Wednesday, October 29, 2008

Do the Rich Owe Us?

Published 10.31.08 at and

Do The Rich Owe Us?

People who are otherwise quite smart become suddenly stupid when the subject is money. I don’t mean they manage their own money poorly, although that is often the case. I mean that they don’t actually understand what money is.

For instance, we are all now painfully aware that Barack Obama believes in some degree of socialism, given his predilection to favor “spreading the wealth around.” The idea is simple. Wealthy people have a lot, and poor people don’t. Money solves problems, so why not take some from the rich to give to the poor? Robin Hood was a hero, and that’s what he did, right? After all (and this is the vital part), those who are rich owe back to the society that’s given them so much.

Wait, what was that last part again?

People who make a lot of money owe a debt to society to use their money for good, and that’s why it’s okay to tax them more heavily in order to do the good things that need doing. This error is the source of the biggest errors people make in thinking about money and government.

In truth, it’s simple. The wealthy don’t owe us. Literally, we owe them. That’s what money means.

If I have $50,000 in a bank somewhere, that means that society OWES ME goods and services in the amount of $50,000. If I spend $20,000 of it on a car, society doesn’t owe me as much anymore because they’ve compensated me in the form of that car. Everyone collectively still owes me $30,000, which I can collect on in a variety of ways.

Money is an IOU from society that we give people when they give us things we desire or do things for us we want. So when a person makes a lot of money, it means that he has done beneficial things for a lot of people. If he accumulates these IOUs in a storage facility somewhere, he is amassing wealth not because he owes society, but precisely because society owes him the value of all those accumulated and uncollected debts.

To put the point a little more bluntly, people who have debt are the ones that truly owe back to society. That’s what debt means. You’ve enjoyed goods or services that you haven’t yet earned. And when you’ve created enough value in the eyes of other people, they’ll trade their stored-up credit to you and you can be debt-free, neither owing society nor being owed by society.

The thing about money is that it measures value. When I pay you $100 for an item, I am admitting that it is worth about twice as much to me in my life as something else I only pay $50 for. When people pay $12 to see a movie, they’re saying that a movie is worth four gallons of gas. And when someone sells a million people movie tickets, he makes a lot of money because he did a million favors.

In what sense, precisely, should someone who delivers the finished experience of watching a movie to a million people then be obligated to those people to give them back any portion of the money they freely paid him? In reality, because he has worked while they have leisured, they now owe him. That’s why he can go back to them and let them cut his hair, change his oil, and weed his garden in exchange for some of those dollars.

Here’s a quick test to see whether you are grasping this idea. Who contributes more value to society: a person who makes $100,000 or a person who makes $20,000? If this question is at all difficult for you, it’s because you’re secretly at war with yourself. You despise people who make a lot of money, yet you daily affirm the social value of making a lot of money when you pay more money for the things you want more.

Also, just to admit the obvious, one may also do beneficial things without receiving money. Friends, parents, and volunteers do this all the time. But when someone gives you money, you know one thing: you have benefited them.

“But what if the man who earns 100K does so through pornography and the 20K guy teaches kindergarten?” Alright. “But what if the 100K guy is a doctor and the 20K guy sells cigarettes?” Don’t cherry-pick your examples. Of course people make bad decisions about value, but other people make good decisions about value. That’s the idea of letting people make and spend their own money. The alternative is socialism.

But here’s one final error that may be plaguing some of you. When people make a lot of money, doesn’t that mean that other people become poor?



Not even a little bit.

As long as the transaction is voluntary (i.e. not taxes or theft), then both people become better off every time money changes hands. That’s because the thing being purchased means more to the person buying it than the money he spends, and the money being paid means more to the person receiving it than the thing he sells. The magic of a free market is that every single transaction (EVERY SINGLE TRANSACTION) makes the world a better place because it benefits both parties involved. (By the way, I’m sorry for screaming, but I had to overcome a Master’s Degree in grasping this elementary concept.) This means that the free market is NEVER a zero sum game where one person gains and the other person loses. It is ALWAYS a positive for both, achieving a more efficient distribution of desirable items through a totally voluntary process. The economic pie is not fixed, but can grow or shrink based on production, consumption, waste, and exchange.

When you buy a haircut, your life gets better because you prefer shorter hair to the $15 you paid. Similarly, the barber’s life gets better because he used his time and talent to help you, and now he can go out to lunch. Who is worse off because you got a haircut? Nobody. Who is worse off because a barber starts hair salons and earns $450,000? No one. That’s just 30,000 little events where both parties improve their lives. That’s the nature of a free market.

So when you imagine that the guy who made it possible for thousands of people to have haircuts suddenly owes those people for having the audacity to have already given them a benefit, you’ve inverted the very meaning of money. And when you then tax him more because he’s been so effective at helping people, you’re teaching him that helping people is a bad thing and disincentivizing good behavior. But regardless of whether he is deaf to your foolish instruction, you have still stolen from him what was rightfully his entirely on the premise that being very good at helping people somehow puts you even more in their debt, a patently absurd concept.

For the sake of clarity, allow me to repeat myself. The rich do not owe us. In reality, we owe them. That’s what money means.

The way we say, “Thank you,” in the modern world is we give you money. The more we give you, the more thankful we are for the thing we’ve received. There is no voodoo threshold at which a pile of thank yous suddenly becomes a pile of “you owe us”es. And there is, therefore, no justification for telling people who accumulate the biggest pile of thank yous every year that they are obligated to give back to all the people that have already thusly thanked them.

In as short a way as I know to explain it, this is basic economic reason why Barack Obama should not be President. He simply does not understand what money is.


Naum said...

So in another words, "let them eat cake"…

So you would prefer the candidate that would grant tax benefits to the already well endowed instead of working Americans? When Warren Buffet and his peers pay less in taxes than his receptionist (and assistants, based on %), something is dreadfully wrong. When working people have seen their standard of living decline over the past 30 years (now 2 income earner families are necessary), yet the top 10% have had their wealth increased exponentially, something is askew.

Inequality of wealth has grave repercussions, according to economists and sociologists. It restricts social mobility, returns us to the days of the gilded age.

It is hyperbole to suggest that Obama restoring tax rates to what they were under Clinton is "socialist", or any more collective than McCain rewarding corporate interests in immense fashion, as he's done during his Senate terms.

People who make great fortunes are a lot more indebted to government aid than the ordinary worker, thus they should shoulder a greater burden. From defense, to infrastructure, to education, social services, etc.…, they profit from all the externalities accrued and gain from avoidance of costs of externalities they do not pay (pollution, waste, etc.…)

The period of the U.S. that saw the greatest rise in worker productivity and the largest expansion of the middle class was post WWII up into the 1970s when the costs of foreign war punctured the once healthy economy. And do you know what tax rates were for most of that period? 90%+ for the affluent…

The progressive income tax was a cornerstone of how U.S. became economic giant, revisionist history nonwithstanding…

Those who do not read and understand history are doomed to repeat it… 

Elizabeth said...

If we could only figure out how to teach the nation to value education and safety over leisure, ie pay teachers, policemen, and firefighters more than baseball players, actors, and actresses.

TLo said...

The point is that we all need to understand the principle of money and who has a legal obligation towards whom. The moral obligation of anyone is a different story. I think the moral obligation of government is to create a fair playing field. Perhaps current tax code is not as fair as it should be but the government is ineffective and out of it's place to "redistribute the wealth" after it has been accumulated legally. The moral obligation rests on the citizens, rich or poor, to help those around them in the ways that best benefit those that need help. For business, it may be best to create jobs rather than pay taxes, let us not be short sighted on the impacts of tax policies. For the rest of us working people it is being willing to structure our lives without financial debt so we can pay our moral debts to poor around us.

Andrew's paragraph discussing how every purchase is good for both parties reminds me of Prov 20:14. ""It is bad, it is bad," says the buyer; but when he goes away, then he boasts." I bet you already thought of that Andrew!

Thanks for making us all think!