Tuesday, September 3, 2019

An Orthopedic Surgeon Thinks He Understands Entrepreneurship and Economics in General

Jay Crawford, a  pediatric orthopedic surgeon, has penned an essay for Stat NewsMy hand surgeon should have been paid $4.5 billion for fixing my broken wrist, not $1,000.

He begins with a claim about entrepreneurship.

He writes that as a rule of thumb an entrepreneur’s creation is worth 10% of the value it creates.

He claims he knows this because a billionaire told him. He does not appear to understand that a billionaire is not an economist anymore than a child that had orthopedic surgery is an expert pediatric orthopedic surgeon.

As the economist Murray Rothbard explained:
… profits are not a regular price, but a residual, which may and do shift wildly from being large, small, zero, or negative.
 It is clear that there is no sense whatever in talking of a going rate of profit. There is no such rate beyond the ephemeral and momentary. For any realized profit tends to disappear because of the entrepreneurial actions it generates.
It gets worse. He calculates his worth to society is $45 billion.

He can make this claim because he doesn't understand an economic first principle, marginal utility. That is he doesn't understand that economists long ago explained, based on margin utility theory, why, for example, diamonds are more expensive than food, despite the fact that food is necessary for the survival of the human species and diamonds are not.

In other words, marginal utility explains why he doesn't actually earn $45 billion.

And it explains why his next claim is not based in reality:
According to the entrepreneurial pay scale, my hand surgeon should have been paid $4.5 billion. But he was paid only $1,000, meaning his work was undervalued by a factor of 99.999978%.
This claim means he doesn't understand entrepreneurship, marginal utility or consumer surplus.

But this doesn't stop him from making conclusions about something he doesn't understand:
Of course, there’s another way to look at the issue. Maybe the entrepreneurial pay scale is what’s completely out of whack, and my hand surgeon’s payment for fixing my wrist is the right way to look at things. Through that lens, Jeff Bezos would be worth $22,222 for creating Amazon, not $100 billion.
A Ludwig von Mises comment comes to mind where he stated that people may disagree on the question of whether everybody ought to study economics seriously, but that those who do publicly write about it should study it before commenting about economic policy.

For an understanding of entrepreneurship, I recommend: Competition and Entrepreneurship by Israel Kirzner.

For the other concepts, consider: Man, Economy, and State with Power and Market by Murray Rothbard.



  1. "An economic writer thinks he understands healthcare, and specialty healthcare in general" Robert, the healthcare system has been revealed as a price-fixing scheme that is becoming less needed and less oppressive to certain groups of physicians. Because of the rise of numerous technologies, legislative victories, income inequality, and dissociation of demand and supply in healthcare, the very rapid development of a multi-tier healthcare system is inevitable in the US. It has been almost unheard of in the past for American physicians to exit the state-payer and commercial-payer system. But, cash pay for healthcare, particularly specialty healthcare, is on the rise and is accelerating. In that scenario, prices for healthcare work rise (not drop!) significantly because of the principles I outlined in my article. If you don't believe it, just wait and watch.

    1. The modern medical industry in the USA begins around 1910. Of the many legislative goals one was to constrict the supply of doctors and use licensing to increase prices and doctors' incomes. Everything else builds from there over the next 110 years.

      Free market medical care was astoundingly cheap and doctors didn't make nearly as much. If medical care becomes free market again prices will have to be what customers can afford out of pocket nor will there be government imposed bottlenecks and restrictions of supply. We may even see a return of the lodge system if a free market comes about.

      That doesn't mean your cash for services doctoring won't end up with higher prices yet. Government will still be interfering. It's how government interferes that will drive how high prices go. However the wealth people have to spend on medical care and insurance for it is in a situation where government will need to tap even more wealth to feed higher prices.

      As to an economic value calculation if I calculated my economic value the way you did I too would arrive at an absurd number. I have spent my career in engineering developing a variety of products that increased people's productivity. Not only was the stuff I came up profitable to my employers it was often copied by the competition. This increases the number of units sold dramatically. Some of the stuff conceptually is still in use after nearly 20 years. Then add on the productivity customers realized? 10% would still be a huge number.

      However my salary is not determined that way. It's determined by what people will pay for the products and what other engineers will take my job for and whatever my employer thinks they may lose or gain by hiring someone else for less money. 10% of the economic value would make me very wealthy. I would probably settle for 5% (or less) of gross profit my employers realized on my work. I would still have far more than my market salary has brought me. On one product alone 5% of profit for what I did would have piled in at about 100K a month for five years. But that's not how it works.

    2. The value created is the value created, no? So, if the creator of that value is not harvesting the reward, someone else is. If a highly skilled surgeon, of which only 1200 similarly skilled surgeons exist in the US, creates massive, indisputable value, yet he does not reap that reward for that value, then someone else does. The key question is "Who?" and maybe, "For how much longer?" Highly skilled, rare, accessible surgeons are no longer reliant on hospitals (they own their own), payers (patients seeking good outcomes will pay cash and deal with their own insurance companies later), or volume of patients. They can work 1/2 as hard for 3x more since they now control the vertical. If you don't believe it, then you haven't needed your wrist fixed.

    3. The value is created but even if we theoretically put the present system aside a free market wouldn't allow for such large evaluations to be realized. In a free market there is competition and limits to what customers can and are willing to pay. That's what sets prices. The productivity value doesn't have a huge influence except for special situations. But special situations are just that, special.

      Without government protection for an effective cartel there would be many more than 1200 wrist surgeons in the country. Why? Because if they started charging high prices then more would be attracted to the field. The field would not be throttled by limited medical school seats, residency, and other features that constrict supply because it would be a free market. Your entire argument hinges on constricted supply which is the result of the government interference in the marketplace. You are arguing the dynamics of that interference are changing and so they may be, but it is still a product of government interference.

      You can't charge on the productivity gained from the product or service unless supply is constricted because there will always be another guy who will undercut you and productivity varies widely between customers.

      Entire businesses make their money on having the right thing right now but they are even limited in what they can charge before the customer says 'I'll wait'.

      Sure maybe the best three wrist surgeons in the world can get their high prices from a select few wealthy or highly productive people who break their wrists on the regular, special complex cases, or what have you. But the ordinary guy who breaks his wrist won't be able to afford those prices. He will find a wrist surgeon that is 90% as good but who charges much much less. Also keep in mind the great majority of wrist injuries will be something that those only 40-50% as good as the best can handle just as well or close to it. So in a free market the high prices will be left to a trivially small number of doctors and similarly small number of patients.

      To put this another way, one of the products I put out into the market has reviews like 'it paid for itself in a week'. But if the price was increased people would go back to the 19th century way of doing the job or buy the competitors product. Despite the fact that it makes its price back quickly they aren't willing to pay more for it and if they were there are competitors ready to step in to offer it to them for today's price.

      If I were charged 4.5 billion dollars or whatever the figure was for a wrist surgery I would probably live with it and learn how to do get by doing my job with my left hand. The price can't be realized because the customer base that can afford it is too small.

      Back to the question you raised. The value ends up in the largest proportion by far with the customer. That's simply how it works and how it will always work. That's the design of capitalism. It's about channeling self interest into serving one's fellow man. And one's fellow man is fickle and stingy with money. Those of us in creative and skilled professions may complain about it but in any other system we would expected to do these things for "society" for nothing or the same that society was willing to pay someone to dig ditches or pump gas.