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A Lesson from 1871 and 1874

Here’s a letter to a student in New Jersey:

Dear Mr. Sloan:

Thanks for your latest note.  You remember correctly that I agree that Pres. Obama’s “You didn’t build that!” quip referred to infrastructure and other inputs – admittedly produced by others – that each entrepreneur relies on.  You’re mistaken, however, to insist that “because government makes businesses’ profits possible, even the most innovative” entrepreneurs and investors “earn only a portion of their profits.”

You confuse possibilities with actualities.  Infrastructure and other inputs do not turn themselves into valuable outputs.  That task requires entrepreneurial creativity, risk-taking, and effort.  The very existence of huge profits earned in markets suffused with infrastructure and other inputs implies that entrepreneurs who earn these huge profits produce something unusually rare and valuable – something that the vast majority of people, despite having the same access as do successful entrepreneurs to infrastructure and other inputs, do not produce.

In short, the outputs created by entrepreneurs would not otherwise have been produced.  Therefore, the profits of these entrepreneurs reflect the additional value to the economy of these outputs.  This is additional market value that, despite the use of infrastructure and other inputs, is created only through the actions of successful entrepreneurs.  These entrepreneurs, and they alone, are responsible for making actual that additional value which, without their efforts, would remain only an unrealized – indeed, unnoticed – potential.

This reality does not itself argue against taxation.  Infrastructure, like other inputs, must be paid for, and taxation is one way to pay for it.  But this reality does mean that it’s mistaken both to attribute to government a prime and uniquely important role in the creation of entrepreneurial profits and to suppose that government, by virtue of a politician quipping fatuously to entrepreneurs “You didn’t build that!,” becomes entitled to an open-ended claim on those profits.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030