What is wealth and where does it come from?

David Mamet corroborates my previous post on pp. 42 and 43 of his book, The Secret Knowledge:

The Left (as Thomas Sowell points out in Intellectuals and Society) believing in what it calls “social justice,” believes that wealth should be “shared,” but enters the discussion in its middle.  For wealth may or may not be shared (in fact, it is shared, as efficiently as possible, through trade), but the a priori question, to the Left, is unasked and unanswered: Where did it come from?

Where does wealth come from?  Great question.  So rarely is it asked and even more rare it answered.  Get ready.  Here’s the answer (in bold):

It was not, again, quoting from Professor Sowell, descended from heaven, like manna, and spread evenly over the ground.  It was created by individual expenditure of effort and individual willingness to undertake risk.

As my generation did not live through the Depression, World War II, and the agony of the immigrants who are our grandparents and great-grandparents; as we were raised in the greatest plenty the world has ever known and in the most just of societies, we have grown lazy and entitled (not unlike Marx, who lived as a parasite upon Engels, and never worked a day in his life).  The baby boomer generation, my own, is content, if of the Left, to live out our remaining years upon the work and upon the entitlements created by our parents, and to entail the costs upon our children–to tax industry out of the country, to tax wealth away from its historical role and use as the funder of innovation.

Risk taking and trial-and-error innovation.  That’s where wealth comes from.

It doesn’t come from laws or legislation.  It doesn’t come from taxes.  It doesn’t come government.

And, let me be clear on what wealth is.  Most people view it the state of being a rich person.  Here, I mean it to be our standard of living.

Wealth is what separates us from our hunter-gatherer ancestors.

They had the same 24 hours in the day that we have (plus a few microseconds).  But, they only managed to use those hours to eek out a sustenance standard of living or get just enough calories to keep from starving.

Most of us aren’t worried about starving.  We spend a fraction of the time getting more than enough calories and we spend the rest of the time doing lots of other stuff.  And we have a lot more time to do lots of other stuff, because we live longer than they did.  We survive illnesses that they didn’t.

All that separates us from the hunter-gatherer lifestyle is wealth.

That wealth resulted from innovation that was made sometime between then and now.

Those innovations resulted from encouragement individuals found in trading with each other and discovering that finding better ways to do things would enable them to move even further away from the life of hunter-gatherer grandpa.

Take a look at the products around you right now that make your life better than a hunter-gatherer.  Your carpet, phone, house, furnace, refrigerator, food in the pantry, the pantry, floor joists, electric wire and so on.

Consider that all of those resulted from an experiment — a risk someone took at some point in time.  It may have been an accidental risk.  It may have been planned.  But, it was a risk no less, because nothing is guaranteed to work or to be wanted.  Someone had to think of it and give it a try.  Very few of them came from a government project.  And even the ones that did were usually accidents that found an unintended purpose and what they have become had nothing to do with government.

When I drive around, I like to ask, “where did all these buildings come from?”  Each of those were a risk.  An individual or a group of individuals decided building that building would be a good idea. What things are in this world because you decided it would be a good idea?  How have those things improved your life or the lives of others?

Understanding what wealth is and where it comes from is important if you’re interested in continuing to improve everyone’s standard of living.

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“I support it, but it doesn’t apply to me”

On page 154 of his book The Secret Knowledge, David Mamet wrote:

I recognized that though, as a lifelong Liberal, I endorsed and paid lip service to “social justice,” which is to say, to equality of result, I actually based the important decisions of my life–those in which I was personally going to be affected by the outcome–by the principle of equality of opportunity; and, further that so did everyone I knew.  Many, I saw, were prepared to pay more taxes, as a form of Charity, which is to say, to hand off to the Government the choice of programs and recipients of their hard-earned money, but no one was prepared to be on the short end of the failed program, however well-intentioned.  (For example–one might endorse a program giving minorities preference in award of government contracts; but, as a business owner, one would fight to get the best possible job under the best possible terms regardless of such a program, and would, in fact, work all legal, perhaps by semi- or illegal means to subvert the program that enforced upon the proprietor a bad business decision.)*

*No one would say of a firefighter, hired under rules reducing the height requirement, and thus unable to carry one’s child to safety, “Nonetheless, I am glad I voted for that ‘more fair’ law.”

Reading this passage brought to mind a conversation I once had with a friend about minimum wage.  He listened to my arguments.  It reduces opportunities for unskilled workers.  It increases unemployment.  It’s a private transaction between two individuals.  The worker can always opt not to take the low paying job.

He listened, but he still couldn’t get over what he saw as an imbalance of power between an employer in areas with few other opportunities (still not recognizing that those limited opportunities may be a result of minimum wage) and an employee.

It occurred to me to ask how he pays the individuals that worked for him on his car lot.

He answered: Them?  Well, they are not “my” employees.  They are independent contractors.  They are paid a commission based on how much they sell.

Me: So, if they don’t sell any cars over a several hour period, they make nothing, which is less than minimum wage?

Him: Well, yes. Technically.  But they usually average more than minimum wage.

Me: Usually?  What about when they don’t?  There has to be hours or days that go by when they don’t sell a car.  Why don’t you put your money where your mouth is and ensure that they make at least minimum wage all the time?

Him: Do you know how much that would cost me?  Besides, then they wouldn’t have as much incentive to sell. 

A perfect example of what Mamet wrote about.

Mamet finishes his chapter:

In the waning days of my belief in “Social Justice” I discovered, in short, that I was not living my life according to the principles I professed, that I disbelieved both in the probity and in the mechanical operations of those groups soliciting first my vote and then my money in the name of Justice, and that so did everyone I knew.  Those of us untroubled by this disparity, I saw, called ourselves “Liberals.”  The others were known as Conservatives.

The my-s**t-don’t-stink crisis

In his book, The Secret Knowledge, David Mamet gives a brief and apt explanation of the economic term moral hazard, which played a key role in causing the financial crisis.

This is from a footnote on page 187 (emphasis added):

Is it not evident that any organization believing itself to be “too big to fail,” will more likely, indeed, inevitably make disastrous decisions? Why should it not–it is Too Big to Fail.

We all know people who (and perhaps have experienced this of ourselves), at one time or another, began to believe that their own s**t did not stink.  And we all know how that story ended.  Not well.

Our last financial crises could be called the my-s**t-don’t-stink crisis.

Also, we should remember how those stories end whenever our “experts”, politicians and economists tell us that such-and-such an industry or company is too important and cannot be allowed to fail (though it usually already has, and few people recognize it yet).

The Constitution was meant to protect us

David Mamet’s The Secret Knowledge: The Dismantling of American Culture came up in my queue at the library.  It’s good to have a talented writer on the side of freedom and recognize deeply that is the side he is on, now.

Early, on page 8, Mamet explains the primary motivation of the U.S. Constitution:

As I began reading and thinking about politics, I saw, to my horror, how easily people could also assemble themselves into a mob, which would either attract or be called into being by those who profited from the surrender of reason and liberty–and that these people are called politicians.  My question, then, was, as we cannot live without Government, how must we deal with those who will be inclined to abuse it–the politicians and their manipulators?  The answer to that question, I realized, was attempted in the U.S. Constitution–a document based not upon the philosophic assumption that people are basically good, but on the tragic confession of the opposite view.

It took some time after learning about the Constitution in my publicly provided education for me to understand its true purpose.  I crossed the border to Mexico once early in my life and wondered why the standard of living–separated only by a few hundred feet–could be so different.

I eventually came to realize that the answer was deeply embedded in American culture and embodied in the purpose of the Constitution–to prevent a person, or groups of people, from gaining too much political power over the rest of us.  It was an insurance policy against tyranny.

Too bad we forgot that (though we seem to be relearning it as groups of people use government to extend their reach into our lives).

A Conversion Story

David Mamet at the premiere of Red Belt at the...

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Bari Weiss interviews David Mamet in this weekend’s Wall Street Journal Opinion about his liberal to conservative conversion.

I blogged about Mamet’s first story in the Village Voice here.  Mamet has now written a book on the subject, The Secret Knowledge: On the Dismantling of American Culture.

In the interview Mamet gives some more helpful details about his conversion.  He cites some books that helped:

He starts, naturally, with the most famous political convert in modern American history: Whittaker Chambers, whose 1952 book, “Witness,” documented his turn from Communism. “I read it. It was miraculous. Extraordinary hero-journey of this fellow that had to examine everything he believed in at the great, great cost—which is a cost I’m not subject to—of abandoning his life, his sustenance, his friends, his associations, and his past. And I said, ‘Oh my God. . . . Perhaps it might be incumbent upon me to see if I could get my thought and my actions into line too.”

There were other books. Most were given to him by his rabbi in L.A., Mordecai Finley. Mr. Mamet rattles off the works that affected him most: “White Guilt” by Shelby Steele, “Ethnic America” by Thomas Sowell, “The Instincts of the Herd in Peace and War” by Wilfred Trotter, “The Road to Serfdom” by Friedrich Hayek, “Capitalism and Freedom” by Milton Friedman, and “On Liberty” by John Stuart Mill.

I can identify with what motivated him to learn more:

 He couldn’t move on, so to speak, before he understood “what the nature of government is, just sufficient so that I as a citizen can actually vote without being a member of a herd.” Same for taxes: “I pay them, so I think I should be responsible for what actually happens to them.” As for the history of the country itself, he wanted to understand “the vision of the Founding Fathers. . . . How does holding to it keep people safe and prosperous?”

And he came to a lot of the same realizations as many of us who have made similar conversions:

Reading and reflecting got him to some basics. Real diversity is intellectual. Whatever its flaws, America is the greatest country in the history of the world. The free market always solves problems better than government. It’s the job of the state to be just, not to render social justice. And, most sobering, Mr. Mamet writes in “The Secret Knowledge,” there are no perfect solutions to inequality, only trade-offs.

“Only trade-offs”…I’d like to think Sowell inspired that.  That’s who inspired it for me.

As a liberal, I didn’t understand this.  I thought solutions should be as simple as waving a wand.  Just fix it!  It took experience and willingness to think and evaluate objectively for me to understand that waving wands have unintended consequences that blow back against the very good intentions of the wand waving.

To take one example, legislating a maximum price on gas (wand waving) to keep gas companies from gouging consumers.  This sounds good to folks who do not have a basic grasp of economics.

But it also has real blow back consequences.  Incentives matter.  Oil companies are under no obligation to produce oil.  If they can’t sell gas for a price high enough to cover their costs, they’ll stop producing and gas supply will shrink.  The result will be that folks will wait a long time for the limited supplies of gas and profits will be pushed to other margins.  Soon, folks will be bringing 12-packs of beer to the back door of the gas station to bribe the owners to ensure they get their share of gas.

Sure, there are longer term consequences as well.  With less gas supply, people may arrange their lives differently.  They may choose to live closer to work, drive smaller vehicles, take fewer vacations, group their errands, car pool and so on, but as Mamet and Sowell say, those are trade-off, not perfect solutions.  It doesn’t help to pretend the trade-offs don’t exist.

Even after explaining this to some folks,  they will attribute the blow backs to oil company greed.

It helps to personalize it.

I ask these folks to consider how they would respond if legislation were passed to limit the salary on their current job to half  their current wage because someone deemed workers for their job to be making too much money.

Would they continue to supply the same amount of labor at the lower wage as they did at the higher wage?  Chances are they will look for other alternatives.  It’s not because of greed.  It’s because incentives matter and there’s opportunity costs.

I look forward to reading Mamet’s book.