What People Don’t Understand about the Rich.

People, particularly socialists, don’t understand the Rich

They’re always complaining about how rich rich people are, and how they’re getting richer. They’re always making comparisons between the incomes of average families and the incomes of the rich and the super rich. It is often seen as morally offensive, if not a crime against humanity, that someone can hack away at a dull job five days a week and take home $700 after tax while a CEO basks in a three million dollar a year salary and media barons can have assets amounting to billions.

Well, I’ve got a flash for everyone. The wealth of these people is not a bad thing. In fact, it’s a sign that we’re all doing well.  Of course I agree that it’s annoying. There’s no argument there. We all wish we had that kind of money. Many of us probably deserve to have money much more than these rich people - many of whom are greedy, dull and not even that intelligent - but to complain about the inequality of wealth in society in general is not only a waste of time but is a misunderstanding of what it actually means.

Many people see the disparity between incomes of normal people and the superrich as an indictment of western society. It isn’t. In fact, the wealth of the super-rich is an indication of the success of western society. The wealth of the billionaires is a by-product of the collective wealth of the society as a whole. In other words: the rich are only rich because we are.

Socialists have never grasped this. The basic tenet of Socialism has always been that the rich are rich because the rest of us are poor - the idea being that somehow it’s a zero-sum game - that there’s a finite pool of wealth and the rich have taken more than their share; that somehow it’s our money that they’re spending. This notion was developed by Marx who theorised that capitalists in the 19^th century got rich by stealing the wealth created by the workers. The problem is that Marx, although he wrote a book called Das Kapital, never really understood the basic principle of capital. He saw industrialists as a new version of the old European aristocracy and industrial workers as a new class of serfs condemned to labour for centuries to keep their capitalist masters wealthy.

Marx’s error was that he saw capitalism as a system where workers laboured in the mines and factories that were owned by an entrepreneur class, to produce goods and services which were then consumed by the middle class. Thus, the middle class would enjoy ever-improving standards of living while the workers continued to live in squalor. What Marx didn’t understand was that for capitalism to work, workers themselves had to become consumers of the goods they produced and, because capitalism constantly reduces the cost of goods, their standards of living would gradually rise. Marx’s prediction of the proletariat enduring a state of permanent servitude was disproved just by observing the living conditions of workers in the 1950s as compared with the  living conditions in the 1850s.

Unions will claim that the improvement in conditions is due to the efforts of the trade union movement, decades of  strikes, go-slows, rallies, lock-outs, picket lines and lobbying, however this is simply not true. Workers’ wages, compared to managers wages and upper management wages are no higher now that they ever were, in fact in some cases workers’ wages have fallen in comparison to executives.

So if workers aren’t really being paid any better. How come they’re better off? How can skilled and unskilled workers own cars and television sets and even pay off homes?

Okay, a lesson in basic economics.

Imagine a tailor in the days before industrialisation. The tailor makes shirts for a living. Hand cutting and stitching, he can make 5 shirts a week. Let’s also say he needs $100 a week to pay his rent, put food on the table, buy shoes for his children and buy cloth and cotton for the shirts. He really can’t afford to charge less than $20 a shirt and hope he sells all the shirts he makes.

Now comes an industrialist who calculates that by setting up a factory with sewing machines and power cutters he can produce 1000 shirts a week, using only 50 employees. To do this, the industrialist will have to persuade someone to put up many thousands of dollar to equip the factory. If he’s lucky he will find one very rich person willing to invest. Early in the industrial revolution, many of the financiers were aristocrats. Alternatively, the industrialist can sell shares in the company to a large number of people who have smaller though still substantial sums of money to invest. Whatever the ownership structure however, the important thing is that the investors get a return on their money. Unless they make a reasonable return, they might as well  leave the cash it in the bank and get interest. And given that there’s always a risk in such a venture - the shirts may not sell - the return will have to be sufficient to coax them take the risk.

Let’s say that our industrialist raises $100,000 in capital and sets up a factory with modern textile technology. He hires 50 people to operate the machines and they go into production. They produce 1000 shirts a week, meaning each employee is now producing four times the number of shirts that the tailor did working on his own. If the industrialist pays his workers the same wage as the tailor was seeking - $100 a week - the wages bill will be $5000 a week. If the factory sells the shirts at a wholesale price of $7 it will get a weekly income of $7,000, enough to cover the wages bill and the cost of materials, plus overheads, cost of repairs and pay the investors a 10% dividend ($10,000) at the end of the year. This dividend represents a profit to the investors of about 20 cents a shirt.

This venture has now created wealth. Firstly, of course, it has created wealth for the investors who are making more than if they just left their money in the bank. But it has also created wealth for the public. People are now able to buy a shirt for a retail price of $10 instead of $20. (The factory doesn’t sell direct like the tailor so there’s a mark-up in the store.) This means that when a customer buys a shirt, they have $10 more left over than they used to. This allows them to consider buying something else. Even though the investors are making a profit of 20 cents per shirt, the customer has actually made a bigger profit of $10 on each shirt.

The point is that the savings that result from using modern technology and production methods are shared between the investor and the customer and the customer gets the greater share.

But what of the poor tailor, you say? He’s been put out of a job. Yes, unless he is one of the 50 people working in the factory, he has,. Because of mechanisation the factory will never need as many textile workers as there were tailors, so even if all the people in the factory are ex-tailors, there will still be tailors left over. So what are they to do?

The answer lies in the fact that people now have $10 left over after buying a shirt. This means that they can buy other goods which perhaps they could not afford before. Suddenly there is a general demand for more goods and services and more factories and businesses spring up to serve that need. Our tailor may not get a job in a garment factory but he might end up making crockery or furniture or working in one of the new emporiums that sell all the new consumer items.

Working in a factory may seem repetitious and depersonalised but the tailor will soon realise there are benefits: his wage is regular and reliable and he doesn’t have to provide his own equipment or materials. He too notices too that when he buys shoes for his kids, the price has dropped considerably. He too can afford things than he once couldn’t.

What has happened right across the society is that millions of people are suddenly able to access goods and services that once they couldn’t. For example, prior to the industrial revolution in England, few working class people could afford china. Their cups, plates and mugs tended to be tinplate, enamel or even wood. By industrialising the production of china cups and saucers, Josiah Wedgewood enabled millions of Britons to drink out of porcelain cups and teapots for the first time - something which was also a health benefit as porcelain is impervious to bacteria.

Here it’s important to note that wealth doesn’t just mean cash in hand, or the value of material assets. Wealth also includes having better health, financial security, leisure time and access to recreational and cultural activities. Many of these things are also created through investment. Institutions such as schools, museums, galleries, parks, libraries and holiday resorts are in their own way also means of creating wealth through “mass production.” Schools, for example, can be seen as an efficient way of providing “mass” education to the children of families who could not afford a private tutor or governess.

The important thing to remember, however, is that the whole capitalist process doesn’t work unless the customers buy the goods on offer. The manufacturer has to either offer a products at a lower price, or a better product at the same price than their competitors.

And there will always be competitors. Our hypothetical shirt manufacturer won’t have the field to themselves. Soon other factories will set up offering either better shirts, or the same quality shirts at a cheaper price. Faster machines or more efficient work practices could drop the price of shirts to $9 or $8. The manufacturer has to continually improve their product and the efficiency of production to stay in business. This means that the customers are continually being offered better goods, and cheaper goods and every time the price of goods drops, the customers' wealth increases. Even if their pay packet remains relatively the same, the money in it becomes worth more and more over time. Hence a workers wage which once only put modest food on the table and the meanest of clothing today pays for food, power, phone, petrol, home insurance and entertainment.

 And therein lies the basic principal of wealth. Investors only make money if the customer does. The wealth which flows to the investor is a share of the wealth which flows to the customer.  If the customer’s wealth does not increase, the investor generally doesn’t make any money.  And the amount of money the investor or the manufacturer makes is a rough indicator of how much wealth they’ve created in the society.

Take Bill Gates for example. He’s worth, on the basis of his shares, many billions of dollars. In real terms, on a cash basis, he’s worth hundreds of millions. This is because he was instrumental in marketing a series of computer operating systems from MS-DOS working up to Windows 10 which enabled an entire generation to run personal computers. Bill’s wealth may seem excessive but if you look at it on a per-computer basis, the number of computers running Microsoft software in the world is around one billion. If Bill Gates were entitled to only one dollar for each of them he would have a billion in cash - more than any other billionaire actually has (since most of their wealth is calculated from the value of their assets.)  Compared to that one dollar which goes to Bill, how much wealth has the owner of the computer gained? The ability to access the Internet, send emails, write documents, play games, print photos, run businesses. schools, hospitals, airlines, newspapers and so on. When you consider the value of the software to the user and society in general, a dollar payment to Bill doesn’t seem that much. It’s just the huge size of the consumer base that makes him so wealthy.

So we shouldn’t writhe with resentment when we see the very rich building their multi-million dollar homes and buying entre islands. They’re only rich because they’ve made us all richer.

But there’s another reason why we shouldn’t resent them. We need them.

As said earlier, the industrialist who has an idea how to produce something better and cheaper needs to find investors. The problem with investment is that it is always risky. It would be nice if an entrepreneur could raise all their finance from ordinary people - what are called “Mom and Pop” investors in the U.S.

But there’s a problem with “Mom and Pop” investors.

Mom and Pop can’t afford to lose their life savings. Every so often entrepreneurs do persuade thousands  of ordinary people to invest in their projects and fund managers invest their clients’ savings in their schemes that all too often end in tears. Many a family has been ruined by investing in a speculative investment scheme that was “guaranteed gilt-edge blue-chip.”  The fact is that many – perhaps most - business ventures fail. So what is needed for economic development is a pool of people who are so rich that they can afford to lose millions of dollars and not actually go broke.

Fortunately there are such people. And they are worth their weight in gold. Literally. If we didn’t have people who could take a loss of several million on an investment and still be able to go on investing, our society would come to a standstill.

Actually it’s amazing that rich people do risk their money in new ventures when they could just keep it in the bank. That’s what happens when a depression occurs. During a depression, the rich don’t lose their money, they just stop investing. The result is that they stay rich but everyone else gets poor. Getting out of a depression is basically about getting the rich to invest again. The only way of explaining why they do invest is just greed. So as Gordon Gekko said “Greed is good.”  If it weren’t for greed the rich would simply keep their money in the bank and spend it on luxuries.

So, even though the rich are greedy, and boring and not even that bright, we need the little darlings to help us get richer. Every time you feel resentment that you are poor but Warren Buffet is rich, look around your house and realise that everything you have, the phone, the carpet, the television, the computer, the fridge, the stove, even the coffee mug on the sink only exist because at some point, some rich person sank a couple of million dollars into factory or a telephone company and made them all possible. So let’s not begrudge them their huge but alienating houses, their expensive but ugly clothes and their vacuous relationships - they’ve earned them and we should let them enjoy them. It’s the least we can do.