Element 1.10: Value Creates Income and Wealth

“The secret of making progress is to get started.”

People differ in many ways—in their productive abilities, specialized skills, career preferences, work attitudes, and willingness to take risks. These differences influence people’s incomes because they affect the value of the goods and services they are willing and able to provide to others at attractive prices and wages.

In a market economy, it is advantageous to produce goods, develop skills, and take actions others value highly. There is a moral here: If you want to earn a lot of income, figure out how to provide others with goods and services they value highly relative to their cost. Even if you don’t strive to earn a lot of income and, instead, want to help the world, use the economic way of thinking to choose which charitable works, social endeavors, and nonprofit activities make the most sense among the various alternatives. In all scenarios, gather information about available resources and consider opportunity costs to make those choices that help you gain the most by supplying what is valued at the least cost. If you are unable or unwilling to help others in ways they value, your income will be low.

This direct link between helping others and receiving income gives each of us a strong incentive to acquire skills, develop talents, and cultivate habits that help us provide others with valuable goods and services. College students study for long hours, endure stress, and incur financial costs in order to become doctors, teachers, accountants, and engineers. Other people acquire training, certification, and experience that will help them become electricians, maintenance workers, or web-site designers. Still others invest and start businesses. Why do people do these things? How do they survive and thrive?

Some people think that high-income individuals must be exploiting others. But people who earn high incomes in the marketplace generally do so by providing consumers with what they value and at attractive prices. Consider billionaire David Steward, the chair of World Wide Technology. Steward was born in the segregated southern US states a child in a family of ten. His father worked in a variety of jobs in the service sector, including as a mechanic, janitor, and trash collector. These beginnings influenced Steward in many ways. After earning a college degree, he worked many jobs before launching World Wide Technology in 1990. Through various trials and tribulations, Steward customized existing computer technologies and improved information systems to help for-profit businesses and nonprofit organizations lower their production costs, improve overall efficiency, reach new markets, and enhance customer experiences at lower prices.

Billionaire and millionaire athletes and entertainers have done the same for their fans and customers. They have earned income and accumulated wealth by specializing, developing, and selling their talents and merchandise to others. Even those with enormous talent maximize their income by investing in developing that talent. Ask Russian-Ukrainian choreographer Alexei Ratmansky how many hours he spent honing his talent. Ask Albanian opera star Ermonela Jaho about the sacrifices needed to be successful even for those with great natural talent.

Those who succeed in big ways do so by bringing products to millions of consumers at attractive and acceptable prices. The late Sam Walton, who founded Walmart, became one of the richest individuals in the United States by figuring out how to manage large inventories effectively and selling brand-name merchandise at discount prices to small-town America. Bill Gates and Paul Allen, cofounders of Microsoft, earned their billions by developing a set of products that dramatically improved the efficiency and compatibility of desktop computers. Billions of consumers who have never heard of Steward, Walton, Gates, or Allen have benefited from their entrepreneurial talents and products. These individuals made a lot of money because they helped a lot of people by providing them with things they valued at attractive prices.

Such examples of “good capitalists” can also be found throughout transition economies. Perhaps not as well-known as Bill Gates, the Czech Pavel Baudiš (Avast), Armenian Hovhannes Avoyan (PicsArt) and Ukrainian Dmytro Zaporozhets (GitLab) have all built multi-billion dollar businesses in the software industry along with vast personal fortunes.

Many people are hostile toward entrepreneurs and the profits they earn. When considering this view, it is important to recognize that the actions of entrepreneurs are a driving force of economic progress. Our living standards today are vastly higher than those of our forbearers fifty or one hundred years ago primarily because entrepreneurs have discovered and developed new products and lower-cost production methods that have improved the quality of our lives. Further, their compensation—profit derived from successful innovative actions—is only a small fraction of the gains they generate for consumers. William Nordhaus, longtime professor of economics at Yale University, estimates that the compensation of entrepreneurs was only 2.2 percent of the total gains their innovative actions generated for consumers during 1948–2001.⁽¹¹⁾ Wow, what a deal! For every $2.20 earned by entrepreneurs, they generate an estimated gain of $97.80 for others. Given these figures, it is not surprising that Steward, Walton, Gates, Allen, and millions of other entrepreneurs have exerted such a strong impact on our living standards.