“The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.” — Frank H. Knight
Conflating the words money and wealth is an easy mistake to make because in most everyday parlance we use the two interchangeably — if you are wealthy, you have a lot of money, and if you have a lot of money, you are wealthy — without loss of comprehension.
But money is a measure of wealth, not wealth itself, just like kilogram is a measure of mass but is not itself mass. They are not the same. They have to be distinguished if we are to reason cogently about the nature and causes of wealth of people (and progress in our “inquiry into the nature and causes of the wealth of nations.”)
Most people would readily identify a heap of gold ingots as wealth. But a moment’s reflection is enough to conclude that what can be considered wealth depends on the context.
Imagine Robinson Crusoe alone on his otherwise uninhabited island coming across a pile of gold nuggets in a stream. What’s more valuable to him: the gold or the fresh water in the stream? Gold is pretty useless to him because he cannot use it for anything. Gold is a heavy, soft metal. A piece of iron would be more valuable for making a knife or a pickax. Gold is of little value to him.
The persistence of the canard that India was once a rich country is understandable. A quick glance at the simple graph illustrates very clearly why it is easy to conclude that India was rich.
This piece has loads of graphics — more than any other piece I ever wrote. No arguments here, just a lot of data-based graphics.
Here’s the TL;DR version: India is not rich today, and really never was rich in the past. In fact, all countries were poor until about a thousand years ago. India had a large share of the world GDP because India’s population was a large share of the world population. India was not rich. It was merely big. Just like it is today: big and poor. Like China used to be just a few decades ago.
If you ask me what are the necessary causes of the wealth of nations, I will answer — having spent decades learning about and pondering that question — in just one word: Freedom!
Freedom is the sweetest word I know in English.
The advancement of civilization is essentially the expansion of individual freedom — the release from constraints imposed by nature, by other humans or by one’s mental and physical limitations. The notion of the freedom of a group has content only when individuals of that group are free. If the individuals are not free, the group cannot be considered to be free in any sense.
Freedom means you have the right to do whatever you please, provided you respect the corresponding right of others to do as they please. In short, mind your own business. A free society is one in which everyone minds only his own business. Free societies are prosperous societies.
The greater the collectivization of society, the greater the size of the government, the greater the constraints on individual liberty, the less free the society, and consequently the less prosperous the society. Unconstrained democracy is inconsistent with individual freedom, and therefore group freedom, and consequently leads to impoverishment.
Below I outline briefly why the universal application of the notion of minding one’s own business leads to the possibility of universal prosperity through individual freedom. And conversely, when people poke their noses into other people’s businesses, it leads to needless misery. Continue reading “The Wealth of Nations — Part 2: Freedom”
In his 2016 annual letter (pdf, 28 pp) to the shareholders of Berkshire Hathaway, Warren Buffett makes this observation about America’s economic dynamism.
“One word sums up our country’s achievements: miraculous. From a standing start 240 years ago – a span of time less than triple my days on earth – Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.
“You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it – they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.”
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. Continue reading “Competition and the Creation of Wealth”
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. Continue reading “What’s wealth and where does it come from?”