Andrew Carnegie
The worry over the disparity of income and wealth is probably as old as the institutions of income and wealth. It may even be a necessary consequence of what Adam Smith calls our propensity to “truck, barter, and exchange.” There are even some scholars such as Richard Pipes who postulate that there may be an innate component to acquisitiveness. Still, there’s no question that the disparity of wealth taken to an extreme can cause (or be the symptom) of many problems. What may not be as obvious are the many benefits to the disparity itself not to mention wealth in and of itself. One of the more famous defenders of wealth is Andrew Carnegie. While the benefits to the wealthy individual (like Carnegie) are obvious we should examine the possibility that there are also benefits to those who are at the bottom of the income curve.
What are the benefits? The disparity of wealth creates competition as individuals strive to reach the top of the income curve. But, in a free-market economy, they do this by striving to produce better products for customers which is the real benefit of competition. As economist Walter Williams puts it, think of the areas in your life where you’re satisfied with the products such as groceries, computers, cell phones. There is competition in these areas. Contrast these with areas where you find dissatisfaction such as the post office or public education. No competition.
Another benefit of the disparity of wealth is the incentive it creates mentioned above. If everyone earned the same amount of money what incentive would there be to work harder or produce more? Some people work very hard to become doctors and lawyers; occupations we need. But, without the incentive of making more money, there would certainly be fewer people motivated to pursue these occupations.
Another important benefit is that wealth creates demand. People who have money rarely just let it sit in the bank; they spend it! This infusion of consumption not only is good for the economy but leads to lower costs for the rest of us. Why is it that big-screen televisions are less expensive now than a few years ago? Partially because the people who could initially afford them decided to purchase them early. Their consumption then makes our consumption now more affordable.
Finally, the only way to fund such public goods as hospitals, universities, and libraries is to accumulate vast sums of wealth in the hands of a few. Some of the most successful universities (ever heard of Carnegie Mellon?) and museums (Speed art museum in Louisville is one example) are the result of very wealthy individuals.
Exactly 70 years after Carnegie’s essay the Austrian economist Friedrich Hayek published an academic tome titled The Constitution of Liberty where he addresses the underlying economic and philosophical basis for wealth in general and disparity in particular. Though this is not the only point of the book it does figure importantly in his treatment of economics. Not surprisingly (based on the title) wealth is an important component of our liberty. As Hayek points out one of the prices we pay for this liberty is the propensity some people have to spend their wealth foolishly. But this can only mean they are spending it in ways that we don’t approve of. However, if the wealth is theirs then how it is disposed of is also theirs (cf. John Locke). As Hayek sees it a large part of the problem with the disparity of income is envy. We wish we made as much money as Bill Gates. We wish we had a house as large as Bill Gates. And so it goes. The question is whether Bill Gates’ having wealth is the cause of our lack of wealth. In simple economic terms, the answer is no.
One of the perennial criticisms of wealth is that it can only be obtained by taking from someone else. This is why the disparity of wealth is seen as such a problem and one that Andrew Carnegie was keen to address. But Carnegie is quick to point out, as did Adam Smith, that the real source of wealth is an increase in productivity which increases prosperity for workers as well as owners. It is the owner’s prosperity that is a direct cause of the worker’s prosperity. Contrary to Marx, the worker becomes richer the more he produces.
For more on this, we can fast forward to the year 2000 and a book published by Dinesh D’Souza titled The Virtue of Prosperity. Like Carnegie, D’Souza is an immigrant though not as wealthy as Carnegie. But, just as Carnegie defended wealth and prosperity D’Souza attempts to show that there are very real benefits to the increase in wealth and prosperity not only for those who are on top but the rest of us as well. One benefit, in particular, is that we can eliminate material poverty. That we aren’t succeeding is not a function of lack of wealth. The other factors involved have more to do with the restriction on liberty which Hayek worried about and still affects many people the world over.
As D’Souza points out, prosperity has become so prevalent that we’ve had to add new categories to our classification of wealth (see graph on the PowerPoint for the “new class structure”). What we still need is a way of understanding the nature of the causes and the consequences of this prosperity. One of the fallacies in economics is thinking that economics only stresses one kind of value when in fact there are other “non-economic values.” Thomas Sowell addresses this fallacy in his book Basic Economics and is a similar point to the one made by D’Souza. As Sowell puts it “of course there are non-economic values. There are only non-economic values. Economics is not a value in and of itself.” In short, what we need is a way of putting prosperity into a proper moral context. This is part of the point of a course in business ethics. Carnegie attempts to do this by showing that wealth can have positive effects. As we saw in a previous lecture Adam Smith makes the same point though he is sometimes criticized for illustrating that these positive effects are unintended. But, as we know, wealth can have potentially negative effects as well brought on in some cases by the belief that money can buy happiness.
Sure, up to point money can affect one’s well-being and therefore happiness. But, once certain basic needs are met money really cannot increase one’s overall happiness very much. The law of diminishing return takes effect around an income level of $50,000 a year. Beyond this level, more money doesn’t make one happier.
This is not a new insight at all. The ancient Stoic philosophers were well aware of this. Seneca once said, “He that is not content in poverty, would not be so neither in plenty; for the fault is not the thing, but in the mind.” Like many things, our attitude towards money is more important than the money itself and this is particularly true when it comes to how much we earn in comparison to others (remember what Hayek said above about envy). The 14th Dalai Lama makes the same point about money and happiness. Given that our desires are without limits we cannot find happiness in fulfilling them. We will always want more. This holds especially true for money. As Epicurus pointed out “nothing satisfies a man who is not satisfied with a little.”
All of this does beg the question about poverty though. Are we simply supposed to allow people who are poor to remain poor? As we have seen, the wealth created by people like Andrew Carnegie can help all of us, including those who are poor. However, two other points should be remembered regarding wealth and poverty. First, most people who start poor do not remain poor for their entire lives. Secondly, what counts as poor, at least in this country, is not whom you might think.
Having included statistics on the wealthy in the PowerPoint here are some interesting statistics for the poor from economist Walter Williams:
In 1995, 41 percent of all "poor" households owned their own homes. The average size of that home was three bedrooms, one-and-a-half bathrooms, a garage, and a porch or patio. Three-quarters of a million "poor" owned homes worth over $150,000; some of those homes sported Jacuzzis and pools. The average "poor" American has one-third more living space than the average Japanese, 25 percent more than the average Frenchman, 40 percent more than the average Greek, and four times more than the average Russian.
Seventy percent of "poor" households own a car; 27 percent own two or more cars. Ninety-seven percent have a color television; nearly half own two or more televisions. Two-thirds of "poor" households have air conditioning. By contrast, 30 years ago, only 36 percent of the entire U.S. population enjoyed air conditioning. America's "poor" people aren't hungry, either."poor" people are more likely to be overweight than higher-income people. The average consumption of proteins, vitamins, and minerals is virtually the same for poor as middle-income children, and in most cases above government recommended minimums.
Part of the problem is in how the Census Bureau computes statistics factoring in income but missing things like the value of estates which often include homes and stocks. Also uncounted are transfer payments. Listen to any politician for any length of time and it will become clear that rich and poor are not so much objective economic terms but subjective political terms. A good reason to discuss them in a business ethics book!
What are the benefits? The disparity of wealth creates competition as individuals strive to reach the top of the income curve. But, in a free-market economy, they do this by striving to produce better products for customers which is the real benefit of competition. As economist Walter Williams puts it, think of the areas in your life where you’re satisfied with the products such as groceries, computers, cell phones. There is competition in these areas. Contrast these with areas where you find dissatisfaction such as the post office or public education. No competition.
Another benefit of the disparity of wealth is the incentive it creates mentioned above. If everyone earned the same amount of money what incentive would there be to work harder or produce more? Some people work very hard to become doctors and lawyers; occupations we need. But, without the incentive of making more money, there would certainly be fewer people motivated to pursue these occupations.
Another important benefit is that wealth creates demand. People who have money rarely just let it sit in the bank; they spend it! This infusion of consumption not only is good for the economy but leads to lower costs for the rest of us. Why is it that big-screen televisions are less expensive now than a few years ago? Partially because the people who could initially afford them decided to purchase them early. Their consumption then makes our consumption now more affordable.
Finally, the only way to fund such public goods as hospitals, universities, and libraries is to accumulate vast sums of wealth in the hands of a few. Some of the most successful universities (ever heard of Carnegie Mellon?) and museums (Speed art museum in Louisville is one example) are the result of very wealthy individuals.
Exactly 70 years after Carnegie’s essay the Austrian economist Friedrich Hayek published an academic tome titled The Constitution of Liberty where he addresses the underlying economic and philosophical basis for wealth in general and disparity in particular. Though this is not the only point of the book it does figure importantly in his treatment of economics. Not surprisingly (based on the title) wealth is an important component of our liberty. As Hayek points out one of the prices we pay for this liberty is the propensity some people have to spend their wealth foolishly. But this can only mean they are spending it in ways that we don’t approve of. However, if the wealth is theirs then how it is disposed of is also theirs (cf. John Locke). As Hayek sees it a large part of the problem with the disparity of income is envy. We wish we made as much money as Bill Gates. We wish we had a house as large as Bill Gates. And so it goes. The question is whether Bill Gates’ having wealth is the cause of our lack of wealth. In simple economic terms, the answer is no.
One of the perennial criticisms of wealth is that it can only be obtained by taking from someone else. This is why the disparity of wealth is seen as such a problem and one that Andrew Carnegie was keen to address. But Carnegie is quick to point out, as did Adam Smith, that the real source of wealth is an increase in productivity which increases prosperity for workers as well as owners. It is the owner’s prosperity that is a direct cause of the worker’s prosperity. Contrary to Marx, the worker becomes richer the more he produces.
For more on this, we can fast forward to the year 2000 and a book published by Dinesh D’Souza titled The Virtue of Prosperity. Like Carnegie, D’Souza is an immigrant though not as wealthy as Carnegie. But, just as Carnegie defended wealth and prosperity D’Souza attempts to show that there are very real benefits to the increase in wealth and prosperity not only for those who are on top but the rest of us as well. One benefit, in particular, is that we can eliminate material poverty. That we aren’t succeeding is not a function of lack of wealth. The other factors involved have more to do with the restriction on liberty which Hayek worried about and still affects many people the world over.
As D’Souza points out, prosperity has become so prevalent that we’ve had to add new categories to our classification of wealth (see graph on the PowerPoint for the “new class structure”). What we still need is a way of understanding the nature of the causes and the consequences of this prosperity. One of the fallacies in economics is thinking that economics only stresses one kind of value when in fact there are other “non-economic values.” Thomas Sowell addresses this fallacy in his book Basic Economics and is a similar point to the one made by D’Souza. As Sowell puts it “of course there are non-economic values. There are only non-economic values. Economics is not a value in and of itself.” In short, what we need is a way of putting prosperity into a proper moral context. This is part of the point of a course in business ethics. Carnegie attempts to do this by showing that wealth can have positive effects. As we saw in a previous lecture Adam Smith makes the same point though he is sometimes criticized for illustrating that these positive effects are unintended. But, as we know, wealth can have potentially negative effects as well brought on in some cases by the belief that money can buy happiness.
Sure, up to point money can affect one’s well-being and therefore happiness. But, once certain basic needs are met money really cannot increase one’s overall happiness very much. The law of diminishing return takes effect around an income level of $50,000 a year. Beyond this level, more money doesn’t make one happier.
This is not a new insight at all. The ancient Stoic philosophers were well aware of this. Seneca once said, “He that is not content in poverty, would not be so neither in plenty; for the fault is not the thing, but in the mind.” Like many things, our attitude towards money is more important than the money itself and this is particularly true when it comes to how much we earn in comparison to others (remember what Hayek said above about envy). The 14th Dalai Lama makes the same point about money and happiness. Given that our desires are without limits we cannot find happiness in fulfilling them. We will always want more. This holds especially true for money. As Epicurus pointed out “nothing satisfies a man who is not satisfied with a little.”
All of this does beg the question about poverty though. Are we simply supposed to allow people who are poor to remain poor? As we have seen, the wealth created by people like Andrew Carnegie can help all of us, including those who are poor. However, two other points should be remembered regarding wealth and poverty. First, most people who start poor do not remain poor for their entire lives. Secondly, what counts as poor, at least in this country, is not whom you might think.
Having included statistics on the wealthy in the PowerPoint here are some interesting statistics for the poor from economist Walter Williams:
In 1995, 41 percent of all "poor" households owned their own homes. The average size of that home was three bedrooms, one-and-a-half bathrooms, a garage, and a porch or patio. Three-quarters of a million "poor" owned homes worth over $150,000; some of those homes sported Jacuzzis and pools. The average "poor" American has one-third more living space than the average Japanese, 25 percent more than the average Frenchman, 40 percent more than the average Greek, and four times more than the average Russian.
Seventy percent of "poor" households own a car; 27 percent own two or more cars. Ninety-seven percent have a color television; nearly half own two or more televisions. Two-thirds of "poor" households have air conditioning. By contrast, 30 years ago, only 36 percent of the entire U.S. population enjoyed air conditioning. America's "poor" people aren't hungry, either."poor" people are more likely to be overweight than higher-income people. The average consumption of proteins, vitamins, and minerals is virtually the same for poor as middle-income children, and in most cases above government recommended minimums.
Part of the problem is in how the Census Bureau computes statistics factoring in income but missing things like the value of estates which often include homes and stocks. Also uncounted are transfer payments. Listen to any politician for any length of time and it will become clear that rich and poor are not so much objective economic terms but subjective political terms. A good reason to discuss them in a business ethics book!