In my column for the February 11th, 2014, edition of the Pittsburgh Tribune-Review I argued that no institution comes close to equalling the market at ensuring “shared prosperity.” You can read my column in full beneath the fold.
Sharing prosperity
In popular discourse, some phrases signal the speaker’s or writer’s political views. Interpreted literally, the phrases convey agreeable sentiments. But the real meanings of these phrases come less from their words than from the fact that people with certain political beliefs habitually use these phrases to justify their favorite government policies.
A familiar “progressive” phrase today is “we want an economy of shared prosperity.” Superficially, this phrase is unobjectionable. Who, after all, wants an economy in which prosperity is hogged by a tiny fraction of the population? The problem is that, while everyone agrees with the goal expressed by this phrase, there’s much disagreement over the best means to achieve this goal.
“Progressives” today deploy the term “shared prosperity” as code for “government must redistribute wealth and otherwise intervene actively into the economy.”
Consider the simple market exchange of Ms. Jones buying tomatoes at Wal-Mart. Ms. Jones gains (otherwise she wouldn’t have chosen to buy the tomatoes at Wal-Mart); Wal-Mart’s shareholders gain (otherwise Wal-Mart wouldn’t have chosen to build a store and employ workers to sell the tomatoes); Wal-Mart’s workers gain (otherwise they wouldn’t have chosen to work for Wal-Mart); farmers gain (otherwise they wouldn’t have chosen to sell their tomatoes to Wal-Mart).
Wal-Mart’s entrepreneurial moves to build stores, to sell groceries and to innovatively manage its inventories undoubtedly enrich investors who stake some of their money on Wal-Mart. These investors, however, earn money only because Wal-Mart enables workers and consumers to gain.
If too few workers choose to work for Wal-Mart or if too few consumers choose to shop at Wal-Mart, Wal-Mart’s investors would lose, not gain, prosperity.
In short, Wal-Mart’s success at increasing its profits causes prosperity to be shared by many others. Some individuals might enjoy larger increases in their well-being than are enjoyed by others, but nearly everyone gains. In the market, an investor, producer or corporation that attempts to gain wealth without at the same time improving the well-being of others will fail.
The logic of how markets necessarily cause prosperity to be shared is plain. And evidence that markets create and share prosperity is all around us. If you doubt this claim, examine the clothes you’re wearing now. Did you make them? Could you make them? Consider also the food you recently ate. Did you grow it? Ditto for nearly everything else you consume on a daily basis.
This logic of how markets create prosperity and cause it to be shared widely is backed also by academic evidence. Yale University economist William Nordhaus finds that innovators capture a mere 2.2 percent of the total social value of their innovations.
For many innovations, of course, the absolute dollar value of this tiny percentage is huge. If, for instance, the total social value of a new smartphone app is $1 billion, its creator will likely pocket $22 million. That’s a lot of money. But it’s a pittance compared to the full value of the app. Its creator — for a fee of only 2.2 percent — shared $988 million worth of prosperity with countless strangers.
