What Causes Wealth? R. Ream

478 economists and social scientists be ginning with Smith have sought to discover the cause of wealth. An ex amination of the shortcomings of many common explanations for the existence of poverty offers insight into the real cause of prosperity. Overpop.ulation. One popular claim is that poverty exists because of overpopulation. It is said that countries with large populations, such as India, Bangladesh, and the People's Republic of China, suffer from poverty because production cannot possibly be great enough to feed, clothe and house adequately the millions ofpeople. If leaders could only convince their people to prac tice birth control, so the argument goes, the standard of living would begin to rise to a decent level. This explanation has shortcomWHAT CAUSES WEALTH? 479 ings. It ignores the necessity for con sidering the size of the population in relation to the area of a country. For every country of high population density that is impoverished, such as Bangladesh, relatively populous and prosperous Japan, South Korea, Taiwan, the Netherlands, Singapore and Belgium may be cited. And among the sparsely populated coun tries, the prosperous United States may be listed along with some of the poorest countries of Africa. Actual population levels, as well as popu lation densities, fail to explain why some countries are poor and others prosperous.

The poor are ulazy." Another fa miliar argument is that the poor are lazy people with low levels of intel ligence and few natural talents. This line of reasoning often takes on strong racial overtones. It also seems to be inconsistent with a number of basic facts. We have the examples of millions of supposedly inferior people who left impoverished countries, became prosperous and made tremendous scientific, cultural and material con tributions in· their adopted nations. In Wealth and Poverty, author George Gilder coneluded after studying the remarkable achievements of several Lebanese families in the Berk shires: ((Other immigrants in every American city-Cubans in Miami, Portuguese in Providence and New'ark, Filipinos in Seattle, Koreans in Washington, D.C. and New York, Vietnamese in Los Angeles, to men tion the more recent crop-have performed comparable [to the Leba nese] feats of commerce, with little help from banks or government or the profession of economics." He goes on to observe that during the sev enties, ((Ameri.ca underwent one of its prime epochs of immigration, comparable to the great floods of Irish, Italians, and Jews in the nine teenth and early twentieth centu ries. Four hundred thousand legal immigrants a year entered the country along with some eight hun dred thousand undocumented aliens, and everywhere they went they found and created jobs."

The peoples of East and West Ger many have a common ancestry and history, yet one country flourishes while the other strains under eco nomic difficulties. Likewise with the Chinese in Hong Kong and Taiwan, contrasted with their relatives and former countrymen in communist China. Compare the Ivory Coast with its neighbors. Clearly, poor people in general are not less intelligent, less talented, or inherently ill-dis posed toward work; the cause of their poverty is to be found elsewhere. Poor nations lack natural re sources. Another reason people are poor, some analysts contend, is that certain countries are not endowed 480 THE FREEMAN August with the necessary type or the proper quantity of natural resources. It is difficult to sustain this assertion, considering the fact that many of the most resource-rich countries are poverty-stricken, while many wealthy nations are less well-en dowed with resources. Examples of the former include most of the na tions in Africa and South America, while in the latter group of poorly endowed can be found Taiwan, J a pan, and most Western European countries. Even the member nations of OPEC, rich in oil, are unable to build a strong industrial base and raise the standard of living for their people to above average levels. There is more to prosperity than the mere presence of natural resources.

Prosperity causes poverty. One of the most extraordinary senti ments existing in the United States today is that high incomes and high profits are unearned or undeserved, while welfare payments are ethical and necessary for achieving ((social justice." According to this view, wealth is obtained through exploi tation or luck and therefore is pos sessed unjustly. This sentiment is the cause of tremendous suffering and poverty. It is doing more harm to the poor than any other idea that has surfaced in the past several dec ades. Furthermore, it contributes to the conflict, hatred and envy that poison our society. Derived from this sentiment is the explanation that prosperity causes poverty. As contradictory as this may seem on the surface, it is perhaps the most prevalent explanation. The creation and accumulation of wealth by some individuals causes others to be poor, so runs the theory. Poverty is the consequence of an unequal distribution of income; the prosper ity of some comes at the expense of others. The acceptance of this fal lacy has given rise to our conflict so ciety, where the haves are blamed for the conditions of the have-nots.

Feelings of guilt are often aroused in the former, while in the latter it stirs up envy and covetousness. Overall, it increases tension in soci ety. This fallacy results from a failure to understand the true nature of both poverty and prosperity. A survey of history and various cultures clearly shows that poverty is the natural state of mankind. It exists without external causes; it is just there. Wealth, on the other hand, is an achievement and requires specific conditions. Wealth will be created and the standard of living will rise only when the necessary precondi tions are present. However, under certain condi tions there is some truth to the claim that wealth causes poverty; there fore it cannot be wholly dismissed. In a closed, collectivist society, the slave owner or communist party of1981 WHAT CAUSES WEALTH? 481 ficial does indeed gain his wealth at the expense of others. The wealth of the elite comes at the expense of the slave or the proletariat, thus typify ing the theoretical model of a zero sum society in which an increase in one individual's slice of the pie causes another's to shrink. However, this zero-sum (or more probably nega tive-sum) situation applies only to stagnant systems which are based on slave labor and collectivist eco nomics. In closed societies, the slaveowner and commissar gain at the expense of others; greed, when backed by coercion, causes some to be poor.

Having stated this qualification, it must be made clear that in open, competitive economic systems, wealth and an unequal distribution of income do not cause poverty. It is a myth that the prosperity of some causes others to be poor. The United States is frequently condemned be cause with less than 5 per cent of the world's population, we consume a large portion of the world's re sources. This criticism is based on the fallacy of the fixed pie. Individ uals in the U.S. are not consuming at the expense of others; what we consume must be either produced or acquired through voluntary ex change. We do not consume goods and services that have always ex isted and which we simply grab up; we consume only what we produce, transform or acquire through free trade. In a free market economy, you cannot consume unless you first produce or exchange. The nature of wealth. Adam Smith recognized the nature and cause of wealth; it results from the development and extension of the division of labor. As Smith observed, ((It is the great multiplication of the productions of all different arts, in consequence of the division of la bour, which occasions, in a well grounded society, that universal op ulence which extends itself to the lowest ranks of the people." This market process is the source of wealth, since it brings individuals freely pursuing their own interests into voluntary cooperation with oth ers. For example, an individual who specializes in mechanics, cooper ates, perhaps unknowingly, with those specializing in physics, chem istry, meteorology, mining, steel .production, and hundreds of other fields to create travel by airplane and make it possible to fly to almost any major city in the world. It is through the division of labor, peace ful cooperation, and free exchange the market process-that wealth is created.

Writing nearly one century after Smith, Herbert Spencer also recog nized the source of wealth. In Man us. the State he observed: It is not to the State that we owe the multitudinous useful inventions from the 482 THE FREEMAN August spade to the telephone; it is not the State which made possible extended naviga tion by a developed astronomy; it was not the State which made the discoveries in physics, chemistry, and the rest, which guide modern manufacturers; it was not the State which devised the machinery for producing fabrics of every kind, for transferring men and things from place to place, and for ministering in a thou sand ways to our comforts. The world wide ~ransactions conducted in mer chants' offices, the rush of traffic filling our streets, the retail distributing sys tem which brings everything within easy reach and delivers the necessaries of life daily at our doors, are not of governmen tal origin. All these are results of the spontaneous activities of citizens, sepa rate or grouped.

The market process is the source of new wealth. It does not redistrib ute wealth to the powerful at the ex pense of others, such as in a collec tivized economy; rather, it enables new goods and services to come into the marketplace. A free market sys tem is a positive sum system. Re markably, the standard of living can rise, even though the population is increasing, because the total amount of wealth is not fixed. Transfer pay ments, on the other hand, .come at the expense of wealth creators workers, businessmen, investors, and successful entrepreneurs. Contrary to popular sentiment, high incomes and high profits are key elements of the process which generates our prosperity~ High incomes and profits are the reward a person receives for serving his fel lowmen. More specifically, profits are the reward for reducing costs and using scarce resources most effi ciently in the competition to satisfy consumer desires. By rewarding with profits those who successfully sat isfy consumer demand, the free market maximizes the incentives to create goods and services. By per mitting the accumulation of wealth, it also maximizes the amount of cap ital available to produce more. Prof its direct this capital to where it is most vitally needed in order to meet consumer demand. Even Samuel Gompers, father of the American la bor movement, recognized that ((the worst crime against working peo ples is a company which fails to op erate at a profit."

Envy, covetousness and hatred to ward those with wealth is ill-ad vised. As Ludwig von Mises pointed out in Human Action, ((The very principle of capitalist entrepreneur ship is to provide for the common man. . .. There is in the market economy no other means of acquir ing and preserving wealth than by supplying the masses in the best and cheapest way with all the goods they ask for." Evidence of this was the success of that creative genius, Thomas Edison, who fulfilled his pledge to make the light bulb~/so cheap that only the rich could afford candles. As Brian Summers com1981 WHAT CAUSES WEALTH? 483 mented in the Spring, 1981 issue of The Lincoln Review, ((It is true, ... that a few captains of industry ac cumulated great fortunes, but they became wealthy through mass pro duction of goods and services which raised the common man's standard of living." Prosperity requires liberty.

High incomes and profits, the incen tives to invest and produce, are put to work, provided they are not con fiscated by government. The motive for wanting a larger income and higher profits should not be a con.cern of economics; whether for a base reason or a high-minded objective, the only way to get more, in a free market economy, is to serve others. The way to lessen poverty is to cre ate a favorable environment for in vestment and wealth creation. In fact, when William E. Simon was Treasury Secretary, he suggested to a Senate committee that, (1f you really want to help the poor, help the rich. They're the ones who will invest, build more factories, create more jobs." The only ((help" the. rich need is the same freedom to which all men and women are entitled, the freedom to produce, to trade, and to use their property peacefully and as they choose. Ultimately, the extent of the market process is in direct re lation to the amount of freedom in society.

A free market can be restored and the division of labor extended only as barriers to saving, investment, the accumulation of wealth, and the maximization of profits are re moved, and most essentially, laws regulating or prohibiting the perfor mance of productive labor are re pealed. It will also require govern ment to perform better one of its key functions: protecting every citizen's right to own and exchange property. This fundamental human right is necessary for the production of wealth. The free market is in the interests of the poor. The alternative, the transfer system, is not humane. It locks people into poverty by destroy ing opportunities and prohibiting many kinds of productive work. The welfare state encourages depen dence, rather than self-reliance. The welfare recipient is deluded into be lieving there is such a thing as a free lunch. In a free market it is nec essary to give in order to receive; in the welfare state, the scheme is to try to live at the expense of others.

Scarcity, and therefore relative poverty, are part of the nature of this world in which we live. Histor ically, mankind has subsisted in what, by today's standards, is abject poverty. However, poverty need not be a permanent condition. It can be and has been overcome by people at various times in history. Our Pil grim Fathers overcame starvation by replacing their communal system 484 THE FREEMAN of economic organization with a pri vate property order. The experiment worked. A turnaround occurred again in Great Britain in the first half of the 19th century when Parliament replaced mercantilism with free trade policies. Standards of living rose, not just for Englishmen, but for countless individuals throughout the world. And, of course, we have evidence of what relative freedom in this country has meant for not only the American settlers but for the millions of immigrants who came to these shores, not to share the exist ing material abundance, but to share in the freedom to try to create their own. With this relative freedom a more humane and prosperous soci ety has emerged.

Perhaps the clearest statement concerning the threat we face today, and which all free people will al ways face, was expressed years ago by President Woodrow Wilson. He Edward P. Coleson observed, ((The history of liberty is a history of the limitation of govern mental power, not the increase of it. When we resist, therefore, the con centration of power, we are resisting the processes of death, because con centration of power is what always precedes the destruction of human liberties." This astute comment can be aptly rephrased to inelude the concepts of poverty and prosperity, for concentration of governmental power and poverty go hand-in-hand, while human liberty and prosperity have always accompanied each other. Regardless of the sincerity of the in tentions, to restrict freedom in the name of helping the poor is to en gage in a destructive endeavor. The creative way to help the needy is to secure the freedom for individuals to pursue their interests voluntarily and peacefully. In such pursuit, free men will bring about an expanding economy, unlimited opportunity, and enduring prosperity. , IDEAS ON LIBERTY To HAVE LIVED in some remote Unative" village long enough to know how their social curbs on progress operate is to understand why the best laid plans of economic development schemes have a way of failing utterly.

Without freedom to achieve and without a measure of security for life and property, aid is useless; and with freedom, it is unnecessary. Any enterprising investor is happy to put his money into a going concern and nothing succeeds like success. But the rigidities of a managed econ omy stifle initiative and scare off venture capital, keeping the depressed area stagnant and backward. Only a rich country can afford the eco nomic interventions of socialism-and they can't afford it for long.