The Nature of Wealth

This is a work in progress. It is my take on what is wealth, how it is created, what motivates that creation, what are the barriers to it, and what can be done to remove them. The series so far:

Part 1. What’s wealth and where does it come from.
Part 2. Competition and the creation of wealth.
Part 3. The Nature of wealth. (The current part below.)

The topic is very exciting if you are the kind of person who like me is interested in figuring out how the world works, and are not that interested in the shenanigans of politicians and other such lowlife. Otherwise all this is very boring stuff that you’d be well advised to give a miss. So with that warning . . .

The Nature of Wealth

We care about wealth because it helps us meet our needs. Food, clothing, shelter are the usual categories of goods that partly constitute wealth. Two broad generalizations apply to them. First, these are essential for our survival. Second, like all wealth, they are human creations and do not exist in nature. They are unlike other two essential items for our survival because they are found in nature — air and water. Clean breathable air and drink water are there for our use without our intervention. With a few minor exceptions in the plant kingdom (coconuts, for example) and some animals (fish or deer), unaided nature did not “create” the food we eat. Certainly, the wild ancestors of the food we eat were provided by nature but nearly all of what we eat at present has been “created” through human effort. Clothing, shelter and nearly all the food we eat are clearly man-made.

Let’s call air, water, food, clothing and shelter primary wealth to distinguish it from “secondary wealth.” Primary wealth is what we directly consume. Secondary wealth is everything else that is of use but not directly or are not essential for basic survival. One category within that group is “producer goods.” These are tools like shovels and computers. They are valuable because they help in the production of primary goods or other producer goods. Secondary wealth also has another group we’ll call “quality goods“. They improve the quality of life. Quality goods and services are those we do not absolutely need for survival but without them the quality of life would suffer. These are things we need for play, entertainment and recreation.

So there we are with a rough taxonomy of wealth: primary and secondary, and within the latter, producer goods and quality goods. All wealth is produced by human beings and involves effort. The effort merely goes to re-arrange the basic matter that is provided by nature. How much effort is involved in creating wealth depends on what we know. This know-how is called knowledge or technology. Three words that are nearly interchangeable are know-how, knowledge and technology.

We’ll go into why creating a taxonomy of wealth is helpful a bit later. For now, let’s make a few generalizations about wealth. To repeat, wealth is man-made. It does not arise unbidden from nature. At some point in the life history of the planet, there was no wealth. Then one particular life-form evolved on earth — humans — that was capable of creating wealth. They began to create wealth slowly and learned how to do so with less effort. That is, they learned how to create wealth. That is what we call technology.

Electronics is technology but it comes much later in the story. The first technologies were quite primitive: how to plant what seeds, how to hunt game, how to make a fire, how to build a shelter, and so on. There’s a word for “how to do something” — recipe. Technology is a recipe or a collection of recipes.

So we have wealth creation, and that depends on technology. Technology is what we call an “information good.” If you know how to do something, and I learn it from you, I too know how to do that but it does not diminish your ability to do that something. Information good can be shared indefinitely without reducing the amount available. This is quite distinct from other goods whose stock goes down with use.

With time the stock of technology grew and with it the ability of humans to create wealth. More people meant more recipes got discovered and eventually shared. New recipes got discovered that built on previously known recipes. For example, someone discovered how to use flint to build a fire. Someone else discovered how to fire to make a durable pot out of clay.

The wealth produced by humans grew in parallel with their discovery of novel and better recipes. That wealth gets created has an important implication: there is no fixed amount of wealth that exists in nature. Human agency and effort is involved in the creation of wealth. The creation of wealth is not a zero-sum game. Meaning when someone creates wealth, it is not at the expense of other people’s wealth.

If you figure out how dig a well and collect the oily stuff to use as fuel, you have created wealth where none existed before.

Of course, one can enrich oneself by taking away other people’s wealth. That’s not creation of wealth but a transfer of wealth, and thus a zero-sum game. Creating wealth is a morally and ethically superior way of enriching oneself than stealing. No doubt the world is plagued with quite a bit of theft but fortunately it is not catastrophic. Worse than stealing is the destruction of wealth — which is a negative-sum game. Someone breaking window destroys but without enriching himself. Destruction of wealth is immoral and stupid. But there’s one activity that is even worse than that: preventing people from creating wealth.

If we consider creating wealth good and destroying wealth bad, then preventing wealth creation is evil. We’ll go down that path later.

Here we’ll focus on wealth creation. And a related topic of wealth distribution. Wealth is unevenly “distributed.” What does that mean? If there was a fixed number of something — say, 10 apples — and someone were to distribute them among two people, we recognize it as a distribution and we can judge whether the distribution was fair, or equitable, or justified. Given that there was some agency that was doing the distributing of the fixed amount, we can instruct (or force, or require) that agency to make the distribution fair or equitable for some other than that which was obtained.

But what if there is no fixed or a given amount of something, and what if that something has to be produced through the effort of some people, and that there is no one that is charge of distributing the produced amount among them? In that case, it is possible that the amounts of the production (wealth) held by different individuals to be different. In what sense can this distribution of wealth be said to be not right? And since we have posited that no one was in charge of this uneven distribution, what agency can be employed to correct the unevenness? Those matters need to be discussed at some length.

There’s another matter related to the distribution of wealth that’s worth our attention. Whenever wealth is created, everyone within that trading area where the wealth was created gains. Wealth cannot be contained and necessarily gets distributed to one and all, though certainly not evenly. Moreover, there is not way to spread the newly created wealth evenly because no agency is in charge of doing the distribution anyway. The distribution of wealth is a natural process which cannot be interfered or improved upon in any orderly way. I find this the most enchanting feature of the nature of wealth.

Let’s briefly examine my claim that whenever any wealth is created everyone within the trading area where that wealth was created gains. The gains from the creation of wealth do not reach everyone instantaneously but eventually it leaves no one unaffected. The time required for a part of the gains to reach someone depends on his physical and logical proximity of the wealth creator.

Imagine that someone in the Silicon Valley invents an awesome music player. The players fly off the shelf. That implies that the benefits to consumers must be greater than the price they pay for the player. Let’s estimate how much wealth was created. Suppose the average buyer paid $100 for it, and gained $150 worth of music listening pleasure. (This assigning a dollar value to pleasure is a handy mechanism to quantify something but is not critical to the argument that follows.)

Assume further that the cost of production of the players is $80 each. So for each player sold, the total surplus of value (the benefit $150 minus the cost $80) is $70. The total surplus is divided between the producer ($20) and the consumer ($50.) Suppose ten million units were sold. That means the inventor’s wealth increased by $200 million, and the consumers enjoyed an aggregated $700 million of net wealth.

So far we’ve only included the inventor, the manufacturer, and the buyers of those players. How does everyone else in the larger trading area (the whole world) figure in this? The fact is that each of us is connected with every other person on earth through a network of trades. What you produce, consume, buy or sell has an effect on others although that effect may be infinitesimally small, it is non-zero and those effects add up.

Ah, but one may say here, this was merely re-distribution of wealth, not really creation of net wealth. Each consumer paid $100, of which $20 went to the inventor and $80 toward the cost of production — which was given to the various factors of production such as the factory workers, etc. This argument is not correct. Why? Because there is a monotonic increase in total wealth in the world. There is more of everything in this world (with one caveat, we can go into later). There is more of everything that we collectively use: computers, cars, houses, shoes, roads, planes, clothes, or whathaveyou. There is no doubt that all of those things were produced by human effort and through a process not unlike the made-up story about a music player. A similar story can be told about everything.

Just to repeat the main point of this piece: Wealth is created by people, and does not fall out of the sky. At some point in the distant past there was very little wealth on earth. At some point there were very few people on earth. (A few hundred thousand years ago, it is estimated that the human race went through a bottleneck when the total world population was down to fewer than a thousand individuals and that the population did begin to increase until around Neolithic times.) Both facts are related.

Now there are seven billion humans, and growing. And the amount of wealth is clearly incalculable but orders of magnitude larger than it was when the human population was orders of magnitude smaller than today. Mere rearrangement of wealth could not have been the process which increased the total amount of wealth.

I will continue with my obsession with wealth the next time.