Tuesday, May 6, 2008

On Wealth (part one, take one)

Okay, so when my wife proof read this she said it was almost incomprehensible. Clearly I need to clarify both my ideas and the presentation. I thought I would post it anyway, because the point of this blog is to be a place for me to refine my ideas. Let me know what you think.


If I were a conspiracy theorist, I’d call it a conspiracy. If I were a cynic I’d call it a lie. As I’m neither we’ll have to call it one of the greatest delusions/illusions of the American Dream. It seems to be believed by most of middle class America. The further up or down the ladder you go the fewer there are who believe it (though for very different reasons.) The delusion: that it is possible to become wealthy through hard work and/or ingenuity. Mormons are especially susceptible; given the theological history they share with the Protestant movement and its adjunct, the Protestant work ethic, combined with the narrative of the Book of Mormon, which can be understood as tying the economic success of a nation to the righteousness of its people.

First we will deal with the delusion itself, then some of the consequences of that delusion.

“Wealth is the result of hard work.” That statement without a doubt is true. It is the similar sounding “If a person is wealthy it is as the result of their hard work.” that is false. With very few exceptions (sports and movie stars, ironically) can anyone become wealth purely by being paid for what they, themselves, do.

There are several paths to wealth in our country: you can inherit it, you can start or personally own a business, or you can become wealthy as a result of investments (basically be a part-owner.) While some of these paths require hard work by the person who becomes wealthy (for example running and owning a business), they all require hard work by someone other than the person who becomes wealthy.

In the case of inheritance this should be easy to see; children typical have nothing to do in the creation of wealth by their parents.

How does a business owner make her wealth on the work of others? Let’s use a small burger franchise as an example. For the business to be considered successful there needs to be a profit. Profit is money that is left over after all the bills have been paid (including payroll.) So let’s imagine that, in addition to owning the burger joint, Jill also manages it. She balances the books, chooses promotions, deals with market, orders supplies etc. For this amount of work she is paid, and rightfully so – that is hard work. Out front is Jim. Jim flips the burgers, sweeps the floor and serves the customers. Again, for this work, Jim is paid. At the end of the month Jill sits down and pays the bills: the bank for the loan, the suppliers, landscapers, etc. She pays out payroll for herself and Jim. Any money left over at this point is called profit. Whose work created that profit? Clearly both Jill and Jim, but who typically keeps the profit? Jill. In other words Jill is not becoming wealthy based on her work alone, she is get wealthy because of Jim’s work too; the more employees the greater the effect.

The stock market exaggerates this. Lets imagine that I was ready to retire today, and that I had gotten my first paycheck 46 years ago (at the age of 19 in 1962), and I took that money and with it bought one share of stock in GE for $75 (check out Yahoo Finance for historical stock prices. Here the finance can get a little trickier for those that don’t understand stocks. To compare historical stock prices with today’s you need to account for splits. Basically, if the stock has been split and you owned one share worth $75 you would then own 2 shares worth $37.50 – or so the theory goes. GE’s stock has split multiple times since 1962. So in order to compare today’s prices with that $75 you need to use what is called the adjusted price, which accounts for the splits. The adjusted price for one share of GE stock on the 2nd of January 1962 was $0.20.) So my original investment increased 166.65 times (not percent) from $75 to $12,498.75. In other words I “made” $12,423.75, but I did nothing. I didn’t work, let alone work hard. If we leave aside market fluctuations induced by speculation (something it is reasonable to do given the long time frame) what gave me this increase in value was the fact that GE became a more valuable company. This is due to hard work, the hard work of the employees of GE. (Or, for the cynics, the laying off of those employees.)

In both of the above cases what is making an individual wealthy is, in part or in full, the hard work of someone other than themselves, and this only measures the hard work of individuals directly associated with the wealth. There is also a lot of other hard work that goes into the creation of this wealth: the work of the teachers at the public schools who educated the employees, the work of the police forces that help protect the property, the physical infrastructure of the nation that allows for the transportation of goods and energy, the system of laws and government that has created an environment stable enough for long term investment, environmental regulations require that natural resources be managed in such away so as to be continuously available from generation to generation, social safety nets that give people the freedom to take risks without the fear that if they fail their families will stave to death, bankruptcy laws that allow people to recover from mistakes and go on to make meaningful contributions to society rather than eternally crushing them with debt. In other words no one ever gets wealthy from their hard work alone.

So if we are able to free ourselves from the delusion that our own hard work has made us wealthy what does that mean? First of all it means that with wealth come responsibilities, such as duty to acknowledge the role of others in the wealth creation process, to facilitate that process for others, to create wealth in a way that is mutually enriching for everyone involved rather than exploitive, and to use the wealth in a way that benefits the society as a whole (see for example see the requirements in the Book of Mormon in Jacob 2:18-19.) Second, it means that the insidious corollary of the delusion, “If wealth is the result of hard work then poverty is the result of a lack of hard work” is false. This sort of logic is often used by conservatives to justify lack of support for social welfare programs (I’ve heard conservatives say that those on welfare are there simply because they are unwilling to work, as if jobs and the skills to work in them appear magically to everyone by virtue of being alive.) After all, if poverty as a result of personal failure (or “sin”) then it is easier to see some how foist off the idea that the poor deserve their poverty. The Book of Mormon debunks even this type of reasoning (see Mosiah 4:16-18) Third, this also debunks what I call the Self Reliance Myth, which is the belief that it is desirable or even possible to achieve success on the basis of one’s own labors. Each of these points will be the topic for upcoming essays.