Wednesday, April 15, 2015

You Didn't Make Sense With That (from Cafe Hayek)

Back in July 2012, when President Obama was running for reelection, he gave a speech that encapsulated everything that I despised about him. Today, that speech is known as the “You Didn't Build That” speech. The portion of the speech that got so many people's attention reads as follows:

There are a lot of wealthy, successful Americans who agree with me – because they want to give something back. They know they didn’t – look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something – there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business – you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.”

Of course, President Obama didn't come up with that on his own. He was actually channeling Elizabeth Warren who said something just as daft before President Obama did. She said:

There is nobody in this country who got rich on their 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.”

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There has been an ungodly amount of political commentary that was made about these two speeches – both for and against. However, I discovered the most impassioned, intelligent, and cogent criticism of this particularly mendacious view yesterday at Cafe Hayek (cafehayek.com). It was written by Donald Boudreaux who is an economics professor at George Mason University.

So, I have decided to share Professor Boudreaux's post in full here:




You Didn't Make Sense With That
By Donald Boudreaux, April 12th 2015

I’m sick of hearing the “you didn’t build that” mantra trumpeted whenever someone feels the need to flaunt his or her faux sophistication about the way the world works.

Yes, it’s true that entrepreneurs and investors who profit in the marketplace typically don’t build much of the infrastructure they use to connect with their input suppliers and with their customers. But this fact proves far less than those who shout it out think it proves.

First, and least importantly, the fact that government in practice supplies X amount and Y kinds of infrastructure does not necessarily mean that that infrastructure would not have been provided – and provided better – by the private sector had government not entered that arena.

Second, no serious proponent of free markets has ever denied the reality that government supplies a great deal of useful infrastructure. Nor has any serious proponent of free markets denied that the use of infrastructure built by others, government or not, is beneficial to all of those who use it productively.

Third, and relatedly, all serious proponents of free markets understand that every person in a free market today, every minute of every day of every year of his or her life, depends upon the productive efforts of hundreds of millions of people. The fact that some of the hundreds of millions of people upon whom each of us depends are government employees, or are set to their tasks by politicians, does not make those particular workers or those particular tasks any more important to each individual’s success in markets than are the tasks that are performed by the private sector. A government-built road might have contributed to Smith’s success, but so, too, did the privately produced truck that he uses to serve his customers. Likewise with the privately produced fuel for that truck and the privately produced and manned filling stations* where that fuel is pumped into the truck. So, too, for the food that Smith eats to stay alive and alert, the privately designed and manufactured clothing that he wears, and the privately supplied financing that tides his business over during a slump and privately supplied insurance that makes his business risks more bearable.

Fourth – and following closely from point number three – those who scream “You didn’t build that!” are oblivious to the importance of the margin. The government-built road that Smith uses to earn handsome profits by serving consumers might well be absolutely essential to Smith’s success, but this fact doesn’t mean that the road’s contribution at the margin to Smith’s success is significant. Smith’s profits depend upon what he adds to the road’s services – how Smith himself uses the road to create value for consumers. If Smith uses the road to ship truckloads full of ordinary toothpicks to market, he might earn just enough to continue in that line of work, but he’ll not earn magnificent profits. If instead Smith uses the road to ship truckloads full of new’n'improved toothpicks – toothpicks that sell at prices only slightly above that of ordinary toothpicks but, in addition to doing what ordinary toothpicks do, also are guaranteed to prevent gum disease, cavities, bad breath, insomnia, and erectile dysfunction – then Smith profits magnificently. Smith’s “above normal” profits (as economists call them) have nothing to do with the road (or with, say, the private efforts of entrepreneurs who are responsible for the delivery truck Smith uses) and everything to do with Smith’s own innovative efforts.

Fifth, government-supplied infrastructure doesn’t guarantee entrepreneurial success – a reality that is not as trite as it might seem in this context. If government-supplied infrastructure did guarantee entrepreneurial success, then everyone with access to that infrastructure would be a successful entrepreneur. Precisely because government-supplied infrastructure is supplied widely, and typical free of any marginal cost to users, the very fact that only some of the people who use it do so entrepreneurially – and, of this number, only a fraction do so successfully – means that successful entrepreneurs contribute at the margin things creative and unique above and beyond the value of whatever inputs, including portions of the infrastructure, that are used to make these creative and unique contributions. Entrepreneurs’ profits come from, and reflect, the value that they add.

It’s true that, because the various pieces of infrastructure (and the inputs used to produce and maintain them) are scarce, infrastructure has a cost. Everyone who uses it should pay his or her appropriate share of this cost – but the amounts due to government as payment are not some open-ended claim on successful entrepreneurs.

Again, the fact that only a relatively small handful of entrepreneurs succeed at the level of achieving a net worth of (say) $10 million or above means that such success is not at all easy and that such success is not remotely guaranteed or even made likely by government’s provision of infrastructure. The marginal contributions of successful entrepreneurs depend far more upon their own contributions. The reality that infrastructure in developed countries is supplied widely (and, again, is often available to users at zero marginal cost) is evidence – when set beside the other fact that relatively few individuals today earn as entrepreneurs even as little as hundreds of thousands of dollars of net personal wealth – that market entrepreneurship is far more scarce than is infrastructure. So to discourage market entrepreneurship with higher taxes and more government-dictated regulation is insane.

Finally, sixth: If market entrepreneurs didn’t build the infrastructure they use to earn profits, nor did consumers and salary and wage workers build the infrastructure they use to get to shopping malls, supermarkets, vacation destinations, and their places of work. Yet those who benefit the most from competitive, innovative markets are the masses. If government’s provision of infrastructure justifies politicians and professors pointing accusing fingers at people who benefit from government-supplied infrastructure and accusing those people of not paying their ‘fair’ share for it, then pointing fingers only at successful entrepreneurs makes no sense.

There’s more to say, but this post is already too long.

* A genuine example of private infrastructure.

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