Sunday, February 1, 2009

Silly Socialists, Capitalism Spreads the Wealth Around

It is often, and incorrectly, believed that capitalism inevitably leads to the accumulation of wealth in the grip of a handful at the great expense of the masses. Nothing could be further from the truth. It is capitalism that abuses the businessman by forcing him to share the fruits of his labor before he can enjoy them himself. The common man benefits from the talents, genius, and/or obsession of the rich capitalist. The rest of us should not envy, discourage, or hinder them, but cajole them to further abdicate leisure so that we can enjoy the benefits.

Let me explain how this is so…

Imagine an island with three inhabitants. Abram lives on the east coast and produces ice cream. He is industrious and driven to expand his wealth and production. Bob lives in the heart of the island, raises cattle, and produces steaks. Bob likes to play cowboy and has little interest in expanding production. Craig lives on the west coast as a vegetarian. He produces tofu burgers, and he too has little desire to expand output, and would rather do yoga.

In recent weeks, Abram produces 10 pints of ice cream every five days, but has grown to dislike the ice cream he produces. Bob produces 10 steaks and Craig produces 10 tofu burgers in the same 5 days. Abram trades with Bob 5 pints for 5 steaks. Abram trades Craig 5 pints for 5 tofu burgers. Bob likes to eat ice cream for lunch and a steak for dinner. Craig likes to eat a tofu burger for lunch and ice cream for dinner.

Now Abram wants to increase his wealth and has been focusing his thoughts on expanding production. Finally one day, the answer strikes him and he is able to increase his ice cream production to 14 pints of ice cream every five days.

Still not liking ice cream, Abram goes to Bob and asks to trade him 7 pints of ice cream for 7 steaks. Bob declines. He says, “I like having ice cream AND steak every day. So, I’ll just take my usual 5 thank you.” Abram goes to Craig and offers to trade him 7 pints of ice cream for 7 tofu burgers. Craig, too, declines. He says, “I like having ice cream AND burgers every day.”

Undaunted, Abram goes back to Bob and offers him a new deal. He says, “I will trade you 7 pints for just 6 steaks. Now you can have more food than you had before.” Bob now realizes that he can have ice cream for lunch, dinner, AND breakfast once every 5 days. Bob happily agrees to the trade. Abram makes the same offer to Craig and he accepts as well. Because Bob and Craig have a diminishing marginal utility of ice cream, Abram must lower the price of ice cream to match his new supply to the quantity demanded.

Abram now enjoys 6 steaks and 6 tofu burgers, so he is clearly better off, but it is a smaller increase in consumption than his increase in production. For Abram to increase his own consumption of the things he likes but does not produce, he must increase the consumption of his fellow islanders. Bob and Craig add nothing, but still enjoy the benefits. Capitalism, it seems, “spreads the wealth around”.

So, to all of those 70 hour week, no vacation, divorced three times, stress medication, corporate titans, I say “Keep up the good work”, my free lunch is depending on you.


Brian Phillips said...

That is a very good example of Say's Law--production drives consumption.

Brian Shelley said...

I tried to find a quote from Say that would fit, but I didn't find one that I really liked.

Mark A. Sadowski said...

No, workaholics spread the wealth around. Bob and Craig are capitalists too. They just derive less marginal utility from consumption relative to leisure than Abram. Because of this they are able to exact better terms of trade from Abram and still have time to smell the roses.

Brian Shelley said...


I guess it depends on your definition of a capitalist. If you think of it as anyone who holds capital, I think that's a little broad for the point I was making. But, if you restrict it to those who actively engage their capital resources to procure more consumption, it makes more sense.