Thursday, July 22, 2004


We all know as we look around that some people have lots of money and some have little. Many people have the belief that there's only so much to go around, i.e., that wealth is static. If that's true then the only reason one person could have more than others is that they, or their parents perhaps, took it from those who have little. This sort of hypothetical plunder of the poor by the rich is a sort of thievery. Even if it is legal it is morally suspect.

But is this hypothesis, the static wealth hypothesis, really true? To answer that, we have to ask a more fundamental question: what is wealth really? Upon examination, it's not such an easy question to answer. Wealth is more than the simple possession of money. Once people did not have money but possessed other things. They still had wealth, but not in such an abstract form. And what's the value of money anyway? If I had oodles of Confederate notes stored up in my basement, would I be rich? Of course not, because nobody would take it. So it's not the money itself which really matters but rather the fact that I can use it to get other things that I want that makes me wealthy.

Thus we can define wealth, at least preliminarily, to mean the ability to command goods and services. Seen in this light, wealth is actually just another form of power. That is why modern economists are mistaken to claim that economics bears no relation to politics: politics is the study of power relations and wealth is itself a form of power. The Marxists have this part of it right. Nonetheless there is a qualitative difference between the sort of power that, say, being governor of Arkansas would give me with respect to women, and the sort of power thatcomes from having a hundred thousand dollars in the bank. In the latter case, the power I have comes only from the ability to explicitly trade my dollars for things which are legally tradeable.

Another thing that emerges from these considerations is that somehow wealth is tied to satisfaction, and satisfaction is very subjective. If everybody I know has blue jeans and blue jeans are all the rage and if one cannot be seen in decent society without blue jeans, and if I do not possess blue jeans, then I will consider blue jeans to be incredibly valuable and might come to envy greatly a man who owns a room full of blue jeans. I might gladly trade a year's salary for a pair. If I possess a room full of black slacks instead I will consider myself to be poor. Suppose though that fashions change and that black slacks are all the buzz. In that case suddenly I am wealthy and my erstwhile rival is poor. This is why corporations labor mightily to convince us that what they produce is a Good Thing. This is called "creating demand".

Now consider a hypothetical village where there are two men, each of whom possesses one object of possible value. Let's say one of them possesses a spear and the other a plow. Suppose the one who possesses a spear is a farmer and the other a hunter. Neither has what they want; both are poor. Now suppose they swap possessions. The farmer has the plow his heart desires, the hunter has the spear of his dreams, and the net wealth of the village has suddenly gone up tremendously. What seems to count then is not the total amount of possessions of the village but the distribution of those possessions relative to the desires of the populace. Wealth is subjective, at least to some extent. Also, wealth can be greatly increased by the ability to trade.

It follows, at least to some extent, that we can become wealthier just by "freeing our minds". If we want to be wealthier, and if we can convince ourselves that the possessions we have right now are more valuable than we thought, then suddenly we are wealthier. Magic. Of course this is harder to do in practice than in theory.

I say to some extent because we are after all tied by our physical and biological requirements into certain daily requirements. We have to eat, need shelter and clothing, etc. If I lack these then I am truly poor. Except that in India I observed people who lacked even these most basic goods, but sat on the curb nonetheless with beatific smiles upon their faces. They did not consider themselves poor. I suppose they truly had "freed their minds".

Still, in America today not having enough to eat is essentially unheard of, barring some bizarre social or cult situation. People don't think of poverty in those terms anymore. We're simply too rich. "Poverty" now means things like having an old car or an old computer that only runs Windows 98. The poorest Americans today are rich by any sort of historical standard. The poorest American today can easily command goods and services that were completely unavailable to the most powerful Roman emperor. He can fly through the air across a continent in a winged chariot in return for about 20 hours of labor, for example. Evidently, wealth which never existed before can be created. It is not static.

Wealth can likewise be destroyed. If I pull a dollar bill from my pocket and set it on fire, the world as a whole is unchanged. I am however a dollar poorer. Nobody else got that dollar from me. Nobody else gained, but I'm worse off. Wealth has been destroyed. If I blow up my car I'm poorer but nobody's wealthier in return. Come to think of it, it's quite easy to destroy wealth. This puts the lie, by the way, to the oft-held sentiment that war can make the economy better. Any destructive activity will only make the economy worse, considered as a whole, because there will simply be less wealth.

How exaclty does wealth get created? If I sit down and paint a picture and that picture has particular value to other people then I can sell that picture to someone who really wants it. In that case I have some money I didn't have before and the person who bought the picture has something beautiful on his or her wall which he or she didn't have before. The amount of dollars in the world is the same but the amount of beauty has increased by one picture. If the picture has real value and the sale wasn't a scam, then the picture can be resold if necessary by the new owner for an equivalent or even greater price. So the owner has lost nothing by the transaction and in truth has gained because--like the hypothetical villagers--he or she has traded something desired less for something desired more. I meanwhile am clearly better off to the tune of the dollars now in my pocket.

One can argue that wealth has not increased because I have traded my time for the dollars. It's true that I have traded my time for the dollars but it is not true that there is no gain. Time is not wealth, contrary to the popular saying. Time can indeed be converted to wealth, but only under certain rather stringent circumstances. If I cannot paint well and I try to sell my lousy paintings anyway then my time will not have been converted to wealth because no one will buy them. I will have simply wasted my time. The conversion of time into wealth via paintings is only available to those of us who possess that artistic skill.

Similarly, if I am a great writer or a great musician or a great inventor I may have the means to convert my time into wealth at hand. But even in the circumstances that I do possess some such remarkable talent, it does not automatically follow that I can actually convert my time into wealth. This is because my ability to convert depends not just on me but also on other people. Wealth is a social phenomenon. Imagine a musician with the skill of a Mozart living in the Dark Ages. He can play like the dickens but nobody wants to buy. Everybody's much too concerned with more basic things, like not being killed by the local sword-wielding bullies. The ability to create wealth depends, then, not just on my ability to supply, but also on other peoples' willingness to buy. What is called "demand" in economics. Our hypothetical Mozart of the Dark Ages is obligated to find another line of work pronto, or die.

This point is often lost, particularly on highly talented creative people. They know that they possess a great gift, one for which they have been greatly praised throughout their entire lives, and rightly so. But the demand for the creative arts is usually far less, in a highly developed civilization like ours, than the supply. Unlike any previous age, we have lots and lots of people with lots and lots of leisure time in which to improve their artistic skills. And with billions of people about, there are bound to be a number of folks with truly great gifts. So the potential supply of art is probably greater than at any time in history. The demand, on the other hand, usually isn't all that great. I only have so many walls and I only need so many paintings on them. I can put a cheap print of "The School of Athens" up and I don't really have a huge need to buy a piece of original art. Again, I can listen to a CD of Bach, Beethoven or the Beatles at hardly any cost and so have very little need to go out of my house to a local pub or town square to hear live musicians who are surely not up to the same refined level as Bach. A hundred years ago or so all music was live and rare and so the demand was higher.

These circumstances limit greatly the ability of the modern artist to trade his or her time for wealth and this tends to lead to a natural clash between those artists who try to make a living from their talent, whether the world wants it or not, and those more realistic people who have cultivated other skills in order to make a living, becoming CPAs for example. Not because it was their first love in life to be CPAs, but because they realized that the balance of supply and demand in that particular profession would provide a means by which they could trade their time effectively for great wealth.

There are other ways to increase wealth besides creating art. Imagine for example that I have a factory producing shoes. Imagine that I give the layout of the factory some thought and realize that by moving some of the machines around and putting them in a slightly different order that the people working in the factory can be more efficient. They can now produce, say, 105 shoes an hour instead of the previous 100. That's 40 extra shoes a day which, providing that there is demand for shoes, can be sold. The extra money thereby generated is extra wealth which didn't exist before, pure and simple. It can be paid to a number of people. The owner of the factory can keep it for himself as profit. Or wages can be raised by paying out that extra money to the employees in gratitude for their higher production. Or the price can be lowered to the shoe buyers. In this latter case, things could be managed so that the total amount made by selling the 840 shoes made in a day, the total revenue, is exactly the same as the revenue from only 800 shoes was before. In this case neither the workers nor the owners gain but the consumers are still wealthier without having to do a thing to achieve that wealth. That new wealth wasn't stolen from anyone--it's simply brand new wealth, the proverbial free lunch. In this scenario, because the shoes are now cheaper, the buyers can afford to buy them new more often and thus wear newer shoes than previous generations could achieve. Far from being hypothetical, the American economy produces these sorts of gains in wealth almost all the time. I'm typing this on a computer that has the power of a supercomputer from the early Nineties and would have cost millions but for which I paid only $700. That's a huge increase in wealth to me and all I had to do was wait. Manna from heaven indeed.

In the real world, because of various circumstances, the new wealth due to increased efficiency described in the previous paragaph is usually distributed in all three ways. Profits increase, salaries go up, and the price of consumer products goes down. Everybody is gaining. Everybody is getting richer. That's why the American peasant beats the Roman emperor of old. This doesn't usually happen in a uniform way. For some years, profits will rise, and then for some other years, wages will rise, and then at different times prices will fall. So over the course of a short time-period the changes aren't quite so obvious but over a longer scale they become dramatic. How much is the Internet worth to you? Cable television? DVDs? None of these existed in my youth.

In summary, we can see that wealth, far from being static and fixed, is quite dynamic. Good policies which allow both trade and the ability to profit from creation are liable to increase wealth; bad policies which restrict trade and creativity are liable to keep wealth fixed or even to decrease it. The United States and the other modern modified capitalist economies like Japan and Singapore have done a good job of implementing policies which increase wealth. The highly repressed Arab states which provide very little opportunity for creativity or change have done a very poor job of creating wealth, despite the presence of vast deposits of minerals of potentially great value lying beneath their sands. Countries, like those of the EU and to some extent Canada, which choose to restrict wealth-creating opportunities in the name of other socially desirable qualities are liable to see little wealth-creation relative to more dynamic countries like Singapore and Hong Kong. In the long run, they are going to stay more or less where they were when these policies were imposed while the US, Singapore, China, etc. are going to pass them by and leave them in the proverbial dust. In absolute terms, they won't be any worse off, of course, but in relative terms they'll be farther and farther behind. In my youth in the Sixties most families possessed only one car. Most European families will continue, then, to possess only one car while American households will routinely possess two or more. This will lead to jealosy. But the Europeans have chosen for their societies to be relatively poorer, as is their right, and it is the dynamism of wealth, rather than any greed inherent in Americans, which will lead to these disparate results.

Finally, it's interesting to note that the nature of wealth is changing. There is a tendency over time for wealth to become increasingly abstract. In ancient times wealth was measured using tangible and important possessions like cattle. To this day we have many words in the English language which derive from the ancient Latin word for cattle, pecus. The words cattle and capital come from the same root in fact. Cattle were an early form of money. Then a coin or a piece of paper was made to stand for an abstract cow and money was invented. Nowadays the world's richest men are rich solely because of their production of patterns of zeroes and ones which they have produced on a piece of plastic. For that's all that software is: a particular pattern of zeroes and ones. Abstract patterns have become, because of the existence of computers, the most important form of wealth in our society.


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