Tuesday, November 14, 2017

Studebaker Review, Part 3: the Economic Inequality Fallacy

2-- Economic inequality comes in two forms—government-favor driven (a bad kind, such as resulting from Fed-driven financial speculation and business subsidies), and market driven (the good kind, such as resulting from investment in private enterprise). Financial speculation driven by artificial monetary expansion and government subsidies allows some people to gain at others’ expense, leading to unjust economic inequality—in fact, it’s not the economic inequality that’s the problem, it’s the unjust that’s the problem. Investment- and work-driven inequality lifts everyone through trade, in which every participant wins and no one losses, leading to perfectly just economic inequality—once again, it’s not the inequality that’s the good, it’s the investment. In fact, economic and income inequality are irrelevant side effects. But I’ll use the terms “good” versus “bad” inequality just to make my point. Since the subject of Studebaker’s article is economic health, I will focus on the “good” kind, because only market inequality correlates to overall economic health. Once again, it’s important to get past the economic mysticism and focus on real people.

Market driven economic inequality is a sure sign of a just and prosperous society, because it indicates a society where individuals are free to rise as far as their unique individuality—their talent, ambition, temperament, moral character, values, and personal circumstances—will carry them. Since a free society is one of freedom of production and trade, every dollar earned represents wealth created and passed on to someone else, in exchange for that person’s money which she herself earned by creating wealth for someone else in exchange for monetary payment. What one earns is determined by the economic value of his work product, as determined by the judgement of the people who buy from (trade with) him. The amount of value one creates for others determines how much he makes, so it logically follows that the people who create the most value for the most people make the biggest fortunes. Keep in mind that the basic source of wealth is intellectual labor, which has unlimited potential, not physical labor, which is obviously very limited. The so-called “top 1%”—a euphemism for “anyone who makes more than me”—don’t take “more than their fair share” from some mystical pie. They get there by trade, the win-win transaction based on mutual benefit—i.e., getting better together. Every earned dollar represents a unit of wealth created, and a fortune represents a lot of wealth created. Unfettered economic activity is not a zero-sum game, but a cooperative human process of ever-expanding production to meet ever-expanding human desires.

Once again, a little introspection Ă  la Obama can prove this point. I’m writing on a Dell computer, driven by Microsoft 10. My wife uses Apple products. We both use Facebook and Google. In so doing, we are contributing to the fortunes of Michael Dell, Bill Gates, Steve Jobs, Mark Zuckerberg, and Larry Page & Sergey Brin. Are these “1 percenters” hurting us? No. They’ve made our lives better. And they make the lives of hundreds of millions of people better as their fortunes grow. You will find that all market fortunes, including the so-called “robber barons” of the 19th Century early capitalism, arose by making untold millions of lives better, not just in terms of goods and services but in terms of jobs and opportunity. This does not mean the producers are altruists. Far from it. Thankfully, they’re selfishly driven, like the rest of us. And that’s a good thing. The nature of trade is voluntary exchange to mutually selfish gain. We should want more fortune-builders—market driven “1 percenters.”

The fact is, market fortunes of every kind trace back to the creation of mass-market products made affordable to the average person. J.K. Rowling, the novelist, is now a billionaire. Think of how many millions of people enjoy Harry Potter. How many people are worse off for Rowling’s fortune? How many of us are threatened by the Rowlings or the Dells of the world, as the anti-1% purveyors of paranoia say we are? None. Economic inequality—the good, market kind—doesn’t make the economy worse. How can it, when the result is improvements to untold millions of people’s lives. You can bet that the purchase of virtually every mass-market product that fills the shelves of merchants is adding to someone’s wealth and/or fortune. And every one of those purchases is done by consumers who judge the transaction to be a net gain. If it’s not, why buy the product?

In fact, The vast majority of benefits of successful entrepreneurs, no matter how big their fortunes, accrue to consumers—up to 96%, according to a Yale University Study. Again, let’s look at the personal narrative. How much did my Dell laptop add to the fortune of Michael Dell? An undetectable amount. Dell’s fortune is built on benefits given to hundreds of millions of consumers like me. Consumers have gotten $trillions in benefits. That amount dwarfs Dell’s $24 billion fortune. (And this doesn't take into consider the value of the jobs Dell created, both for his company and his suppliers.)

Be careful of statistics, which rank below damned lies. Statistics showing wealth inequality typically ignore the value of the products received by consumers in exchange for the money the provider receives. The inequality alarmists look at money in the hands of the rich, but ignore the value of what really counts—the material wealth in the hands of consumers. Why? Because they commit another fallacy: They equate money with wealth.

Related Reading:

My Objective Standard review of  The Forgotten Depression—1921: The Crash That Cured Itself, by James Grant

Equal Is Unfair: America's Misguided Fight Against Income Inequality—Yaron Brook and Don Watkins

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