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Tom Keane

An economics lesson for Warren

Elise Amendola/associated press

THE VIDEO in which Elizabeth Warren, de facto Democratic nominee for the US Senate, rebuts GOP claims that taxing the rich is “class warfare,’’ continues to be a sensation. “There is nobody in this country who got rich on his own,’’ Warren tells supporters. “Nobody!’’

Her claim is that it is not entrepreneurs who create wealth. They play a role, she acknowledges, but the credit really belongs to all of us. And that becomes the rationale for why they deserve to pay a premium in taxes: We deserve a share of their wealth because we helped create it.

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It’s a beguiling idea, but Warren is wrong. My taxes may have helped pay for the roads on which Steve Jobs shipped his iPads, but without Steve Jobs - no matter how many roads my taxes might have paid for - there never would have been an iPad. Indeed, the only reason I have a job that enables me to pay taxes is because of past entrepreneurs, who created the companies and the technologies that in turn created a wealthier society that in turn could provide me with a job. If Steve Jobs owed his wealth to anyone else, it was to those past entrepreneurs.

Economics got named the “dismal science’’ because some of its earliest, greatest thinkers - Thomas Robert Malthus, David Ricardo, Karl Marx - concluded that society was doomed to a stagnant existence. Although each had far different world views, each concluded there was, essentially, a finite amount of wealth. There might be bubbles up or down, but in the end, each generation would be no better off than the last. It was a gloomy prognosis, with seemingly the only battle left being who got what.

Those airtight academic arguments were confounded by the real world, however. During the Industrial Revolution, per capita wealth was plainly growing. It took economists such as Alfred Marshall and Joseph Schumpeter to explain why. The way out of the stagnation was productivity. If more could be accomplished with the same resources (or, if the same could be accomplished with fewer resources), then wealth would grow. And who made that happen? Schumpeter said it was entrepreneurs.

Schumpeter had a broad definition of entrepreneurs. They included the stereotypical lone inventors, but also were those who developed new products, processes, organizations, or ways of doing things - any sort of innovation. And, he stressed, those folks could be found not just in small start-ups, but also in the midst of large organizations. Absent entrepreneurs, he argued, economies couldn’t grow. We would be in a stationary equilibrium, where the wealth of no one would ever improve.

Of course, none of this means we shouldn’t tax wealthy entrepreneurs. But the reason we do so is not because, as Warren would claim, that they somehow owe us. Rather, we tax the rich for the same reason Willie Sutton robbed banks (“Because that’s where the money is,’’ Sutton allegedly explained). Nor does it mean that government can’t help create the conditions in which entrepreneurship flourishes. As Warren notes, those conditions include stable legal systems, safe streets, and an educated populace. But they also include flexible labor rules, open markets, a refusal to countenance protectionism, and a regulatory system that minimizes burdens on businesses - usually not high priorities for left-wing politicians.

Still, the key point is that it is not government or we the teeming masses that create wealth. It’s entrepreneurs. Warren says entrepreneurs should “pay forward’’ to the rest of us in gratitude for their success. If anything, the thanks should go the other way.

Clarification: My Oct. 29 column about a Globe investigation into mislabeling of fish in restaurants across the region referred incompletely to the testing of fish at a Legal Sea Foods restaurant. In one case, the Globe found a minor mix-up in which cod was ordered but haddock was served instead; the receipt described it as haddock. In all the Globe’s other tests at the restaurant, fish entrees were correctly labeled.

Tom Keane writes regularly for the Globe.
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