From Seven Deadly Economic Sins: Obstacles to Prosperity and Happiness Every Citizen Should Know by James R. Otteson. © 2021 by Cambridge University Press. Reprinted by permission of the publisher. The book will be available from April 2021.
In a properly functioning market economy - one, that is, in which all transactions are mutually voluntary and mutually beneficial, and in which every party to any transaction retains an opt-out option or the right to say “no, thank you” and go elsewhere - any successfully executed transactions lead to gain for both (or all) parties to them. Thus, the idea that one person can get wealthy only at the expense of another, or only by making another poor - that is, that wealth is necessarily zero-sum - is a fallacy.
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A related fallacy, however, is connected to the common “haves vs. the have-nots” phrase, namely, that if someone has wealth, then that person is the only one who benefits from it. When we speak of “the rich” who “own” or “possess” or “accumulate” wealth, or when we speak of how much the rich “have,” we may be assuming that the rich not only acquired their wealth through extraction but are hoarding it.
They “have” it and are not sharing. If there are people who do not have wealth, however, then hoarding it seems clearly wrong - the rich should share. As many put it, the rich should “pay their fair share,” usually in taxes, out of a duty not of charity but of fairness or justice. Perhaps the rich have benefited from living in a country whose institutions have allowed them to grow rich; or perhaps they have benefited from luck in the form of good parents or good schools or good infrastructure - none of which can they claim to have created or chosen on their own, and hence for none of which can they claim moral credit or entitlement. If some are richer than others, perhaps much richer than others, then it might seem only fair that they should “give back” to their communities, either in thanks for their lucky good fortune or in repayment for the opportunities they exploited when others did not have the chance.
Jeff Bezos is currently the wealthiest person in the world, with a net worth estimated, as of this writing, at $130 billion. As astonishing as that number is, it does not make him the wealthiest person ever. Over the last 500 years, there have been at least six people wealthier than Bezos, and perhaps (depending on estimates) a handful more. At their peaks, the inflation-adjusted wealth of several Americans probably topped that of Bezos: Cornelius Vanderbilt (1794- 1877) is estimated to have had a net worth of between (in contemporary dollars) $105 billion and $205 billion; Vanderbilt’s son William Henry (1821-1885) inherited and increased his father’s fortune to as much as $239 billion; and the wealth of Henry Ford (1863-1947) is estimated to have been between $188 and $199 billion. As high as those numbers are, they pale in comparison to the two wealthiest Americans of all time: Andrew Carnegie (1835-1919), whose net worth at its peak would equal roughly, in contemporary dollars, $310 billion; and John D. Rockefeller (1839-1937), whose net worth at its peak would be roughly equivalent today to a staggering $336 billion. And yet none of them can hold a candle to the single wealthiest person in the world over the last 500 years, the German merchant, banker, financier, and mining rights owner Jakob Fugger (1459-1525), whose total wealth at its peak is estimated to be roughly equivalent to an incredible $400 billion today - roughly triple Bezos’s wealth.
What on earth did they do with all that wealth? Did they really need all of that? In the cases of the earlier historical figures especially, when they were building their fortunes the world was full of desperately poor people, and the differentials between their wealth and the wealth of the average of the rest of the world was on the order of hundreds of thousands to one. When Carnegie sold his holdings in U.S. Steel in 1901, his resulting net worth is estimated to have constituted some 4 percent of the wealth of the entire United States, making him approximately 150,000 times as wealthy as the average American at the time and some 200,000 times as wealthy as the world average. It is difficult to contemplate such numbers and not feel resentment, even revulsion. There was no way for Carnegie to have used all that wealth, no reasonable way to imagine that he could possibly have needed it. It may be true that in the last third or so of his life he gave much of it away to various good charitable causes - universities, libraries, hospitals, churches, and so on - but what could possibly justify his having all that in the first place?
I suggest that the mere possession of wealth, however, even a great deal of wealth or a great deal more wealth than many (most, almost all) others, does not by itself rise to the level of injustice or justify moral condemnation. A moral judgment would instead turn on answering the question of how the person got his wealth. Was it through force, fraud, theft, imperialism, cronyism, conquest, or usurpation - in other words, was it through involuntary extraction? Or was it through mutually voluntary and mutually beneficial exchanges, or cooperation? The answer to that question makes all the moral difference: the former is immoral, but the latter is not. If one wants to condemn another’s wealth, one would have to show not just that the wealth is large or is more (even a great deal more) than what others have, but, instead, one would have to show that it was acquired through immoral means. Actual historical examples - including Carnegie and virtually every other person in the pantheon of what the contemporary philosopher Peter Singer (2009) calls the “superrich” - admit of various judgments, with many arguing that extraction played at least some role in the generation of virtually all their fortunes, though there is disagreement about whether, and if so to what extent, they did benefit from extraction. But to whatever extent extraction did play a role, then we would be justified in condemning it morally.
I propose to put aside judgment of any particular historical figure, however, and instead make a more general claim: the wealth of the rich does not - at least in a market economy - benefit only themselves. It will certainly benefit them, but many others will benefit as well. The reason is that, despite the way we often speak and perhaps think of the matter, the wealth is not “distributed” to anyone, and their “holdings” are not literally held by them. Take these in turn.
We often speak of “wealth distribution,” as, for example, when we speak of how much wealth is distributed to the top 1 percent in America or how worldwide wealth is distributed across the globe. When we speak this way, we can imagine that the wealth is sitting in some people’s pockets or in their backyards, or perhaps hoarded in some countries as opposed to others, and that it was either handed out to them by someone or something, or that it was gathered by them, like sand from a beach and piled in a heap. In a market economy, however, there is no person or agency that has the wealth and dispenses it to some as opposed to others. As we have seen, it has often happened in human history that a pharaoh, emperor, king, or warlord confiscated, stole, or otherwise wrested wealth from others, and then oftentimes distributed the booty to his family, friends, or foot soldiers. All that is extraction. By contrast, in a properly functioning market economy, which operates under attitudes that condemn extraction and institutions that punish it, the only way to get wealth is by producing, generating, or creating it in voluntary cooperation with others. In other words, in a market economy, the only way one can benefit or enrich oneself is by benefiting or enriching others - simultaneously, if not always to the same degree.
I am speaking literally, not figuratively or metaphorically: by “producing” it I mean that before there was no wealth and now there is. Suppose you and I are blacksmiths who make pins. Alone I can make twenty pins per day and you can make twenty pins per day. If we partner and work together, by dividing the labor we can make not forty but sixty. Adding more voluntary partners to our venture, and further dividing the labor among us to enable further specialization, increases the productive gains not linearly but exponentially. If we voluntarily partner with eight other people, then, according to estimates Adam Smith made based on his own observations (Smith 1981 , 15), the ten of us could make upwards of 48,000 pins per day, or the equivalent of some 4,800 pins per person - an increase in production of 23,900 percent! Now, do any of us by ourselves need 4,800 pins per person per day? Of course not. So, what do we do with the remainder? We sell it. If our ten-person pin-making shop is now producing 48,000 pins per day, the vast majority of which we are selling in markets, then the total supply of pins in society is increasing dramatically. What happens to the price, other things equal, as the supply increases? The price comes down. What happens as the price comes down? More and more people can afford the pins.
Now, pin-making may seem like a trivial matter (Smith himself calls it a “trifling” example), but the same logic applies to other goods produced in markets. If people are allowed to partner and cooperate, they will discover ways to divide the labor and specialize. Dividing the labor enables increasing production for, as Smith enumerates, three principal reasons: (1) each worker increases his dexterity and skill, because by focusing on a smaller range of tasks he gets much better at them; (2) time is saved that would otherwise be lost by switching from one task to another; and, perhaps most importantly, (3) specialization enables the development of new ideas, expedients, and innovations to improve and expand production. Thus, the pattern observed in pin making would hold elsewhere as well: division of labor and specialization, thus increased production, thus decreased prices, thus increasing numbers of people who can afford them, and thus an increasing standard of living.
As more and more people can engage in these entrepreneurial ventures and partnerships, more and more goods and services will follow these patterns of increased production and decreased prices, which means there will be an increasing overall supply of goods and services in society. The Adam Smithian prediction would be that as attitudes and institutions supporting and encouraging cooperative transactions spread, more and more people would rise out of humanity’s historical norm of poverty, perhaps reaching heights that in his day no one could have dreamed of. It was an audacious prediction to make in 1776, when Smith published his Wealth of Nations. And yet what has unfolded in the subsequent 245 years?
The Labor Theory of Value
A belief that economics long ago abandoned but that continues to recur is a labor theory of value. One of its proponents was Karl Marx (1818-1883), but another was none other than Adam Smith. They were both wrong, however, despite how intuitively plausible the labor theory of value, or LTV, might seem. It is important to see why.
Let us view our pin-making example from a different angle. Suppose I decide I want to open a pin-making shop, and I borrow money to buy a warehouse, equipment, and supplies, and to hire you and nine other people. Your jobs will be to execute the various operations required to make the pins: as Smith describes it, one person “draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head” and so on (Smith 1981 , 15). Suppose we then begin to manufacture our tens of thousands of pins per day, and, the market being favorable, we sell them at a profit. Who gets that profit? I, the owner, do. What do you and the other workers get? A wage. Is that fair? If one subscribes to an LTV, it might seem quite unfair - even unjust.
Both Marx and Smith thought that the ultimate origin and source of value is human labor. Consider the difference between open land left in the condition in which nature created it and that same field that has been cultivated by human labor. An acre of land with naturally occurring apple trees on it might produce a bushel or two of apples; but an acre of land with apple trees that are deliberately planted and cultivated for maximum productive output will produce many times that amount. In the seventeenth century, John Locke (1632-1704) estimated that the addition of human labor in the form of farming and active cultivation could add ten times, one hundred times, even one thousand times the value that would have been produced by the same land if left to nature’s devices (Locke 1980 , sects. 37, 40, and 43). That meant that human labor accounted for between nine-tenths and nine hundred and ninety-nine thousandths of the value created for others to use or consume. It is easy to conclude - indeed, it can seem all but self-evident - that labor is not only what creates value but perhaps even that labor is value. The former is what Smith thought, and the latter is what Marx seemed to think.
Now come back to the pin-making shop I started and in which you and others work for me for a wage. If it is labor that creates value, then it is the workers who are creating the value because they are the ones laboring. If, however, the profit goes to me (the owner) instead, then it seems as though I am exploiting the laborers and arrogating to myself, perhaps even stealing, what rightfully belongs to them. For consider: if it was the workers’ labor that created, or perhaps constitutes, the value, then what right do I have to profit from it? Shouldn’t the profit go to them instead?
It turns out that the LTV is false, however. But before coming to that, an unnoticed aspect of the example should be pointed out: the owner of the shop also contributed labor! It was the owner who had the idea, who hired the workers, who manages the workers and supplies, who pays the bills, and who sells in the market. It is also the owner who took out the initial loans of capital, at his own risk, and who therefore stands not only to profit if things go well but also to lose if things go poorly. And it is he who bears the responsibility of meeting payroll. All of these require skill and labor, under both risk and uncertainty, which goes some way toward explaining why, in those relatively rare occasions that a business succeeds, the entrepreneur also profits, just as the workers do who are receiving their wages.