Paul Krugman has a post today linking to an article in the New York Times magazine about a wealthy man named Edward Conard. In the second line of his post, Krugman writes:

Because, you see, they don’t spend all their wealth building homes as big as the Taj Mahal; some of it they invest in innovation.

I know it may sound shocking, but Krugman didn’t quite do justice to Mr. Conard’s point.

Here’s the meat of the excellent article by Adam Davidson:

Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone. “Most citizens are consumers, not investors,” he told me during one of our long, occasionally contentious conversations. “They don’t recognize the benefits to consumers that come from investment.”

This is the usual defense of the 1 percent. Conard, however, has laid out a tightly argued case for just how much consumers actually benefit from the wealthy. Take computers, for example. A small number of innovators and investors may have earned disproportionate billions as the I.T. industry grew, but they got that money by competing to constantly improve their products and simultaneously lower prices. Their work has helped everyone get a lot more value. Cheap, improved computing helps us do our jobs more effectively and, often, earn more money. Countless other industries (travel, telecom, entertainment) use that computing power to lower their prices and enhance their products. This generally makes life more efficient and helps the economy grow.

The one thing that’s off, given the point of the article, is Davidson’s use of the word “disproportionate.” Disproportionate to what? If the wealthy investors created value that’s a multiple of their own reward, then the billions they earned are not disproportionate, unless they’re disproportionately small, which I’m sure is not Davidson’s point.

Fortunately, in the next paragraph, Davidson continues:

The idea that society benefits when investors compete successfully is pretty widely accepted. Dean Baker, a prominent progressive economist with the Center for Economic and Policy Research, says that most economists believe society often benefits from investments by the wealthy. Baker estimates the ratio is 5 to 1, meaning that for every dollar an investor earns, the public receives the equivalent of $5 of value. The Google founder Sergey Brin might be very rich, but the world is far richer than he is because of Google. Conard said Baker was undercounting the social benefits of investment. He looks, in particular, at agriculture, where, since the 1940s, the cost of food has steadily fallen because of a constant stream of innovations. While the businesses that profit from that innovation — like seed companies and fast-food restaurants — have made their owners rich, the average U.S. consumer has benefited far more. Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it.

Exactly. Whether the right number is 5 or 20–and I have no idea which–it’s pretty clearly a multiple.

My favorite part of the piece is this:

His book is filled with a lot of abstraction, so I asked him to show me how his ideas play out in the real world.

Conard picked up a soda can and pointed to the way the can’s side bent inward at the top. “I worked with the company that makes the machine that tapers that can,” he told me. That little taper allows manufacturers to make the same size can with a tiny bit less aluminum. “It saves a fraction of a penny on every can,” he said. “There are a lot of soda cans in the world. That means the economy can produce more cans with the same amount of resources. It makes every American who buys a soda can a little bit richer because their paycheck buys more.”

It reminded me of this passage from Ayn Rand’s The Fountainhead. Gail Wynand and Howard Roark are talking:

“I was thinking of people who say that happiness is impossible on earth. Look how hard they all try to find some joy in life. Look how they struggle for it. Why should any living creature exist in pain? By what conceivable right can anyone demand that a human being exist for anything but his own joy? Every one of them wants it. Every part of him wants it. But they never find it. I wonder why. They whine and say they don’t understand the meaning of life. There’s a particular kind of people that I despise. Those who seek some sort of a higher purpose or ‘universal goal,’ who don’t know what to live for, who moan that they must ‘find themselves.’ You hear it all around us. That seems to be the official bromide of our century. Every book you open. Every drooling self-¬≠confession. It seems to be the noble thing to confess. I’d think it would be the most shameful one.”

“Look, Gail.” Roark got up, reached out, tore a thick branch off a tree, held it in both hands, one fist closed at each end; then, his wrists and knuckles tensed against the resistance, he bent the branch slowly into an arc. “Now I can make what I want of it: a bow, a spear, a cane, a railing. That’s the meaning of life.”

“Your strength?”

“Your work.” He tossed the branch aside. “The material the earth offers you and what you make of it . .

Thanks to Jeff Scialabba of the Ayn Rand Institute for tracking down the passage after my vague description to him over the phone. It’s in Part IV, Chapter 5.

NOTE: I watched the whole Ron Paul vs. Paul Krugman debate yesterday and found it more interesting than I expected. Ron Paul stumbled a lot, as I expected, but I was surprised at the weakness of some of Krugman’s responses. I agree with some of what Tyler Cowen said, but I think Tyler missed some pretty important things. That will wait, though, until I go through it frame by frame and take notes.