America loves people that make things. George Romney made cars, Bill Gates made computers, and Steve Jobs made iPods and other Apple products. The innovations of these three people and countless others like them have created millions of manufacturing jobs, as well as merchandising jobs that sell those products. There is most likely not a single person in this America who has not benefited either directly or indirectly from the creation of cars, computers, and other consumer goods that these titans of industry have helped to create.
President Obama was surely thinking of people such as George Romney, Gates, and Jobs when he said the following during the State of the Union: “Americans understand that some people will earn more than others, and we don’t resent those who, by virtue of their efforts, achieve incredible success.” They deserve what they have because it was through their efforts that they achieved their success. They are among of the great “makers” of our society.
According to Adam Smith’s The Wealth of Nations, there are three forms of income: profit, wage, and rent. The “makers” described above earn their income as profit. They ventured capital in the hope of a return, and it paid off for them. Wages are earned by people who work for businesses. Earning wages requires virtually no risk, only their time and the use of their human capital. The third kind of income is referred to as economic rent. This is the easiest kind of income because it requires a low amount of both capital and labor, only the ownership or control of a factor of production. As Adam Smith explains:
"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ....While the Gates and Jobs of the world are making their income from consumer goods, the hedge fund managers, venture capitalists, and other Wall Street types make their money from simply moving money around and engaging in rent-seeking. Rent-seeking does not increase national productivity or benefit society as a whole. While profit-seeking works to create wealth, rent-seeking works to redistribute the wealth. Since rent-seekers make their money from moving money around and taking a cut off the top, they should be referred to as the “takers” of our economy.
One specific example of the way these “takers” operate is the soon to be famous example of Bruce Rauner. Rauner was the chairman of the private equity firm GTCR. In 2001, he contributed $200,000 to Ed Rendell, the Democratic candidate for governor of Pennsylvania. In 2002 right before the general election, Rauner sent the Rendell campaign another handful of pocket change: $100,000. Soon after being sworn in as governor, the state of Pennsylvania doubled its business with GTCR, thus increasing the management fees received by Rauner and GTCR by at least $4 million. Due to the fact that a definite causal relationship was not established between the donations and the increased stake in GTCR funds by the state, the situation was not deemed to be illegal corruption. This is rent-seeking action because Pennsylvania choosing GTCR over another private equity firm does not increase the public benefit or the economic pie, it simply changes who gets what of the economic pie. Rauner himself is now running for governor in Illinois.
Other examples of rent-seeking actions from Wall Street firms include their use of lobbyists to change bankruptcy laws to give priority to derivatives, according to Nobel Prize-winning economist Joseph Stiglitz. Stiglitz also cites the predatory lending and the abusive credit card practices of Wall Street as yet another example of its rent-seeking behavior. This brings us back to the Warren Buffett quote. While earning an honest profit from selling products or services and being a “maker” is not class warfare, the rent-seeking “taker” actions of many of the extremely wealthy does constitute class warfare because it harms the general society while benefiting those at the top. Most people do not hate the rich simply for being rich, it is how they got rich that causes a sense of unfairness.