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Tuesday, October 4, 2011

Beneficial Business

Recently a video of Elizabeth Warren has been circulating around the Internet. This quote has become particularly popular:

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.

In part she is right. Our economy is based on social cooperation under the division of labor. Our ability to become as wealthy as we have rests on this cooperation, where each of us specializes in the things we do best. The problem is the jump in logic taken from there. As Sheldon Richman points out, her argument is a non sequitur. The jump from working together to higher taxes, particularly for wealthy businesses, doesn’t necessarily follow. Further, the “social contract” she mentions was signed and agreed to by no one. In fact some of the only, if not only, historical examples of real social contracts can be found in medieval trading towns in Germany and on pirate ships, and certainly neither are applicable to our modern and complex society. Providing certain services does not imply complete ownership over us.

There is, however, more wrong with Warren’s words. In Philosophical Society: The Tale of the Slave, the obligation to “pay forward for the next kid who comes along,” she seems to be implying that businessmen, at least in part, should work for the good of others. Going into business requires you to work for others because others worked for you, making your profits possible. This is the Cliché of Socialism number 41, as Leonard Read pointed out.

Morally the libertarian should be outraged by such a notion. Nozick’s tale of the slave may even come to mind. But again, it is a non sequitur. Those things, which “we” have paid for, that benefit the factory owner and other businessmen are just that: beneficial! So much so, in fact, that most would be willing to pay for these services. There is little-to-no reason businesses should pay more in taxes so the State can provide these and many other “services.” They could be provided, at least for the businesses, privately.

Moving your goods to market is all part of the costs of doing business. It is in their own self-interest to make sure they have the roads necessary to get them to the customer (meaning they have a willingness to pay). Roads in fact were historically provided privately, and some still are today.

Employees have an incentive to educate themselves. When we go, or our parents send us, to school we are investing in our future. In other words, we are hoping education will result in higher wages in the future. And employers prefer this because it means a higher productivity. There is already an embedded incentive to educate.

And security. Many businesses don’t even rely on the police but instead hire their own private security. Making sure their goods are secure is another cost of doing business that firms have their own incentive to provide. Some of the safest places in the world are safe not because of public police but because of private security and commerce.

Businesses are willing or would be willing to pay for these things because it is in their own self-interest. And similarly other individuals and businesses would be willing to provide them. There is no need to rely on the coercive tools of the State or some notion of a mythical obligation towards a social duty to provide these goods. As Adam Smith put it,

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . . . By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it.

By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

In other words, these selfish businessmen earning a profit are benefiting society. They are providing society with goods that it wants; it is making us better off. The larger the profits the more it has paid it forward.

The above is not necessarily an argument for anarchy in the broad sense. A case could be made for the need of a State, but that is an argument for another  time and place. What it shows, albeit in an overly simplistic form due to space constraints, is that these goods which make most businesses possible are in themselves the products of businesses. This could all be up for debate. After all a case can be made that these are public goods that would be underprovided by the market. But they certainly can be provided. Even if it is true that they cannot, businesses still pay it forward through the value they generate.

Warren’s argument seems unjustified; the State she envisions is much greater than it needs to be. Thus higher taxes are not necessary; a cut in government is. We are in debt because the State does too much. This type of collectivist thinking will only undermine the incentives that make social cooperation under the division of labor work.

Download Leonard E. Read’s Cliché of the Socialism Number 41 here.  

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.