As I was walking around the waterfront in Vancouver, I noticed some beautiful yachts. I took a picture with the largest, dreaming about how nice it would be to have one of my own.
After my walk, I returned to my hotel room, scrolled through the television channels, and stumbled across the show Secret Lives of the Super Rich. It consisted of segments about multimillion dollar mansions, a $100 million dollar Colorado cabin on several acres of land, a $3.4 million car and, yes, a 237-foot yacht with a price tag of around $60 million.
Many people would be angry or disgusted with this show. Unfortunately, most people don’t understand the free enterprise system. To them the millionaires and billionaires who own these homes, vacation getaways, cars, and yachts do so at the expense of the rest of us. Some people might say that nobody needs that big of a house or a car, or that things with price tags in the millions of dollars are unreasonable when there are people who have nowhere to live or nothing to drive.
Why People Hate Rich People
At the heart of this anger seems to be the notion that someone is winning and someone is losing. “Evil rich people” don’t deserve more than what they already have. But if these entrepreneurs or successful people are vilified, in a sense, the argument is that financial success is a negative and buying luxurious items is immoral. This anti-business and anti-wealth mentality can have the unintended consequence of taking away the incentive to strive for financial success and to be entrepreneurial.
Let me be clear—I am not arguing that true happiness is found in possessions or money. My point is that aside from stealing or cheating, there is nothing wrong with financial success and the goods and services that come with it, especially for those who successfully take a risk or see an opportunity that nobody else sees.
Why Rich People Exist in Today’s Society
Besides stealing or depending on others for financial security, the only way to make money is to earn it. A business pays its employees not out of benevolence but because the employees are producing something of value.
Where do businesses get the money to pay employees with in the first place? Well, from their customers of course. If you own an Apple product, it’s not as if one day you said, “Hmmm, I feel like donating money to Apple today.” No, you bought that Apple product because Apple made something of value to you.
So, I don’t have a problem if Tim Cook, CEO of Apple, makes millions of dollars each year. He is not taking it from me or anyone else. I also don’t have a problem with an NBA or NFL player having a mansion and several expensive sports cars.
These people are doing something that most of us cannot do—running billion-dollar companies or playing in the NBA or NFL. Remember, we’re ultimately the source of their income, and we’re voluntarily paying for their products and services.
A Society That Rips Us Off?
Besides criticizing the lifestyle of the rich and famous, many anti-market individuals cry foul at prices. Movie ticket prices, popcorn prices at those movies, and sporting event tickets are examples of when people claim that they are being “ripped off.”
The concept of revealed preference is enlightening at this point in the argument. People might complain, but it’s their actions that prove the reality. So when people say, “What a rip off!” and then say, “Can I please buy two tickets and a large popcorn?” either they love getting voluntarily “ripped off” (which would be irrational) or, obviously, the movie and popcorn is worth it to them.
I have been to movie theaters all over the United States, Canada, and Europe, and I have never had a theater employee jump over the counter, tackle me, and forcibly take my wallet. When I attend San Jose Sharks games, the clerk in the ticket booth doesn’t run out with a gun and say, “Buy or die!” It is always my hand going into my pocket, and it is I who willingly hands over cash or my credit card. I even say “Thank you” after the transactions.
A Really Arrogant Thing to Say…
When people get angry at “high” prices, they act as if it’s their right to go to a movie or to eat popcorn or to enjoy a sporting event. The other side of the coin is that people are basically implying they are owed these things. How arrogant! If a person feels something is truly a “rip off” or “too expensive,” then it’s very simple—they don’t have to buy it.
Of course, I would love to pay nothing for movie tickets or other goods, and of course, businesses would love to charge not $15 for a movie but $15 billion! This is why when friends say to me in a movie theater when I’m trying to enjoy the previews (while eating the popcorn they voluntarily purchased), “Ninos, you know why popcorn and soda is so expensive at the movie theaters, right? It’s because the theater can charge whatever it wants,” my response is, “If they can charge whatever they want, then why does popcorn only have a price of $8 and not $8,000?” Their response is usually, “Well, they can’t do that!” Then I look at them and calmly say, “But you said they can charge whatever they want! So, now I am confused.”
If movie theaters could charge whatever they want, then irritated customers should actually hug theater employees and write a letter to the CEO of the company saying, “Thank you so much for only charging me $8 for that popcorn and not $8,000, since you can charge whatever you want.”
One of the main lessons I teach my students is that prices are a function of supply and demand. I tell them, “If you are mad at Starbucks because that latte you are drinking is ‘too expensive’ then, ok, be mad at Starbucks—but then go home and look in the mirror and yell at yourself as well! And ask yourself if what is really at the root of your anger is that you believe you have a right to that drink or that you feel Starbucks owes you.”
Critics of capitalism don’t understand that in order for someone to make millions, they are not taking a larger piece of a fixed pie; they are baking a bigger pie for us all. And if they choose to live luxurious lives, fantastic! They are entitled to spend money on whatever they wish.
Incidentally, the products they buy create jobs for people in those industries. And critics of capitalism or market economies need to understand that when a voluntary transaction takes place and there is no fraud or misrepresentation, then “rip offs” do not exist. So, saying the price is “too high” is nonsense.
Prices are determined by supply and demand. Unless we assume people like to voluntarily harm themselves, then a person’s revealed preference tells us the truth—when someone buys something voluntarily, the benefit must have been greater than the cost.