In this case, John Stott—the person Inspector French is referring to—is the wealthy victim whose murder French has to solve.

Image of the novel from Amazon.com

Inspector French’s view that “one man’s gain meant another man’s loss” echoes recent arguments that rich businesspeople don’t deserve the wealth their success brings. This view runs counter to the fundamental economic idea that if a transaction is freely entered into, the transaction must benefit both parties. Otherwise, why would the party who is made worse off have agreed to the transaction?

Even in the case where there is an imbalance in economic power—for instance, when a consumer is buying a product from a monopolist—the purchase must have made the buyer better off, or he or she wouldn’t have made it. In this case, though, we can argue that, by forming monopolies, sellers make themselves better off at the expense of consumers. In the United States, the antitrust laws are intended to deal with that situation by making illegal mergers and other business practices that make consumers worse off.

In general, though, entrepreneurs, by starting new businesses or introducing new products, make consumers better off even if the entrepreneurs become very wealthy. In a famous academic paper, Nobel laureate William Nordhaus of Yale University, estimated the “fraction of the benefits from new technologies that have been captured by innovators … as compared to the fraction that have been passed on in lower prices.” He found that innovators captured only 2.2 percent of the social returns to innovation. The remainder of the returns represent consumer surplus. (We discuss the role of entrepreneurs in a market system in Microeconomics, Chapter 2, Section 2.3. We discuss the concept of consumer surplus in Chapter 4.)

In an opinion column on bloomberg.com, Michael Strain of the American Enterprise Institute noted that “a back-of-the-envelope calculation [applying] Nordhaus’s result to Bezos suggests he has created $5.4 trillion in value for the rest of society.” As Strain’s reference to this calculation as being “back-of-the-envelope” indicates, it’s not clear that Nordhaus’s analysis, which is based on data for the U.S. nonfarm business sector, can be applied to the contribution of a single entrepreneur like Bezos. But most economists would agree with the general point that entrepreneurs generate benefits to consumers that are far greater than the return the entrepreneurs receive for their contributions—even if the entrepreneurs end up earning billions. 

Inspector French solved the mystery of John Stott’s murder, proving himself to have been an excellent detective even if he wasn’t a very good economist. 

Is Caitlin Clark Being Paid What She’s Worth?

Photo of Caitlin Clark when she played for the University of Iowa from Reuters via the Wall Street Journal.

Caitlin Clark’s ability to hit three-point shots made her a star at the University of Iowa. Since she joined the Indiana Fever of the Women’s National Basketball Association (WNBA) in 2024, she’s been, arguably, the league’s biggest star. An article on theathletic.com discussing Clark’s effect on the league includes the following chart:

Clark’s popularity has resulted in substantially increased revenue for her team and for the WNBA. Should that fact affect the salary she receives from the Indiana Fever? The article states that: “Clark will almost assuredly never receive in salary what she is worth to the WNBA. In that regard, she’s a lot like [former men’s basketball star Michael] Jordan, and other all-time greats across sports.” Why won’t Clark be paid a salary equal to her worth to the WNBA?

In Microeconomics, Chapter 16, we show that in a competitive labor market, workers receive the value of their maginal products. The value of a basketball player’s marginal product is the additional revenue the player’s team earns from employing the player. We note that the marginal product of an athlete is the additional number of games the athlete’s team wins by employing the player. The value of a player’s marginal product is the additional revenue the team earns from those additional wins. Teams that win more games attract more fans to watch the teams play—both in person and on television or online. Teams earn revenue from selling tickets, as well as concessions and souvenirs sold in the area. Teams are paid for the rights to broadcast or stream their games. And, as the chart above shows, a player as popular as Clark will increase the game jerseys and other merchandise a team can sell.

We note in Chapter 16 that, once their inital contracts with their teams expire, the best professional athletes tend to sign contracts with teams in larger cities. Although an athlete’s marginal product may be no larger in a big city than in a smaller city, the revenue a team earns from the additional games the team wins from employing a star athlete depends in part on the population of the city the team plays in. Clark’s 2025 salary is only $78,066, far below the value of her marginal product, which is likely at least several million dollars. Her current contract with the Fever lasts through the 2027 season. But even after the contract expires, by league rules, she can’t be paid more than $294,244 by whichever team signs her. (It’s possible that amount may have increased by the time her current contract expires.)

The ceiling on WBNA salaries is far below the average salary in most U.S. men’s professional leagues. For instance, the average salary in the men’s National Basketball Association (NBA) during the 2024–2025 year was nearly $12 million. A low salary cap is common in leagues that are relatively new or that aren’t popular enough to receive large payments for the rights to broadcast or stream their games. For example, men’s Major League Soccer (MLS) has a salary limit of about $6 million per team. The WNBA was founded in 1996 (the NBA was founded in 1946) and, although the broadcast and online viewership for its games has increased, its viewership remains well below the NBA’s viewership.

Clark has been earning millions of dollars from endorisng Nike, Gatoade, and other products. But unless the factors just discussed change, it seems unlikely that she will receive a salary equal to the value of her marginal product to the Fever or any WNBA team she might play for in the future. The excerpt from theathletic.com article that we quoted above, though, compares her salary not to the value of her marginal product to the Fever but to the WNBA as a whole. Are there any circumstances under which we might expect a major sports star to be paid a salary equal to the additional revenue he or she is generating for a league as a whole?

The quotation from the article notes that no “all-time great” players, inclduing Michael Jordan of the NBA, have received salaries equal to the value of their marginal product to the leagues they played in. This outcome shouldn’t be surprising. Returns that entrepreneurs or workers earn in a market system are typically well below the total value they provide to society. For example, in a classic academic paper Nobel laureate William Nordhaus of Yale University estimated that entrepreneurs keep just 2.2 percent of the economic surplus they create by founding new firms. (We discuss the concept of economic surplus in Microeconomics, Chapter 4.) Leaving aside the monetary value of Clark to her team and her league, she has provided substantial consumer surplus to viewers of her games that is not captured by arena ticket prices or cable or streaming subscriptions. As we discuss in Chapter 4, the same is true of most goods and services in competitive markets.

Caitlin Clark, like Amazon founder Jeff Bezos, has only received a small fraction of the economic surplus she has created. (Photo from the Wall Street Journal)

So, although Caitlin Clark is a millionaire as a result of the money she has been paid to endorse products, the actual additional value she has created for her team, her league, and the economy is far greater than the income she earns.

“Clark will almost assuredly never receive in salary what she is worth to the WNBA. In that regard, she’s a lot like [Michael] Jordan, and other all-time greats across sports.”