Sunday, June 5, 2016

Is wealth a good indicator of aggregate service to society?

Libertarian economist Antony Davies recently posted the following on Facebook.

Imagine someone who produces more value for society than he consumes of society's resources. Clearly, society is better off because of this person. But when you provide value for others, you receive dollars in return. And when you consume society's resources, you give up dollars to acquire the resources. So, in a free market, those who end up with more dollars do so precisely because they serve others more than they ask to be served in exchange.

It's in a government controlled economy that one can acquire dollars without providing value to others.

I met Davies at an IHS Learn Liberty conference last June, and asked him whether he thought inheritance might complicate this.  He said “Neither more nor less than charity.”  I took a couple hours to think this over and then got busy with other things, and by now too much time has passed for me to respond to his post without it being awkward.  So now that I’ve circled back around, I figured I’d respond here instead.

I agree inheritance complicates it no more than charity – we could even view inheritance as a mere subset of charity – but it complicates it all the same.  Many of the same people who demonize the rich believe most rich people were born into their wealth; if that’s true, those with the most dollars might well consume more value than they provide, or at least break even.  So this argument would not convince those people.

The fact that some people start out with more money than others complicates things in another way too: the inconsistent valuation of dollars themselves.  Dollars are a commodity, and like most commodities they are valued differently by different people due to scarcity and unique indifference curves.  Someone who is poor likely values $1 more dearly than you or I, and Bill Gates will more readily part with his dollars than we will.  This poses problems for the idea that how many dollars you acquire is proportional to how much you have served others, because in a world where people start out with vastly different amounts of wealth, how much you can profit depends as much on who you’re serving as it does on how much value you have provided them.

Suppose I produce one ice cream cone, and that two brothers named Ben and Jerry each like ice cream equally much.  Since they derive exactly equal utility from eating ice cream, I would be providing the same amount of “value for others” no matter which brother I sold the ice cream to.  But if they have different amounts of money – suppose Ben has $100 and Jerry has only $10 – Ben might give me $5 for the ice cream whereas Jerry might only offer me 50 cents.  While it is still true that “when you provide value for others, you receive dollars in return,” the ratio of value provided to dollars received is not consistent from one transaction to the next.

In practice, this allows providers of luxury goods, for example, to make profits out of sync with how much they have served others – not just in my opinion, but even in the opinion of people who buy luxury goods.  Suppose Casio produces 100 watches at a cost of $5 each and sells them for $8 each: they have a profit of $300.  Over the same time frame, Rolex produces one watch at a cost of $3,000 and sells it for $6,000: they have a profit of $3,000.  Of course the products are different: the Rolex consumer is purchasing a status symbol, not a timekeeping device.  But you’d be hard pressed to convince me that Rolex has “served others” 10 times as much as Casio has while selling only a hundredth of the watches.  And I think even people who wear Rolexes might concede – perhaps even at the moment of sale – that the utility they derive from owning one Rolex is not 750 times greater than the utility they would derive from a regular watch.  They just have more money than they know what to do with, so are willing to spend more of it per unit of utility received than others are.

None of this is wrong, it just makes it harder for me to see wealth as a clear barometer of service to others, even if we did live in a free market.  Wealth is an amoral characteristic.

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