By Jared Miller
We have already explored the idea that wealth is all of the things that money does, and isn’t necessarily money itself. That’s a pretty good foundation. But we still need to expand it further. Maybe a better definition is, “Wealth is all of the things that money does, AND the economic growth that the accumulation of money represents.”
I mentioned in part one that our exaggerated revulsion towards inequality depends on the ideas that the amount of wealth is fixed, and that wealth equals money. Since we’ve already covered the latter, I want to address the idea of fixed wealth by first examining “The paradox of thrift.” The idea is that the more people save, the less money there is in the economy. Less money in the economy means less economic activity, which means people lose jobs and businesses close. In times of economic distress, someone might be able to make the case that this is a genuine concern. But as a truism for all economic activity, it’s complete nonsense.
Maybe that’s a little unfair. Maybe it’s more accurate to say it is the result of another misunderstanding brought about by the use of currency. Once again, it’s much easier to understand the true nature of things without using money. Without proper understanding of wealth, talking about money just muddies the waters.
Let’s say a farmer can produce about a bushel a month: enough to buy about a month’s worth of beef. In this scenario, the economy is in complete equilibrium. It is neither growing nor shrinking, and there is no profit to be had as both parties are simply meeting their basic needs.
If the farmer comes up with a new technique whereby he is able to increase his yield to 2 bushels of grain, he is now building capital (profit) to the tune of 1 bushel per month. In our economy, he would sell this grain for a certain amount of money, but this makes no difference. He now has a surplus of capital to be used for a variety of means.
He could trade for some fruit or some new clothes, or use it to further improve his farm with a plow, or some land, or by paying a farm hand. Or he could save it at absolutely no expense to the rest of the economy. And that’s the most important part.
He has more because he produced more, not because he took it from someone else. If he were to trade the extra production, everyone would benefit from that additional wealth. But if he does not trade it, nobody is worse off. In the modern world, we are one step removed from the appearance of this, but we are not removed from its reality.
To understand, it needs to be completely clear that the word “profit” is not the vomit-inducing, greed-ridden, class warfare cliche that it’s made out to be. As long as it is not earned through fraud or exploitation, profit is good. It is growth. It is the numerical representation of exactly how far societal wealth has expanded — Not shifted, expanded. Profit means that everyone is wealthier, not just the person who earns it. (One might still try to argue that workers must be exploited for profit to exist at all, but that is a topic for another time. If I were to get into that here, this would be so long that nobody would read it.)
The same is true for personal wages, even though it doesn’t feel that way. Income (revenue) minus expenses still equals profit or loss. Profit in this case refers to the amount of value you have added through your labor that is above what you need to live. Like the farmer’s grain, this excess is not a drag on the economy. And increasing it by eliminating expenditures (reducing your consumption of limited resources) is also good for the economy.
Yes, it looks like the economy is shrinking because you aren’t consuming as much stuff. Activity slows down, but consumption of resources is by definition the destruction of wealth. It is absolutely true that businesses and systems that depend on constant consumption will suffer from an increase in thrift. But shifting our habits away from consumption is the best way to ensure both economic stability AND more general distribution of wealth. After all, who suffers most from lack of thrift? Is it the wealthy, or the rest of us? Who benefits most from a throwaway, consumptive mentality?
Increasing production and reducing waste, or more plainly, creating more than you consume: that is the definition of economic growth — not how much money is flying around. The only arguments against this fact result from an unfortunate preoccupation with money, or the immediate effects of personal decision making. When the extended consequences are considered, everyone eventually benefits.
There’s one more characteristic of profit we need to address in order to understand how this relates to inequality. Probably the most important function of profit is as a bat signal to entrepreneurs. High profits are the most clear way to say, “This model works! People want this! You can make money here!” The higher the profits, the brighter the bat signal. As new people copy the success of the first guy, competition forces profit margins to decrease as each competitor fights for a bigger piece of the pie. More new methods develop, efficiency increases, and labor and price are both reduced dramatically over time.
This happens because people see opportunity, and are allowed to pursue it to the best of their ability. But when something happens to limit the ability for new businesses to try their luck, success remains concentrated. The wealth gap grows. Usually, but not always, this happens when often well-meaning restrictions make it too costly for new players to face off with existing ones.
Therefore, if there is an arena where wealth concentration must be fought first, it is the addition of obstacles to entrepreneurial activity, and the reduction of competition by artificial means. That includes an element of personal responsibility for poor financial choices. People like you and me could become entrepreneurs ourselves, or at least stop squandering our own capital for the benefit of the elite. This may be the most important way to battle inequality, because it’s the only arena within which you personally have control.
Shift your definition of wealth. Learn to manage your finances wisely. If you’ve got the stomach for it, act entrepreneurially. Learn patience and stop borrowing money. Then maybe one day your success could contribute to reducing inequality.
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