Wealth 101

Bonafide wealth.

Bonafide wealth.

Mr. X reminded me that it’s hard to think properly about wealth and wealth disparity without understanding the economic aspects of wealth creation. I agree. In fact, as I’ve mentioned from time to time, I think that an understanding of economics in general is important if we want to have any hope of improving the planet. If visions of a path forward aren’t grounded in economic “reality”, then they won’t work, period, and therefore are of no value.

So, an addition to my last post here, I’ll just call it “Wealth 101”. My main point—there isn’t some fixed amount of wealth on the planet. The poor half of the world only has 1% of the wealth, and the richest tenth has 85%, but, the rich don’t have to necessarily give their wealth away for the poorer parts to have more. It isn’t a zero-sum game. Wealth can be created, almost out of thin air. An example—suppose a rural village in some poor part of the world has a hard time getting across a river that divides the area they live in. This makes their lives difficult. So, they decide to work together, and dig stones out of the ground, and build a stone bridge. When they are done, they don’t have any more gold in their pockets, (or Euros, or yen, or dollars), BUT—they’re richer. The bridge will enable the villagers to more efficiently get to and from their fields, and to get their products (and themselves) to and from markets. They have created wealth, and this wealth will improve their lives. The bridge (which is itself wealth) will in turn help make future wealth creation easier, in a virtuous cycle.

The same is true in the rich world. Picture, say, the White-Rodgers plant in Batesville, Arkansas, that makes thermostats for gas-powered appliances. I’ve been there, and have seen this. Aluminum ingots come into one side of the factory, and they are melted down, and cast into rough shapes. They then follow along a series of complicated machining steps, and come out the other end (with the addition of some parts) as finished thermostats. The value of the finished thermostats greatly exceeds the value of the parts and aluminum ingots. It had nothing to do with dollars—it had to do with combining labor and energy with raw materials in a way that created wealth. Wealth was created.

(An aside—the best way to view money in this situation is as a medium of exchange. It can be traded for wealth, but the money itself isn’t “wealth”. You can’t eat dollar bills, or clothe yourself with them, or keep the rain off of your head with them).

Wealth can be destroyed, too. Wealth is consumed, it wears out, it rusts away, it becomes obsolete, it is destroyed by war, or natural disasters. Harbors silt up, roads degrade, roofs begin to leak, wood rots. What a society’s people know and are able to do is also wealth. By some accounts, half of the wealth of the United States is in this form; “human capital”. And human capital wears out, too. Workers grow old, or their skills become obsolete.

So wealth levels in a society are a moving target. Wealth is constantly being consumed or destroyed, so it must constantly be replaced. We produce, we train our workers, we invest in education for young people, we update, we repair, we replace.

So why exactly are poor parts of the world so poor, and what can we do about it? In general, they are poor because their systems to create wealth are broken. They are wracked by war, they lack communications or energy or transportation infrastructure, their human capital is lacking due to disease, or malnutrition, or lack of education, or they are plagued by natural disasters, or live in places where their governments fail miserably to fulfill proper governmental functions, and/or steal the wealth that the country produces, or waste it. Some governments impede trade, some fail to protect the rule of law. Unfortunately, wealth creation is easily disrupted; it doesn’t work if any of these things are broken.

This is what makes fixing world poverty so difficult. Fixing just education isn’t enough. Fixing just medical care isn’t enough. Fixing just transportation infrastructure isn’t enough. Countries need all the puzzle pieces to create wealth. And all people need to consume to live, and if a country’s consumption is higher than its wealth creation, then a brutal economic downward spiral begins. Conversely, in the rich parts of the world, wealth creation begets yet more wealth creation, in a virtuous cycle. Both of these are concurrent: cue wealth inequality.

All is not dismal. Economic advances have virtually halved the world’s poverty rate in the last two decades. But, here we have the great Catch-22—the same economic growth that lifts the poor from poverty is what is mushrooming the human footprint to a point that we’re threatening the very water, soil, air, and biodiversity that we all need to survive. Economic growth (that strived-for 3% a year) is exponential, yet we live on a finite planet.

We care about the environment, but caring for the environment, as Mr. X never tires of telling me, is the luxury of a wealthy nation. The desperately poor are just trying to eat and survive, and pesticide use and carbon emissions and water usage enable them to do this. We can’t fault them for that. Because of this, as I mentioned in the last post, they can’t help us save the planet until they have more wealth. But their future economies, like ours, need to be sustainable. So we have a lot to do.

I’ll stop here; there are too many aspects to this issue to flesh them all out at once. But understanding wealth creation is necessary step, I think.

Image credit: pixphoto / 123RF Stock Photo

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