A popular and pernicious fallacy that Thomas Sowell calls “the physical fallacy” holds that you’re not creating value if you’re not turning material stuff into another kind of material stuff. In this view, you take some stuff, hit it with something enough times that it becomes other stuff, and presto! You have created wealth. And industrial policy doesn’t seem to account for any other kind of creative value, leading to the all-too-common, and clearly fallacious, claim that “Americans don’t make things anymore.”
The statement that we only create wealth by creating physical objects is wrong in both tenets. Just because you’re making something doesn’t mean you’re creating value. You could very well be destroying it, as someone does when he raises cattle on land that would be more profitably used for housing and office space. And conversely, someone creates wealth when they move assets from a lower-valued use to a higher-valued use. Everyone selling things on eBay is creating wealth — or trying to — by matching things with people who want them at prices that make the sale worthwhile to both parties. I’ve been buying a bunch of junk on eBay recently that I find very meaningful. Other people might disagree.
On an early 2023 trip, my family went to the Atlanta BrickFair (a Lego convention) and then to Atlanta Brick Company, which is one of the largest unofficial Lego stores in the world. In hardly any case did we see people really manufacturing. They were taking already-manufactured goods — Lego bricks — and rearranging them into patterns that were worth paying to see. One exhibitor had made Voltron, and we had a nice chat about how all the dads at the convention had freaked out when they saw Voltron, who was, of course, an indispensable part of our childhood.
The kids bought some stuff. My daughter, in particular, got a Bo-Katan Kryze Minifigure — a good investment, I think, after watching season 3 of The Mandalorian and seeing how prominent a role she plays — and some figures out of which she decided she wanted to make scenes from Jane Austen books.
It occurred to me that this might be the void she should hustle to fill: recreating Jane Austen’s novels in the new medium of Lego bricks. There are, no doubt, lots of other quirky niches at the intersection of “Lego and” something that doesn’t seem to have much to do with Lego to begin with. Rearranging Legos is one way to create wealth.
The value of a Lego set is not the value of the raw materials that went into making it. It’s the value of the ideas that went into designing it. Cheap knockoffs are possible — and they are all over the internet — but my younger son took me through a very quick lesson on how to identify a genuine article and how to tell whether or not it’s fake.
Lego illustrates the power of a brand name. Anonymous companies that make Lego knock-offs are very much not making “the same thing.” They usually use cheaper plastic, (much) less exacting engineering and quality control, cheaper paint and adhesive, and so on. That might be fine for some people sometimes. I bought a Lego Stan Lee minifigure for a few dollars on eBay a few years ago. When I looked at it after getting instructions from my younger son on how to spot fake Legos, it became pretty clear I had been duped.
It’s distressing as I advance into middle age to go to a “vintage” market or look for “vintage” clothing on eBay and see shirts from bands’ tours that happened when I was in high school and, pretty regularly, clothes I used to wear, particularly when they are priced at rates that, if they don’t reflect appreciation on par with the S&P 500, at least represent slower depreciation than I anticipated so many years ago — and than so many people seem to appreciate now. Sellers at vintage markets and flea malls are creating value every bit as much as their friends and neighbors working in the coal mines or in the mills. They’re transforming lower-value assets to higher-value uses. The transformation may not be as obvious, but turning something called a t-shirt in the bottom of a drawer where it has sat for ten years into a t-shirt on the back of someone who was willing to pay $20 for it is every bit as much a creation of value as turning chunks of ore into steel or turning coal buried under a mountain into coal burning at the power plant. For things like vintage clothes, we’re not buying the item, per se. We’re buying lower search costs.
We’re also buying knowledge. Sometimes, scouring thrift stores for treasures to sell at a hefty markup gets a bad reputation because, ostensibly, what’s given to thrift stores is to be sold to the poor for the benefit of the poor. It’s easy to feel a little put off when you go to a vintage market and find yourself surrounded by people asking $20 for hats and shirts they probably bought from a thrift store for a few dollars at most. Before we raise our ire we should raise a few questions, though. How many hands did that hat or shirt pass through before someone found it and thought “you know what? I’ll bet someone would pay $10 for that.” And bet they did, wagering their own money on what might be a data-driven analytical conclusion or what might just be a hunch.
I jumped at the opportunity to buy a Sunderland AFC soccer jersey, brand new, for $7 plus tax at a vintage market. I couldn’t locate Sunderland on a map and it’s a size too small (maybe not after I lose those next twenty pounds…), but if nothing else, eBay prices suggest I could sell it for twice or thrice what I paid. One of my (new) favorite shirts is a Birmingham Iron shirt I bought at a thrift store recently for $2. It might have been $1. I would have been happy to pay $10. How many people, I wonder, passed over treasures like these not knowing what they had found? Or simply valued the item, or their own time, differently?
I’m reminded of two stories, one from Jesus’s parables and the other from Atlas Shrugged. And yes, they pair well: while I was largely critical of the book Better Capitalism, the authors were spot on in their claim that John Galt’s speech from Atlas Shrugged overlaps with scriptural themes and Christian anthropology much more than she knows.
But I digress. I’m reminded first of the parable of the treasure hidden in the field. The man who discovers the treasure sells all he has to buy the field. As Robert Sirico points out in his book The Economics of the Parables, he commits no sin by acting on his private information, and importantly, treasure is in the eye of the beholder. Why, one wonders, had no one else noticed?
That brings me to Atlas Shrugged. One of Rand’s villains’ themes is that her heroes don’t deserve their fortunes. After all, they would not have been able to make those fortunes without the work of innumerable others (true) or without the God-given earth (also true). But, as Cheryl Taggart asks, the oil that Ellis Wyatt pumped had been there forever. People have been working together forever. Why didn’t anyone do it before Ellis Wyatt? We can ask the same questions about the copper ore dug by the d’Anconia family, the coal dug by Ken Dannager, and all the ores smelted into Rearden Metal. Indeed, in his perfecting Rearden Metal, Henry Rearden discovered something that someone else presumably could have learned long ago about the properties of the Metal’s ingredients and what made them come together into such a revolutionary substance. If it was there for the doing, why hadn’t it happened until Henry Rearden came along?
As I have argued before, a good’s value comes from the ideas it embodies, not the material. In an academic treatment, Rosolino Candela and I discuss how something isn’t obviously a resource until someone has figured out how to use it, and we argue that private property and voluntary exchange make it coherent.
The physical fallacy is a common but costly mistake, particularly when we base public policy on it. We waste resources when we pursue “industrial policy” to protect this or that “strategic” industry, make inane comments like “we can’t get rich doing one another’s laundry” (yes, we can) and “we should make computer chips, not potato chips,” and wring our hands about how the rise of a service economy means “Americans don’t make anything anymore.” Yes, we do, though it might not be as obvious as it is when someone is pouring steel or mining coal.