The Benefactor

by Don Boudreaux on January 29, 2017

in Growth, Inequality

At lunch today in California with my friend Chris Rufer, we discussed, among other topics, production and consumption.  The following is a distillation of an important point that Chris made – a point that is correct and relevant.  (Ignore, for purposes of this post, taxation.)

Consider an extraordinarily wealthy modern American – someone’s whose net worth is multiple billions of dollars.  Call this person Smith.  Smith, despite his great wealth, continues to work – successfully – to supply goods to offer through markets to consumers.  Suppose that in 2016 Smith’s personal income is $400 million.  That is, Smith’s productive efforts generated a net increase in wealth in society of $400 million – as expressed though, and as measured by, the voluntary choices of the input suppliers and the consumers with whom Smith dealt in 2016.  Smith’s efforts caused in 2016 the total value of the wealth in society to rise by $400 million more than it would have risen had Smith relaxed for all of 2016 on a beach sipping cocktails and doing crossword puzzles.

Now ask: what did Smith likely do with this $400 million addition to his already-vast fortune?  Some of it he spent on food and drink and clothing and transportation and entertainment for himself and his family.  Some of it he spent to repair his residences and his personal private jet and his yacht that incurred wear and tear during 2016.  But it’s unlikely that Smith spent in 2016 significantly more than he spent in 2015 or in 2014 or 2013.

Let’s say that Smith loves to live lavishly.  He annually spends on consumption the exceedingly high sum of $100 million and he never gives a cent to charitable causes.  So he spent this amount in 2016.  But surely, had lavish Smith in 2016 not earned $400 million but only, say, $350 million, being a multibillionaire, Smith’s consumption in 2016 would likely still have been $100 million.  Indeed, even if Smith in 2016 earned as personal income $0, his consumption expenditures quite possibily would still have been $100 million.  (He can, after all, liquidate some small portion of his assets.)

But, again, Smith earned in 2016 a personal income of $400 million.  Yet this large income does not cause Smith to consume more in 2016 than he consumed in 2015 or 2014 or 2013.  Smith’s productive efforts added $400 million to the world’s wealth in 2016 yet Smith effectively consumes none of it.  Under the not-implausible assumption made above that, being a multibillionaire, Smith’s current consumption is independent of his current income, Smith’s $400 million personal income in 2016 is a net addition to society’s wealth.  So, again, Smith in 2016 created an additional $400 million worth of goods and services for people to consume and yet he himself consumed none of it.

Stated differently, because of Smith’s productive efforts in 2016 the people of the world have available an additional $400 million worth of goods and services to consume that they would otherwise not have available, but Smith’s own consumption doesn’t change one bit.  Consumption-wise, Smith’s efforts in 2016 enrich others but do nothing to enrich him and his family.  Smith’s efforts likely caused financial-wealth inequality, and perhaps even income inequality, to rise in 2016, but these same efforts also caused consumption inequality either to fall or certainly to be lower than it would have been without Smith’s productive efforts.

Why is someone such as Smith, in his capacity as a very successful entrepreneur in the market, not celebrated as a great and wonderful benefactor of humanity?


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