In an address to his supporters in Roanoke, Va., President Obama revisited Elizabeth Warren's reasoning for higher taxes on the wealthy. Like the Harvard law professor who is running for the U.S. Senate in Massachusetts, the president stated, "If you've been successful, you didn't get there on your own. If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody invested in roads and bridges." The president then took Mrs. Warren's reasoning up a rhetorical notch and said, "If you've got a business, you didn't build that. Somebody else made that happen."
Mr. Obama is right to note that all of us have received help from others — even though those "others" were much more likely to be our families and friends than government officials. But to deny the critical role that entrepreneurs — persons who build capital through risk or initiative — play in the success and failure of the companies they run is mistaken.
It was Steve Jobs' vision and leadership, for example, which turned Apple into the world's largest corporation. Yes, Apple has benefited from government services, from roads to education, but the president's apparent belief that the use of public services justifies even higher taxes on successful entrepreneurs is a non sequitur.
First, it is both morally and logically suspect for advocates of bigger government to berate businesses for using government services to which there is no private alternative because of government legislation. That is true of the de facto government monopoly on the provision of primary and secondary education, and high regulatory costs associated with private road-building.
Nobody is suggesting that government has no role in our modern society or that taxes should be zero, but it is undeniable that the growth of government has "crowded out" services that were provided privately in the past and could be privately provided in the future.
Recognizing that the lack of private delivery of certain services does not necessarily constitute a "market failure" goes back to a debate between two Nobel Prize-winning economists — Paul Samuelson and Ronald Coase. In 1964, Samuelson illustrated his concept of a market failure by claiming that lighthouses must be provided by the government because they cannot generate revenue for privately held enterprises. Ten years later, Mr. Coase looked at the history of lighthouses in England and Wales, and found that they started off as privately built, for-profit enterprises. There really is very little that the market cannot provide — often much more efficiently — than the government.
Second, Mr. Obama's comments in Roanoke illustrate deep misunderstanding of what it means to be a successful entrepreneur. As the president said, "I'm always struck by people who think, well, [success in business] must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hard-working people out there."
No one doubts that Americans are a good and hard-working people, but hard work and successful entrepreneurship are not the same thing. If it were as easy to succeed in business as the president suggests — just put together all the services that the government provides you with and enjoy your fame and fortune — why isn't everyone a successful entrepreneur?
As professor Israel Kirzner of New York University reminds us, successful entrepreneurs tend to be people who are alert to the opportunities that surround us but others cannot see. Just think of Art Fry, who invented the Post-it note, and of Bill Gates' vision of a personal computer in every household. That sort of alertness cannot be taught.
There are many practical reasons for not begrudging the wealth of successful entrepreneurs. They often risk their own capital, provide us with goods and services we consume, create employment and grow both personal and corporate tax revenue. However, let us not lose sight of the moral aspect. The sometimes stratospheric earnings of successful entrepreneurs are generally tied to innovations that disproportionately benefit us all.
All too often, the rhetoric of the president and his supporters paints the "rich" as a homogenous group of morally questionable characters who got where they are through luck or deceit. Studies suggest that inherited wealth accounts for between 10 percent and 20 percent of the net worth of the richest 1 percent of Americans. According to professor Mark Perry of the University of Michigan, "Inheritance is not the main driver of today's wealth." Most of today's wealth, in other words, is earned. While is it undoubtedly true that the rich include disreputable characters like Bernard Madoff and Allen Stanford, the vast majority of the rich are people you and I will never hear about. They are the businessmen, entrepreneurs and innovators who work every day to make our lives a little better.