This is a continuation of the brief piece about what’s wealth and where does it come from. Wealth, defined broadly, is important to us because it’s useful for our material well-being. Material well-being is not an end in itself but it is instrumental in providing the irreducible basis for our happiness and therefore it is a means to all other higher human aspirations and goals. Without a sufficiently wealthy foundation, it is hard if not impossible to live in peace and harmony with oneself and with others.
10 million years ago, there was no wealth on earth
Wealth comes from human action. It does not exist in nature although the ingredients from which wealth is derived through human action does exist in nature. A simple example illustrative example is hydrocarbons in the ground (coal, crude oil, natural gas, etc.) They simply exist in nature. Whether it is useful or not depends on the user. Primitive life forms on earth had no use for it. Dinosaurs did not dig up coal to use as an energy source. Even primitive hominids had no use for coal. Though coal existed for millions of years, it did not become wealth until modern humans figured out only a few thousand years ago that it was great fuel for fires.
CNN has a nice graph showing the top oil producers of the world. Here’s the data for 2014 and 2015.
You notice two things: the production trend is positive. That partly explains the downward trend in prices over the last year or so. In the not too distant past, I had paid as much as $4.50 per gallon of gas in the SF Bay area. Recently I paid as little as $1.90 per gal at the same pump. It was delightful to pump gas. When I was visiting New Jersey in January, I paid just $1.50 per gal. (For those who are unfamiliar with the archaic system of measurement in the US, a US gallon is 3.78 liters.)
In the US, gas prices move with world prices of crude. No such luck in India. Indians are forced to pay whatever the licence permit quota control raj decrees. Which basically translates into allocative inefficiency, and that means increased poverty. Indians have some seriously shitty karma that they have such worthless governments that don’t understand basic economics.
It’s all karma, neh?
We take it as a given, almost a fact of nature like the seasons or the geography of continents, that different parts of the world enjoy different levels of prosperity. But there’s nothing “natural” about this since this is almost entirely within human control. The differences are stark, and at one end of the scale, heartbreaking. Consider the extremely rich first. Luxembourg has an annual per capita income of over $110,000, Norway over $100,000, Switzerland around $85,000. Those are small countries and outliers with perhaps little to tell us. But the US is large and has an annual per capita income of $53,000. Why is it so rich?
At the other end of the scale are Burundi and Malawi with only $200 or so annual per capita incomes. Why are they so poor? The richest countries are around 500 times richer in per capita terms than the poorest. What accounts for this inequality in incomes of countries? That question has engaged the attention of people for hundreds of years — starting with of course the great Scottish economist Adam Smith who inquired about “The Nature and Causes of the Wealth of Nations” in his famous 1776 book.
Markets work. That’s the “First Law” of the Extended Order of Social Interactions. I just made up that EOoSI bit but the ‘markets work’ bit is a genuine law in the sense that it expresses an observed regurality in human societies.
What does it mean? Among other things, it means that when the need (the demand) for something arises, the market spontaneously figures out a solution (the supply) without the need for some controlling authority passing orders to get that need met. Those who address the needs of people are sometimes referred to as entrepreneurs. These are the people who look around for unmet needs and figure out some way of meeting those needs.
“. . . how absurd it is to judge relative performance by rate of growth, which is as often as not evidence of past neglect rather than of present achievement. In many respects it is easier and not more difficult for an undeveloped country to grow rapidly once an appropriate framework has been secured.”
Source: F. A Hayek. The Political Order of a Free People. 1979. Page 190. Volume 3 of Law, Legislation and Liberty.
A couple of quotes related to violence and development.
“. . . all societies must deal with the problem of violence. In most developing countries, individuals and organizations actively use or threaten to use violence to gather wealth and resources, and violence has to be restrained for development to occur. In many societies the potential for violence is latent: organizations generally refrain from violence in most years, but occasionally find violence a useful tool for pursuing their ends. These societies live in the shadow of violence, and they account for most of human history and for most of today’s world population. Social arrangements deter the use of violence by creating incentives for powerful individuals to coordinate rather than fight.”
Source: In the Shadow of Violence: Politics, Economics, and the Problems of Development. Edited by Douglass C. North, et al. Cambridge Univ Press 2013.
“Political development occurs when people domesticate violence, transforming coercion from a means of predation into a productive resource. Coercion becomes productive when it is employed not to seize or to destroy wealth, but rather to safeguard and promote its creation.”
Source: Prosperity and Violence: The Political Economy of Development. Robert H. Bates. (2001)
A related post worth a read is “Of Kakistocracies, Principals and Agents.“