In the previous post on Inequality, I argued that (income or wealth) inequality, while it might correlate with some societal ills, is not itself a societal ill. In this post, I want to go a bit further and argue that the wealthy (specifically, the entrepreneurial class) are normally a positive benefit to society. This argument is often made in philanthropic terms – only if people are allowed to become as wealthy as Carnegie will we get the resulting public libraries, etc. that Carnegie and other philanthropists have built and endowed.
This is quite true, but I want to focus on entrepreneurs, NOT philanthropists. I have no wish to disparage philanthropy in the slightest – a person who has earned significant wealth through voluntary exchange with others is morally free to do as he or she wishes with that wealth, and philanthropy is certainly preferable to the hedonistic excess that often occurs if the wealth is left to heirs.
Instead, I want to argue that, as beneficial as philanthropy is for society, entrepreneurship is more so. A wealthy entrepreneur may certainly donate wealth to any social cause whatsoever, but is under no moral obligation to do so, as accumulating that wealth has already provided significantly more benefit to society than could possibly be generated by giving it away.
In researching this topic, I intended to use an article I read several years ago referring to a philanthropy journal study on the average ratio between entrepreneurial benefit and social benefit. Sadly, I neglected to store the coordinates of that article, so I was forced to do a rough cut at the same estimation on my own. I am certain that my first-order analysis is nowhere near as sophisticated as the one I read earlier, but one does what one must.
Using 2018 data on corporate finance from Aswath Damodaran at NYU, and publicly available GDP and import numbers from the St. Louis Fed for the same year, I put together a crude model of where the money goes (on average across industries and business sizes, making some reasonable assumptions about corporate purchasing) that a US corporation takes in via sales (details of all of this available on request). The upshot is that corresponding to $1.00 that accrues to the owner(s) of a business, roughly $3.85 is paid out in salaries, and another $0.65 is paid to owners of other vendor businesses. Even if that owner gave away the entire $1.00, much more has already been transferred to society in the process of making that $1.00.
I would add that this analysis is only focusing on the “price above cost” component of voluntary exchange wealth generation. The entrepreneur’s customers also had the benefit of the “value above price” wealth generation component.
One other important point: philanthropic donations have their use directed by the donor, and the good achieved is “good” from the donor’s perspective. Money paid out in salary to workers has its use directed by the recipient, and the good achieved is “good” from the recipient’s perspective. It is easy to forget that different people value goods and services very differently – this fact however is one of the two fundamental bases for wealth generation by voluntary exchange (the other one being efficiency from specialization).
In thinking about the good done by philanthropy as opposed to the good done by entrepreneurship and trade, I am often reminded of a two-panel cartoon I saw in my youth (if I remembered the details, I would gladly give credit!). In the first panel, a group of ladies in a church were tearing old bedsheets into long strips, saying, “These will make excellent bandages to be distributed by our missionaries in Africa.” In the second panel, the ladies in Africa were receiving them, saying, “Look, all these bandages are the same length – we can sew them together and make bedsheets!”