Thank You Rich People: A Brief Opinion on The Ethics of Capitalism

In the 1500s no king, regardless of his power or riches, could fly above the countryside, but now for less than $100 anyone can — that is powerful. That is Capitalism.

Capitalism is the most ethical economic system we have ever invented. Capitalism is the most ethical way to produce goods and perform services. Capitalism is most ethical creator and distributor of wealth. And the practitioners of Capitalism are among the most ethical.

First a disclaimer: Capitalism here refers to any person or company that makes “stuff” we buy or delivers a service we pay for. It does not refer to crony capitalism — unscrupulous Wall Street bankers, patent trolls, or the like. Those groups are corrupt and should be held accountable, but let’s not let these outliers tarnish the practice of true capitalism and the profound good it has produced for society.

At its most fundamental level, Capitalism is about giving and working together. Capitalism is phenomenal at driving complex cooperation. This level of willingness to work with and enrich others is a moral incentive unique to Capitalism. The profound nature of that can be understood when considering the case of a simple pencil. No one individual knows how to make a pencil, but together we craft pencils so efficiently that they cost only a few cents.

And the reason we spend all this effort to make pencils in the first place? Capitalism incentivizes business owners to give before they take. Every business has beginnings (new company, new industry, new product), and in each beginning there is no guarantee that people will want anything a business produces. Entrepreneurs and investors use their own time and money in the hope of giving us something that will improve our lives, for that is the only reason we buy anything. These risk takers have no assurance they will ever receive compensation in return. Therefore without the willingness to first give, entrepreneurs can never receive any financial reward. It is this enthusiasm to give before taking that makes capitalists moral.

The primary way businesses can earn financial rewards is through consumers. A good way to think about this is voting. Imagine each dollar we have is a vote. When we spend money, we are voting for whom we want to keep making stuff for us. Buy a Honda Civic over a Ford Fusion? That is a vote that we believe Honda will best use that money to try and benefit us in new ways in the future. If they don’t, then the next vote will go to someone else. The beautiful part of this monetary voting system is that businesses and individuals will only become rich if we want them to. The rich become so, because they keep giving us better and better stuff. However, if they fail to give us something better we will cast our votes elsewhere, taking away their wealth as quickly as we gave them it.

A common critique of Capitalism is that it leads to great income inequality. This is true in a relative sense (peasants from feudal Europe may beg to differ), but we will not discuss that here. Income inequality does not tell us much in the way of quality of life. By contrast, wealth and consumption inequality are far more relevant when considering quality of life. Here is Khan Academy to explain the difference between wealth and income.

To frame this, why do we care about money? At the end of the day money only matters because it is the medium that enables a lifestyle we want, hence whatever measure can most accurately address quality of life is the best measuring stick.

Wealth is a better measuring stick than income, because income can vary so widely from year to year. Take for example a CEO of a Fortune 500 company. In the year she exercises her stock options, say for $50 million, her income is well within the top 1 percentile (this ignores the years it took for her options to vest). But the next year she decides to take a $1 salary. Her income that year places her well below the poverty line, but no one would dare say she was poor. Why? Because of her wealth, which is the aggregate of all the incomes and assets minus expenses she has earned throughout her lifetime. Stanford Welfare Economist Thomas Sowell explains how income is extremely variable, notably IRS data “shows that more than half the people who were in the top 1 percent in 1996 were no longer there in 2005.”

While wealth is a stable and reliable indicator than income, it is still imperfect. Much of the inequality present there is explained by age. Older people tend to have more money because they have been working and saving longer, go figure. Thus disparities in wealth inequality can be partly explained as being the same person in different stages of their life, a topic explored in great detail by George Gilder. Moreover, wealth doesn’t tell us much about how expensive it is to have a certain quality of life.

So more important than both income and wealth in terms of quality of life is consumption inequality, which has continually dropped since the industrial revolution. Regardless of wealth, the rich and poor alike benefit extremely equally when consuming refrigeration and heating/cooling products. To illustrate a more complex example, consider consumption differences between the average person and the rich, watching your favorite sports team for example. You plop down on your couch with your favorite food that was delivered just before game time. You put your feet up as you begin enjoying the game on your HD flat-screen TV.

Now imagine watching a game as our multi-millionaire. What can she have that’s better? A box seat at the stadium is a likely suspect. And while there is gravitas associated with that, is watching the game from a suite that much better than the experience from the comfort of your own home with the crisp live feed, expert commentary, replays, and no crowds? But let’s say this millionaire is watching the game from home too. In that case, great TVs are so low-cost now; there really isn’t a much better experience a millionaire can buy than the average person. Any improvement is marginal at best.

And while we’re on the subject of rich people, let’s thank them for buying all the expensive things we can’t afford — no really. They essentially act as guinea pigs for all the products and services we love. Take cell phones. The first one cost an equivalent of almost $10K today, could only make calls, and looked like this:

Today we walk around with the descendants of that phone, which are essentially pocket computers. We can get many of them for under $100 or free with a contract.

Once a product is tested out on the wealthy, better versions can be made. Inherently, companies are incentivized to make things low-cost enough for the masses, not the rich, because that’s where the money is. There are only so many washing machines the rich and powerful need after all. But it is only because the rich can provide the initial cash infusions for wacky and expensive technology that companies are able to fund development of lower cost, more advanced goods and services for the rest of us.

So thank you twice for being rich.

1) For giving us “stuff” to continually improve our lives

2) For testing out unproven goods and services so that the best ones become affordable enough for the rest of us.

Please debate and poke holes in these ideas so we can strengthen our understanding together.

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