A NECESSARY DIGRESSION

A few pages back I asserted that an individual who works hard under institutions of private property gets most of the benefit. This is directly contrary to socialist ideas about exploitation, which I discuss in Chapter 8. It also contradicts the common belief that when an individual becomes more productive, most of the benefit goes to others. This belief is behind much of the public support for state-supported schooling, government subsidies to individual firms, and the like. It would require a fair-sized economics text to deal thoroughly with this question (I suggest several in Appendices I and II), but a careful examination of a single example may make it easier for the reader to think out the logic of other examples for himself.

Suppose there are one hundred physicians, each charging $10 for a visit. At that price the number of visits patients wish to make to doctors is the same as the number the doctors wish to have made. If that were not the case — if, for instance, there were people willing to pay $10 for a visit but the doctors were booked up — the price would change. Doctors would be able to raise their prices and still keep their appointment books filled. At a higher price, some customers would decide to visit doctors less often. The demand for medical services would fall with rising price until it was equal to the amount of service the doctors were willing to supply at that price.

I decide to become the hundred and first physician. The total supply of medical services is increased. The price at which supply equals demand falls; doctors get only $9.90 per visit.

Have I greatly benefited society in general? No. Consider the visits to doctors that would have occurred without me. For each of these, the patient is now ten cents richer but the doctor is ten cents poorer; on net, people are no better off. Consider the extra visits to doctors that people make because of the lower price. These people must have considered an extra visit to the doctor worth less than $10 or they would have made it at the old price. They must consider it worth more than $9.90 or they would not make it at the new price. Therefore the patients profit on the extra visits by between zero and ten cents per extra visit — the difference between what they pay for it and the value they place on it. But I, the new doctor providing the extra service, make $9.90 for each visit, thus getting most of the benefit from what I produce. In effect, I produce a service worth between $9.90 and $10 and sell it for $9.90.

If the total number of physicians were much larger than one hundred (as it is), the decrease in the price of a visit resulting from the addition of one more physician would be far lower. The closer this change is to zero, the nearer the new doctor comes to getting 100 percent of what he produces.

As this example suggests, the essential error in the idea that the benefit of one person’s productivity goes mainly to others is that it ignores the income the productive person gets. In a well-functioning private-property society, the amount for which a person can sell what he produces with his labor corresponds closely to the real value of that product to the people who consume it.

This argument depends on my accepting what the patient is willing to pay as the true value to him of what he is getting, a principle that economists call ‘consumer sovereignty’. Suppose that I reject that principle. I believe that most people stupidly underestimate the importance of staying healthy and that a man who is only willing to pay $10 to visit the doctor is really getting something worth $20. I conclude that a doctor receives only half as much as he produces.

The argument works the other way as well. If I believe that sitting at a bar getting drunk is an idiotic way to spend an evening, I conclude that bartenders are paid far more than they are really worth. In both cases, my belief that someone produces more or less than he is paid comes from my refusal to accept the judgment of the person who uses the product as to the value of what he is getting. Naturally, the socialist or the bluenose always assumes that if the state decides what people should want, it will, since his values are right, decide his way.

No such argument can imply that everyone who produces is underpaid, for that would mean that people underestimate the value of everything. But each thing is valued in terms of other things; money is merely a convenient intermediary. If I think a visit to the doctor is worth only $10, I mean it is worth only as much as the other things I could buy with that amount. If I am undervaluing the doctor’s visit, I must be overvaluing the other things.