J.K. Rowling is the former welfare mother who wrote the Harry Potter books. She’s worth an estimated $1 billion. That makes her one of the richest self-made women in the world.
I don’t know what her U.S. income is, but I’m sure she is in the top 1 percent. Make that the top 1/10th of 1 percent.
So why should you care? If you’re not a fan, there is no reason why you should. Harry Potter books and Harry Potter movies certainly are not making you any worse off. If you are a fan, you have lots of reasons to care. Rowling has undoubtedly made your life richer. Every time you plunk down the cash needed to buy one more book or see one more movie, you are getting something that is probably much more valuable than what you paid for it. At least I rarely hear anyone complain. The way J.K. Rowling got really, really rich is by making millions of ordinary folks really, really entertained.
Most people get this. One person who doesn’t is Paul Krugman, editorial writer for The New York Times. We are experiencing an "extreme concentration of income," he writes, and this is "incompatible with real democracy." It’s "oligarchy, American style," he complains.
Did you know that every time you buy a ticket to see a Harry Potter movie you are contributing to extreme inequality of wealth? Did you know that you are undermining the foundations of our democracy? Did you know you are helping one more billionaire to get more than her fair share of our national income?
Ah, but wait. Before you succumb to mind numbing guilt and sink into fits depression, there is a cheerier side to all this. Back before Krugman was churning out folklore designed to make left wing lunacy look respectable, he actually wrote about real economics — which is why he won a Nobel Prize. Let’s tackle the real economics first. Then I’ll return to the folklore.
For more than 100 years there has been a fairly well established economic theory about personal incomes. In fact it’s so well established that it isn’t even controversial. In a market economy, people tend to get the value of what they produce, at the margin.
When J.K. Rowling writes a book, she is creating something new, something of value. She is creating something that would not have existed at all, but for her efforts. This new entity she creates isn’t taking anything away from anybody else. It adds to humanity’s stock of wealth. It doesn’t subtract anything.
The words "at the margin," are important here. Let’s say that theater tickets to the latest Harry Potter movie are $8 a piece, and Rowling gets some fraction of that amount. The marginal movie-goer is the one who won’t pay any more than $8. He is paying a price that is exactly equal to what seeing the movie is worth to him. But there are a lot of other people who would have paid $10 to see the movie. Some would have paid $20. These movie-goers are getting something worth a lot more to them than what they have to pay.
Bottom line: The only way Rowling can get rich is by producing products that people want to buy. And whenever Rowling receives a dollar, she has probably created a value worth many times that amount for most of her fans.
This same principle applies to Steve Jobs, Bill Gates, Sam Walton (creator of Wal-Mart), Bernie Marcus (creator of Home Depot) and many others. The only way Steve Jobs could get rich is by producing iPads, iPhones and other products that meet our needs. He became rich by making you and me better off.
Here’s something else that’s interesting. The vast majority of all wealth is self-made. Inheritance only accounts for two percent of the wealth of millionaires and 9 percent of the wealth of the wealthiest one percent. Furthermore, inheritance makes the distribution of wealth more equal, not less equal. That’s because wealth transfers are more important to the poor and the middle class than to the wealthy.
Now let’s turn to the folklore. Many on the left completely ignore wealth creation. They ignore the link between production and income. They think there is a fixed income pie that somehow comes into existence and somehow gets divided. If one person gets a larger slice, everyone else must be getting a smaller slice. The rich are rich because other people are poor.
Now to be fair, Paul Krugman doesn’t actually say any of these things. But I bet that 90 percent of his readers think that he has said those things. That’s because Krugman’s stock in trade is writing columns that make economically illiterate readers think that their folklore views are endorsed by a real economist. In fact, there is no other way to make sense of what Krugman writes other than seeing it as an attempt to dress up economic illiteracy in respectable clothing. (I’ve seen Jeffrey Sachs do the same thing on Morning Joe.)
There is, however, one place in our society where the folklore view is correct. In a lottery, there is a fixed pie (the prize). Everyone pays in and one person (the winner) walks away with the whole kit and caboodle. In a lottery, one person’s gain is another person’s loss. Lotteries are zero sum games. The winner’s gain is only possible because of everyone else’s loss.
As I have written before, lotteries are the most regressive institution in our society. They take in money from (mostly poor) people and give it to a person who emerges as a multi-millionaire. There is no other event in our economic life that creates more inequality more completely and more swiftly than a lottery.
Yet people on the left almost never complain about the unfairness of lotteries. Maybe that’s because lotteries are created by government.