People who handle ideas for a living rarely carry the outcome of those ideas. A reading of what happens when the argument turns to dividing the pie instead of working to make it larger.
Source · Thomas Sowell, Intellectuals and Society
— Reflections on Thomas Sowell, Intellectuals and Society
Note: This piece was written under the influence of the book as I read it. Thomas Sowell is a scholar and writer I admire, and I am myself a business student; the text will inevitably carry a pronounced “libertarian” inclination. If it conflicts with your own convictions, I ask your indulgence.
Intellectuals are described in the book as a relatively complex group — though by Sowell’s own definition he belongs to it himself.
Intellectuals do not depend for their income on creating products or supplying services; their occupation is the handling of ideas — and often merely the generation of ideas, without the obligation to execute them or put them into practice. They likewise generally bear no responsibility for the outcomes that follow when their ideas are put into practice; that responsibility falls on those who actually execute them.
Under the basic and universal assumption of limited conditions and limited capacity, a distance may open between the testing and practice of an idea and social fact. And through long cohabitation with an idea — as one’s self-understanding gradually converges with the idea — there may emerge a condition of idea-centrism: viewing problems in other domains through deeply entrenched prejudice.
Examined from the standpoint of idea-centrism, “social injustice” — and specifically the unequal outcomes produced by market competition — becomes so conspicuous that it can hardly avoid becoming a target for other intellectuals.
Political interest enters the arena, public opinion applies its pressure, and inequality of process displaces the social fact of unequal outcomes arising from a spontaneously fair competitive process.
This is in fact the conflict between equality of process and equality of outcome; between achievement and privilege; between limited capacity and unlimited potential; between natural evolution and deliberate design; between the constrained vision and the unconstrained vision. (The theme of A Conflict of Visions.)
Most intellectuals outside the field of economics show little interest in learning even the most basic principles of economics. Yet when confronted with general economic questions — especially questions of business, and the many questions surrounding so-called “income distribution” — they do not hesitate to issue sweeping pronouncements. — Thomas Sowell
The market, as a systemic social product, does not require the deliberate design of any particular third-party institution or organization. It is an objectively existing system.
Entrepreneurs compete with rivals by lowering prices, and then accumulate wealth from the substantially increased volume of sales. Lower prices allow more ordinary people to afford these products, which simultaneously raises the quality of ordinary people’s lives; and the sellers of those products grow wealthy through the substantially increased number of customers.
This passage is Sowell’s own text, and may equally be read as a shield in defense of “libertarianism.”
The implicit assumption embedded in words such as seizing, plundering, and exploiting — words freighted with the meaning of inequality — is that the market process is a zero-sum process: that the creation of wealth is a process in which some people’s gains necessarily equal others’ losses, a process making the poor poorer and the rich richer.
But if we set our existing convictions aside for a moment and look back:
Automobiles, computers, and smartphones; travel and further study — things that once belonged to the middle class — have long since been absorbed into the basic life of ordinary people.
Some may still credit these achievements to the wisdom of government, or to the inevitability of the age — the demographic dividend, urbanization, globalization, and so on.
But compare the outcomes of Qing China’s closure to foreign trade and of Japan’s Meiji Restoration in the same era. Perhaps that comparison reflects something of what “the market” means.
Behind the demographic dividend is labor; the subtext of globalization and urbanization is the expansion of the market…
Seen this way, does the market process not look rather more like a positive-sum process?
Because statistics appear to be a few dispassionate numbers, they are taken to be objective…
Our prejudicial trust in statistics costs us the opportunity to survey the facts.
The subjects within a statistical scope undergo changes over the measurement period that the statistics do not capture; the data can therefore conceal the true state of social mobility.
Confronted with reports or articles of the type “the income of the richest 5% has grown 24 times faster than that of the poorest 5%,” we are invariably moved and unsettled.
But let us introduce the concept of human capital and look at the figure again.
Behind these statistics and the alarmist metaphors of the intellectual class and the media lies an entirely commonplace fact: young people generally receive low wages on first entering the workforce, but their productivity — the economic value to society of the goods or services they produce — increases with age, experience, and accumulated knowledge, and their earnings develop alongside it.
So along the time dimension, the “poor” counted twenty years ago will, as their human capital develops, gradually shed that label, while young people entering the workforce behind them will enter the statistical category of “the poor” anew.
Nor is this true only of the poor. The wealth structure of “the rich” likewise obliges them to bear far more financial risk than “the poor.” Put otherwise, the wealth “the rich” accumulate is in some measure compensation for bearing excess risk.
Along the time dimension, the risk they bear sometimes yields excess returns — appreciation in equity and assets — and sometimes proves destructive: market crashes, asset depreciation.
As for mobility within the so-called “rich” stratum: because the information required to understand that mobility is concealed, we have no way of knowing it, while being simultaneously subjected to a great volume of commentary and content protesting on behalf of “social justice.” We thereby form a conscious and prejudiced understanding of the relevant social facts.
Upward social mobility, then, does exist — as against the widely circulated notion, which we are in fact unwilling to see disproved, of a calcified society controlled by a small minority…
But we cannot bear the cost of collecting all the statistics, and must therefore rely on experience in responding to information from outside. And that experience can scarcely escape the guidance of public opinion — which draws our consciousness steadily closer to the ideology prevailing in society.
Some statistics record only the changes that occurred within a statistical period, not the changes in the same individuals within the same category over the same period. Most people move from one category to another over time — some statistics treat a moving population as a fixed statistical category, a permanent class called “the poor,” ignoring the transience of the statistical subject.
A small note: Across many of his works Sowell stresses the importance of human capital and treats its accumulation as the foundation of individual productive advance. Sociology likewise treats education as the engine of upward mobility. The importance of education is evident.
Income is a narrow concept relative to wealth — remuneration obtained through work.
The composition of wealth is comparatively broad — income, assets, capital gains, and so on.
Yet in many reported statistics, the headline reads “the income gap between rich and poor is widening,” while the underlying data are the wealth holdings of different groups.
As noted above, the wealth composition of “the rich” carries greater latent risk and greater volatility, while the wealth structure of “the poor” is comparatively stable.
Some statistics include only monetary income, while payment in kind obtained through work is difficult to count and is not counted.
For example: material rewards or compensation such as rice, flour, grain and oil, coupons, or store cards.
Social development is historical, but our field of vision is fixed in the present.
We cannot avoid comparing ourselves with those around us. This is instinct, of course, and a way of knowing the world and ourselves.
But should we be using statistics spanning many years to compare against present social phenomena, in order to prove the closure of social mobility and the fact of class calcification?
How exactly do we demonstrate our own progress — by comparison with history, or by comparison with the people beside us?
The above does not claim that all four problems appear in every statistic and its analysis; but they may serve as reference points for a more objective reading of similar data in future.
It [income distribution] begins the story in the middle, with income or wealth somehow already existing, the only question being how it is apportioned. In the real world the situation is entirely different.
“Distribution,” like “seizing,” carries an implicit assumption: that some third-party institution (individual or organization) exists, acting according to some artificially established standard.
In reality, however, income arises from the systemic interaction of consumers and producers in the market — thousands upon thousands of people are paid by thousands upon thousands of others according to the objective value of their product.
What people earn by supplying products, services, or labor to others is in fact determined by the economic value of their output to society — by the satisfaction they supply to society’s consumers.
Plainly stated: the income we receive is the reward for having produced something that satisfied certain consumers. This is in substance a point-to-point exchange, not a distribution passing through another’s hands.
Yet in discussions of “income distribution,” how the income came to exist remains unknown.
To set aside how income is earned and attend only to how it is distributed is to put the cart before the horse. But setting aside process and speaking only of outcome is the more attractive move — and one into which far too much moral anxiety has been injected…
Exploitation and deprivation share, at one level, the same meaning: the taking of a right from someone who originally held it.
The difference is this. Exploitation is frequently invoked in critiques of “social injustice” and attracts wide social attention, yet cannot be shown to have actually occurred. Deprivation, by contrast, occurs in the very course of realizing “social fairness” — and goes unnoticed.
Take the minimum wage, which I used in an earlier piece (Discrimination Is Not What You and I Think It Is). Raising the minimum wage in fact deprives those who would have been willing to accept a wage below the “minimum” of their employment opportunity.
Employers, protecting their own interests, will cut the staff rendered redundant by the minimum-wage regime. Where a firm could previously afford 3,000 yuan a month per employee and hire four, under a 4,000-yuan minimum it can afford only three and must reluctantly cut one. And once that employee is cut, the work formerly done by four must now be borne by three. In substance, this equals the volume of work worth 4,000 yuan before the minimum wage was enacted.
To keep operating, the firm distributes an unchanged total workload among fewer employees, obliging them to bear a greater volume of work than before the regime — a volume commensurate with the minimum wage.
Take next Sowell’s example of high-interest lending in poor American neighborhoods.
Residents of low-income neighborhoods generally have poor consumption habits (this is a fact, not an assumption), which means they frequently require short-term loans to meet emergencies — emergencies relative to their circumstances.
But the latent cost of providing financial services in low-income neighborhoods is high: weak repayment capacity, high credit risk, high operating cost (recurrent criminal incidents oblige providers to spend more simply to remain in operation). Lending rates grounded in these conditions are correspondingly higher than in middle-class neighborhoods or ordinary urban markets.
Moreover, loan terms in low-income neighborhoods are generally shorter, since the purpose is to meet a short-term emergency — which raises the rate further.
Suppose, then, that I borrow \$100 at \$10 interest, promising repayment in one week. Under these terms, my nominal annual interest is \$520, since there are 52 weeks in a year. More alarming still, my annual rate is roughly 1,000%.
But in reality, short-term, small-value loans constitute the overwhelming majority of such lending.
First, lenders in low-income neighborhoods are rarely willing to offer long-term, low-interest loans; second, most borrowers are only trying to solve an immediate difficulty.
And in these statistics, roughly all that gets reported is the “exploitative” and “immoral” annual interest and annual rate — while the satisfaction of the underlying need behind this economic behavior sinks without a trace.
Why should a decision that low-income people can weigh and reach for themselves be forcibly transferred by law (interest-rate ceilings) to a third party far removed from the specific knowledge involved and wholly unrelated to it? Why not let those who know their own circumstances intimately — and who are most deeply affected by the relevant policy — decide for themselves?
Wealth is created; it does not pre-exist in some fashion. Wealth is a systemic outcome, not the determination of a third party.
In the section on income distribution above I noted the implicit condition of distribution — namely that wealth somehow always already exists. To discuss distribution without discussing why wealth exists is a castle in the air, a fairy tale.
Unfortunately, the real world is not a fairy tale.
It bears emphasizing once more: wealth is created, and it is not created in a manner requiring that some must lose for others to gain.
The fundamental source of wealth is the return obtained by creating value — whether it arrives by inheritance or by seizure, its fundamental source is value creation.
In creating products or services of economic value to society, we obtain remuneration from consumers who have been satisfied by what we supplied; and our own satisfaction likewise depends on others who supply products and services to us.
We live within a mutually dependent social network of extraordinary complexity and scale, in which the butterfly effect is never quite visible and never quite absent.
If we hope to improve the living conditions of those we regard as “living unsatisfactory lives” by our own means — raising the minimum wage, for example — and this instead produces greater unemployment pressure, then we shall have to solve the unemployment problem by “our own means” as well. And so a whole series of derivative problems may follow…
A final line to share:
The wellbeing of others depends on the goods and services supplied by those who earn income.
I only answer from what is written on this site.
Type a few words — I will show you where it says so.