On the Creation of Wealth

Wealth really isn’t all that hard to understand.

A person’s Wealth is measured by what other people are willing to give him to purchase everything he owns.

It’s nice to have cash, since its value is guaranteed by the government. The Wealth value of other possessions is not quite so reliable. Total Wealth is measured by what everyone is willing to pay to own everything that can be owned.

Manufacturing or agriculture is the way that wealth is created (as measured by the value of human property) as opposed to transferring it (like doctors and lawyers do).

Though in an ideal world, everyone would agree with me and this note would already be over, it is possible that the reader may be skeptical of this claim. Let us consider an example of a small manufacturer.

Consider a guitarist and budding luthier, who has made several electric guitars from hardwoods, hardware, and electronics. Some of his friends and acquaintances have begged him for guitars of their own, and he has accepted a commission to make a $1,000 guitar for someone.

  1. At process beginning, he obtains $200 worth of hardwoods, hardware, and electronics.
  2. He already has $1,000 in tools to shape and finish the guitar and install the electronic parts.
  3. Finally, he sells the guitar for $1,000.

The value of everything at the process beginning is $1,200. At the process end the value is $2,000. The increase in value, or profit, is $800. The process is repeatable. Each guitar continues to be worth $1,000 after being sold, so the person who buys it has just as much wealth after the transaction as before, while the luthier has the created wealth as a reward for his hard work and taking a risk on selling the product of his work. $800 of wealth was created by the process. This is the process by which all manufacturing, not just the manufacture of guitars, produces wealth. Agriculture works the same way as manufacturing.

If our luthier produces enough guitars to sell two guitars per week that’s a gross annual profit of $83,200. After accounting for taxes, tool replacements, and the various penalties for self employment his will be the equivalent of a $40-50,000 salary. If he wants to make more at the end of the year he reinvests his income in an expanded workshop with an attached high-end-boutique-store and hires employees to follow his system of manufacture and sales. The more efficient the system is, the more money there is for everybody including employees and business owner, and the better the product that is available to customers.

The way to get customers into his boutique business is to do something simple like teaching, painting guitars for people, upgrading pickups, repairing worn out fretboards and replacing old tuning machines. That’s how advertising works, as a way to get the business’ name to people.

Compare manufacturing to a medical clinic.

  1. At process beginning, the customer walks into the medical clinic.
  2. The doctor at the clinic uses $500,000 worth of equipment to perform some tests on the customer.
  3. Finally, the customer leaves after paying $500 to the medical clinic for his test.

The value of everything in the process at its beginning is $500,000 and it is the same at the end. The customer simply pays the $500 fee for the privilege of getting a use of the equipment and the doctor’s training. No wealth was created. Wealth was transferred from the customer to the clinic, where it will tend to accumulate.

The way that wealth will be created from the clinic is when the clinic purchases more manufactured equipment.

The proportion of manufacturing in an economy will determine the amount of growth built into the economy. Economies dominated by services tend to be stagnant. If an economy grows, then everybody who is part of it becomes more wealthy. If an economy is stagnant, then the economy tends to fracture, with high status occupations such as doctors and lawyers getting richer and lower status occupations getting poorer. The engine of the economy that evens wealth by bringing the level of wealth up, is manufacturing and agriculture.

As misbegotten government programs, product safety lawsuits, and NIMBY lawsuits drive manufacturing out of America, so shall the economy stagnate. If you want to see which country will become the next superpower standing astride the world girded in impregnable armor and wielding its terrible swift sword, look to the economy that focuses all its efforts on agriculture and manufacturing.

Technorati Tags: , ,

Advertisements

Comments are closed.