Monday, July 30, 2012

Intellectuals and Society: Poverty And Wealth

Intellectuals have a great tendency to see poverty as a great moral problem to which they have the solution. The human race began in poverty, so there's no mysterious explanation as to why some people are poor. The question is why have some people gotten prosperous, and in particular why some have gotten prosperous to a greater degree than others. But everybody started poor, so poverty is not a mystery to be solved by intellectuals. More than that, intellectuals have no interest in what creates wealth, and what inhibits the creation of wealth. They are very concerned about the distribution of it, but they act as if wealth just exists - somehow. It's like manna from heaven, it's only a question of how we split it up.

[...] Most intellectuals in most countries around the world see the issue as how those who are more prosperous should be brought down, and moreover that the people who are lagging should cling to their culture. I don’t know how you're going to keep on doing what you've always done and get results that are different from what you’ve always gotten.

Thomas Sowell

What is wealth?! This is a basic question one might ask. Paper money is not wealth! Wealth are the actual goods and services that a person has access to. Wealth are the goods and services which can be used to satisfy our human desires and needs.

A fish swimming in the ocean is not wealth. A fish caught in the net of a fisherman is wealth. The difference is that the fish in the ocean is not accessible to anyone, it cannot satisfy hunger by the virtue of existing. However, once that fish is caught, it becomes accessible and can satisfy hunger. Then, and only then, that fish is considered wealth.

Rocks found in nature are not wealth. A house that is built with those rocks is wealth, because houses can be used to satisfy the need for shelter.

In other words, our wealth depends on our capacity to transform raw materials found in nature into useful products that we can use in our everyday life. This process requires deliberate actions made by individuals.

A caveman no matter how much wealthier he is compared to his fellow cavemen is much less wealthier than most of the people we consider as poor in our day and age. There are two fundamentally different ways to measure poverty and wealth. The first is absolute measurement; Such measurement would lead us to see how the poor individuals of today are indeed much wealthier than their predecessors. The second way is comparative; That is comparing the wealth of one person to another. However, the second way can lead to disasters in terms of human progress. Most intellectuals on the left-wing of politics focus on the question of wealth in the comparative sense, but without the faintest understanding of how their type of analysis affects wealth in the absolute sense.

Having millions of dollars means nothing if there were no fish to eat, no houses to live in, no cars to drive, or no mobiles to use. In a world without goods and services, it does not make a difference if you have a million dollars or no money at all, because there is nothing to buy in the first place. Money derives its value from the goods and services you can buy, not from any intrinsic value that money has.

Without Microsoft Inc. there would be no MS Windows to buy; Without Apple Inc. there would be no iPads to buy; Without GM Ford Inc. there would be no cars to buy; And without IBM Inc. there would be no computers. Without the effort the individuals behind those companies invested, the products which we take for granted would not have existed. So, is it reasonable to claim that it is unfair that Bill Gates owns more money than other people, when the reason he became rich is that individuals found the products and services his company provided beneficial to billions of people around the globe?! Every single individual who bought MS Windows has participated in creating Bill Gate's wealth: His wealth is proportional to the amount of service he provided to individual people.

There is general fallacy that people generally commit when thinking that paper money is a measure of wealth. For example, let's say a person bought a car for 4000$; Did that person lose wealth or gain wealth?! Most people would say that this person lost wealth because he now has 4000$ less. This is the fallacy of thinking that money is a measure of wealth. 4000$ sitting in a bank account is worthless if you do not benefit from it. So, the person who bought the car has converted "virtual" wealth in the form of paper money into real wealth which is the car. The car itself is the real wealth, not the paper money.

Real wealth is a function of technology (also called "capital"). Real wealth depends on our ability to convert raw materials found in nature into useful products that we can use in our real life. A fishing net is technology: It enables fishermen to extract fish found in the ocean into fish that we can consume. Before the invention of fishing nets, people had to catch fish by their bare hands. Such a method might require numerous hours to get 4 or 5 fishes to eat. Using fishing nets we can now get hundreds of fish to eat in a small amount of time. The fishing net is thus called capital.

It can be easily seen that in a primitive society that has not invented fishing nets would be much poorer (even if the fish were evenly distributed among members of that society) than one where fishing nets have been invented (even if the fish is not evenly distributed) because the second society has higher yield of fish. Yield is the amount of resources required to obtain certain goods; Time is one of the resources that is required obtain goods; So, the higher yield in the second society is because they were able to produce more fish in a given amount of time. This increased efficiency would improve the wealth of society as a whole and the individuals within that society.

In a primitive society, if an oil field exploded in your farm, this would be a disaster, because the crude oil would destroy your crops. In that case, oil is not wealth because the technology that makes use of oil has not been discovered yet. On the other hand, in today's world this would be great fortune, because that oil can be used to run cars or be used in industry; Oil is now a commodity that serves our human needs. In other words, a primitive society cannot convert the natural resource of oil into a valuable commodity, but an industrial society does.

In short, wealth is a function of technology. The discoveries that improve our use of scarce raw materials that are found in nature. Whether it is a fish that you don't have the tools to hunt, or the oil that you cannot put to use in your day-to-day life. And those technological advancements are what creates real wealth.

Technology makes it possible to divide labor and makes better use of our time. In a primitive society (assuming it depended on fishing to eat), all people would be busy fishing because each individual can barely feed himself and his family. However, once the technology of fishing nets are discovered, only a handful of people would become fishermen and the rest would go about their day trying to make other kinds of products that they desire or need. Those individuals can then trade their products with the fishermen to satisfy their hunger, and the fishermen would have excess fish and food that they would be glad to trade their fish for the other services that have now become possible due to the process of freeing up people's time to provide new services. In this scenario, those new products -that were not possible before- are how a society as a whole become more wealthy and prosperous than another society that is not using that technology.

In other words, the technology of fishing nets freed up the time of the people in that society. They can now think about philosophy, make up theories about geometry and math, or make scientific discoveries. All of these endeavors would consequently be used to invent new technologies that would bring that society even more technological advancements that is needed to create more wealth.

Some people worry that improved technology like automated industries are not good because then the people who worked in those factories would lose their jobs. But in reality, this is how real wealth is created; Those people are now freed up and can make better use of their productive capacity and employ that capacity in new services that were not possible before, or in places they are needed more. Those automated industries can now produce more products in less time at a cheaper prince, and the workforce is now available to provide their services in other products and services.

Technology does have the short-term effect of causing some people to lose their jobs. Another example is the email. The mailman might be upset that his job is now obsolete since people can now use the email, but if every new technological advancement had to be discouraged due to it's short-term impact on a small sector of individuals nothing would ever be accomplished.

Wealth creation generally tends to improve society as a whole. And the wealth distribution generally remains roughly constant among different sectors of society like say, business owners and employees. The wealth gap might increase, but this should not be considered as a serious problem.

To give a numerical example, let's suppose that a certain sum of money is going to be divided between you and another person (say, 30% to you and 70% to the other person). In that setup, which is better: Splitting 100$ such that you get 30$ and 70$ for the other person?! Or splitting 1000$ such that you get 300$ and 700$ for the other person?! If you focus on the wealth gap, you would conclude that splitting a 100$ is better because the gap is 40$ compared to 400$. On the other hand, if you focus on absolute wealth you conclude that splitting 1000$ is better because you got more money. [Of course, we should not focus on paper money, but real wealth in terms of products and services, but let's assume that the purchasing power of money in this example is constant.]

Empirical evidence generally shows that the best way to improve the quality of life for all people (regardless of economic class) in the long-term is not to redistribute wealth, but to increase the wealth of the nation in absolute terms. Wealth does naturally flow around, and the more wealth that exists the more there is to go around.

It is a known fact (although not commonly understood and sometimes deliberately ignored) that socialism and communism have negative impact on real wealth. Socialism destroys real wealth (for many reasons that will be explained in later posts), and in the long-run all wealth would ultimately be destroyed, leaving society in dire poverty in terms of absolute wealth. One of the reasons is that our wealth depends on our capacity to transform raw materials found in nature into useful products that we can use in our everyday life. Socialism and communism interfere with the natural mechanisms that enables us to put natural resources into their most efficient use. This in turn would turn the natural progress towards more wealth in the opposite direction of less wealth, until wealth runs out completely.

No comments: