Extreme leaps in innovation, like the invention of the microprocessor, bring with them staggering fortunes. Mr. Gordon is the author of “An Empire of Wealth: The Epic History of American Economic Power” (HarperCollins, 2004). This is a reblog from a recent WSJ article.
Judging by the Forbes 400 list, the richest people in America have been getting richer very quickly. In 1982, the first year of the list, there were only 13 billionaires on it. A net worth of $75 million was enough to earn a spot. The 2013 list has nothing but billionaires, with $1.3 billion as the cutoff. Sixty-one American billionaires aren’t rich enough to make the list.
Many regard this as a serious problem, seeing the development of a plutocracy dominating the American economy through the sheer power of its wealth. The French economist Thomas Piketty, in his new book “Capital in the 21st Century,” calls for an 80% tax on incomes over $250,000 and a 2% annual tax on net worth in order to prevent an excessive concentration of wealth.
That is a monumentally bad idea.
The great growth of fortunes in recent decades is not a sinister development. Instead it is simply the inevitable result of an extraordinary technological innovation, the microprocessor, which Intel brought to market in 1971. Seven of the 10 largest fortunes in America today were built on this technology, as have been countless smaller ones. These new fortunes unavoidably result in wealth being more concentrated at the top.
But no one is poorer because Bill Gates, Larry Ellison, et al., are so much richer. These new fortunes came into existence only because the public wanted the products and services — and lower prices — that the microprocessor made possible. Anyone who has found his way home thanks to a GPS device or has contacted a child thanks to a cellphone appreciates the awesome power of the microprocessor. All of our lives have been enhanced and enriched by the technology.
This sort of social transformation has happened many times before. Whenever a new technology comes along that greatly reduces the cost of a fundamental input to the economy, or makes possible what had previously been impossible, there has always been a flowering of great new fortunes – often far larger than those that came before. The technology opens up many new economic niches, and entrepreneurs rush to take advantage of the new opportunities.
The full-rigged ship that Europeans developed in the 15th century, for instance, was capable of reaching the far corners of the globe. Soon gold and silver were pouring into Europe from the New World, and a brisk trade with India and the East Indies sprang up. The Dutch exploited the new trade so successfully that the historian Simon Schama entitled his 1987 book on this period of Dutch history “The Embarrassment of Riches.”
Or consider work-doing energy. Before James Watt’s rotary steam engine, patented in 1781, only human and animal muscles, water mills and windmills could supply power. But with Watt’s engine it was suddenly possible to input vast amounts of very-low-cost energy into the economy. Combined with the factory system of production, the steam engine sparked the Industrial Revolution, causing growth — and thus wealth as well as job creation — to sharply accelerate.
By the 1820s so many new fortunes were piling up that the English social critic John Sterling was writing, “Wealth! Wealth! Wealth! Praise to the God of the 19th century! The Golden Idol! The mighty Mammon!” In 1826 the young Benjamin Disraeli coined the word millionaire to denote the holders of these new industrial fortunes.
Transportation is another fundamental input. But before the railroad, moving goods overland was extremely, and often prohibitively, expensive. The railroad made it cheap. Such fortunes as those of the railroad-owning Vanderbilts, Goulds and Harrimans became legendary for their size.
The railroad also made possible many great fortunes that had nothing, directly, to do with railroads at all. The railroads made national markets possible and thus huge economies of scale — to the benefit of everyone at every income level. Many merchandising fortunes, such as F.W. Woolworth’s five-and-dime, could not have happened without the cheap and quick transportation of goods.
Many of the new fortunes in America’s Gilded Age in the late 19th century were based on petroleum, by then inexpensive and abundant thanks to Edwin Drake’s drilling technique. Steel, suddenly made cheap thanks to the Bessemer converter, could now have a thousand new uses. Oil and steel, taken together, made the automobile possible. That produced still more great fortunes, not only in car manufacturing, but also in rubber, glass, highway construction and such ancillary industries.
Today the microprocessor, the most fundamental new technology since the steam engine, is transforming the world before our astonished eyes and inevitably creating huge new fortunes in the process.
To see how fundamental the microprocessor — a dirt-cheap computer on a chip — is, do a thought experiment. Imagine it’s 1970 and someone pushes a button causing every computer in the world to stop working. The average man on the street won’t have noticed anything amiss until his bank statement failed to come in at the end of the month. Push that button today and civilization collapses in seconds. Cars don’t run, phones don’t work, the lights go out, planes can’t land or take off. That is all because the microprocessor is now found in nearly everything more complex than a pencil.
The number of new economic niches created by cheap computing power is nearly limitless. Opportunities in software and hardware over the past 30 years have produced many billionaires — but they’re not all in Silicon Valley. The Walton family collectively is worth, according to Forbes, $144.7 billion, thanks to the world’s largest retail business. But Wal-Mart couldn’t exist without the precise inventory controls that the microprocessor makes possible.
The “income disparity” between the Waltons and the patrons of their stores is as pronounced as critics complain, but then again the lives of countless millions of Wal-Mart shoppers have been materially enriched by the stores’ staggering array of affordable goods.
Just as the railroad, the most important secondary technology of the steam engine, produced many new fortunes, the Internet is producing enormous numbers of them, from the likes of Amazon, Facebook and Twitter. When Twitter went public last November, it created about 1,600 newly minted millionaires.
Any attempt to tax away new fortunes in the name of preventing inequality is certain to have adverse effects on further technology creation and niche exploitation by entrepreneurs — and harm job creation as a result. The reason is one of the laws of economics: Potential reward must equal the risk or the risk won’t be taken.
And the risks in any new technology are very real in the highly competitive game that is capitalism. In 1903, 57 automobile companies opened for business in this country, hoping to exploit the new technology. Only the Ford Motor Co. survived the Darwinian struggle to succeed. As Henry Ford’s fortune grew to dazzling levels, some might have decried it, but they also should have rejoiced as he made the automobile affordable for everyman.
Some readers took exception:
John Steele Gordon’s post is short on facts. For example, he could have cited figures showing how the share of the country’s wealth held by the top 1% has gone from approximately 25% in 1981 to approximately 35% in 2010.
He could also have mentioned that the Gini coefficient, a broad-based, widely accepted measure of income inequality, for the U.S. was higher than in Sweden, Norway, Austria, Germany, Denmark, Austria, Italy, Canada, France, Switzerland, the United Kingdom, Japan, Israel, Iran, etc.
I agree with Mr. Gordon that capitalism has benefited more people than any other widely practiced economic system. But the question is, “Have its benefits been fairly distributed?” I think not. Personally, I tend to agree with a recent pope who condemned what he called “rapacious capitalism.” This is what it seems to me we now have in the U.S.
Bernard Schrautemeier in the WSJ
St. Joseph, Mo.
Mr. Gordon contends that allowing a few members of society to accumulate massive wealth does no harm and is the only way to sustain the incentive to excel. This seems to be a widely held view, but it is flat wrong in my opinion.
If society claimed, in support of the common good, another 5% of GDP, and in doing so, raised marginal income-tax rates enough to claim 75% of all annual incomes above $25 million, is there really anyone out there who believes that entrepreneurs, inventors, hedge-fund managers, executives, rock stars and star athletes would stop working, inventing, playing and performing?
Unusually talented people want to be the leaders and deciders in society and will strive to be recognized as such. U.S. taxes are much lower than those in most other developed countries and could rise substantially without denying high achievers the princely incomes they desire. However, I don’t think we need to create a society unable to fund its infrastructure, educate its young, care for its sick and protect its environment to permit successful people to realize breathtakingly large annual incomes and accumulate wealth that is almost beyond imagination.
R.L. Crandall in the WSJ
I think what doesn’t get dealt with in any of these opinion here are the benefits of massive wealth to a society like the United States. While European governments may claw back a great deal of the wealth of their citizenry, the US, as is being pointed out, allows this great disparity in wealth to pass through almost untouched.
All in all I think I prefer to have my fellow citizens dispense with their wealth. I mean, what do you do with such wealth after you have taken care of yourselves and your offspring? Usually it goes to some foundation who works at disposing of it to the lasting memory of your name. The work of great foundations seems to me far more preferable than the kind of government waste and inefficiencies we are so familiar with. But that’s just me.