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How much is innovation worth to the economy? And what is crucial to reaping its benefits? We’ll begin our musings in an unlikely place: a photo of a used car lot from 1951 shared by a friend of ours, Bruce Munson, who has been both a state representative and a used car dealer. The picture featured a 1948 Tucker with a $3,000 price tag. The Tucker 48 was genuinely innovative, offering numerous unique safety and engineering features not found in other cars of the time. Unfortunately, the Tucker Corp. went bankrupt and produced only 51 Tucker 48s.
According to Bruce, if a person had bought the used Tucker in 1951 and reasonably maintained and stored the car, it would be worth at least $1.5 million today. So, the return from investing $3,000 in the 1948 Tucker, an innovative car of its time, would be a 500-fold nominal increase, or an average annual rate of return of 9.01% over the 76 years since 1948.
In comparison, had one invested the $3,000 in “risk-free” five-year U.S. government bonds in 1951 and reinvested all the principal and earnings, they would today be worth a mere $110,049: a 36-fold nominal increase, or an average annual rate of return of only 5.04%.
It seems reasonable to attribute the additional return from owning the Tucker automobile as a reward for having the insight to perceive the auto’s future value and the persistence to maintain ownership of the asset.
But had one invested the $3,000 in the S&P 500 in 1951 and reinvested all the dividends in the S&P 500, the investment would be worth $5,368,476 today: a 1,789-fold nominal increase, or an average annual rate of return of 10.96%.
When one acquires equity in S&P 500 firms, the investor is betting on the ability of those firms to generate innovations that increase social value. The differential gain of equity ownership in for-profit corporations over government bonds of over $5.2 million indicates how much innovation affects our well-being. Additional gains from innovations from S&P 500 firms also accrue to those firms’ customers, workers and suppliers.
We think it is reasonable to attribute the additional return to investment via ownership of common stocks as a reward for having the insight to perceive the future value of U.S. corporations and the persistence to stay the course in maintaining ownership of the asset. We hope the system stays around!•
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Bohanon and Horowitz are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.
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