Grasping Reality on TypePad, by Brad DeLong

Here's a comment http://delong.typepad.com/pdf/20070626-thoma-barro-microsoft.pdf on Robert Barro's claim that the social value contributed by Bill Gates is roughly equal to Microsoft's total revenue:

Bill Gates's Charitable Vistas - WSJ.com: In 2006, [Microsoft's] revenue was $44 billion, with earnings of $13 billion. This money was generated by creating something consumers value. Only Microsoft's competitors could believe that this much market value, revenue and earnings would have been created by delivering products that have little value to society. Suppose that a copy of a new version of Windows sells for $50 (and is typically charged as part of the price of a personal computer). Microsoft's revenue from Windows would then equal $50 multiplied by the number of copies consumers snap up. Microsoft's earnings are the revenue less production and development expenses. But that's not the social value. That comes from the increase in productivity created when businesses and households use the software. The social benefit equals the value of the extra product, less the total paid for the software. Almost by definition, the benefit has to be positive. Otherwise, why would consumers willingly pay for Windows? A conservative estimate, in a model where software serves as a new variety of productive input, is that the social benefit of Microsoft's software is at least the $44 billion Microsoft pulls in each year.... Mr. Gates is free to do what he wishes with his $90 billion. But I think he is kidding himself if he believes that the efforts of the Gates Foundation are likely to provide society anything like the past and future accomplishments of Microsoft. And, frankly, I would have preferred to get the $300 per person "Gates Grants."

Barro's defense of this claim is at http://economistsview.typepad.com/economistsview/2007/06/robert-barro-sk.html#comment-73987582.

I don't buy it. Barro's model doesn't address the major issues that have to be dealt with in assessing the social utility of Microsoft:

http://delong.typepad.com/sdj/2007/06/mark_thoma_is_i.html: Whether the net social value of Bill Gates is positive or negative depends on his impact in creating and shaping Microsoft: relative to its competitors and to its alternative paths of development, did he make it more of a lockin-breaking innovator or a death zone-creating predator? Did he do more to make Microsoft a company that takes advantage of economies of scale or more to make Microsoft a company that raises profit margins? I'm on the side that thinks that Microsoft has been a considerable net plus. But others I respect see it is a net minus...

And I don't think Barro uses his own model correctly. He gets to the conclusions that the ratio of the social value of Microsoft to its total revenue is (a) roughly one, (b) does not depend on how substitutable Microsoft's products are with those of other intellectual-property holders, and (c) depends primarily on the share of "idea factors" relative to "standard factors" in the economy's production function. These seem to be wrong: artifacts of an extra term Barro adds to the production function in order to get a balanced-growth path out of the model.

Proper use of Barro's model leads, I think, to the conclusions that:

• The ratio of the social value of Microsoft to its revenue could be very big--much more than one--or very small--much less than one--and there is certainly no reason to think that it is about one.
• The ratio will be large to the extent that Microsoft's goods are radically different from those of others, and small to the extent that Microsoft's goods have close substitutes made by others.
• As long as Microsoft's goods are not radically different from those of its competitors, the share of "ideas" in the economy's overall production function has relatively little to do with this ratio.

But, as I said, the big issues with Microsoft have to do with its effect on the pace of innovation. Was it a lockin-breaking innovator that provided a platform--shoulders on which others can stand? Or was it a death zone-creating predator that discouraged innovation and experimentation in broad market segments? My reading is that it was more of the first. But I am happy to be educated.