Monday, 13 April 2015

Sorry envious lefty folks but entrepreneurs did build that infrastructure


You'll all be familiar with the "you didn't build that" line directed at wealthy and successful entrepreneurs who have the audacity to use public roads, educated employees and safe communities in managing their business. The most commonly used example - usually in the form of this little Internet poster - is from US Senator Elizabeth Warren.

There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn't have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.

You can hear as the socially aware cheer to the rafters at Liz sticking it to the man - telling those rich, successful business people that they owe all that success to the government and should be jolly grateful that it plans to take most of it away in taxes. And it's true that all those things were done with public money (although it's entirely possible - certainly with roads - that private investment could have delivered just as well). But that's not the point, the point is that the rich and successful entrepreneur added some value that wasn't there before - here's Don Boudreaux:

The government-built road that Smith uses to earn handsome profits by serving consumers might well be absolutely essential to Smith’s success, but this fact doesn’t mean that the road’s contribution at the margin to Smith’s success is significant.  Smith’s profits depend upon what he adds to the road’s services – how Smith himself uses the road to create value for consumers.  If Smith uses the road to ship truckloads of ordinary toothpicks to market, he might earn just enough to continue in that line of work, but he’ll not earn magnificent profits.  If instead Smith uses the road to ship truckloads full of new’n'improved toothpicks – toothpicks that sell at prices only slightly above that of ordinary toothpicks but, in addition to doing what ordinary toothpicks do, also are guaranteed to prevent gum disease, cavities, bad breath, insomnia, and erectile dysfunction – then Smith profits magnificently.  Smith’s “above normal” profits (as economists call them) have nothing to do with the road (or with, say, the private efforts of entrepreneurs who are responsible for the delivery truck Smith uses) and everything to do with Smith’s own innovative efforts.
This is the entire point - the entrepreneur is successful because he gets a small part of the value he has added to society (about 3%), most of that value is enjoyed by the consumers who use the goods or services that entrepreneur creates. Having schools, hospitals, roads and policemen paid for from taxes is not a guarantee that we will get that extra bit of margin - it is entirely down the the entrepreneur, which is why such folk are so rich.

So we have benefited (collectively) from 97% of the value added by the creation of whatever wonderful innovation our entrepreneur has developed. And, since this is how the world works, a pretty juicy chunk of that 97% has gone to the government is taxes, duties, fees, levies and rents - the Elizabeth Warren argument is simply wrong. For sure, the entrepreneur didn't build those roads but the extra tax income the added value from his innovation provides made a big contribution to providing schools and hospitals as well as contributing to the next generation of infrastructure investment.

No-one denies the essentially collective nature of free markets - the idea that they are selfish, individualistic or greedy is utter nonsense - yet the cheerleaders for what we might call the 'envious left' continue to peddle the lie that somehow that billionaire entrepreneur isn't successful from his own intelligence and efforts. Worse still that our entrepreneur should face punitive taxes on income and on the return from investment for the sole reason that he has such a lot of the stuff and we don't like him for that reason.

In the end, the marginal improvements those entrepreneurs got rich from also were what made us all richer and made it possible for government to built that infrastructure so the next generation of creative business people can make the next set of marginal improvements (as well as the rest of us enjoying better roads, schools, hospitals and sundry other infrastructure).

The entrepreneurs did build that...


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