A proud capitalist on what really drives economic growth -- and how the tax system can better reflect reality
A young entrepreneur poses with photos of colleagues at a conference for start-ups in February 2012. (Reuters)
In a November 2011 op-ed for Bloomberg View, I argued that rich people in general -- and business-people in particular -- are not job creators. When the economy is understood in 21st-century terms, as an ecosystem, it becomes obvious that jobs don't squirt out of business-people like jelly from doughnuts. Rather, jobs are the consequence of the feedback loop between customers and businesses. For this reason, it is middle-class consumers and the demand they create that are our true job creators, not rich business-people.
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Given this, it is counter-productive to build a tax system that asymmetrically benefits the people at the very top. We all are better off -- business-people and consumers, rich and poor -- if the burden of taxes is placed at the top and not the middle, enabling middle class citizens to consume, and starting the positive feedback loop of job creation again.
Not surprisingly, this argument has created significant consternation among many of my peers. I hope to redeem myself with my fellow capitalists by arguing that thinking of ourselves as job creators significantly underestimates our contribution to our country. Any knucklehead can create jobs. We capitalists do something far more important.
Capitalists are idea creators, not job creators.
Every business, from the mundane ("How do you make the chip taste more like BBQ?") to the arcane ("How do we turn photons into electrons?"), is based on an idea about how to solve a problem. The process of converting great ideas into products that effectively solve fast-changing human needs is what creates a business. The essence of every business is both an idea for a product that meets an important human need and the ability to make that product efficiently in order to create profit.
The unmatched benefit of capitalism is the way it creates an almost unlimited number of ways for individuals to hatch ideas and then propagate those ideas in the form of businesses. I firmly believe that these businesses can collectively solve human problems faster than any other type of economic organization.
Capitalism, when properly constructed, is the best way ever invented for humans to adapt to changing challenges and conditions. Crucially, it's not just the fact that capitalists create ideas, but also the rate at which those ideas are created to meet the blindingly fast changes in human need that makes such a critical difference and produces so much value.
This is why capitalist countries are rich and communist countries are poor.
No state-run enterprise can ever compete to solve the abundance of fast-evolving human problems as well or as fast as millions of individuals trying to solve these problems in competition and in real time. The key here is the diversity of approaches taken. Ten people trying to solve a particular problem in ten entirely different ways will always solve it faster and better than ten people trying to solve it in one way, and the modern study of complex systems proves this.
The crony capitalism that we have allowed to infect the U.S. economic system shares weaknesses with communism. A tax system that amplifies compounding advantages for business-people and corporations the higher up the food chain they go and compounds disadvantages for people at the bottom is bad for business. It slows the rate at which ideas are generated and problems are solved. The healthiest ecosystem or economy is one with the most diverse, able competitors, not one overrun with one or two dominant species.
If capitalists create ideas that produce social and economic value, then it is obvious why it makes so little sense to pour more money into the already wealthy and successful. Even the best of us have only a few ideas. Steve Jobs, arguably the greatest entrepreneur of our generation, had only a handful of truly brilliant ideas. Most billionaires, it could be argued, have only one. It would be far better for our country to enable every citizen to participate in our capitalist economy by ensuring that they have the requisite education and access to capital and training to convert those ideas into products that solve the world's problems.
Of course, the kind of problems we choose to solve is important. Finding clever ways of securitizing imaginary assets may not create a lot of social utility. Finding cheap ways of converting the sun's rays into electricity unquestionably does.
Great success should be celebrated, but not institutionalized. When we tax working Americans at a higher rate than billionaires, it is bad for business. When we tax the small business more than our largest corporations, it is similarly bad for business. When we give tax breaks to the wealthiest while excluding those in the middle and the bottom, we slow down our economy by slowing down the rate of idea creation, because so many are excluded from the process of solving our nation's problems.
Small adjustments in how we run our system can make a huge difference to our economy and our country. A truly capitalist system structured to maximize the participation of the many rather than the advantages of the few will generate more jobs, growth, and prosperity. Additionally, being fairer and more inclusive will increase solidarity in our country, creating yet another positive feedback loop of ever-increasing cohesiveness and patriotism.
The diversity of our citizens and the dynamism of our markets is America's "secret sauce." Insuring that the kind of capitalism we embrace is structured to maximize the greatest number of diverse, able competitors, and that those competitors focus on America's greatest challenges, should be the central role of government. If we get that right, no country on Earth can best us.
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