steve jobsiTech-BB.comOne of the most amazing entrepreneurs and executives in history. And a genius. But not a job creator.

A billionaire named Nick Hanauer recently wrote an editorial for Bloomberg in which he destroyed the argument that the jobs in America are created by rich entrepreneurs and investors.

In our current "class war" climate, this argument has been repeated so often that it's now regarded as fact. And it is frequently and passionately invoked to defend the idea that we should make further tax cuts for rich people — so rich people can have an incentive to create more jobs.

As I explained yesterday, the argument that rich people create the jobs is flawed for many reasons, starting with:

  1. Taxes on rich people are already historically low relative to other (very prosperous) periods, and
  2. Many billionaires and entrepreneurs like Hanauer have already gone on record to ridicule the idea that raising capital gains and income taxes a few points would suddenly reduce the incentive to start companies.

(The entrepreneurs would take home slightly less money from their companies, but they'd start them anyway. So cutting taxes for rich "job creators" would just make the job creators richer.)

But Hanauer's more profound point, which explains one of the things that is ailing our economy, is that rich people actually don't create the jobs.

What creates the jobs is a healthy economic ecosystem. Specifically, a healthy ecosystem that starts with the company's customers.

An entrepreneur can have the most brilliant idea in the world and plenty of funding to develop and sell it, but if customers can't afford to buy the company's products, the entrepreneur and his or her investors won't create a single permanent job.

Saying "the entrepreneur and investors create the jobs," in other words, is like saying a seed creates a tree.

A seed does not create a tree. The seed starts the tree, and contains the blueprint (idea) for the tree. But the tree is created by a combination of this blueprint plus soil, sunshine, nutrients, water, and a climate that has perfect temperature and atmosphere with enough of the above resources to go around.

Plant a seed in an inhospitable environment, and it won't create anything. It will die.

And the same is true for entrepreneurs and investors. Without their future customers and employees, and a legal and societal environment that can nurture their growth, they're done for.

And who are the customers who have the power to create and destroy jobs and fix the economy?

For the most part, the middle class — a.k.a., "the 99%."  (Yes, there are some companies that cater exclusively to the 1%, but not many.)

60 minutes child homelessness truck60 MinutesFinally, a rich American destroys the fiction that rich people create the jobs. Click to read >

One of the fundamental problems in our economy right now is that the percentage of the national income taken home by the 1% at the expense of the 99% has radically shifted in the past 30 years. And this (and other factors) has left the 99% strapped and unable to provide the buying power necessary to create as many jobs as we need.

Anyway, as expected, Hanauer's argument struck a nerve, especially among folks who take pride and comfort in the fact that, as rich people, they're the ones who create the jobs.

(The original post has 300+ comments and counting, and my email box has exploded with praise and vitriol.)

The logic in the smarter arguments about why rich people DO create the jobs sounds persuasive, but it's wrong. This logic, too, has also been repeated so often that it is regarded as fact.  So it's worth exploring.

The smarter arguments about why rich people DO create the jobs boil down to this:

  • Just look at the number of jobs created in Silicon Valley, where there is a unique combination of a highly developed venture capital system, an entrepreneurial culture, and brilliant entrepreneurs.
  • Brilliant entrepreneurs like Steve Jobs create products that create demand. No one knew they wanted an iPhone before Steve made one. Therefore, Steve created all the jobs that are required to make and sell and service the iPhone.

Again, these arguments are seductive, but they're wrong. 

In both cases, what actually created the jobs were the combination of the companies and the customers of the products and services that the companies created and the ecosystem in which those companies operate.  Without the customers, the iPad and hundreds of other Silicon Valley products would have remained little more than cool prototypes. And the jobs of those who made them, which were initially funded with investment capital, would quickly have disappeared. And the invested capital would have disappeared, too.


How do we know that entrepreneurs and investors don't create the jobs?

Let's look at a couple of examples.

Income Inequality, 1981-2008Economic Policy InstituteThese amazing charts show how most Americans have gotten shafted over the past 30 years. Click to see >

Silicon Valley

Silicon Valley entrepreneurs start a lot of cool companies, and Silicon Valley investors provide the risk capital necessary for these companies to develop.

These contributions are very important to the health of the economy, and they should not be played down.

And this combination of entrepreneurs plus capital can certainly create a handful of temporary jobs — jobs that last until the invested capital runs out. But without healthy customers to buy the products and services created by these entrepreneurs and investors, whatever jobs are temporarily created will quickly go "poof."

If you need proof of this, just look at the late 1990s.

In the late 1990s, and especially in 1999, hundreds of thousands of investors poured tens of billions of dollars into Internet-related investments. The entrepreneurs and companies that received these investments used it to create tens of thousands of jobs — very temporarily.

If entrepreneurs and investors really could singlehandedly "create jobs," these jobs would still exist. But by 2001, when the Internet bubble had burst, and the investment capital dried up, most of the jobs created by those 1999-era entrepreneurs and investors disappeared. Because it turned out there was no real demand for their products.

chart of the day, scariest jobs chat ever, november 2011Entrepreneurs and investors can't solve this problem. Click for details >

But what about the companies that survived the Internet bust — Amazon, Google, Yahoo?

Didn't Jeff Bezos, Larry Page, and Jerry Yang each create tens of thousands of jobs?


Jeff, Larry, and Jerry started cool companies, and they deserve a ton of credit for that. And investors provided the initial capital necessary to get the companies going. And Jeff, Larry, and Jerry hired smart people to help them build the companies. And Jeff, Larry, and Jerry built products that people wanted, which is obviously critical. And Jeff and Larry (if not Jerry) have managed their companies well for the past 10-15 years. But to say that Jeff, Larry, and Jerry and their initial investors "created" the ~100,000 jobs that Amazon, Google, and Yahoo now have is ridiculous.

What has created the ~100,000 jobs is the combination of the companies, the companies products and services, and the market's ability to pay for those products and services.

How can we be certain of this?

Because as Yahoo is painfully learning, once the market demand for your products and services wanes, the jobs you have "created" disappear.


But how about Steve Jobs? Didn't he single-handedly create tens of thousands of jobs when he invented the iPhone and iPad? After all, no one even knew they wanted an iPhone or iPad before Steve and Apple invented them.

No, Steve Jobs didn't create those jobs.

Steve and Apple did invent a couple of awesome products that about a hundred million people have bought, and he and his team deserve tons of credit for that.

But they didn't "create the jobs."

Why not?

Tax rates v/s revenues chartTHE TRUTH ABOUT TAXES: They're much lower on rich people now than in other prosperous periods. Click to see >

First because, if the 100+ million people who bought iPhones and iPads had not been able to afford iPhones or iPads, Apple wouldn't have sold any of them.

It doesn't matter how much "demand" is created by a product that is so awesome that everyone wants it. If no one has the money to buy it, they won't buy it. (Unless they can borrow the money to buy it, which is another story, and is another part of the problem with the U.S. economy.)

Furthermore, the money used to buy iPhones and iPads was not created out of thin air. When the money used to buy iPhones and iPads was spent on iPhones and iPads, it was not spent on something else. In other words, if Steve Jobs and Apple had NOT invented the iPhone and iPad, the money used to buy them would likely have been used to buy something else — and the companies that made the something else would have "created" the jobs.

Apple's building of a better mousetrap, in other words, did not suddenly "create jobs." It moved the jobs. It moved the jobs from the companies that were making the older mousetraps to the one that was making the better mousetrap (and, in this case, it mostly moved them to Asia, which is another issue). In fact, to the extent that Apple created a more efficient manufacturing process for its better mousetraps, Apple and Steve Jobs may actually have destroyed jobs, not created them.

If you still don't believe it, think of it this way:

Imagine if Steve Jobs and Apple had only been able to sell their miraculous new iPhones and iPads in Bangladesh, where the average per-capita income is about $1,700 a year.

How many jobs do you think Steve Jobs and Apple would have "created" then?

Not many.


Entrepreneurs and investors do not create the jobs in our economy. The economy itself creates the jobs. and it does this most effectively when it is healthy, meaning that all of the key components, including the middle class, have enough disposable income that they can buy what our companies produce.

Henry Ford is legendary for his decision to make sure he paid his rank-and-file production workers enough that they would be able to afford the company's cars. This decision was not just based on kindness and generosity. Ford knew that his employees would become his customers--and that without his customers, he wouldn't have a company.

Entrepreneurs and investors are very important to our economy. They keep the economy vibrant and nimble, and they help the "gale of creative destruction" that creates innovation and progress and wealth and allows the economy to remain competitive. And they deserve credit for that.

But we are all in this together.

And what "creates" most of the jobs in our economy is the healthy economic ecosystem, not one privileged part of it. Without healthy potential customers, in other words, entrepreneurs and investors can't do jack.
