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A short lesson on wealth creation
A short lesson on wealth creation
This morning on CBC Newsworld business reporter John Northcott was describing, in horror, a recent OXFAM report indicating that 62 of the world’s richest people have as much wealth combined ($1.76 trillion) as the poorest half of the planet (3.625 billion). Mr. Northcott and lead anchor Suhana Meharchand made comments about the unfairness of this distribution of wealth. Indeed, if only that amount of wealth could be distributed evenly, this would solve so many of the poverty problems in the world.
One of the benefits of studying economics is the insight it provides in identifying, precisely, how wealth is created and the logical consequences of legally expropriating created wealth and transferring it to other individuals.
The only way that wealth can be created in a free market is producing at profit something that satisfies the wants of your fellow man. Profit is the signal that resources are being used efficiently in production. If a person cannot produce a good or service at a profit, this reveals that costs are too high, the price consumers wish to pay is too low (they have other, more urgent priorities) or both. In other words, losses reflect that resources (including the labour of the resource owners the entrepreneurs bringing necessary inputs together) are not being put to their highest valued used as judged by consumers.
That 62 of the richest people have generated $1.76 trillion is something to be celebrated, not denigrated. A moments thought to how much poorer would be not only the 3.625 billion, but everyone else too if individuals like Bill Gates never created Microsoft. Without Bill Gate’s magnificent impact on humanity I could have been typing this on an Olympia manual typewriter. If #62 ranked Bill Li of China never developed his Chinese internet search engine, countless numbers of welfare improving transactions in China would not occur.
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What’s Scarce Geopolitically: Stability, Ways to Get Ahead and Innovation
What’s Scarce Geopolitically: Stability, Ways to Get Ahead and Innovation
Conserving what is failing is not a path to stability.
What’s in demand but scarce is valuable. This is one of those scale-invariant principles: businesses large and small want what’s scarce and in demand, because that’s what generates profits.
What’s abundant but not in demand is cheap. What’s scarce but not in demand is ignored. Capital, talent and profits flow to whatever is scarce and valued as an engine of wealth creation.
Geopolitically speaking, tangible assets have self-evident value: seas between your borders and potential enemies, a wealth of natural resources, and so on. But equally important are intangible assets: the human, social and symbolic capital of the people, culture and institutions of the nation.
What seems scarce in the world is not just a specific tangible asset or intangible form of capital, but a mix that provides stability, ways for average citizens to get ahead and fosters innovations that can quickly spread through the society and economy.
We could say engines of wealth creation are scarce, but if the wealth isn’t distributed somewhat broadly, or the source of the wealth is not innovation but extraction of resources, any stability is temporary or illusory: resources run out, and wealth inequality fuels social and political instability.
What’s exceptional is a mix of assets and attributes that yield the stability needed for for people to get ahead, a playing field that’s level enough for people to get ahead, and a culture of innovation, because ultimately only innovation increases productivity, and increasing productivity is the only sustainable source of wealth.
For example, cheap energy is a gift to its owners and consumers; but eventually cheap energy is consumed and what’s left becomes expensive. Innovation is needed to extract more work from the remaining energy.
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