A lot of people are upset with the President’s remarks from last weekend. Here is what the President said:
[L]ook, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it 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 hardworking people out there. (Applause.)
If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business — you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.
I agree with those who believe the remarks seem to completely dismiss the role of the entrepreneur. I also agree with those who think the president is exaggerating the role of government. But in two important respects, I think it would be a mistake for free market advocates to dismiss the entire statement. In fact, we should embrace some of it.
First, the president is absolutely right to note that intelligence is not the only determinant of success. In fact, I expressed a very similar sentiment in my SPN piece:
What allows me and my fellow countrymen to command such salaries? I’d like to think work ethic or intelligence has something to do with it. But the truth is that those things can explain only so much. There are plenty in the bottom 99 percent with better work ethics and more intelligence than I. Most of the world’s unemployed and underemployed—the ones with nowhere to go and nothing to do—would jump at the opportunity to work hard and would excel if given the opportunity to do so.
Second, the president is absolutely correct that a person’s productivity is crucially dependent upon the “system” in which he or she operates. Too many free-market advocates get hung up on the ‘pull yourself up by your bootstraps’ mentality and miss this point. There is a reason more successful businesses are started in the U.S. than in Zimbabwe. It has nothing to do with the inherent business acumen of Americans and everything to do with our “system.”
As I point out in my SPN piece, those who move just a short distance across the border from Mexico into the U.S. increase their salaries more than 415 percent. What could possibly account for such a dramatic improvement?
Physical capital is surely part of it. Once on the American side of the border, the typical worker is more likely to work with machines that enhance her productivity. But an important World Bank study demonstrates that these differences in physical capital only account for a small fraction of the differences in productivity around the world.
Much more important are differences in “intangible assets.” These are factors that cannot be seen but nevertheless help determine our productivity. When a worker produces a good or a service, he uses more than the physical tools in his hand. As I wrote in the piece:
He also uses a legal system, which (ideally) ensures his contracts are honored. He uses a police force, which (hopefully) protects his property. He uses a currency, which either affords him a reliable means of exchange or one that may lose its value at any moment. He depends on the honesty of government officials as they judge his compliance with the laws. Since governments require resources, he relies on the incentives of his country’s tax regime as it encourages or discourages him (and those with whom he does business) to work, save, invest, and consume. A worker even relies on the culture of his countrymen. Are they disposed to praise him for his hard work and business acumen? Or—like the Romans in their decline—will his countrymen save their plaudits for those who destroy goods in armed conflict rather than sell them in the marketplace?
It turns out that the U.S. has a much larger stock of such intangible capital than Mexico (the World Bank estimates it at $420,000 per capita in the U.S. compared with only about $34,000 per capita in Mexico). And this helps make a Mexican immigrant to the U.S. far more productive than he would be in his home country.
But here is the irony in the President’s statement: the enormous stock of intangible capital in the U.S. is mostly due to the country’s economic freedom, not its active government. Historically speaking, people in the United States have been some of the most-productive on the planet because they have been the most-free. Compared with citizens elsewhere, Americans have enjoyed better protection of their property, lower taxes, fewer and lighter regulations, greater ability to trade with foreigners, and more-sound monetary policy. Historically, business decisions in the U.S. have been more likely to be driven by consumer interests than by political considerations. Our culture has tended to celebrate entrepreneurship and risk-taking and we have been more willing to trust one another. I put all of this in the past tense because there is evidence that many of these things are less true now than they were twelve years ago.
But the basic point is that, historically, the “unbelievable American system” has indeed allowed Americans to thrive.
But the president is mistaken to imply that our “system” is superior because we spend more on roads or bridges, or because we invest more public capital in private R&D, or because we make more grants to start-up businesses like Solyndra. To the extent our system has succeeded, it is because it has allowed Americans more freedom.
It takes a village. A free one.