In a recent New York Times column titled “The Undeserving Rich,” Paul Krugman writes, “You almost never see apologists for inequality willing to talk about the 1 percent, let alone the really big winners [the top .1 percent].”
Here is my totally unapologetic defense of the most extreme economic inequality: the building of great business fortunes, fortunes reaching into the billions and tens of billions of dollars. Such fortunes are accumulated by a minority far smaller even than .1 percent of the population.
I do not offer a defense of each and every such fortune, only those which are built on a foundation of productive innovation and the saving and reinvestment of the proceeds of such innovation. I exclude fortunes built on a foundation of government subsidies, or government regulations harming competitors, and those built merely on a foundation of inflation and credit expansion. In today’s “mixed economy,” many great fortunes have mixed foundations. In such cases, my discussion applies only to the free market element in the mixture.
A great business fortune is accumulated by means of earning a high rate of profit on capital and heavily saving and reinvesting that high rate of profit year after year. For the sake of illustration, earning a 100 percent rate of profit and then saving and reinvesting practically the entire profit achieves a doubling of capital every year. At this rate of increase, in 10 years an initial capital of $1 million, say, will grow approximately 1,000-fold to somewhat more than $1 billion. This is the necessary arithmetic of fortune building: the combination of a high rate of profit and a high rate of saving and reinvestment to achieve a high compound rate of growth of capital.
A high rate of profit is achieved by introducing newer, better products or producing existing products at a lower cost.
Sooner or later, competition brings down a high rate of profit to the general level. To go on earning it, further innovation is necessary.
For example, to maintain its high rate of profit, Apple has had to repeatedly improve its products and introduce major new products. To maintain its high rate of profit, Intel has had to repeatedly reduce the cost of production and price of its computer chips, to the point where gigabytes of RAM now sell for less than megabytes did a generation ago.
Had Apple or Intel stood still, its initially very profitable products, made obsolete by competition, would now be selling at huge losses.
The high profits are generally invested in the means of producing the very kind of products in which the innovations take place. For example, Apple’s profits are invested in the expanded and improved production of Apple’s products.
Thus, business fortunes under capitalism represent ever better, less expensive products produced with capital constituted by those fortunes.
The fortunes originate in profits and are used as capital. Both ways they serve the general buying public. They also pay wages and salaries.
The existence of fortunes under capitalism benefits everyone in his capacity both as a buyer of products and seller of labor.
The process of fortune building has been the driving force of economic progress and rising living standards for more than two centuries. It was responsible for the steam engine, the cotton textile industry and mass produced clothing and shoes, railroads and steamships, coal mining and iron and steel production, oil and natural gas production, electric power and light, the automobile industry, motion pictures, radio and television sets, and consumer appliances of all kinds, such as air conditioners, refrigerators, and washing machines, and now, in our day, such things as personal computers, tablets, and smart phones. At every step, the building of the fortunes rested on innovations and then their increasing and improved production based on capital accumulated out of profits earned from the innovations.
Those who have earned their fortunes by means of such positive productive contributions fully deserve them. They are truly benefactors of mankind.
The enemies of such economic inequality are ignorant of economics. They know nothing about profits, innovation, or capital. They do not realize that in entailing the confiscation of high profits and aborting the earning of fortunes, their policies would stifle economic progress.
The enemies of such economic inequality believe that wealth is a pile of consumers’ goods that somehow is just here and can be taken for granted. They believe that the capitalists, whom they depict as fat men, allegedly have too much of this pile. Some of it, they claim, must be given to the starving masses. On this basis, they are led to advocate a policy of seizing capital in order to consume it— a policy of eating the seed corn and being impoverished.
In their ignorance, the enemies of the free-market’s economic inequality are fueled by envy and resentment, biting the hands that feed them.
Socialism/Communism is their philosophy. Stalin and Mao are their heroes. Famine, slave labor camps, and mass death are their legacy.
Copyright © 2014 by George Reisman. This article may be reproduced electronically provided this note is included in full. George Reisman, Ph.D., is Pepperdine University Professor Emeritus of Economics, and the author of Capitalism:A Treatise on Economics and other titles His website is www.capitalism.net. His blog is www.georgereismansblog.blogspot.com. Follow him on Twitter at @GGReisman.