Wealth creation

There’s been a lot of discussion recently about creating wealth and I’ve generally felt that the concept is not well-defined or well understood. It has, however, taken me some time to start writing about this, largely because I’m not sure I can explain my thinking as well as I would like. I tried discussing this with my wife who has studied some Economics and she didn’t quite understand what I was getting at, so possibly my thinking is very muddled, or even completely wrong.

One of the interpretations of wealth creation is that a company makes a product that costs a certain amount to produce and if they then sell this produce for more than it cost, they’ve created wealth. I would argue that this is simply making a profit. It doesn’t necessarily imply creation of new wealth. This company could simply be capturing part of an existing market, so their gain means someone else’s loss. However, if this product is sold overseas then that would bring new wealth into the country. If all the costs of making the product also remain within your country then you essentially win twice. You’ve kept all the costs internal and recovered all the costs plus profits by selling to an external economy. However, this still doesn’t necessarily increase the total global wealth.

Creating wealth, as far as I can tell, implies something more than simply making a profit. If one considers a society in which everyone basically subsists, everyone spends all their time looking after their shelter and growing or collecting their food. If someone then develops a tool (plough, scythe, etc) this makes food production easier. Now people can grow more food than they need and can use the excess to pay the person who makes and repairs the tools. Someone else then finds a way to make bricks more easily so that houses can be built more cheaply. People can spend more time farming and can use the excess to pay people to build/extend and repair their houses. To me, this type of thing is wealth creating. The amount of food has remained constant, but new products have been added which have made various things easier and cheaper and essentially added wealth to the society. If this continues then one can start adding entertainment and other luxuries and an economy develops.

To a certain extent the same must apply today. People in a developed society (like the UK) have a certain amount of income/wealth, some of which is spent on necessities and the rest could be regarded as disposable income. Some will have only enough for the basics and have no disposable income (although the credit crisis appears to be largely a consequence of trying to lend these people some disposable income). To create wealth, it seems to me, that you need to increase the amount of disposable income in society. An obvious way to do this is to reduce the costs of the basics – food, accommodation, energy. This will increase the amount of disposable income, but also increase the number of people who have disposable income that can now be spend on new products. My basic argument is that wealth creation requires a development that makes something that society needs/uses more efficient and consequently cheaper. This frees up wealth that can be used on something new and consequently – in a sense – increases the total wealth.

There seem to be a few consequences of this. It becomes increasingly difficult to create wealth in a developed society as you have to introduce efficiencies into an already efficient system. This is presumably why parts of the developing world are growing so fast. It’s much easier to introduce new innovations into such societies and these innovations can have a large impact. However, some of the things that may well be potentially wealth creating in the developed world are things like education and healthcare. Having a well educated and healthy workforce gives you an advantage compared to countries whose population are not as educated or healthy. The proposed changes to both Higher Education and the NHS, could therefore be very counterproductive. It also seems that the general view that the public sector soaks up wealth, while the private sector generates wealth is simplistic and possibly completely wrong. It may well be that the basic resources provided by the public sector are a fundamental part of creating new wealth. By definition, the public sector does not create a profit but that does not mean that it can’t effectively create wealth (by providing valuable resources for the private sector).

Additionally, there must be a point at which giving more money to fewer people is counterproductive. We do need (I believe) to reward those who are innovative and those who takes risks. However, we also need to ensure that these people don’t continually soak up all the excess wealth. It seems to me that wealth creation implies making things more accessible within one’s society so that more and more can afford these products. This requires some balance between the profits of enterprise going to the wealthiest and this money being fed back into society. Investors do need and deserve some return on their investment but it seems as though wealth creation requires that spending power of the general population also has to increase with time. There is an argument that there is a trickle down effect so that the wealthiest ultimately trickle their wealth down to the rest. As far as I can tell, however, there is no real evidence for this.

I don’t really know if there is any merit it what I’ve said above, or even if it really makes sense. It just seems to me that the term “wealth creation” is thrown around without those using it having a good sense of what it really means and that such people generally confuse “making a profit” with “wealth creation”. This is not to suggest that a company making a profit doesn’t also generate wealth, but simply that making a profit doesn’t necessarily imply the generation of new wealth. It also seems that wealth creation is something that applies to society as a whole and not just to a few individuals. A viable, growing economy would seem to require a situation in which the number of people with excess wealth (i.e., disposable income) increases with time. Currently, it feels like the reverse is happening. People are spending more and more of their income on basics and have less and less available for what might be regarded as luxuries. To me wealth creation implies the reverse and unless we can reverse the situation it seems fairly clear to me that we won’t be able to really generate new wealth.

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3 thoughts on “Wealth creation

  1. Pingback: Private vs public (again) | To the left of centre

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