Adam Smith, Meet Oprah Winfrey

by Gary North

Recently by Gary North: Ron Paul: 'Sell the Gold in Ft. Knox'

In a recent report, "What Makes Oprah Run?" I discussed her career move: founding a new cable TV network. She has an estimated net worth of $2.7 billion. She has received a network TV salary of over $300 million a year. She is the most financially successful woman in history. Yet she is putting her reputation on the line. She is telling the world, "I can create my own TV network, named OWN. It will be a greater success than my career so far."

Why?

I also pointed out that very rich people are not passively rich. They are actively rich. They are involved in their businesses, or else they are involved in charitable work, or the pursuit of influence, or the pursuit of historical legacy, or even the pursuit of power. They have about the same amount of life expectancy as the rest of us. They cannot buy more time. They use this time to produce, not consume,

This is what I want to talk about here.

ADAM SMITH ON CONSUMPTION

In his path-setting book, The Wealth of Nations (1776), Smith made this observation.

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

This appears deep into the book, in Part 4, Chapter 8 (p. 625 of the Modern Library version). It is the heart of his economic analysis. He would have saved readers a great deal of time and trouble if he had placed it as the opening sentence of the first paragraph of the book. Then he should have developed his system in terms of this assumption.

In every social order, there is a hierarchy of wealth. At the very top of the income production system, there are people who do not have to work in order to be fed, clothed, housed, and generally kept happy by retainers who cater to his every whim. The question I ask is this: Will most of these rich people be indolent? That is, will they use their one irreplaceable resource – time – exclusively to consume or to "set aside for a rainy day" so as to consume later? I have never read of such a society.

In richer societies, where consumption is a matter of taste rather than survival, more people can afford to accumulate capital in order to . . . what? Not consume. For consumption costs time, and time is not replaceable. The cost of time is high for the productive masters of capital. They do not waste it in full-time orgies of consumption. They could afford to, but they don't.

Why not?

By "consumption" I mean the use of an asset that renders it unusable in the future by the owner. Food is the obvious example. Food satisfies hunger. It may make a person more productive, or it may fatten him so that he becomes less productive. But, once eaten, it is gone by means of the second law of thermodynamics' one-way, irreversible transformation of potential energy into kinetic energy: heat and light. It's here today and gone tomorrow: forever.

I don't want to enter into a discussion of the implications of this for philosophy: the end of meaning in the inevitable heat death of the universe. In that view, everything really is consumption, and resources finally are exploited to their limit. That is science's pure version of "peak energy." We are told that this scenario is many billions of years away . . . and, no, Keynesian deficits cannot overcome it. Sorry about that. Ultimately, Al Gore is wrong. Global warming will cease, big time. I have written a book on this, and why I don't believe the scenario: Is the World Running Down?" It's free here.

If people do not accumulate capital to consume all of it, contrary to Smith, then why do they accumulate it? To produce even more.

This is not the way that post-Smith economists have discussed production. They have generally assumed that people accumulate goods, including production goods, in order to consume. Yet in my experience, this is not the case, nor is it the case of the wealthy people I know. To assume that production is for personal consumption leads to bad forecasts of human action.

That some people consume most of what they produce is self-evident. Use yourself as an example. You consume more than you save. But remember: the word "most" implies "not all."

"Not all" makes most of the difference.

THE GREAT FACT

Sometime around 1800, the United Kingdom began to experience 2% economic growth per annum. This rate has continued. It was matched by the United States, then Western Europe. The result has been a 16-fold per capita increase of wealth, worldwide, and in some nations, 100-fold. Yet no one has presented a compelling explanation for its origin in 1800. Mankind at last overcame the Malthusian trap. When Malthus wrote anonymously in 1798 that starvation had always overcome economic growth, he had all of history on his side.

An almost unmeasurable change – 2% per annum – has changed everything. It had to do with thrift. It had to do with the capitalization of new ideas. It had to do with the newfound dignity and legitimacy of doing business. Yet we do not know what specific mix of factors produced this.

It had to do with future orientation. It had to do with gaining wealth and fame and influence. There is no formula for it as far as anyone knows and can defend. In all of mankind's history before 1800, rising consumption had always overcome rising production. Economies always stopped growing. Per capita income always contracted.

The world has learned how to produce more than it consumes. Producing more than you consume is a moral imperative today. It is now recognized as the means to prosperity. The willingness to forego consumption is the key to ever-greater consumption.

This, economists understand. But have they got it backward?

EATING TO LIVE, OR LIVING TO EAT

We know of the person who lives to eat. He may be a gourmet. He may be a glutton. But most of us recognize that something is bizarre about such a person. Most of us eat to live. We do not live on Twinkies.

Then there are the cooks. Do they live to cook or cook to live? If we are talking about some teenager working in a fast-food restaurant, we are talking about someone who cooks to live, or at least live better. But when we are talking about a master chef, we aren't. In a world filled with fast food restaurants and garbage cans, there is always a Ratatouille.

Samuel Johnson is famous for his statement, "No man but a blockhead ever wrote, except for money." But no one reads Johnson any more, and people haven't for two centuries. They read extracts from the multi-volume Life of Samuel Johnson, written by James Boswell, who did not write for money.

Most people do not write for money. The World Wide Web is proof. Few people make a living writing for the Web. I do, but I am rare. People want to get their two cents' worth, even if they never get paid two cents, and they have to start a free WordPress.com or Blogger.com site to get in those two cents' worth. They write for hours. They broadcast on Twitter. They write and write and write, but they don't get paid.

Why do they do this?

Because they want to be read, which means heard. They will spend hours trying to be heard . . . by someone, sometime, somehow. They act in faith that someone will pay attention to their thoughts.

This is production. We can say that it is for consumption – some other person's "consumption" of the author's words – but this is a form of service.

Service can be profit-seeking. It can be non-profit. It can be charitable. But it is service nonetheless.

To define all forms of service as consumption makes hash of definitions.

SMITH'S BUTCHER, BREWER, AND BAKER

In one of the most famous passages in the history of economic thought, Smith wrote this:

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. (Wealth of Nations, Book I, Chapter 2.)

All true. But does this say all there is to say about it? Let me re-write this passage.

But man has almost constant occasion to help his brethren, but it is in vain for him to expect to be able to do this for long without running out of resources. He has to make a profit. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them in order to keep helping them. He needs to make them customers, then clients. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of, in order to continue to serve. It is not from the needs of the meatless, the beerless, or the breadless, that we expect to fund our efforts, but from customers' regard of their own interest. We address ourselves, not to customers' humanity but to their self-love, and never talk to them of others' necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens.

This is the outlook of a master chef, the master painter, the master everything. This is the outlook of the person who understands the principle of private ownership as a social function: service to others.

If you live to serve, this is your outlook. This is the outlook of a mother. If you serve to live, your outlook is more like that of a tradesmen who sells to mothers.

If we see that service is the basis of profitability, and profitability is the best way to extend our area of service, then we understand the person who accumulates to produce. We understand the capitalist.

The laying up of capital is the laying up of tools. Do men do this to lay up tools for their own sake? Only if they are misers. Do they lay up tools in order to serve? Yes, if they understand the profit system in a free market social order.

The super-rich do not lay up capital to consume. They lay up capital to serve. Their motives for serving vary. These may be for fame, or beating some rival, or extending influence. This may also be for reasons of concern for the poor. The psychology of motivation varies widely. What does not vary is the means of accumulation: either violence or service. The free market rests on the latter means.

THE WAR FOR MEN'S MINDS

The battle for men's minds is mostly a battle for service. We try to persuade others that our suggested way is the way of success. We try to persuade them that honesty is the best policy, that efficient service produces profits, that retained earnings are the best way to expand a business long-term. We try to persuade them that peaceful trade is superior to violent intervention as a way to serve the poor, the needy, and the helpless.

We should try to explain Oprah Winfrey in terms of production, not consumption. She is internally driven to blaze new paths. She is forced to place her wealth and reputation on the line. She is not doing this in order to accumulate more consumer goods. She is running out of time, the crucial consumer good. She is allocating this most scarce of all resources to production.

Her problem is that it is not clear how best to do this. She had three main options. She could give it away. She could stick with the network and reach millions of women. She could start her own network. She cannot know for sure which is the most cost-effective way to do this. This decision is a huge one, given her level of wealth. I described it in 2003 as the horror of being Oprah. But to explain her motivation in terms of personal consumption would be to misunderstand her motives.

Production is for consumption – just not our own consumption.

Production is for accumulating the tools of consumption – just not our consumption.

Production can be used for service. Apart from violence, it must be used for service if it is to increase.

Production says, "He who dies with the most tools wins." This is in contrast to "He who dies with the most toys wins."

The chief motivation of the true believer is not his consumption. It is someone else's consumption.

The chief motivation of the peaceful social reformer is the accumulation of capital: the tools of sustainable, self-reinforcing social change.

CONCLUSION

Christianity speaks of redemption. What is its meaning? To buy back.

Capital accumulation is one means of redeeming the world from evil. It illustrates success. It enables success.

Capitalism is more than a social system for growing the pie. It is a system for learning the ways of economic growth. Production is a legitimate goal. It is not a goal for its own sake. Idolatry is pursuing anything other than God for its own sake. So, production is not for its own sake. But neither is consumption. And neither is production solely for consumption: "more for me in history." That is Mammon. Avoid it.

May 25, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

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