Dinesh D'Souza - America: Imagine a World without Her (22 page)

Marx gives the example of a new enterprise in which an entrepreneur invests a fixed sum, say $100. This is the cost of hiring the labor. There are of course other costs: rent, raw materials, machinery,
and so on. Let’s say that these amount to $400. So the total investment is $500. Then the product is sold for $600. The profit is, of course, $100. Now most people might say that this is a 20 percent rate of profit, since profits are calculated based on the total investment. Yet Marx calculates the profit to be 100 percent, since it is double the cost paid to the workers. Marx insists that workers were deprived of one-half the value of their labor. In a sense, they gave a day’s work and were paid for half a day. This Marx terms “the real degree of exploitation of labor.” Marx’s math may be suspect, but his general point remains. Essentially, from Marx’s point of view, the capitalists are thieves, stealing from the worker the true value of what the worker has contributed. Marx is the original apostle of Obama’s doctrine of “fair share.”
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Many intellectuals are naturally sympathetic to these “fair share” doctrines. Years ago I debated a political scientist—very much a creature of the 1960s—on the subject of free markets. Our exchange illuminated one of the biggest reasons intellectuals detest capitalism. During our discussion, the political scientist said that free markets systematically undervalue intellectuals like, well, himself. Yet he acknowledged he drove a very nice car and employed a nanny. Even so, he fumed that “some fat Rotarian with a gold chain on his chest is taking in $2 million a year selling pest control or term-life insurance.” So this well-published Ph.D. simply couldn’t fathom why a society would want to pay ill-educated, culturally unsophisticated entrepreneurs so much and a guy like him so much less. His complaint wasn’t a simple matter of envy; rather, it was one of injured merit. He wasn’t getting his “fair share.” (Of course, in reality, most professors get a subsidized share, as taxpayers pay part of all of their salaries at state schools or through federal research grants, a “benefit” the pest control or term-life insurance salesman doesn’t get.)

Ordinarily these grievances about market distribution of rewards simmer below the surface; the reason they have become the central political question of our time is that economic inequality in America seems so much greater. We now live in a country where CEOs make several million dollars a year while their low-wage employees have trouble making ends meet; where tech entrepreneurs become billionaires in short order while ordinary families (their savings depleted and their homes under water) have virtually no accumulated wealth, where the great American middle class seems to have disappeared and America is now a nation of plutocrats on the one hand and wage serfs on the other. Technological capitalism appears to be the obvious culprit causing this inequality. To the degree that the inequality reflects an unjust distribution of wealth, technological capitalism can be viewed as a form of systematized theft. The people at the top seem to be ripping off the people at the bottom. This is the moral force behind Obama’s success.

Let’s begin by considering the parking lot guy. He thinks that he is the one doing the work in parking the cars. But in fact, the actual value of parking a car is close to zero. The physical labor involved is negligible, and the benefit to the guy who owns the car is virtually nil. If you offer to come to my house and park my car every time I get home, I would pay a dollar or two for the service. Why, then, do patrons of a resort pay $25? They do so because they are
at a resort
. They want a vacation experience, or a convenience so that they can rush to their business conference, and in this situation they are willing to pay much more for parking than they normally would. The value of this convenience cannot be properly measured by simply considering the labor of parking the car. Someone had the idea for the resort. Someone raised the money. Someone secured and paid for the permits. Someone then designed the property, including the
parking lot. Someone fitted the parking lot with its gates and structures. Someone obtained and paid for insurance. Then came the hiring not only of the parking lot guy but a hierarchy of overseers and managers to make sure the entire resort functioned properly.

There are a few points worth making here. First, Marx is wrong that a business venture is simply capital plus labor. He fails to count the added value of the entrepreneur. What the entrepreneur brings to the project is, first, the idea. This is quite simply the most important element of any business—the original idea for doing it. An idea, of course, is hard to measure because it is abstract, it is ethereal, it is not a thing. Yet without the idea for delivering mail overnight there would be no Federal Express. A second, equally valuable, contribution of the entrepreneur is the organization of the business. Ideas are fine by themselves but they don’t get the job done. We all know people who have great ideas—for businesses, for new inventions, for books and movies—but they don’t take the necessary steps to implement their ideas. A third entrepreneurial contribution is risk. While labor gets paid its fixed wage, the entrepreneurs take all the risk. Entrepreneurs might do well, but they might also lose money, ending up worse than they were before they started. The worker’s risk is much lower: at worst, he’s out of a job and doesn’t get additional wages. No one, however, asks the worker to receive wages only if the company does well, or to give back wages to help the company meet its obligations.

So these distinctive entrepreneurial contributions—ideas, organization, and risk—are very different from “labor,” indeed they involve the establishing of a system that then enables labor to function. If labor gets paid “wages” in return for its contributions, entrepreneurs get paid “profits” in return for theirs. There is nothing inherently unfair about that, even when the profits are substantial, since without entrepreneurs, the workers would not have their jobs.

Moreover, the parking lot guy seems to be suffering from an optical illusion. He thinks that he is doing the work of parking the car, but he is merely the last man in a chain of employees who are getting this particular job done. The parking lot guy wonders, “All I got paid was $100. Where did the rest of the money go?” Well, it went to all the other people who created and designed, and continue to maintain and manage a resort property in which it is feasible to charge $25 per day to park a car. Instead of wallowing in his grievances, and voting for Obama, the parking lot guy would do better for himself if he asked, “How can I become one of the managers?” or “How can I start a company that builds and operates parking lots?”

In a way, the confusion of the parking lot guy is understandable—it derives from a basic misunderstanding of the principle of division of labor. We can understand this better by recalling Adam Smith’s famous example of how pins are made. Smith intended to show that ten skilled individual pin-makers might each make one, or just a few, pins a day, while as workers in a pin factory they could make thousands of pins—Smith estimated “upwards of forty-eight thousand pins a day.” How? “One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it,” and so on. Smith figured that “the important business of making a pin is … divided into about eighteen distinct operations.” Now assume that the last of these eighteen operations is the act of putting the head on the pin. The guy who does that could easily say, “I finished the job. I made the pin.” That guy—who is the equivalent of the parking lot guy—then demands that most or all of the profit derived from selling the pin should go to him. From that man’s perspective, he got the job done, he made the pin; nevertheless, once we understand the full operation of pin-making, we see how myopic and mistaken he is. The money paid to the last man in the pin-making chain, just like the $100 paid to the parking lot guy, represent precisely the
value that they are adding to a process that goes far beyond their narrow efforts.

This last point, however, requires clarification. How do we know that $100 represents the “merit” of the labor of the parking lot guy? Here we need to make an important distinction between “merit” and “value.” In
The Constitution of Liberty
, Friedrich Hayek writes that “in a free society it is neither desirable nor practicable that material rewards should be made generally to conform to what men recognize as merit.” Hayek acknowledges that “this contention may appear at first strange and even shocking.” He gives the example of several people who are striving with equal intelligence and equal effort to create a new venture or to make a new discovery. Even though all have striven as meritoriously, he writes, we still give all the rewards to the ones who succeed.
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In the case of the new discovery, success may be measured objectively, as when Watson and Crick figured out the structure of the DNA molecule. In the case of new ventures and new products, however, success is measured subjectively, by the amount that customers are willing to pay.

Consider an extreme example: let’s say I can throw sharp objects into the air and catch them between my teeth. Am I going to get rich doing it? In some places this skill may be completely useless; at most, it would make me a barroom curiosity. In a capitalist society, however, I can put my skills up for public consumption. If for some reason millions of people are fascinated by my skill—and even more important, if they are willing to pay to watch me—then my peculiar talent, regardless of its intrinsic “merit,” becomes marketable. Now it has the potential to make me rich. Luck may also be a factor here. A person with very good math skills who lived in the early twentieth century might have found those skills largely unmarketable; today, another person with the same skills would likely be in huge demand as a hedge fund analyst or a computer programmer. Of course the
second fellow is simply lucky, compared to the first, but even so, he is entitled to the benefit of his luck, in the same manner that the lottery winner deserves his winnings even though it was mere good fortune that conferred them.

Here, as in all cases, the monetary value of a person’s contribution is determined by the consumer. The consumer issues the final verdict and casts the deciding vote, using ballots that are otherwise known as dollar bills. So that’s why athletes and singers get paid so much, vastly more than teachers and doctors. Obama may have a low view of the “merits” of their services, but their millions of fans feel differently and prove it by continually buying tickets for games and concerts. In this context I recall the response of baseball great Babe Ruth who was once asked why he deserved a higher salary than President Hoover. He said, “I had a better year than he did.”
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The beauty of free markets is that the “value” of each provider is decided precisely by the guy who is going to pay for that provider. CEOs, for instance, are paid by boards that are typically made up of large investors in a company. (I am not speaking here of companies where CEOs are somehow able to put their own cronies on the board.) These investors stand to make money with a good CEO, and lose money with a bad one. In a competitive market, a difference between a good CEO and a bad one can be critical. It is analogous, in a way, to the difference between a good and a bad quarterback. Therefore companies are often willing to pay high prices to attract the right “quarterback.” How preposterous it is for Obama to pontificate on what CEOs should be paid when he is not the one who is paying them! All that he brings to the subject are his prejudices. He has no more idea of what value CEOs provide to their companies than he has of what value a particular coach or quarterback provides to a team. That’s something for the owners of the team to decide,
not some outside observer who is ignorant of the team’s needs and has absolutely no “skin in the game.”

Intellectuals are particularly susceptible to such speculations. Recently I found myself at MIT, in the spacious office of the famous linguist and leftist Noam Chomsky. Chomsky was raging about how workers in America are really “wage slaves,” and in this category he includes intellectuals. I sat there in amazement. Here is a guy who likes to spend part of his day on linguistics; the rest he devotes to politics, from blasting Israel to celebrating the “Occupy” movement to assorted other leftist causes. For these activities MIT pays him a six-figure salary and gives him a secretary and a team of student researchers. Now who is exploiting whom? Sure, MIT gets a distinguished linguist who is, at least part time, working on linguistics. But Chomsky gets well-paid to do something that he would probably do even if no one paid him—namely pursue his academic interests and advance his pet causes. Is MIT depriving Chomsky of his “fair share”? One could equally make the case that Chomsky has found himself a pretty good racket. Professors who teach a few classes a week for nine months out of the year and get comfortably paid for doing it somehow manage to count themselves among the ranks of the oppressed.

Is Chomsky getting his due from MIT? Of course he is. So is the CEO. So is the parking lot guy. How do we know that? We know it because they have consented to those terms of employment. If Chomsky thinks he’s worth more, say double his current salary, he can approach Harvard or Dartmouth and see if they will pay it. If no one will, then he ain’t worth it.

The point here is that the morality of capitalism, just like the morality of democracy, is rooted in consent. What gives Obama his legitimacy as president? The fact that Americans voted for him: our consent is the moral basis for representative government. Similarly, what gives capitalist transactions—from employment terms to the
price of milk—their legitimacy is that all parties must agree or the transaction doesn’t go through. Obviously Chomsky wouldn’t take the job if he didn’t consent to the terms. Obviously MIT as an employer also has to consent to those same terms. This mutual consent is what gives capitalism and trade their legitimacy. Why? Because consent is confirmation on the part of all parties that they are better off. If they weren’t better off, they wouldn’t make the deal. The ingenuity of capitalism is that people who are complete strangers can make deals with each other for mutual benefit. Multiply these deals across a society and we have that good and well-functioning institution called a market.