Wealth
So, I was thinking a bit about economics. People in my Thursday night small group were talking about how guilty they felt that they lived in one of the richest countries in the world. Even a low income family in the US ($30,000 two income) was richer than 97% of the rest of the world. I pointed out that the natural state of human beings was not being rich, but being poor. We come into the world naked and with nothing, and we need to work to create anything. The question we should be asking is not, "Why are some people poor?", but "Why is anybody rich?" And if the inequality bothers us, then we can add "How do we make more people wealthy?" The exact wrong question to ask is "How do we stop people from being rich?" That's been tried. That's what communism was all about. The idea was that if we could stop people from being richer than others, then everybody would be equally rich. The problem was that everywhere communism was tried, everybody became equally poor. Why was that? Well, I'm not an economist, so I may get some of this wrong, but the number one reason is the following:
Rule 1: Economics is not a zero sum game.
Way too many people, including bright, college educated people, think that it is. They think that if some people are rich, it must be because they took their money from other people, making them poorer. This basic misconception is behind a lot of bad ideas, including political movements and public policy.
Wealth, unlike energy and matter, can be created and destroyed. When a carpenter buys wood, and using hammer, nails, saw, and lathe, makes it into a chair, he has created something more valuable than the wood he bought. He then sells it for more than the cost of all the things he put into it, because it is more valuable than everything he put into it. He created wealth, and he earns a profit because he did.
Rule 2: Profit is the result of creating wealth.
In the ideal case, the amount of profit you make is roughly equivalent to the amount of wealth you create. From the carpenter to the office worker to the CEO, your compensation should reflect your value. Which leads us to:
Rule 3: The wealthiest people are those who create the most wealth.
And yes, this applies to nations as well. The US is the richest nation in the world not because it stole from everyone else, but because it creates the most wealth. Other nations do not get poorer because the US is so wealthy--in fact, they can and do get richer.
Rule 4: Creating wealth benefits everyone.
It is true, certain people are misers. They hoard their wealth rather than spending it. Most people, though, spend wealth. Rich people spend more money. This redistributes the wealth, making more people wealthy. People in the US, in general, have more, because the wealth that is created is spread around. It is not distributed evenly, but it is distributed well enough that even the poor in the US are richer than most other people in the world.
But what if our vision is greater than just the US? What if we want the rest of the world to get richer, too? Well, we could just give them money. That seems to be the way some people want to do it. This, at best, just spreads the current wealth around. At worst, however, the inverse of Rule 1 comes into play. Wealth can be created, and wealth can be destroyed. When wealth is consumed rather than exchanged, we are effectively destroying the wealth. This actually hurts, not helps, from a purely economic point of view. Of course, I'm not advocating letting hungry people starve. I am saying that a much better way is to help them be wealth-makers too. This means things like free trade, outsourcing, all the bugaboos of people who prefer to just give the needy money rather than help them make money.
Rule 5: The rules aren't perfect.
This is also a hard one, as lots of people think they can, by the force of regulation and legislation, force the rules to be perfect. They can't. This is a fallen world filled with imperfect humans. And all monetary transfers are based not on the true value of something, but on the perception of it. Some people are way overpaid for the work that they do, and some are way underpaid. Some people are given less opportunity to create wealth, and others are given more. Some live up to their promise, some fall short, and some go above and beyond. And of course, some people do make their money not by creating wealth, but by taking what others make.
Lots of wealth is wasted on things that aren't as valuable as they seem, lots of wealth created isn't properly compensated, and lots gets lost in the black holes of bureaucracy and litigation.
But, you know what? We can live with that. As long as we're creating more wealth than we're destroying, we can afford losing some.
Rule 6: Economics isn't everything.
As I said earlier, wealth can be destroyed. And a lot of things that we consider very important destroy wealth without creating more. As I said before when talking about waste, we can live with that. Wealth, and the creation thereof, isn't everything. And some things that don't have any obvious wealth creating benefits should be done simply because they are the right things to do. And this works as long as we're creating more wealth. If that ever stops, if we're just consuming and redistributing it, then anything that destroys wealth is intolerable. This is why rich, western countries can afford things like welfare and universal health care and social security. They create enough wealth that consuming it in that way doesn't destroy the economy. Poorer countries aren't so lucky.
Rule 1: Economics is not a zero sum game.
Way too many people, including bright, college educated people, think that it is. They think that if some people are rich, it must be because they took their money from other people, making them poorer. This basic misconception is behind a lot of bad ideas, including political movements and public policy.
Wealth, unlike energy and matter, can be created and destroyed. When a carpenter buys wood, and using hammer, nails, saw, and lathe, makes it into a chair, he has created something more valuable than the wood he bought. He then sells it for more than the cost of all the things he put into it, because it is more valuable than everything he put into it. He created wealth, and he earns a profit because he did.
Rule 2: Profit is the result of creating wealth.
In the ideal case, the amount of profit you make is roughly equivalent to the amount of wealth you create. From the carpenter to the office worker to the CEO, your compensation should reflect your value. Which leads us to:
Rule 3: The wealthiest people are those who create the most wealth.
And yes, this applies to nations as well. The US is the richest nation in the world not because it stole from everyone else, but because it creates the most wealth. Other nations do not get poorer because the US is so wealthy--in fact, they can and do get richer.
Rule 4: Creating wealth benefits everyone.
It is true, certain people are misers. They hoard their wealth rather than spending it. Most people, though, spend wealth. Rich people spend more money. This redistributes the wealth, making more people wealthy. People in the US, in general, have more, because the wealth that is created is spread around. It is not distributed evenly, but it is distributed well enough that even the poor in the US are richer than most other people in the world.
But what if our vision is greater than just the US? What if we want the rest of the world to get richer, too? Well, we could just give them money. That seems to be the way some people want to do it. This, at best, just spreads the current wealth around. At worst, however, the inverse of Rule 1 comes into play. Wealth can be created, and wealth can be destroyed. When wealth is consumed rather than exchanged, we are effectively destroying the wealth. This actually hurts, not helps, from a purely economic point of view. Of course, I'm not advocating letting hungry people starve. I am saying that a much better way is to help them be wealth-makers too. This means things like free trade, outsourcing, all the bugaboos of people who prefer to just give the needy money rather than help them make money.
Rule 5: The rules aren't perfect.
This is also a hard one, as lots of people think they can, by the force of regulation and legislation, force the rules to be perfect. They can't. This is a fallen world filled with imperfect humans. And all monetary transfers are based not on the true value of something, but on the perception of it. Some people are way overpaid for the work that they do, and some are way underpaid. Some people are given less opportunity to create wealth, and others are given more. Some live up to their promise, some fall short, and some go above and beyond. And of course, some people do make their money not by creating wealth, but by taking what others make.
Lots of wealth is wasted on things that aren't as valuable as they seem, lots of wealth created isn't properly compensated, and lots gets lost in the black holes of bureaucracy and litigation.
But, you know what? We can live with that. As long as we're creating more wealth than we're destroying, we can afford losing some.
Rule 6: Economics isn't everything.
As I said earlier, wealth can be destroyed. And a lot of things that we consider very important destroy wealth without creating more. As I said before when talking about waste, we can live with that. Wealth, and the creation thereof, isn't everything. And some things that don't have any obvious wealth creating benefits should be done simply because they are the right things to do. And this works as long as we're creating more wealth. If that ever stops, if we're just consuming and redistributing it, then anything that destroys wealth is intolerable. This is why rich, western countries can afford things like welfare and universal health care and social security. They create enough wealth that consuming it in that way doesn't destroy the economy. Poorer countries aren't so lucky.
