All Commentary
Monday, June 1, 1987

Defending the Rich

Dr. Peterson, the first homer of the Scott L. Probasco. Jr. Chair of Free Enterprise at the University of Tennessee at Chattanooga, has just formed with his wife a Washington research consulting firm.

Listen. The winds of egalitarianism still blow. . . . Listen, for example, to Rep. David R, Obey of Wisconsin, then chairman of the Joint Congressional Economic Committee, issuing last summer a Committee report (later withdrawn as incorrect) alleging that the so-called “super-rich” have become 38 per cent richer in the last 20 years:

“This study is proof that the rich get richer. A continuation of this trend erodes the basic confidence of the American public in our entire system. It increases cynicism, and adds to the us-vs.-them attitude about all institutions, economic and governmental.”

Or, listen to economics professor David M. Kotz of the University of Massachusetts last fall writing à la Robin Hood in The New York Times on the annual Forbes listing of the 400 richest people in America: “How many billionaires are enough? The share of income and wealth flowing to the rich has been expanding at the expense of the poor. The free-market policies that lie at the heart of the Reagan program have produced this redistribution, while conferring no compensating economic benefits. Instead, we have the worst of all possible worlds: rising inequality amid sluggish growth.”

Or, listen to Professor David Gordon of the New School for Social Research and co-author of the newly released Democratic Party study, “Democratic Alternative to Economic Decline”: “The most important story about the U.S. economy in the ‘80s is the economic warfare that the wealthy and powerful have been waging against the vast majority of Americans.” His proof: “The real median income of families in the U.S. dropped by 5.7 percent from 1979 to 1984.”

Handling charges like these has been my lot in a professional teaching career spanning almost four decades. As an ingrained supporter of freedom and free market policy, I have long found myself having to defend what many critics deem the undefendable: the rich. Or, having to put down personal innuendos, usually getting them second- or third-hand, that I am perforce a lackey, a sycophant for the rich.

Sometimes my defense is technical. To Messrs. Obey, Kotz, and Gordon, for example, let me remind them of a new Joint Economic Committee study by Ohio University Professors Lowell Gallaway and Richard Vedder. Professors Gallaway and Vedder note family erosion in America and accordingly think that income per family or household member is the appropriate measure. They then show a “real household income growth per household member of nearly 5.9 percent” from 1980 to 1984.

Moreover, a recent U.S. Census Bureau Survey on Household Wealth and Asset Ownership finds a long-term declining trend in family wealth concentration. This finding ties in with those of University of Chicago economist Yale Brozen. Brozen determined from U.S. Government statistics that in 1929 employee compensation amounted to 60 per cent of national income while the top 5 per cent of all families received 30 per cent of national income. In the next 40 years the share of the top 5 per cent steadily eroded while the employee share rose. By 1969 the employee share reached 72.5 per cent while the top 5 per cent share dropped to 16.5 per cent, almost down to half of what it was in 1929.

To be sure, employee share improvement has slowed since 1969. But Brozen notes a declining U.S. savings rate (net national savings as a percent of net national produc0 from 15.2 per cent in the 1961-1970 decade to 11.7 per cent in the 1971-1980 decade. Thus the pace of business investment also slowed, with the upshot of much slower growth in labor productivity. Output per manhour fell from a postwar annual average of around 3 per cent through 1970 to under 1 per cent in the 1971-1980 decade.

With such data as this, Yale Brozen has unabashedly formulated Brozen’s Law: Whenever the government attempts to redistribute income from the rich to the poor, it creates more poor people, impoverishes the nation, and decreases the portion of the tax burden borne by the rich. I concur, heartily.

Why does more investment lead to a more equal distribution of income? The reason: Capital, mainly in the form of plant and equipment, complements labor: more capital per employee means greater employee productivity—and higher pay. Thus capital, Karl Marx to the contrary, tums out to be labor’s best friend, with labor exploiting capital rather than the other way around. Indeed, the greater the capital investment relative to labor the lower the return to capital and the higher the return to labor. This is the history of the “exploited” working man with his ever-rising living standards under capitalism.

But sometimes my defense of the rich is less technical and more philosophical. I have to re mind my critics that eventually rich entrepreneurs like Henry Ford, Andrew Carnegie, John D. Rockefeller, and Thomas Alva Edison, as well as more recent commercial pioneers like David Sarnoff (RCA), Edwin Land (Polaroid), Ray Kroc (McDonald’s), and Sam Walton (Wal-Mart—Mr. Walton, who started from scratch, is Forbes’ No. 1 billionaire), helped make America great, that they forged millions upon millions of jobs, that they mightily boosted capital formation and thereby advanced America’s living standards, that, accordingly, they belong in America’s pantheon of heroes. It follows that all incomes are not created equal—nor should they be. Equality of opportunity, yes, equality of outcome, no.

I have also to remind my critics of the wisdom of my graduate teacher, Ludwig von Mises, whom I lucked into at New York University in 1950 as a result of his being a refugee from Hitler’s Festung Europa (Mises escaped in 1940, working his way to New York City). Said Mises in his The Anti-Capitalistic Mentality (1956):

Nobody is needy in the market economy because of the fact that some people are rich. The riches of the rich are not the cause of the poverty of anybody. The process that makes some people rich is, on the contrary, the corollary of the process that improves many peoples’ want satisfaction. The entrepreneurs, the capitalists and the technologists prosper as far as they succeed in best supplying the consumers.

Moreover, critics, hear this: Investment inevitably involves risk, while pushing up all incomes, including those of the poor. Stocks, bonds, real estate, and so on are ever subject to the vagaries and risks of the market, and a number of historians have propounded the thesis of “from shirt- sleeves to shirt-sleeves in three generations.”

Hence, Mises argued in Human Action (1949) that wealth is in reality a “social liability,” very much subject to loss:

Ownership of the means of production is not a privilege, but a social liability. Capi talists and landowners are compelled to employ their property for the best possible satis faction of the consumers. If they are slow and inept in the performance of their duties, they are penalized by losses. If they do not learn the lesson and do not reform their con duct of affairs, they lose their wealth.

One more thing: Is there a hidden agenda in the attack on the rich? Is envy, one of those ancient Seven Deadly Sins, at work? Scores of Latin, German, Russian, Polish, Spanish, Chinese, and Jewish proverbs tell us, inter alia, envy has never made anyone rich, envy cuts its own throat, envy makes life bitter, envy envies itself, envy sees faults rather than virtues, the envious die over and over before they finally keel over, and so forth and so on. Dryden put it this way: “Envy, that does with misery reside/ The joy and the revenge of ruin’d pride.”

To me, the attack on the rich ties in with the theology behind the progressive income tax—with the opposition toward flatter tax rates. Interestingly, the first modern supply-sider was not Ronald Reagan but John F. Kennedy. In pushing for a reduction of tax rates from a top bracket of 91 to 65 per cent and a bottom rate from 20 to 14 per cent, enacted into law in 1964, President Kennedy voiced a simple truth: “A rising tide lifts all boats.”

  • William H. Peterson (1921-2012) was an economist, businessman and author who wrote extensively on Austrian Economics. He completed his PhD at New York University in 1952 under the supervision of Ludwig von Mises.