Monday, October 24, 2011

Occupy Wall Street: Where Does Wealth Come From?

(Russ Rogers made some very cogent points in a response to my last Rumination, and I've asked him to post them in comments so I can respond to them. But before I address those points directly I want to complete a thought that I'd planned, because it's going to be very important for us to understand it in the coming discussion.)
Before we get started I need to define some terms. I need to define them because you're going to find as many different definitions for these terms as there are places to look. Since that's true, I'm not going to debate my definitions and you need to know what they are. First, something that all economists agree upon; money is not wealth. So what are they, and what is the difference between them? Money consists of tokens of value. Slips of paper, bits of metal, bytes in a computer. You cannot produce those tokens; you can merely collect them in exchange for assets of your own. Wealth, on the other hand, is the totality of your assets (things of value). This is more encompassing. It includes money, but also any assets that could be converted to money, or which may be valued more highly than money. You might say that wealth = money + potential money. Cash, property, real estate, reputation, skills, talents, and ideas all constitute wealth. Tangible forms of wealth (land, jewelry, cash) are what I refer to as real assets. Intangible forms of wealth (reputation, copyrights, patents, processes) I refer to as ideas. A third class of wealth is labor... simple effort. Because "labor" is now a politically charged word, in those places where I'd normally use it to mean "effort", I'm simply going to use "effort". I'll use Labor in the political sense, as Marx did, to mean "workers".

Socialism is based on the huge misconception that the Labor produces wealth. Not so, at least not to any great extent. It was so in pre-industrial times, where more effort equaled more product, and there are some cases, such as in some farming and mining, where it's true today, but it has not been generally true since the beginning of the industrial age. Karl Marx's economics were based on outmoded assumptions. His complaints were founded in a transitional era. And he concocted a lie. Reliance on that lie is why the Soviet Union, though they had an ideologically "fair" system where everybody gets the same slice of the jack shit they produced, never managed to produce more than jack shit.

So how is wealth created? In an industrial civilization, with few exceptions, it ain't through effort. It's through ideas. Ideas are the creation of wealth, plain and simple. There's not an appreciably bigger pie out there because people worked it into existence. There's a bigger pie because ideas are valuable. Ideas grow the pie. What Labor does is capitalize the wealth.. convert the intangible wealth to tangible assets. The more industrialized we are, the less effort is required to do that.

Here's an example, and I'm going to strip it down to a very basic act of creation so you can see exactly how it works without distraction: A single mother, broke, living in Edinburgh, Scotland, sat in a train and had a thought. There's nobody else you can ascribe it to. It was and is hers. And in so doing, J.K. Rowling literally dreamed up a billion dollars. The value of the Harry Potter books had nothing whatsoever to do with the effort she put into it. You could hire someone for a very reasonable rate to type up the whole thing, and no one would argue that the printing of the books diminishes Rowling's ownership of the material. The value entirely rests on the creative process... the Idea. That idea fueled seven novels, eight movies, a theme park, and and the industries built around them. It put thousands of people to work, and the billion dollars was just Rowling's portion of it. The total value distributed far exceeded that. But do not forget that exactly none of it would have happened without the Idea she thought up on that train.

Here you can see that it is the Idea that provides the wealth that Labor converts to money for a fee (a wage). It's not the other way around.
(I think it's intriguing that many, if not most of the people that I could hold up as examples would take exception to being used as an example in this context, even when they acknowledge that what I'm saying is true. They know they're being compensated for ideas, not effort, and I'll explore their reaction later.) 
The creative process is the most truly god-like power that can be exercised by a sentient being. It is as close to creatio ex nihilo as we can possibly get. An Idea doesn't even have to have utility to have value: it can be utilitarian invention, sure, but it can simply be entertaining, which is how rock stars and authors become rich. It can be in portrayal... the creation or re-creation of emotion, which is how Hollywood actors become rich. In terms of labor, the leading man doesn't work appreciably harder than the second fiddle, but he's not paid for his labor. He is the box-office draw; he is the reason tickets are sold.

Once upon a time, wealth was simply dug out of the ground, from gold and diamond mines, etc. But these things are not intrinsically valuable; they hold whatever value we agree upon. Wealth is only incidentally associated with effort. Jackson Pollock may not have put as much effort into his paintings as an ordinary house painter; a painting of dogs playing poker requires more technical expertise than his drip technique; yet at $140 million, Pollock's No. 5, 1948, is the most expensive painting ever sold because it embodies an idea. You can work your fingers to the bone for the entirety of your life, live like a miser, saving every spare bit of change, and never approach the value of one single idea conceived in one single moment.

Not every idea is valuable; you get paid far more for shoddy labor than you do for a shoddy idea. Sadly though, we don't get to decide whether our own ideas are good or bad. John Cleese once made an observation that the same qualities that make you hopeless at something ironically make you incapable of recognizing that you're hopeless at it. So as with anything of value, other people decide what that value actually is. We call that the free market. Really good ideas are relatively rare, and people who consistently come up with good ideas are rarer still. When you find such a person he's very likely a millionaire. Like Cleese.

To give you an understanding of the power of the Idea, oil seeping from the ground in Pennsylvania and West Virginia was simply a nuisance to salt miners until the invention of the practical internal combustion engine in the mid-1800s. Owners of oil-soaked land made fortunes practically overnight although their physical assets had not changed at all.

Now, whether you're J.K. Rowling, or Harrison Ford, or Steve Jobs, you're compensated not for your labor, but for the ideas that you bring or embody, and those ideas are directly responsible for putting people to work. The bigger the ideas, the more the disparity between what you earn and what the people around you do. Even the most Liberal corporate-hate-spewing attack dog can agree on this principle... as it applies to himself.
"I'm a millionaire, I'm a multi-millionaire. I'm filthy rich. You know why I'm a multi-millionaire? 'Cause multi-millions like what I do. That's pretty good, isn't it?"
-- Michael Moore
So why is it that some types of ideas are demonized? Why is it that an author can take home millions of dollars for a book, or an actor can take home 20 million dollars for a movie, and that's OK, but a CEO is a greedy bastard for similar compensation for bringing a similar level of success through the force of his ideas? Why is it OK for Michael Moore to live in a million-dollar upper West Side apartment in Manhattan, paid for by bitching about other rich people?

We don't teach economics in school anymore. People simply do not recognize the source of wealth, nor what the CEO's job is. They've been told that Labor creates capital, and they believe it, lock stock and barrel. Yet, when you point out something obviously creative -- like an author, or painter -- they nod and say, "oh, yes, of course!" They even defend it vigorously on "intellectual property" grounds. Many of these people are fiercely Liberal, and have no conception whatsoever of how blatantly, unapologetically, and indefensibly hypocritical they are in this regard.
(Fierce Conservatives have their own problems. By focusing entirely on the creation of wealth, they ignore important truths about the capitalization of that wealth, and they sell our future to other nations. More on that below.)

Steve Jobs was forced out of Apple Computer in 1985. Prior to that they had sizeable market share and had recently introduced the Macintosh. Without him, Apple gets run into the ground. He returns to the CEO position in 1997, and changes everything. Apple Computer becomes Apple, Inc. They go from a computer company to a consumer electronics company. They go from niche market has-beens to cool. They go from bleeding money to profitability. Steve's salary until he died was $1 per year. His compensation was purely stock, which as of last Spring was worth about $2 billion, and he earned every penny of it. How? Because all the workers at Apple combined couldn't keep them profitable. That $2 billion represents a little less than 1 percent of Apple's "public float". But Jobs' ideas are what made that float... float. They were sinking without him.

When I explained the creative aspect of the CEO using Steve Jobs as an example to a friend I was told, "yeah, but Jobs was an exception". Well, NO. He bloody well was not.

When Chrysler faced bankruptcy in the '70s, Lee Iacocca took a $1 salary and stock. It was a gamble, and his decisions turned the company around. The government did not "bail out" Chrysler; the government guaranteed loans that Chrysler obtained from others, and which they repaid in full, seven years ahead of schedule, paying the US government $350 million for the guarantee. Iacocca took that capital and made it work, hard. K-cars? Iacocca. Minivans? Iacocca. First front-wheel drive American small cars? Iacocca. Great ideas. Were there concessions by Labor? Yes, indeed. They spent many long months proposing business as usual until the government legislation required wage concessions by both union and salaried workers as a condition for the loan guarantees.

A CEO isn't hired to warm a desk while business happens all around him. And he's not there purely for analytical thought... he has analysts to help him with that. His job is in large part to be as creative as a scriptwriter or songwriter. You just don't see that aspect of most of them because they don't jump up on a public stage at Comdex.

Today I'm talking about the creation of wealth though... if you're not a miner or a farmer... and in this country you probably aren't... effort is a means to monetize wealth, but the wealth is there in the Idea. That's true of a company, and it's true of individuals. It's true when the Idea is sold as a work-for-hire (as I do with contract programming) or when ownership is retained (as with an author). It is only through the Idea that new wealth is created and the pie truly gets bigger. Without the Idea then all you're doing is shoving existing bits of paper and metal around and it truly is a zero sum game.

Remember, Labor is usually required to monetize wealth. But conversion of wealth to financial capital is not the same thing as the creation of wealth. This isn't a Republican argument or a Democrat argument; it's just how economics works. All of my examples above are Liberals.
(Keep in mind here, too, that I'm as aware as anybody that there are people who break the law and mismanage companies, etc. and who need to be prosecuted. I'm aware that people are broke. That I haven't talked about abuses and checks and balances yet doesn't mean I won't, or that I don't know of the need. But these posts get long enough as it is. In discussing the system as it should (and mostly does) work, I don't feel the need to throw everything at you at once. That would be a book, not a blog. It may take me weeks to get where I'm eventually headed with this.) 
So... if you'd read this far, some of the questions you should be asking by now are these: if wealth is created by ideas in a Capitalist society, and the Socialist experiment failed so miserably for the USSR, how come China is so filthy rich? Where did they get their wealth, except on the backs of labor? And that's a fair question.

When Russ Rogers avers that "trickled down economics" fails, he's absolutely wrong. At least some effort is required to monetize wealth. So why don't we see the trickle down effect that he insists isn't there and I insist is? Because it's not trickling down to our workers. We've outsourced our Labor, and with it we've exported the trickle-down effect. We sent it to China (and India, and Malaysia...). And all you have to do is look at the the wealth that China has accumulated to actually measure the trickle-down effect... and how badly we screw up when we don't keep manufacturing in-country, and when we allow Labor to become over-valued, making it non-competitive.

The Chinese know that the ideas come from the West. They also know the value of those ideas, and that this wealth floats all boats. They want a piece of that wealth, and have arranged to get it, artificially. So, to the West, they sell cheap effort. Because the poor in the US have gotten relatively richer, they've priced themselves out of the labor market.

But the Chinese haven't, and aren't likely to as long as Communists rule. The dirty secret is that the very same income disparity that exists here exists in China, in spades, but they're extremely good at camoflage. Their Big Idea is simple: LIE, and LIE BIG. In the People's Republic of China it's OK to be a Capitalist, so long as you wear the Communist facade.

Footprints Recruiting recruits teachers to work in China. On their website they describe a bit about the standard of living. It's not an ideological missive, but practical advice for prospective teachers who will be living there.  As you read it, know that "RMB" means Renminbi, which is the mainland Chinese currency. As you read it, note the difference between living in Western fashion vs. living "like a Chinese".

Since their income is based on the export of effort, the Chinese, in order to keep themselves competitive, artificially withhold it from the workers. Money that would have been paid directly to US workers is stopped at the top by the Chinese. They simply pretend it doesn't exist. This is not the same as money flowing naturally to the creator of wealth. In the West, each transaction, taken alone, is a reasonable exchange. You buy a book you enjoy at a price you're willing to pay; you see a movie you enjoy at a price you're willing to pay; and while there's satisfaction at every transaction, the end result is that Michael Moore leases a million-dollar penthouse near Central Park. In China, you work where they tell you, for what they allow. And what they allow isn't anywhere near even the sub-minimum student pay-rate in the U.S. The practical upshot is that the income disparity in China is worse than anywhere in the West, even though they themselves don't admit to owning squat. And should the people get uppity, the government can run some tanks down Tiananmen Square and massacre a thousand or so of them.

The Soviets were purer in their ideology. They weren't Capitalists and they didn't want to touch Western money if they could avoid it. But their own system didn't float enough boats to bring them prosperity, and Capitalism finally won. Capitalism won in China, too, though the Chinese pretend otherwise. Every capitalistic abuse leveled at Wall Street execs happens as a matter of policy in China.

So wealth, while generated by ideas, is collected on the backs of Labor... in Communism.

Another question you should be asking right now is "if it's all ideas, what about service industries? What about the guy who landscapes. What about my barber? My plumber?"

The answer to this one is simple. Not all ideas have to be unique. And the most pervasive, effective, and empowering idea is this: you don't have to get a job. You don't have to work for somebody else. The moment someone who's unemployed stops looking for a job and starts looking for work, then he's created a business, and he's created wealth. All he has to do is pick up that idea and run with it. My brother doesn't have a job... he has a business. That business employs one person... my brother. When he needs help, he pays people to help. When it's time to pay taxes, he pays. And with only a couple of very short stints working on a W2 early in his career, he's been doing that since he left school. That's not being "lucky", it's being industrious. It's seeing a need and filling it. Everyone has the ability to see a need, and it doesn't take much education to recognize that every need is an opportunity. Every time you say "Someone should...", replace it with "I could..." and suddenly you're a visionary. Replace "I could..." with "I will..." and you're an entrepeneur.
(This is why I don't mind illegal aliens. Every one of them is an entrepeneur. I have far less respect for people who COULD be working and refuse. The thing to recognize is that if you're going to have a good idea, then you're going to have it whether you're employed or not. That's how new companies come into existence, and we'll talk more about that when we discuss things like salary caps in another post.)
Being an entrepeneur is admittedly not as easy as simply working to achieve someone else's goals. But that "not as easy" aspect is why it's fair that the boss makes more money. You can't simultaneously complain that, "that's too hard for me" and ask, "why does he make more?"

A few years back I met a man from Pittsburg. I asked him what he did, and he told me he was an unemployed steel worker. I asked him how long since he'd been laid off, and he told me 15 years. FIFTEEN YEARS! He wasn't much older than I was! That's not an "unemployed steel worker", that's a bum. Which is the second most empowering idea is this: if what you're doing isn't working... if the approach just isn't achieving results... do something else.

Coming up... 

It ain't one pie, then answering some questions.


  1. You are right that people with great unique idea would naturally be a millionaire. Their thinking, different from the crowd propels them to the path of success and to the millionaire and billionaire status.

  2. I have read a lot of things on, Where does wealth come from? Wow you talk about an eye opener for me this was a renewing of thoughts and mind. As Micheal Moore wrote: I'm a millionaire,I'm a multi-millionaire. I'm filthy rich. You know why I'm a multi-millionaire? "Cause multi-millions like what I do. That's pretty good, Isn't it?" I think that's phenomenal.

    Bren-The Matriarch