Appreciating the rich for how they got there, Part II

June 5, 2014

We once wrote that the hard-earned success of entrepreneurs is what gives them the inclination and the wherewithal to help support the next generation of high-growth companies.  The wealth created “yesterday” is not stuffed under plump mattresses, it’s used “today” to fund the businesses and innovations that enhance and enrich all our lives.  Most of those savings come from a relatively small fraction of individuals in the top income tax bracket, and to disparage them is to bite the hand that feeds long-run economic growth.

Intel's 4004: the first microprocessor

Intel’s 4004: the first microprocessor

John Steele Gordon, author of “An Empire of Wealth: The Epic History of American Economic Power,” advances the argument in the 6/4/14 Wall Street Journalextreme leaps in innovation, like the microprocessor, bring with them staggering fortunes – but also enrich and enhance all our lives.

(N)o one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services—and lower prices—that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology.

This sort of social transformation has happened many times before. Whenever a new technology comes along that greatly reduces the cost of a fundamental input to the economy, or makes possible what had previously been impossible, there has always been a flowering of great new fortunes—often far larger than those that came before. The technology opens up many new economic niches, and entrepreneurs rush to take advantage of the new opportunities.

The full-rigged ship that Europeans developed in the 15th century, for instance, was capable of reaching the far corners of the globe. Soon gold and silver were pouring into Europe from the New World, and a brisk trade with India and the East Indies sprang up. The Dutch exploited the new trade so successfully that the historian Simon Schama entitled his 1987 book on this period of Dutch history “The Embarrassment of Riches.”

Steele mentions a few other notable examples:

  • James Watt’s rotary steam engine sparked the Industrial Revolution, causing growth – and thus wealth and job creation – to sharply accelerate.
  • Railroads made transportation cheap and created national markets.  Railroad owners and retailers made fortunes while everyone benefited from easier access to cheaper goods.
  • Edwin Drake’s drilling technique made oil abundant, the Bessemer converter made steel cheap, and both taken together made the automobile possible;  this in turn had spillover effects (and fortunes) in other industries (rubber, glass, road building, etc.)

The Little Miracle Spurring Inequality today is cheap computing power.  Software, hardware, the Internet, and precise inventory control have transformed the world and created huge new fortunes in the process.

To see how fundamental the microprocessor—a dirt-cheap computer on a chip—is, do a thought experiment. Imagine it’s 1970 and someone pushes a button causing every computer in the world to stop working. The average man on the street won’t have noticed anything amiss until his bank statement failed to come in at the end of the month. Push that button today and civilization collapses in seconds. Cars don’t run, phones don’t work, the lights go out, planes can’t land or take off. That is all because the microprocessor is now found in nearly everything more complex than a pencil.

Just as before, that wealth will not be stuffed into mattresses, it will go to work:

Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs—and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won’t be taken.

And the risks in any new technology are very real in the highly competitive game that is capitalism. In 1903, 57 automobile companies opened for business in this country, hoping to exploit the new technology. Only the Ford Motor Co. survived the Darwinian struggle to succeed. As Henry Ford’s fortune grew to dazzling levels, some might have decried it, but they also should have rejoiced as he made the automobile affordable for everyman.

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