Saturday, March 31, 2012

The Wisdom of Our Fathers part 3

I was going to title this essay "On Wealth". But I felt that is way too pretentious. I thought of a quote that better framed my thoughts. "Build a better mousetrap and the world will beat a path to your door." That quote, in a much more complicated wording, has been attributed to Ralph Waldo Emerson.  What it demonstrates is how wealth is created. A number of uncounted decades ago the elected geniuses that run our country decided that no American should dirty his or her hands. Everyone must go to college and get a degree. The great new idea was that the United States should be a service economy. To understand where this idea was born you must understand something about politicians. Particularly those on the national level. They are all geniuses. If you do not believe me, just ask them. Although most of them do not know what door to go through to take an economics course but they are all experts in the subject.

Actually what most politicians know is that John Maynard Keynes said something about government spending being a good thing. That's enough economics for them. There wasn't even a final exam. Keynes held that free markets were insufficient to support a modern economy and government deficit spending was necessary. Truth be told, many modern economic theorists accept this in small amounts to tweak a slow economy. Bankrupting a country by insane levels of spending with no controls goes so far outside of Keynesian economics that John Maynard himself would shrink in horror.

But getting back to the creation of wealth. A service economy does not create wealth. It merely moves wealth around. As wealth is moved around the government always siphons off a little for the "Greater Good" ie. giving politicians a chunk of your money to spend as they see fit. Governments cannot create wealth. Those printing presses in the mint do not, have not, and never will create wealth. At any given point in time the country, like a business, has a certain value. When the government prints money it is a representation of that value. The more money they print the less each one is as a share of the total value. So the value of the dollar shrinks, as it is doing now. If a company doubles the shares of their stock each share is worth half as much. Same deal.

When a person buys an item no wealth is created. The buyer receives something he values. The seller receives money. Even swap.  I challenge anyone to find creation of wealth in a service economy.

Ok, so how is wealth created? There are two tools to create wealth. Those are brains and brawn. If someone has an idea for a great new computer program and generates the code for it, then sells it on the free market, they have created wealth. New value exists where none existed before. If you go out into the mountains with a pick and a mule and discover gold, you have  created wealth. Drilling for oil creates wealth. Taking raw material and using it to manufacture a durable product produces wealth, as it increases the intrinsic value of that raw material. Farming produces wealth.

When the powers that be decided to support a service economy they increased taxes and regulations on the economy that gave this country the freedom and strength to endure. The creation of wealth is a messy business. Holes need to be dug in the ground. Chemicals need to be used. Large quantities of power are required. It would be lovely if the whole country were one great big park. But to have a balanced economy sacrifices must be made. Advancements in technology will help to mitigate the problems created in manufacturing. But if we are to survive as a nation, we must create wealth not deplete it.

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