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QOTD: Your Wealth Does Not Create My Poverty
“…most important was the insight, key insight that Adam Smith had – brilliant insight – that wealth is not zero-sum, that you can make more of practically everything that’s important.
He understood this even while he was still living in a largely agricultural economy. He realized that because somebody is rich, that’s not what makes other people poor. Wealth is not a pizza where, if I have too many slices, you have to eat the Dominos box. My wealth does not create your poverty. Your wealth does not create my poverty. They’re separate questions. And we can generate more wealth.“
For several years now, I have used a variant on this quote as a signature on a sci-fi forum. “Your wealth does not cause my poverty. Failure to understand this is the basis of most bad economic thinking.” It’s a remarkable statement. Wealth is not a limited resource, it is highly renewable, like hydroelectric energy. The free market means that people can become rich without robbing anyone. This is not a trivial insight – it goes against how we think about most possessions.
Part of this comes from growing up in a nearly communist community, your family. Kids grow up in a group where people divide up resources according to the socialist mantra – “From each according to his ability, to each according to his needs.” This makes perfect sense when you have people who cannot take of themselves. (There’s not really a market for soiled diapers.) Even when kids make money on the side (paper routes, farm / yard work, babysitting, etc) they are still reliant on Mom and Dad. The authority figure has all the wealth, and they hand it out to their subordinates. The free market is completely different.
The free market does not need love or loyalty like a family. If I want to make money, I need to make something customers will buy, even if I hate them. People will be motivated to work to provide something if people are willing to pay for it. This only works if people are able to turn a profit. If you exchange money for something, it will remain largely renewable, while outright seizing property is a one and done deal. Have fun looting the Walgreens, since that will be the last you see one nearby. This is why the Goose Laying Golden Eggs is such an amazing fable – greed can break a system that would otherwise produce wealth beyond imagining. (A lord of Adam Smith’s time would likely trade his lands and title for my spare bedroom and its contents.)
All this came to mind when I saw P. J. O’Rourke’s take on millennials and socialism. Like always, his writing is incredible – it’s like the drunken stand-up comic version of Thomas Sowell. The remarkable thing is that socialism and similar schemes are actually doomed to despair outside of utopian science fiction; you will eventually run out of wealth to spread around. Far from a utopia, it encourages a dystopia; either you need to find someone else to loot, or reduce the number of mouths to feed. Only the capitalist free market allows for a future of abundance and plenty.
So teach your children and young people who will listen to the basics of free-market economics. That way, they will how to keep the goose making golden eggs in exchange for food. Otherwise, our goose is cooked.
Published in Economics
Bonus quote:
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Hydroelectric is produced through the water cycle in the atmosphere. While renewable, it is limited. If there is too much rain, the plants have to open the sluices or have water going over the spillways. You can’t generate more at a time than the plant is created to produce. You invest $x in building, and you may be able to recoup $x/30 or $x/3 each year. But it will never go over the limit. If the rains don’t come, you will get less. The economy and its growth is not as limited.
I might compare it to a tree. As long as the tree has resources (water, good soil, micro-nutrients from fungi), it will provide more wood. It will grow. Or maybe better would comparing it to a forest. It can live much longer than and produce more than just one tree. One or two seeds can become a forest. That is what an economy can be like.
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This is why there has been (or at least used to be) so much interest in pumped storage. The idea being that the energy “lost” after the initial flow downstream can be recovered as potential energy via a pump back for later use. Pumping cycles being done during off-peak (or low demand) times for later electrical generation during peak or high demand times.
If you have a sense of humor and have not read the P.J. O’Rourke piece that Omega linked to, you must do it. He’s been doing it for decades and P.J. is still hitting it out of the park with his writing.
As to the idea that wealth is created and not just transferred from person to person, it ought to be obvious to everyone, but is not. Even many conservatives these days who believe that this is true within the 50 states sound like Bernie Sanders when talking about international trade. As if the only way that Mexico, Japan, or any other country could have a growing economy is if they steal our jobs. Is there some law of economics that states what the fixed number of global jobs is, so that if someone in Bangladesh gets a job, an American loses his? Apparently Andrew Klavan thinks so.
I sent that article to my kids yesterday
Terry Crews gets it:
“(A lord of Adam Smith’s time would likely trade his lands and title for my spare bedroom and its contents.)”
I doubt it…because his social status and sense of identity were (if he was at all typical) wrapped up in his real estate possessions.
There were attempts made to get US Southern plantation owners to invest in manufacturing (cotton mills, especially)…there was relatively little interest, because it didn’t fit the lifestyle.
re Hydropower, it is indeed renewable within the constraints of a particular location. But the number of locations suitable for hydropower is limited.
It’s interesting to speculate about what things would have been like had the steam engine never been invented, and all the mechanisms of the Industrial Revolution and of electrification needed to be powered by hydro or wind. (The first mechanized spinning machine was called the Water Frame, reflecting its energy source) Good waterpower locations would have become very, very valuable, with tremendous financial rewards for their owners. Waterpower rights and regulation would have become a major political issue.
But human intenuity, in the form of the efficient steam engine freed power generation from dependence on appropriate rivers and terrain…BUT is put a high value on real-estate beneath which there was coal (and later oil/gas)
Adam Smith said something far more radical than one person’s wealth does not make another poor. He claimed that the wealthier the people around me are, the better off I’m likely to be:
Randy,
I way-more-than Liked the OP.
But I way, way-more-than Liked your addendum. The logic of your attack on the pseudo-conservatives is like two to center mass, one to the head.
Peace,
Camper
[Florence, if Weivoda is not on the LOATBTTTUFITGS (List of Assets to Be Transported to the Underground Facility if Things Go South) please add him.]
Possibly all the lord’s capital and attention was sunk in his land as well. For plantation owners there was that and, immorality aside, that given cheap land suited to a highly lucrative crop and available (if expensive) labor, it was probably a competitive investment.
If you do bring the Weivodas, bring cat food. Lots of cat food.
Generally, I hear more complaints that the people negotiating for the US tend not drive a hard bargain. You want a good poker player, not someone looking to make friends. The free market does not stop you from getting a raw deal unless you work at it.
A number of people who resent wealth are under the impression that rich people hate the middle class and wish that everyone not rich were poor. Some conspiracy wackos even think the rich have secret plans to literally exterminate the middle class, so it’s just the very rich and the destitute.
This makes no sense to me at all. Most people who are rich got that way by selling products to the masses. If you lived in a country where most people are destitute, who are you going to sell your products and services to? Would Steve Jobs or Bill Gates have become rich if they lived in a world where only the upper 1% could afford a computer? Would Henry Ford have become rich if he lived in a country where most people’s transportation budget covered a pair of shoes?
The counterargument is that some people would rather feel more like nobility than make more money. If everyone can have the good life, then being super-rich loses some of its appeal.
One of the main sensations the liberal project offers is the sense of looking down on those people. This may include people who hate their family etc. This why you have intricate beliefs the Heinz 57 genders and such – they are luxury beliefs that only the elite can hold.
Agree, this is silly. In a market society there are entrepreneurs. An entrepreneur is NOT distinguished from others in a market society by his hatreds or loves. His emotional connections and enmities are irrelevant to the classification.
An entrepreneur seeks a profit. That is what distinguishes him from non-entrepreneurs.
A successful entrepreneur becomes rich. What distinguishes him from unsuccessful entrepreneurs is that he generates great wealth for his customers and society, whereas the others did not.
Not every rich person became rich by entrepreneurship. Some inherited their wealth, some gained it by deception or violence. The latter group comprises two sub-groups: criminals and corrupt politicians.
Now, perhaps there is something about (a) inherited wealth or (b) wealth gained either by violence against one’s fellow man or by deceit that is correlated positively with hatred of the middle class or the wish that everyone not rich were poor.
But why would this association exist for people whose distinctive characteristic is the successful pursuit of their own wellbeing by the pursuit of far greater wellbeing of ordinary people?
I’m sure most people consider it a raw deal if our markets are more open to another country than theirs are to our producers. The majority of economists, though, believe that free trade is beneficial even when it is not reciprocal. For example, it hurts American rice farmers that Japan largely keeps out imported rice to the benefit of Japanese rice farmers. But hurt far worse are the Japaneses rice consumers who get screwed over and have to pay far more than the world market price.* Should we retaliate by screwing over the American consumer by also raising our cost of living by restricting imports? I don’t think so, but I realize I am in the minority. I live in sugar beet country and it’s a very unpopular opinion around here that we should have unrestricted access to the world’s sugar market.
* Or at least that was the case several years ago, I haven’t looked up if Japan has opened up their rice market recently.
Part of the problem is the different time horizons involved. Your plan will work on the long run, but it the short term it will drive farmers out of business. Countries can make decisions that are very bad economics, like massive subsidies for local industry, in an attempt to drive other nations industry out of business. Since restarting production is expensive, the local industry will be able to increase their prices with less competition.
Unilateral open markets are a political loser because the benefits are delayed, distributed, and not obvious, while the costs are specific, visible, and immediate. There are also things that need to be kept in-house, as we saw during the intense phase of the Wuhan pandemic with panic buying. In essence, sometimes the decision supported by economics is not the best policy.
Intervention in markets to keep bad businesses afloat is misguided good intentions. Rather than solving a social problem, it prolongs and worsens it.
Quote of the day from Phil Gramm?