Perhaps the strongest force propelling socialism in the United States is the moral anxiety about capitalism. Capitalism, we know, is efficient. But the Left insists it is grossly unjust. Partly this is because capitalism creates inequality, but the underlying claim is that capitalism doesn’t allocate rewards in proportion with what people contribute. Alexandria Ocasio-Cortez reflected this when she recently declared that no one genuinely earns $1 billion.
“You take a billion dollars.”
Is this true?
I’m going to answer this question at the deepest level by considering what entrepreneurs and workers actually do.
The Tale of the Parking Guy
One of my favorite hotels in America is the Trump Hotel in Washington, D.C. I’ve stayed there several times, and gotten to observe the staff—the concierge, the doormen, the valets—at work. Consider, for a moment, the fellow who parks cars at that hotel and earns, let us say, $100 a day.
Now, if I put myself in his place, I would ask myself this question: How many cars do I park each day? Let’s say the average is a hundred. And it costs $30 to park a car overnight, a rate comparable to the Ritz Carlton or the Four Seasons or any fine resort hotel. So how much does the Trump Organization make each day on the parking? It makes, on average, $3,000. So that’s interesting! The hotel makes three grand and it pays the parking guy just $100.
From the point of view of the parking guy, he’s being cheated. Why? Because he’s the one doing the work. Yet virtually the entire profit goes to the Trump Organization. Why does he get so little? Who gets the remaining $2,900? Our indignant parking guy imagines a member of the Trump family using the money to help pay for a Hawaiian soiree. Notice the parking guy doesn’t view himself as a “taker.” Rather, he’s a “maker.” It’s the Trumps who are the “takers,” depriving their employees of their fair share.
The parking lot guy wants to know, “Where are my just deserts?” And this is a legitimate question. We cannot convince him—and countless others like him—by simply chanting, “Free markets!” “Capitalism!” “America—Love It or Leave it!” We have to show where the other $2,900 went. In other words, we have to show that he is being paid commensurate with what he is producing. If we can, we will have shown that the rewards of the free market system are not only efficient but also fair. If we cannot, some socialist-type redistribution becomes not only plausible but also irresistible.
We can generalize the parking guy’s question by putting it in the context of Marx’s celebrated criticism of capitalism, one that is taught in schools and universities today, and one that Marx regarded as his most original contribution to economic thought. This is the critique on the basis of “surplus value.” It is intended to show that the outward cooperation between entrepreneurs and workers is illusory, that at bottom there is a deep conflict between them, and the result of the conflict is thievery and exploitation. In short, the capitalist is a dirty rotten scoundrel and he, not to mention the capitalist system that sustains him, deserves to be overthrown.
The strength of Marx’s critique is that it does not apply to capitalist “excess”: to crisis situations or monopolies or predatory pricing environments like airport concession stores and eateries in sports stadiums. Rather, Marx attacks capitalism in its normal functioning; this gives his critique a universal character. And nothing vindicates it in the minds of young people so much as the fact that it is rarely confronted and never answered. I have never heard a single Republican—not Trump, nor any congressman or senator—ever discuss, let alone rebut, the Marxist critique.
Marx considers the operations of a normal business, let us say an automobile company or a delivery service like FedEx. Marx recognizes that it costs money to start and operate a business; these represent its total costs. The total costs would include such things as rent, machinery, insurance, travel and so on. Typically, the largest cost is for labor, in the form of salaries and benefits, so Marx factors this in as well. And when you have added these all up you get the total cost of running the business.
Now, Marx says, one might imagine that a business would price its products in such a way that it would recover all its costs, but in fact businesses are not content to do that. Rather, they price their products as high as the market will bear. And so, Marx says, businesses generate an income stream that we can call total revenue. Total revenue typically exceeds total cost. And when you subtract total cost from total revenue, you get a crucial number. That number Marx calls “surplus value.” We call it “profit.”
Profit . . . and Loss
Marx asks a profound question: who gets that? The profit, Marx argues, belongs entirely to the workers. Why? Because they are the ones who have produced the product. What about the capitalist? Marx insists that the capitalist has produced nothing. The capitalist has—like the name says—contributed the capital. Marx concedes that capital counts for something, but we know what capital counts for: it counts for interest. And paying the going rate of interest on capital is part of the cost of doing business. So a business that does this has already repaid its capitalists. They are not due anything above and beyond that.
Yet although the workers are the ones who are getting the job done, Marx notes that it is the entrepreneur who swoops in and takes all the profits. The workers produce the “surplus value” but the capitalists steal it. Here, for Marx, is the true meaning of exploitation and social injustice. Here are the roots of the class division. And here is the moral argument against capitalist exploitation and in favor of socialist redistribution. Here’s where Obama and later Elizabeth Warren got their diatribes about “fair share.” It’s not about realizing some vague goal of equality; it is simply giving workers their due, using the agency of government to return, one may say, the “stolen goods” that have been taken from them.
The Marxist critique is open to an immediate objection that I regard as telling, though not decisive. Marx insists that the capitalist contributes nothing but the capital, and the workers do all the work to make the business run profitably. Ilhan Omar offered a softer version of this critique when she tweeted that the CEO of Walmart earns over $20 million while the median worker at the company barely earns above $20,000. But if this is indeed the case, why don’t the workers dispense with the CEOs and start their own companies?
No one is being forced to work at Walmart, so why don’t the workers leave and create their own Walmart? Sure, they may lack the initial capital, but surely they can borrow that at a going rate of interest. This way, there is no one to exploit them and they can share all the profit among themselves. I find it interesting that workers never do this, and even more interesting that Marxists and socialists never even call on them to do it. Deep down, the Marxists seem to realize: they don’t do it because they can’t.
But why not? Here we get to the heart of Marx’s fallacy. Marx was a highly theoretical guy, and I intend to show that he had no idea of how businesses actually operate, and what entrepreneurs actually do. Let’s recall that Marx never ran a business. He never even balanced his checkbook. He was a lifelong leech, a Bernie Sanders type, who had most of his expenses paid for by his partner, Friedrich Engels, who inherited his father’s textile companies. Incidentally, Engels didn’t run his family business either; he had people do that for him. Freed from the need to work, Engels was a man of leisure and a part-time intellectual.
Ironically, Marx and Engels were both dependent on the capitalist system they scorned. And one reason American progressives are continually drawn to this duo is that they too have little understanding of what entrepreneurs do. Nor do they really care. They have no aspiration to become entrepreneurs. Rather, they prefer occupations like community activist or professor of romance languages at Bowdoin College. And they aspire to be, like Marx, lifelong leeches, agitating against capitalism even as they subsist off its largesse.
But what is it that Marx and the progressives are ignorant about? I’m going to answer this question by considering two men, an economist and an entrepreneur. The economist is Joseph Schumpeter, who is famous for his theories about the cultural impact of capitalism. Schumpeter wrote a little-known book The Entrepreneur that is one of those rare documents that makes the moral case for capitalism and entrepreneurship.
Tellingly, however, Schumpeter doesn’t say this. He merely describes what entrepreneurs do. But this is very instructive. Schumpeter shows that the one thing Marx says that capitalists do, capitalists in fact do not do. Schumpeter shows that capitalists do at least four important things that Marx either ignored or had no idea about, calling his whole critique into question. Entrepreneurs earn what they make because of the vital functions they—and they alone—perform.
Trump as Entrepreneur
The entrepreneur I’ll focus on is a familiar guy, who happens to be president of the United States. But we’re not looking at him in that capacity, but rather in the capacity he functioned for most of his career. Trump is a businessman and a builder; he is the quintessential American capitalist. He actually did the things that Schumpeter talks about, and it’s revealing to see how he did them. Together these two will help me provide my full and complete refutation of the Marxist critique and a persuasive answer to that sullen parking attendant at the Trump Hotel in D.C.
The starting point of Donald Trump’s career, he writes in his best-known book The Art of the Deal, was his realization that “I didn’t want to be in the business my father was in.” A strange thing to say, since his father was in real estate. But Frederick Trump made his money through rent-controlled and rent-stabilized housing units in Queen and Brooklyn. A cautious, self-effacing man, he liked to say that collecting rent was a reliable way to make money. Donald Trump—who was not his father’s son in this respect—disagreed.
Trump wanted to cross the bridge and do business in Manhattan, and collecting small rents could not have been further from his mind. “I was looking to make a statement,” he says. “I was out to build something monumental—something worth a big effort….What attracted me was the challenge of building a spectacular development on almost one hundred acres by the river on the West Side of Manhattan, or creating a huge new hotel next to Grand Central Station at Park Avenue and Forty Second Street.”
What does Schumpeter have to say about this? One defining feature of an entrepreneur, he writes, is “the dream and the desire to found a private kingdom.” In fact, the secret dream of the entrepreneur is to found a “dynasty,” to project the dream beyond his own life. It is, Schumpeter admits, “the nearest approach to medieval lordship possible to modern man.”
The motivation of the entrepreneur, according to Schumpeter, is not primarily monetary success. Rather, it is “the will to conquer, the impulse to fight, to prove oneself superior to others, to succeed for the sake, not of the fruits of success, but of success itself.” Schumpeter likens it to sport. “The financial result is a secondary consideration, or at all events, mainly valued as an index of success and a symptom of victory.” It is entirely subordinate to “the joy of creating, of getting things done, or simply of exercising one’s energy and ingenuity.”
Early in his career, Trump sets his sights on the Commodore Hotel—built in 1919 and named after “Commodore” Cornelius Vanderbilt. Yet in the depressed real estate market of the mid-1970s, this historic property had become a sorry sight. “The hotel and the surrounding neighborhood were unbelievably run down,” Trump says. “Half the buildings were already in foreclosure.” The brick façade was filthy; the lobby dingy; and there were derelicts reclined in the hallways. Management didn’t mind; no one wanted to stay at the Commodore, despite paltry room rates.
“But as I approached the hotel,” Trump writes, “something completely different caught my eye. It was about nine in the morning and there were thousands of well-dressed Connecticut and Westchester commuters flooding onto the streets from Grand Central Terminal and the subway stations below.”
Here we have a critical scene. A progressive academic might interpret it one way, such as to note the ironic contrast between the upbeat commuters and the depressed Commodore. Once the hotel was historic, but now history had passed it by.
Trump’s interpretation was more prosaic: There’s a business opportunity here!
“What I saw was a superb location.” Affluent prospects were passing through it every day. “The problem was the hotel, not the neighborhood. If I could transform the Commodore, I was sure it could be a hit. Convenience alone would assure that.” Trump put himself in the place of his prospective customers. Surely they would say to themselves: why live in Westchester when I can live at a chic location in midtown, just minutes away from work?
The Creative Disposition
So Trump has an idea for a business: he wants to buy the Commodore. It’s a crazy idea for a brash kid who just came across the bridge from Queens. But it’s a big new idea, and that’s what counts to get things started. So here’s the first thing entrepreneurs do, they come up with a big new idea for a venture. They don’t necessarily invent something new—in fact, invention takes an entirely different skill and sensibility—rather, they envision a new product, a new landscape, a new way of doing things or a new way of living.
This new idea—this new combination the entrepreneur sees—is invisible to others. “Most people,” Schumpeter writes, “do not see the new combinations. They do not exist to them. Most people tend to their usual daily business” and that effort alone “exhausts their energies and suppresses all appetite for further exploration.” They have neither the creativity nor the disposition to envision something new. In fact, they view the entrepreneur as reckless, “out there,” even as a bit of a crackpot.
It’s one thing to have the vision for a new business, Schumpeter writes, but entirely something else to figure out how to do it.
Here we have the second element of entrepreneurship, which involves organizing the business. In Trump’s case, he didn’t have the money to buy the Commodore. Nor was daddy much help. “I went to my father and told him I had a chance to make a deal for this huge midtown hotel . . . He refused to believe I was serious.”
Trump had to figure out how to buy the Commodore, and how to run it, even though he lacked the funds to purchase it, or to renovate it, and he had no experience in operating an upscale Manhattan hotel.
First, Trump negotiated a bargain price for the hotel with its owners, who were eager to unload it, but who had to be convinced that Trump could afford to buy it. Trump convinced them to sign a paper listing the terms. Then Trump went to banks and told them the owners of the Commodore had consented to sell to him, so if the banks loaned him the asking price, plus the money to upgrade the hotel, he could put up the Commodore itself as collateral. It was, as Trump himself admits, a “juggling act.” But the banks went for it and the sellers came through, so Trump got the Commodore.
Schumpeter calls the entrepreneur a Mann der Tat, a German phrase that means a “man of action.” What he means is that quite apart from conceiving the idea for a business, and figuring out how to organize it, you must take action notwithstanding the risk involved. So here we have a third distinguishing feature of the entrepreneur; unlike his employees, who receive a guaranteed paycheck, as per their contracts, the entrepreneur takes virtually all the risk. The entrepreneur gets paid only after the profit is calculated—that is to say, after everyone else is paid—and if the venture fails, he does not get paid at all.
Trump knew the risk: If the Commodore failed, he would not only make no money; he was basically out of the real estate business in Manhattan. It would then be back to Queens and collecting rents! Yet how could Trump be sure that the Commodore would be successful? He couldn’t. Trump confesses he hates risk. “People think I’m a gambler. I’ve never gambled in my life. It’s been said I believe in the power of positive thinking. In fact, I believe in the power of negative thinking. I always go into the deal anticipating the worst.”
With the Commodore, as with most business ventures, there are known risks that one can compute, but there are also unknown risks. A known risk is one you can insure against. An example of a known risk is tossing a coin: you know in advance that there is a 50 percent chance to get “heads” or “tails.” Unknown risks are risks you cannot insure against because you cannot compute the probabilities.
A Leap Into the Unknown
Imagine starting a new business in luxury goods that is highly dependent on the state of the economy over the next several years. What is the chance the economy will remain strong? Or drop into recession? This is like tossing a die with an unknown number of sides; there is no way to know. Economists call this second type of risk Knightian uncertainty, after the economist Frank Knight who studied the concept. Knight pointed out that unknown risks are the hallmark of a capitalist economy.
Entrepreneurs must go ahead in the face of risks that cannot be known, let alone mitigated. Sometimes they must do so with very limited information, indeed with little more to go on than personal intuition. This, Schumpeter writes, involves the entrepreneur overcoming the greatest resistance his venture will ever encounter, not resistance from the outside but resistance from within the mind of the entrepreneur himself.
Yet at some point, Schumpeter says, the entrepreneur has got to quell this resistance, to stop calculating and agonizing, and make the leap. It is a leap into the unknown, because the new thing the entrepreneur wants to make does not exist yet; it is only the “figment of his imagination.” He is carving out a new road, and Schumpeter notes that this is an entirely different matter than walking along a road that someone else has already carved out.
Trump wasn’t making a new road, but he was determined to make a new hotel. He unveiled his plan to remake the hotel. He intended “to cover the Commodore’s brick façade with an entirely new curtain wall of highly reflective glass.” Trump’s plan drew fire from city planners, architectural critics, and media pundits. This was friendly fire; Trump was not a Republican, so he didn’t get the unrelentingly savage opposition he gets now. The critics groused that Trump was violating the architectural norm of the area, breaking away from the classical look of Grand Central Station and the ornamented brick-and-limestone buildings along the block.
Trump had a different idea. The point of the reflective glass, he felt, was to make the hotel a kind of mirror of the grand landscape of New York City itself. “By choosing this highly reflective glass, I’ve created four walls of mirrors. Now when you go across Forty Second Street or go over the Park Avenue ramp…you see the reflection of Grand Central Terminal, the Chrysler Building, and all the other landmarks, which otherwise you might not have noticed at all.”
What we see here is Trump’s genius for spectacle, which gives us the fourth characteristic feature of entrepreneurs: the branding and marketing of the business. Trump has shown this marketing flair throughout his career. When he built Trump Tower he pitched it as the most desirable place to live in New York. “we were selling fantasy,” he admits. His business team informed him that a competing property—Museum Tower—had lowered its prices. “We’re in trouble,” they told Trump.
Here’s how Trump reacted. “I thought for a minute, and I realized that actually the opposite was true: Museum Tower had done itself damage. The sort of wealthy people we were competing for don’t look for bargains in apartments. They may want bargains in everything else, but when it comes to a house, they want the best, not the best buy. By pricing its apartments lower than ours, Museum Tower had just announced that it was not as good as Trump Tower.”
Trump summarized his marketing strategy for Trump Tower as “play hard to get.”
Finally, Trump solved the problem of how to operate the Commodore. He partnered with the Hyatt hotel chain to do it. At first, Trump’s people advised him against splitting the profits 50-50 with Hyatt. Hyatt wanted to re-name the Commodore the Grand Hyatt, and Trump agreed. His reason was that in Hyatt, he found a partner that was not only experienced in running hotels, but was also willing to share the financial risk, by reimbursing Trump a significant portion of the funds expended to acquire and upgrade the old Commodore.
And it paid off for him. The Commodore reopened as the Grand Hyatt, it was successful, Trump and Hyatt split the profits. Eventually, a dispute arose between the two parties which was settled in a conventional business way: in 1996 Hyatt gained complete ownership by buying out Trump’s half-share in the hotel for $142 million.
A Walking Refutation of Marxist Nostrums
Today, decades later, Trump has the experience, and he doesn’t have to go to Hyatt; he operates his own hotels, resorts, and casinos across America, indeed in foreign locations also. And he employs thousands of people, including, of course, the parking guy at his D.C. location. “The entrepreneurs,” Schumpeter writes, “are the workers’ best customers.” This is a very clever way to look at it: the worker is a salesman who markets his labor to his employer, who is, in that sense, his customer. “A continuous improvement of the workers’ situation stems from them.”
Contrary to Marx, the entrepreneur undertakes projects the worker has no comprehension of and would not undertake himself, but which nevertheless result in paid employment commensurate with the value the worker provides to the employer. Imagine the workers at the old Commodore Hotel figuring out how to transform the hotel, and then making it happen, and then marketing it, and taking all the risk, and finally, when the venture is successful, splitting the cash among themselves. They could scarcely get started! That’s why they didn’t. It took Trump to do it. That’s why Trump is the boss and they are the workers.
I’ve given only a tiny window into Trump’s entrepreneurial world, and we can see from it the inadequacy of the Marxist critique. Marx implies that all that capitalists’ supply is capital, and yet typically this is the one thing that capitalists do not supply. Most entrepreneurs get their capital from banks—as Trump did—or venture capital firms.
What entrepreneurs do supply—the idea for the business, the organization of it, the marketing, the assumption of risk—are all critical elements completely ignored by Marx. He simply had no conception of what capitalists do. This ignorance renders the Marxist critique of who gets what under capitalism completely useless.
Although Trump may be a walking refutation of Marxist nostrums, Trump’s story is by no means one of unalloyed entrepreneurial success. In Trump’s The Art of the Comeback, he describes seeing a homeless man holding a begging cup on the street. This was in the early 1990s, and two of Trump’s big properties—the Trump Taj Mahal and the Trump Plaza Hotel—had just gone bankrupt. Trump owed $900 million. Pointing to the homeless man, Trump remarked, “He’s a beggar, but he’s worth $900 million more than me.”
Reviewing this passage in the book, a writer for the website Vox is appalled by Trump’s casual, almost whimsical, attitude here.
“You’d think this kind of story would result in some kind of self-reflecting,” Dylan Matthews writes. Trump, however, seems “uninterested in his failures.” In progressive academic and journalistic precincts, self-reflection is what you do when things take a downward turn. Failure is an occasion for some high-toned navel gazing, asking whether your busts and bankruptcies are a real measure of your worth as a person.
To such minds, Trump’s willingness to assume gargantuan debt, and then forge unreflectively ahead, seems downright surreal. The man must be demented! Total lack of introspection!
Yet Trump weathered the storm and went on to massively successful new ventures, including some like hosting NBC’s reality TV show “The Apprentice” that was quite remote from his familiar territory of real estate. He won some and he lost some, but he won more than he lost, and he’s got a vastly bigger brand, and the vastly bigger bank account, than all his critics put together.
I’d like to conclude this section by addressing the parking guy at Trump’s hotel. If he wants to know why he isn’t being paid more, the likely answer is that his work is not worth more. It’s not worth $30 to park a car. If the guy parked my car, I’d pay him a dollar. The reason people pay $30 to park overnight is that they are at a resort. The overall ambiance and amenities of the resort, and not merely the simple task of parking a car, is the “value” that people seek when they park their cars overnight. Deep down, I suspect the valet knows this.
Someone—in this case Trump—had the idea for that resort. He organized it. He marketed it and established a coveted brand. His brand attracted the clientele. He took all the risk. The parking guy did none of this. So Trump, not the parking guy, deserves the lion’s share of the profit. Both of them—the boss and the menial laborer—are getting their just desert. If the parking guy wants more, he should work to be the parking supervisor. Or go back to school and study hotel management. Perhaps, one day, he will run his own business and, once he has paid all his employees and managers, justly keep the balance for himself as profit.