This article is from the March/April 2010 issue of Dollars & Sense: Real World Economics, available at http://www.dollarsandsense.org

This article is from the March/April 2010 issue of Dollars & Sense magazine.

The Undeserving Rich

Collectively produced and inherited knowledge and the (re)distribution of income and wealth.

By Gar Alperovitz and Lew Daly

Warren Buffett, one of the wealthiest men in the nation, is worth nearly $50 billion. Does he “deserve” all this money? Why? Did he work so much harder than everyone else? Did he create something so extraordinary that no one else could have created it? Ask Buffett himself and he will tell you that he thinks “society is responsible for a very significant percentage of what I’ve earned.” But if that’s true, doesn’t society deserve a very significant share of what he has earned?

When asked why he is so successful, Buffett commonly replies that this is the wrong question. The more important question, he stresses, is why he has so much to work with compared to other people in the world, or compared to previous generations of Americans. How much money would I have “if I were born in Bangladesh,” or “if I was born here in 1700,” he asks.

Buffett may or may not deserve something more than another person working with what a given historical or collective context provides. As he observes, however, it is simply not possible to argue in any serious way that he deserves all of the benefits that are clearly attributable to living in a highly developed society.

Buffett has put his finger on one of the most explosive issues developing just beneath the surface of public awareness. Over the last several decades, economic research has done a great deal of solid work pinpointing much more precisely than in the past what share of what we call “wealth” society creates versus what share any individual can be said to have earned and thus deserved. This research raises profound moral—and ultimately political—questions.

RECENT ESTIMATES SUGGEST that U.S. economic output per capita has increased more than twenty-fold since 1800. Output per hour worked has increased an estimated fifteen-fold since 1870 alone. Yet the average modern person likely works with no greater commitment, risk, or intelligence than his or her counterpart from the past. What is the primary cause of such vast gains if individuals do not really “improve”? Clearly, it is largely that the scientific, technical, and cultural knowledge available to us, and the efficiency of our means of storing and retrieving this knowledge, have grown at a scale and pace that far outstrip any other factor in the nation’s economic development.

A half century ago, in 1957, economist Robert Solow calculated that nearly 90% of productivity growth in the first half of the 20th century (from 1909 to 1949) could only be attributed to “technical change in the broadest sense.” The supply of labor and capital—what workers and employers contribute—appeared almost incidental to this massive technological “residual.” Subsequent research inspired by Solow and others continued to point to “advances in knowledge” as the main source of growth. Economist William Baumol calculates that “nearly 90 percent . . . of current GDP was contributed by innovation carried out since 1870.” Baumol judges that his estimate, in fact, understates the cumulative influence of past advances: Even “the steam engine, the railroad, and many other inventions of an earlier era, still add to today’s GDP.”

Related research on the sources of invention bolsters the new view, posing a powerful challenge to conventional, heroic views of technology that characterize progress as a sequence of extraordinary contributions by “Great Men” (occasionally “Great Women”) and their “Great Inventions.” In contrast to this popular view, historians of technology have carefully delineated the incremental and cumulative way most technologies actually develop. In general, a specific field of knowledge builds up slowly through diverse contributions over time until—at a particular moment when enough has been established—the next so-called “breakthrough” becomes all but inevitable.

Often many people reach the same point at virtually the same time, for the simple reason that they all are working from the same developing information and research base. The next step commonly becomes obvious (or if not obvious, very likely to be taken within a few months or years). We tend to give credit to the person who gets there first—or rather, who gets the first public attention, since often the real originator is not as good at public relations as the one who jumps to the front of the line and claims credit. Thus, we remember Alexander Graham Bell as the inventor of the telephone even though, among others, Elisha Gray and Antonio Meucci got there at the same time or even before him. Newton and Leibniz hit upon the calculus at roughly the same time in the 1670s; Darwin and Alfred Russel Wallace produced essentially the same theory of evolution at roughly the same time in the late 1850s.

Less important than who gets the credit is the simple fact that most breakthroughs occur not so much thanks to one “genius,” but because of the longer historical unfolding of knowledge. All of this knowledge—the overwhelming source of all modern wealth—comes to us today through no effort of our own. It is the generous and unearned gift of the past. In the words of Northwestern economist Joel Mokyr, it is a “free lunch.”

Collective knowledge is often created by formal public efforts as well, a point progressives often stress. Many of the advances which propelled our high-tech economy in the early 1990s grew directly out of research programs and technical systems financed and often collaboratively developed by the federal government. The Internet, to take the most obvious example, began as a government defense project, the ARPANET, in the early 1960s. Up through the 1980s there was little private investment or interest in developing computer networks. Today’s vast software industry also rests on a foundation of computer language and operating hardware developed in large part with public support. The Bill Gateses of the world—the heroes of the “New Economy”—might still be working with vacuum tubes and punch cards were it not for critical research and technology programs created or financed by the federal government after World War II. Other illustrations range from jet airplanes and radar to the basic life science research undergirding many pharmaceutical industry advances. Yet the truth is that the role of collectively inherited knowledge is far, far greater than just the contributions made by direct public support, important as they are.

A STRAIGHTFORWARD BUT rarely confronted question arises from these facts: If most of what we have today is attributable to advances we inherit in common, then why should this gift of our collective history not more generously benefit all members of society?

The top 1% of U.S. households now receives more income than the bottom 120 million Americans combined. The richest 1% of households owns nearly half of all investment assets (stocks and mutual funds, financial securities, business equity, trusts, non-home real estate). The bottom 90% of the population owns less than 15%; the bottom half—150 million Americans—owns less than 1%. If America’s vast wealth is mainly a gift of our common past, what justifies such disparities?

Robert Dahl, one of America’s leading political scientists—and one of the few to have confronted these facts—put it this way after reading economist Edward Denison’s pioneering work on growth accounting: “It is immediately obvious that little growth in the American economy can be attributed to the actions of particular individuals.” He concluded straightforwardly that, accordingly, “the control and ownership of the economy rightfully belongs to ‘society.’”

Contrast Dahl’s view with that of Joe the Plumber, who famously inserted himself into the 2008 presidential campaign with his repeated claim that he has “earned” everything he gets and so any attempt to tax his earnings is totally unjustified. Likewise, “we didn’t rely on somebody else to build what we built,” banking titan Sanford Weill tells us in a New York Times front-page story on the “New Gilded Age.” “I think there are people,” another executive tells the Times, “who because of their uniqueness warrant whatever the market will bear.”

A direct confrontation with the role of knowledge—and especially inherited knowledge—goes to the root of a profound challenge to such arguments. One way to think about all this is by focusing on the concept of “earned” versus “unearned” income. Today this distinction can be found in conservative attacks on welfare “cheats” who refuse to work to earn their keep, as well as in calls even by some Republican senators to tax the windfall oil-company profits occasioned by the Iraq war and Hurricane Katrina.

The concept of unearned income first came into clear focus during the era of rapidly rising land values caused by grain shortages in early 19th-century England. Wealth derived simply from owning land whose price was escalating appeared illegitimate because no individual truly “earned” such wealth. Land values—and especially explosively high values—were largely the product of factors such as fertility, location, and population pressures. The huge profits (unearned “rents,” in the technical language of economics) landowners reaped when there were food shortages were viewed as particularly egregious. David Ricardo’s influential theory of “differential rent”—i.e., that land values are determined by differences in fertility and location between different plots of land—along with religious perspectives reaching back to the Book of Genesis played a central role in sharpening this critical moral distinction.

John Stuart Mill, among others, developed the distinction between “earned” and “unearned” in the middle decades of the 19th century and applied it to other forms of “external wealth,” or what he called “wealth created by circumstances.” Mill’s approach fed into a growing sense of the importance of societal inputs which produce economic gains beyond what can be ascribed to one person working alone in nature without benefit of civilization’s many contributions. Here a second element of what appears, historically, as a slowly evolving understanding also becomes clear: If contribution is important in determining rewards, then, Mill and others urged, since society at large makes major contributions to economic achievement, it too has “earned” and deserves a share of what has been created. Mill believed strongly in personal contribution and individual reward, but he held that in principle wealth “created by circumstances” should be reclaimed for social purposes. Karl Marx, of course, tapped the distinction between earned and unearned in his much broader attack on capitalism and its exploitation of workers’ labor.

The American republican writer Thomas Paine was among the first to articulate a societal theory of wealth based directly on the earned\unearned distinction. Paine argued that everything “beyond what a man’s own hands produce” was a gift which came to him simply by living in society, and hence “he owes on every principle of justice, of gratitude, and of civilization, a part of that accumulation back again to society from whence the whole came.” A later American reformer, Henry George, focused on urban land rather than the agricultural land at the heart of Ricardo’s concern. George challenged what he called “the unearned increment” which is created when population growth and other societal factors increase land values. In Britain, J. A. Hobson argued that the unearned value created by the industrial system in general was much larger than just the part which accrued to landowners, and that it should be treated in a similar (if not more radical and comprehensive) fashion. In a similar vein, Hobson’s early 20th-century contemporary Leonard Trelawny Hobhouse declared that the “prosperous business man” should consider “what single step he could have taken” without the “sum of intelligence which civilization has placed at his disposal.” More recently, the famed American social scientist Herbert Simon judged that if “we are very generous with ourselves, I suppose we might claim that we ‘earned’ as much as one fifth of [our income].”

The distinction between earned and unearned gains is central to most of these thinkers, as is the notion that societal contributions—including everything an industrial economy requires, from the creation of laws, police, and courts to the development of schools, trade restrictions, and patents—must be recognized and rewarded. The understanding that such societal contributions are both contemporary and have made a huge and cumulative contribution over all of history is also widely accepted. Much of the income they permit and confer now appears broadly analogous to the unearned rent a landlord claims. What is new and significant here is the further clarification that by far the most important element in all this is the accumulated knowledge which society contributes over time.

ALL OF THIS, as sociologist Daniel Bell has suggested, requires a new “knowledge theory of value”—especially as we move deeper into the high-tech era through computerization, the Internet, cybernetics, and cutting-edge fields such as gene therapy and nanotechnology. One way to grasp what is at stake is the following: A person today working the same number of hours as a similar person in 1870—working just as hard but no harder—will produce perhaps 15 times as much economic output. It is clear that the contemporary person can hardly be said to have “earned” his much greater productivity.

Consider further that if we project forward the past century’s rate of growth, a person working a century from now would be able to produce—and potentially receive as “income”—up to seven times today’s average income. By far the greatest part of this gain will also come to this person as a free gift of the past—the gift of the new knowledge created, passed on, and inherited from our own time forward.

She and her descendents, in fact, will inevitably contribute less, relative to the huge and now expanded contribution of the past, than we do today. The obvious question, again, is simply this: to what degree is it meaningful to say that this person will have “earned” all that may come her way? These and other realities suggest that the quiet revolution in our understanding of how wealth is created has ramifications for a much more profound and far reaching challenge to today’s untenable distribution of income and wealth.

GAR ALPEROVITZ, Lionel R. Bauman Professor of Political Economy at the University of Maryland, and LEW DALY, a Senior Fellow of Demos, are the authors of Unjust Deserts: How the Rich Are Taking Our Common Inheritance and Why We Should Take It Back (New Press, 2009), upon which this article is based.

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