Americans are famously of two minds about the wealthy. Many of us, openly or secretly, aspire to become rich, some confident the path lies in hard work and savings, others waiting for the lightning bolt of Powerball. Yet, a strain in our intellectual heritage disparages the rich. It may derive from biblical admonishments about camels squeezing through the eye of a needle, or it could just as easily flow from envy. No matter, there’s an ingrained tendency to view the wealthy as rapacious, haughtily extravagant, even freeloaders on society.
As individuals, the wealthy (like the poor) manifest all kinds of virtues and vices. As a class, though, they get a bum rap. When it comes to taxes, the rich give until it hurts (the top 10 percent of American families pay nearly half of federal income taxes). They give more to charity (households making $100,000 or more donate over five times as much as middle-class families making $30,000 to $50,000). And they start new businesses, which create jobs, raise incomes and deliver goods and services to society’s rank and file.
Of course, paying taxes is mandatory, and good works ought to be their own reward (even if they are tax deductible). And motives count for something: For most businesses, profit is the primary pursuit, not the employment of ordinary Americans. Nevertheless, it shouldn’t be too much to recognize the facts for what they are: The rich do quite a bit of good for society.
Middle-class jet setters
They also do one specific good thing that escapes the notice of almost everyone. By and large, economies surge forward on waves of new products. Those waves typically start out small, with a relatively small number of mostly wealthy consumers. In times gone by, they’ve forged the initial market for electric lights, automobiles, airplane travel, color televisions, and air-conditioning; more recently, they’ve provided the launching pad for cellular telephones, microwave ovens, videocassette recorders, and computers. By encouraging new markets, the rich hurry along the process that’s taken mankind from the Pony Express to email. Indeed, this might just be the most unexpected gift from the upper reaches of the income distribution—wealthy consumers serving as midwives to new goods and services.
They do so simply because they’ve got the money to buy, even at what would for most of us be prohibitive prices. In 1908, Henry Ford sold his first Model T for $850, or what it would take an average factory worker more than two years to earn. Not surprisingly, factory workers didn’t stampede into Ford dealerships. All told, Ford sold just 2,500 Model T’s that year, and critics dismissed the early automobile as a “rich man’s toy.” So many innovations started out just that way, as niche products for the rich. A black and white videocassette recorder went for $1,395 in 1972. A cellular car phone cost $4,195 in 1984 (and took up a good part of your trunk). The same year, an IBM personal computer sold for $3,995.
Few entrepreneurs get rich selling to the wealthy, even at extravagant prices. The real money—and the real benefit to society—lies in bringing products within the reach of the masses. The “rich man’s toy” will remain so forever unless it gets cheaper—if not in dollars and cents at least in the currency that really matters: hours of work. Over the past quarter century, the cost of a VCR fell from 365 hours (based on the wage of the average manufacturing production worker) to a mere 15 hours. A cellular phone dropped from 456 hours in 1984 to nine hours in 1997. An IBM PC, one with over 100 times more computing power, declined from 435 hours to 76 hours over the same time. Sticker prices of $15,000 to $20,000 may cause car buyers to complain, but even cars are taking much less of a toll on the family budget: A 1999 Ford Taurus costs only a third of the hours worked of the first Model T.
Decade by decade, what were once luxuries available only to a few wealthy consumers have come to be seen as the birthright of the American middle class. For a particularly vivid example, just take a look at what’s happened to long-distance telephone service. Coast-to- coast service became a reality forty years after Alexander Bell invented the device—but only at prohibitive prices. At the average wage of 1915, a typical worker would have to toil for about two weeks just to pay the $20.70 cost of a single three-minute call. The same call can be made today for 1/2500th the amount of labor. With service so cheap, Americans make 100 billion long-distance calls a year. Air travel, too, started out as the province of the rich. In 1930, it took the equivalent of two months of a factory hand’s work to journey 1,000 miles aboard a twelve-passenger, 120 mile-per-hour American Airways Ford Tri-Motor. Today, getting there five times faster requires the equivalent of two days on the job. Everyday Americans are now card- carrying members of what once was called the jet set, each logging an average of more than 2,200 miles per year. Better still, it’s not just a matter of falling real prices. Our economic system creates value by improving existing products, adding new features, enhancing design or increasing durability. In the past three decades, for example, even economy cars are coming off the assembly line with features like power windows and remote-control locks that were once reserved for luxury models. Antilock brakes, nearly ubiquitous today, were initially available in the 1970s only as a $2,500 option on high-end European imports. Today’s vehicles are also better made, with some models traveling 100,000 miles before their first scheduled tune-up.
Sunk costs and silk stockings
In Capitalism, Socialism, and Democracy, economist Joseph Schumpeter offered a succinct capsule of a market economy’s delivery system: “Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”
Of course, things are expensive at first because virtually every new product, even stockings, requires an up-front investment to cover the cost of getting started. Whether innovation springs from small startups or established industrial giants, money will be needed for initial investment costs such as research and development as well as physical plant, machinery, equipment, and labor. To provide long- distance telephone connections in the early years of this century, AT&T had to string hundreds of thousands of miles of wires. Before the automobile could become the quintessential component of the American lifestyle, Ford and other companies had to build factories and establish dealerships.
Investors want to recoup their up-front money as quickly as possible. To do so, companies have to charge high prices at first, usually knowing full well that only the wealthy will be able to foot the bill. Rich consumers could wait for prices to come down—and, no doubt, some of them do—but human nature drives many of us to covet what’s new. By buying when prices are highest, the rich pay most of the early fixed costs of new industries, allowing them to take root and grow.
If the product succeeds, initial investments are recouped and new money arrives to fuel expansion. The market grows beyond a thin sliver at the top, spreading expenses over a larger and larger pool of consumers, allowing prices to come down. When goods and services become commonplace, prices more nearly reflect companies’ added cost of production and distribution—in economists’ jargon, “marginal cost.” It’s at this point that the car, the television, the computer find their way into the homes of working-class Americans. In this manner, by harnessing the natural power of unequal income distribution, the United States has brought to the great masses of Americans goods and services once beyond the reach of kings. What’s noteworthy, too, is that it derives, by and large, from voluntary exchange. No taxes or handouts required.
Without the rich, we’d all be much poorer.
W. Michael Cox is vice president and economic advisor at the Federal Reserve Bank of Dallas. Richard Alm is a business writer for The Dallas Morning News. They are the authors of Myths of Rich and Poor, a book on the success of the American economy to be published by Basic Books in January 1999.