How the Rich Make Us All Better Off

Fiscal Times ^ | 05/11/2012 | Bruce Bartlett



Sunday’s New York Times Magazine contained a controversial article about a former partner of Mitt Romney’s at Bain Capital named Edward Conrad. Sounding a bit like the libertarian novelist Ayn Rand, Conrad argues, forcefully, that we are all better off because of rich people.

Rich people, Conrad says, do most of the saving and investing. They provide the capital that creates new businesses and industries, finances inventions and discoveries, and are willing to take many risks and lose a lot of money for every one that pays off spectacularly. If the rich didn’t do these things, we would all be worse off.

Conrad concentrates on rich people as investors. But the wealthy also provide enormous benefits as consumers. Think of all the inventions of recent years that were enormously expensive when the first ones came on the market: personal computers, high definition televisions, cellular telephones, tablets, and so many others.
I still remember the first time I ever saw a mobile phone back in the 1980s. My friend Wayne Valis, a lobbyist, had one. It was the size of a car battery and had to be carried with a strap over his shoulder because it was so bulky and heavy. I don’t think it was even a cellular phone, but a radio telephone. It undoubtedly cost several thousand dollars at the time, probably equivalent to about $10,000 today. Nevertheless, it was extraordinarily valuable to Wayne in his work to have instant contact with his office and clients back in the days of beepers and phone booths.
Today, of course, almost everyone has a cell phone. Basic ones with prepaid service cost less than $20. They are a Godsend to people in developing countries that would never have phone service if the only option was a land line. Fancy cell phones are like mini-computers with a staggering array of capabilities.
The point is that unless well-to-do people like my friend Wayne weren’t willing to pay exorbitant prices for early, primitive mobile phones, we wouldn’t have cheap throw-away phones today. People like him effectively underwrote the enormous cost of creating the first cell phone – not just the research and development and industrial capability of manufacturing one, but the enormous infrastructure of cell phone towers so that it can be used.
If you think about it, the same thing is true of every important technological development you can think of. The first person to have electricity in his home was undoubtedly a very rich person. Same goes for radio, television, microwave ovens, air conditioning and all kinds of other things that even poor people take for granted.
Economists have long recognized that “conspicuous consumption” by the wealthy served the beneficial social and economic purpose of creating initial markets for products that later became necessities of life used by everyone. As the economist Ludwig von Mises put it in his 1927 book, Liberalism:
The luxury of today is the necessity of tomorrow. Every advance first comes into being as the luxury of a few rich people, only to become, after a time, the indispensable necessity taken for granted by everyone. Luxury consumption provides industry with the stimulus to discover and introduce new things. It is one of the dynamic factors in our economy. To it we owe the progressive innovations by which the standard of living of all strata of the population has been gradually raised.
This fact is illustrated in a 2006 Pew study, which looked at a range of products and the extent to which they had gone from being luxuries to necessities. For example, air conditioning was considered to be a luxury by 72 percent of people in 1973, with only 26 percent saying it was a necessity. By 2006, those numbers were reversed, with 70 percent of people saying that air conditioning was a necessity and only 29 percent viewing it as a luxury. Between 1996 and 2006, microwave ovens went from being considered a luxury by 68 percent of people to being considered a necessity by 68 percent of people.
In his famous 1889 essay, “Wealth,” Andrew Carnegie, who sold his steel company in 1901 for the equivalent of $325 billion in today’s dollars, agreed that the wealthy aided society both as investors and consumers. But at the same time, he said that the ownership of great wealth bestowed a heavy obligation on those with it.
Carnegie had no respect at all for those who merely inherited their wealth and simply sat on it; and he thought it was irresponsible for those who made great fortunes to leave them to those who didn’t earn it. He believed strongly in an archaic concept known as noblesse oblige, which means that great privilege brings with it great responsibility.
Carnegie believed that not only should wealthy men leave little to their heirs, he also disdained those who left their fortunes to foundations, universities and such, viewing them as monuments to vanity. While the latter was better than the former, Carnegie felt that rich men ought to use the same skills that made them wealthy to properly dispose of their fortunes while they lived. The man who dies rich, he said, dies disgraced.
I think Carnegie would disagree strongly with Conrad, who appears to think that the responsibility of the rich man begins and ends with making a fortune. Sadly, far more rich people today appear to agree with Conrad than Carnegie.