The most common form of wealth in a static system comes from redistribution of existing wealth, often inheritance or theft/seizure. Where there is growth wealth creation comes from innovative new companies.
It is worthwhile to review what we have already
seen in Personal Economics
For an individual for a period of time:
Income (I) minus Expenses (E) =
Savings (S)
or
I – E = S
Because one has Income and Expenses for a
specific time this relationship is period dependent. A month is a good baseline
to consider as rent or housing costs are often monthly. Rent is only part of
expenses. One must eat so food costs over the period must be considered.
E = sum of all costs for the period (rent,
food, utility bills, transportation, credit card payments, taxes, gambling
losses, etc.)
I = some of all inflow of cash for the period
(wages/salary, investment income like interest, dividends, or the collection of
rents for property owned, money your Granny gave you, government payments,
gambling wins, etc.)
S= the left-over income if you spend less
than you make i.e. I – E. If Expenses are larger than Income, then S is negative,
and you are in debt.
All of these are period dependent. We used a
month, but there is a longer-term effect. If I -E = positive S one can use the
S in another period, and it is part of I. If it persists positively your
savings will grow. If it persists negatively your debt will grow.
Income is a flow concept – it happens over time, for example how much you earn from your
labor, investments, inheritance, gambling wins, theft…
Wealth is a static snapshot concept but changes over time as one makes or loses wealth (W). It is effectively the sum of all one’s Savings over time or
W = ∑ S
There are essentially two ways to
acquire wealth.
1) In a growing system, one is to
be the first to find it or create it. (innovation,
luck or labor is the key)
2) In a static system the other
is to create a surplus of savings over time or steal it.
(work, planning and power is the key)
This is one of
the key concepts that make humans strive to labor effectively, be innovative
and/ or be powerful.
Intelligence,
training and luck are often involved. The biggest lottery in the world is where
and to whom you were born.
A) If you are born in a highly developed
country to well-off, educated parents/family who care about your development,
and you are healthy you mostly won the first lottery. (Recall Maslow hierarchy,
your basic needs are covered, and you can move on to self-actualization)
B) If you are born in a lesser developed
country to poor, uneducated parents/family who don’t care about your development,
and you are unhealthy, you mostly lose the first lottery. (Recall Maslow hierarchy,
your basic needs are NOT covered, and you need to survive.)
A and B are extremes
but hopefully you get the point that starting positions are important but NOT
the only factors in determining economic wellbeing. The closer to A, one can focus on moving
forward to self-actualization.
Pulling other
topics together “Uncertainty and Risk” brings probability into actions. The
birth lottery is the opening condition, others include training (education), intelligence
(all of them IQ, EQ (Emotional/Interpersonal), Linguistic, Mathematical, Spatial,
Musical, Self-Awareness, Naturalist,) physical ability/attractiveness,
opportunity, having goals with planning, hard work, time management, health, adaptability,
support system, positive attitude and LUCK.
The result:
there emerges from any group of people those who are innovators and/or leaders.
Innovators can conceptualize alternative means of doing things differently and potentially
better. Innovators may not have the ability to motivate the group to change. It
will likely take several individuals. Consider a start up firm. They need the
idea, then often production, sales, marketing, dealing with regulation… all the
stuff of commercial enterprise, in short, a TEAM. The TEAM will decide what
gets done and how much everyone gets compensated. The Innovator may well be the
driving force, but it is likely there is a leader (CEO) who directs everything,
including the innovation. The right team members in the right roles are
critical. Trust and respect between team members will fuel the success or
failure. This initial TEAM starts out with the most power, but they may have to
cede some of it to investors who get a “piece of the action” for their investment
and other critical additional team members. There will be an ongoing dynamic as
successes and failures evolve. Whoever controls the TEAM at critical points of
development could become VERY RICH.
Why?
There exists a
labor market in most economies. Compensation levels are established for nearly
every occupation from manual laborer to lawyer, to manager, etc. which will
specify a range of compensation. That is the starting point. This start up will
likely have limited resources so they include “piece of the action” as
compensation for less income up front. The value of each member of the team
becomes more apparent to the success of the TEAM so an informal calibration takes
place. The dynamic here is to be valuable to the TEAM and keep close enough to
the decision power. Ability alone is unlikely to ensure “fair” compensation
(whatever that means!). Each individual and the investors will likely overestimate
their individual value. For example, the innovator will see himself as the only
reason the venture started and hence continued. Tension can and has destroyed what
otherwise would be prosperous companies. Assuming the process can be managed to
a successful level, a great deal of value could be created where none existed
before. Billion-dollar companies can be created with million and billionaires.
Forget about
the wages associated with the labor that was used, there now is a new company
that is worth many times that. The finding of new previously undiscovered resources,
like oil, mining, etc. works similarly and may be less complicated to imagine. The
distribution of that wealth now is in the hands of the TEAM and how it evolved.
Throughout
history there have been “revolutions” that have created growth opportunities. About
10,000 years ago the agricultural revolution allowed for greater food supply
that fueled civilization. The Renaissance fueled new ideas, inventions and
discovery of undiscover or imagined worlds to the existing dominant
civilizations (and often the detriment to the indigenous people, remember Pizarro and the Incas).
The Industrial Revolution in the mid/late 18th and especially in the
early to mid-19th centuries revolutionized production, transportation,
communication, finance and urbanization. The information/tech revolution is
ongoing to the present.
There is much
more to discuss, such as the difference between a growth economy (innovative –
do more with less resources/cost, an example is mechanizing agriculture) and a
static economy (think the Middle Ages, raising crops in a traditional manner). Being
less than wildly successful can still produce good, solid sustainable value and
worth. Almost nothing is a purely static or growth economy. Components of both
exist.
Frankly, some
commentary from readers would be helpful as to what in this blog they have
found useful or not.
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