Sunday, April 7, 2013

Theory of Wealth is about abundance, not scarcity. Wealth, not poverty.

We are also concerned about everyone – the many and the few. We feel compelled to act now because even in the United States, still the wealthiest nation on earth, the wealth gap between the rich and the poor is growing when it should be declining. We are against the use of tactics that increase the wealth gap in capitalist systems: business/extortion cycles, austerity/poverty measures, and economic fear. We therefore believe that understanding wealth is an important part of creating a better capitalism.

Wealth is the power to control resources. From a "hierarchy of needs" standpoint (see Maslow), the basic required level of individual wealth is to control enough resources to survive – that is, subsistence. Those who control a lot of resources are "wealthy" or "rich". The rest of us are poor. (At we do not have much use for distinctions such as "middle class" partly because the middle class is disappearing in the U.S.)

Previously we have said that the rich are those who can escape with their wealth when threatened by laws and regulations, either by running away or by countering policy with policy within the government itself. Let us add another way to distinguish rich from poor. The rich are able to avoid the business/extortion cycles and austerity/poverty policies. (They avoid economic fear of course by the very nature of being rich.)

The rich are not entirely immune to poor economic results, of course. For example, there were a number of suicides among the wealthy as a result of both the Great Recession and the fall of Bernie Madoff. Madoff himself did not escape the law, either. The general case remains however that the rich are getting safely richer while the poor are getting poorer.

Here is how understands wealth. Wealth only exists in a social context. In capitalist societies it is measured generally in money. In other societies, it is measured generally by political power. For example, in the old Soviet Union, resource control was vested in the Communist Party. Money was distributed as needed according to political needs. The "wealthy" in the communist system may not have a lot of money, but they do have a lot of clout within the Party. When they need money, they just print it.

In the U.S., it is often the opposite. Those with a lot of money often do not have much political clout. When they need it, however, they just buy it.

Even in capitalist societies it is worth asking if money and wealth are the same. The answer is that they are not quite the same depending on one's definition of money. For example, Warren Buffett is worth billions of dollars, but that does not mean he actually has billions of dollars in his personal bank accounts. He keeps most of his wealth in financial instruments like stocks and bonds. His wealth gets reported in dollars because reporters want to keep things simple. The dollar figure comes from marking Buffett's assets to market prices and adding up the dollars. Therefore Buffett is richer or poorer depending on market prices.

Since Buffett is one of the market movers, there is something of a circular quality to his wealth. If he wants to be worth more in a given period of time, he simply buys and drives the market up. Or sells and drives the market down if he needs to be worth less than before. (Note that this one of the ways that the rich have advantages over the poor. The poor cannot distort markets as they wish.)

If wealth is control of resources, then creation of (or discovery of) and destruction of resources corresponds to creation and destruction of wealth. The word "resource" covers a lot of ground. There are natural resources and human resources. There are also technical resources. Technical resources are non-human resources that do not occur naturally, but emerge from complex technical infrastructures. The automobile and radio telecommunications are examples.

There is a saying that there is nothing new under the sun. When it comes to technological advances, at least, this is simply not true.

There is some similarity between the theory of wealth and previous theories of value, such as the labor theory of value. finds the concept of value to be too difficult and too narrow, however, so we prefer the concept of wealth. We think that "value" implies price and therefore is not general enough. Also, theories of value are usually narrow because they focus too much on only one element that contributes to value, such as labor or land.

So far, however, our notion of wealth has been static, as in control of quantities of resources rather than the movement of those resources. The fallacy of this is illustrated by the old Soviet Union which was so proud of itself when it surpassed the U.S. in production of steel. It evokes the image of Marx, Lenin, and Stalin perched on a giant pile of excess steel that they cannot use. They say to themselves that based on solid Marxist-Leninist principles, their labor force has created much more value than the dirty capitalists. So why aren't they rich?

The problem was that they focused too much on increasing labor (the production or supply side) and not enough on matching supply with consumption (the demand side). They also paid too much attention to relatively static quantities rather than flows that move production to consumption.

In other words, wealth is not just about static quantities of resources, but also about the dynamics of resource use. Resources can be held in reserve, but for the most part, wealth is related to the social context of resource use – as represented by purchases in active markets.

In the perfect market, the rate of production (resource use) exactly matches the rate of consumption by end-users. There are variations on this, such as the buildup of inventories and speculative purchases, but matching supply and demand is the basic principle. Suppliers do not waste any resources in unwanted production and no consumers are left unsatisfied. So let us modify our definition of wealth as control of resources in the social context of active markets that use those resources.

If static wealth can be measured in money, then the creation of wealth is measured by savings (a.k.a. profits). This is where's theory of wealth matches the common idea of wealth. The more of your income that you save, the wealthier you become.

This dynamic view of wealth creation also means that wealth is dependent on the speed of transactions. The faster a market moves, the more income it produces and the faster savings can be built. Anything that slows or stops markets destroys wealth – in the sense that less wealth is created than is possible.

Following the ideas presented above, it should be clear now that wealth is really a social concept in a social context. In a capitalist system, the meaning of wealth depends on markets. Control of resources only makes sense if saved money can be used to purchase resources in a market. (If resources cannot be purchased in a market, then it is not a capitalist system.)

These thoughts also lead to the idea that wealth creation is about leadership and the morale of the people. To maximize wealth creation, the people should be encouraged to both produce and consume at maximum rates. The best leadership is not found in "command" economies like that of the old Soviet Union. People do not respond well to forced transactions, markets that are not free, and the criminalization of saving significant amounts of money. Command economies will always create less wealth than free market economies.

Free market economies are best at creating wealth because they use natural human behaviors and desires. "If I work hard, I can save enough money to accomplish my dreams." It is easier to lead people in the direction they already want to go. Provide the people with the education, skills, and resources for both production and consumption, and they will feel that the system really is set up for them to get ahead, gaining wealth. This is positive reinforcement that will encourage wealth-producing behaviors. Superior leadership supports and invests in these things so that the system sustains itself.

Increasing the wealth of the people therefore means inspiring them to be as active as they can be at work and at play, consuming but also saving so that wealth is better distributed among the population. It seems to that the trends are in the opposite direction in the U.S. right now. The Great Recession and government policy responses destroyed a great deal of saved wealth, redistributed large quantities of the remaining wealth to the rich, and also made the people suspicious of the markets. No wonder the economy just limps along.

Nothing has really changed in our economy, so still recommends multiple exclusive currencies and markets. The cost is a lower wealth creation rate due to the required government controls over market-to-market exchanges, but the advantage is that the wealth of the poor will be better-protected. The people will not work hard and save if they are sure that they will only be cheated out of their wealth in the end.

Socialism for the socialists and capitalism for the capitalists.

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