Adam Smith recognized the nature and cause of wealth; it results from the development and extension of the division of labor. As Smith observed, “It is the great multiplication of the productions of all different arts, in consequence of the division of labour, which occasions, in a well-grounded society, that universal opulence which extends itself to the lowest ranks of the people.” This market process is the source of wealth, since it brings individuals freely pursuing their own interests into voluntary cooperation with others. For example, an individual who specializes in mechanics, cooperates, perhaps unknowingly, with those specializing in physics, chemistry, meteorology, mining, steel production, and hundreds of other fields to create travel by airplane and make it possible to fly to almost any major city in the world. It is through the division of labor, peaceful cooperation, and free exchange—the market process—that wealth is created….
The market process is the source of new wealth. It does not redistribute wealth to the powerful at the expense of others, such as in a collectivized economy; rather, it enables new goods and services to come into the marketplace. A free market system is a positive sum system. Remarkably, the standard of living can rise, even though the population is increasing, because the total amount of wealth is not fixed. Transfer payments, on the other hand, come at the expense of wealth creators—workers, businessmen, investors, and successful entrepreneurs.
Contrary to popular sentiment, high incomes and high profits are key elements of the process which generates our prosperity. High incomes and profits are the reward a person receives for serving his fellowmen. More specifically, profits are the reward for reducing costs and using scarce resources most efficiently in the competition to satisfy consumer desires. By rewarding with profits those who successfully satisfy consumer demand, the free market maximizes the incentives to create goods and services. By permitting the accumulation of wealth, it also maximizes the amount of capital available to produce more. Profits direct this capital to where it is most vitally needed in order to meet consumer demand. Even Samuel Gompers, father of the American labor movement, recognized that “the worst crime against working peoples is a company which fails to operate at a profit.”
Envy, covetousness and hatred toward those with wealth is ill-advised. As Ludwig von Mises pointed out in Human Action, “The very principle of capitalist entrepreneur-ship is to provide for the common man…. There is in the market economy no other means of acquiring and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for.” Evidence of this was the success of that creative genius, Thomas Edison, who fulfilled his pledge to make the light bulb so cheap that only the rich could afford candles. As Brian Summers commented in the Spring, 1981 issue of The Lincoln Review, “It is true,… that a few captains of industry accumulated great fortunes, but they became wealthy through mass production of goods and services which raised the common man’s standard of living.”
High incomes and profits, the incentives to invest and produce, are put to work, provided they are not confiscated by government. The motive for wanting a larger income and higher profits should not be a concern of economics; whether for a base reason or a high-minded objective, the only way to get more, in a free market economy, is to serve others. The way to lessen poverty is to create a favorable environment for investment and wealth creation. In fact, when William E. Simon was Treasury Secretary, he suggested to a Senate committee that, “If you really want to help the poor, help the rich. They’re the ones who will invest, build more factories, create more jobs.”
* Excerpted from “What Causes Wealth,” by Roger Ream (August 1981)
The Wealth of Nations
By Adam Smith
What Causes Wealth
By Roger Ream
Government Never ‘Creates’ Wealth
By Thomas Sowell
December 9, 2009
The Market Will Set You Free
By Andy Puzder (Prager U)