There are (at least?) two ways that people can earn money:
(1) They can create value.
(2) They can transfer value created by other people to themselves.
Certain economist types, even though they acknowledge the existence of “rent seeking behavior,” seem oblivious to the fact that the majority of economic activity in the United States (if measured by dollars) is about value transference rather than value creation.
The most base type of value transferring activity is theft. For example, you reach into your wallet, and it’s not there. A pickpocket has stolen your wallet, transferring the money that was in there to himself.
The most blatant types of value transference activities are illegal. It’s considered illegal fraud when someone tries to sell you a share of the Brooklyn Bridge. But what about when Juicy Couture sells you a $5 t-shirt for $88? Surely this is an example of value transference, yet it’s perfectly legal, and not really so much different than the Brooklyn Bridge hypothetical.
The more money a person makes, the more likely it is that he’s involved in value transference and not value creation. This is because there is only so much value that a single human being is capable of creating. The salary paid to the best engineers or computer programmers, about $150,000/year, is probably close to the upper limit of how much value a person can create. It’s extremely unlikely that a person making more than $200,000/year is doing it purely through value creation.
You don’t have to be rich to earn your living through value transference. Both the welfare mother and the senior citizen living off of Social Security rely on value transference as their primary source of income. Being rich merely increases the likelihood that you’re a transferee rather than a creator.
Winner-take-all markets are an important mechanism of value transference. Take CEO pay for example. The nature of the system creates the opportunity for the person who is CEO to transfer a lot of value from the shareholders to himself. What would have happen if A, the CEO of Big Corporation who gets paid $10 million per year, died in a car accident? Well, shortly afterwards, someone else, B, would be given A’s CEO job, and B would get a huge increase in his income because of his good luck (which was A’s bad luck). Is B somehow magically able to create more value because he was promoted? No! It should be obvious that B’s ability to create value hasn’t changed, only his circumstances have changed.
Entrepreneurialism is often idolized as the ultimate in value creation, but actually it’s just another example of a winner-take-all market and value transference. If Bill Gates had died in a high school computer accident, would all his billions of dollars of wealth have never been created? This is highly unlikely. Other people would have stepped into his shoes and the same stuff would have been created. (There are many who think that better software would have been created in his absence.)
Our economy is a big pyramid in which the majority of people on the bottom create value (but take home less money than the value they created because some of it is transferred away from them), while the small number of people at the top are very rich because of the value they transferred from the people at the bottom of the pyramid to themselves.
Value transference doesn’t lead to long-term economic growth, but it can create the illusion of short-term economic growth based on the way that the economy is measured. Suppose that B transfers X value from A to himself. Then C transfers X value from B. Then D transfers X value from C. Then finally A transfers X value from D. In reality, there has been no value creation, the value has just moved around in a circle. But economists, who assume that all income is legitimate, will say that there has been 4X of income added to the economy.