Wealth Creation

In the past few months we have seen an unprecedented profusion of bailouts, stimuli, rescues, tax proposals, on and on, attempting or pretending to deal with the economic “crisis.” All this talk can get confusing if we don’t have a basic framework of principles to provide a context for understanding the real agendas behind these actions and for predicting their likely results.

A few weeks ago I wrote on Supply and Demand, using healthcare as an example. Today’s posting will focus on wealth creation.

Wealth creation: Wealth is created by producing some product or service that someone is willing to pay for. Government does not create wealth because it does not produce anything: it consumes wealth. Societies are willing to allocate part of their wealth to government because a proper government can provide the environment in which wealth can be created. That environment includes national security, a stable currency, protection of property rights, contract enforcement and individual liberty.

When the government controls everything and denies people the right and opportunity to create wealth, like the former U.S.S.R., the country goes broke because it does not produce anything that anyone else wants to buy. That is why China, while still a one-party dictatorship, has abandoned communist socialism and created a thriving, market based economy. It is why Cuba, no longer surviving on Soviet subsidies, has been cutting deals with foreign investors to develop its tourism industry. It is why North Korea sells the only thing it has, nuclear technology, to our enemies while we feed its starving people.

Only the private sector, businesses and individuals, creates wealth. As Adam Smith wrote 200+ years ago, they do it, not for the benefit of others, but in pursuit their own self interests. Put another way, in a capitalist, free market system, the only way you can prosper is to help to produce something that provides value to others.

Over the last 75 years our Government has morphed into, primarily, a wealth redistribution machine. The current bunch of radicals promises to take this function to even greater extremes, which brings us to the next installments subject, The Role of Incentives.

PS: I’ve been goofing off lately, but I promise to be more disciplined in the future.