The Ultimate Source of Wealth; C. Dykes

Charles Dykes The Ultimate Source of Wealth "Is Saudi Arabia rich? Is Mecca Muslim? one might respond."1 With this seemingly trivial question, George Gilder introduces a subject of profound importance: the nature of wealth. And when Gilder points to history as showing that "the most prosperous countries-from Phoeni cia to Venice, from England to Ja pan, from Hong Kong to Singapore have been domains rich not in 'nat ural resources' but in human free dom and rights to propertY,"2 he opens up an even more profound matter: the source of wealth. What, then is "wealth"? For the economist, wealth is anything hav ing economic value measurable in price. For most people, wealth means great amounts of worldly possesMr. Dykes is a businessman, freelance writer and en thusiastic advocate of the free market. sions. For nearly everyone, wealth is synonymous with money. From the perspective of history, however, it is instructive to note that money has not always been the chief symbol of wealth as it is today. The concept of wealth has varied in dif ferent periods of history. For exam ple, wealth in the medieval era was not thought of primarily as the pos session of large amounts of money or material possessions, but in having power over other people. Still later, wealth came to mean the ownership of large tracts of land and great houses.

The Industrial Revolution again transformed the idea of wealth. Wealth no longer was viewed pri marily as the possession of landed property, but the ownership of the means of production-e.g., factories, 479 480 THE FREEMAN August looms, mines, railroads. Then insid iously, over the last 150 years, the idea of wealth has changed from the ownership of the means of produc tion to the possession of money. Is Saudi Arabia rich? She is, if "rich" means money. But is Saudi Arabia wealthy? Warren Brookes re marks "that most, if not all, of the economic mistakes we have made (and continue to make) over the last generation have resulted from a fun damental misconception about the nature of substance or wealth," and insists that if our economy is to be re-established on a sound basis we must have "a more correct under standing ofwhat wealth really is and (perhaps more important) what it is not."3 Adam Smith YS. Karl Marx Among economic thinkers over the past 200 years, there have been two dominant schools of thought on the nature of wealth. According to men like Adam Smith and J.B. Say, wealth is primarily a matter of the human spirit, "the result of ideas, imagination, innovation, and indi vidual creativity, and is therefore, relatively speaking, unlimited, sus ceptible to great growth and devel opment." The other dominant school, represented by such men as Thomas Malthus and Karl Marx, believes "wealth is essentially and primarily physical and therefore ultimately finite."4 George Gilder makes clear his con viction that wealth is basically a product of the human spirit and not of natural resources. He ar gues, moreover, that "riches" -i.e., money-is not the same thing as wealth. "Wealth consists," he writes with reference to Saudi Arabia, "in assets that promise a future stream of income. The flows of oil money do not become an enduring asset of the nation until they can be converted into a stock of remunerative capi tal-industries, ports, roads, schools, and working skills-that offer a fu ture flow of support when the 9il runs out." In the 16th century Spain became "rich" much like Saudi Ara bia, flooded by money in the form of silver from the mines of its colonies in Latin America. "But Spain failed to achieve wealth, and soon fell back into its previous doldrums, while in dustry triumphed in apparently poorer parts of Europe" [My empha sisl. Gilder is certain the oil-rich na tions of today will achieve wealth when they "transform the transitory streams of income from oil into cap ital goods at home with a yield for the future."5 Is wealth, then, "the consequence, possessed by the oil rich lands ... , or the cause, mani fested for centuries, for example, by relatively barren islands like Japan and Great Britain, and now by Hong Kong and Taiwan?"8 One cannot undertake a serious examination of the subject of wealth 1985 THE ULTIMATE SOURCE OF WEALTH 481 without at the same time clearly un derstanding what economists call capital. While wealth and capital can be distinguished, they cannot be sep arated. Capital is a form of wealth.

It is a unique form of wealth, how ever, in that its function is the pro duction of additional wealth. Capital is wealth in the form of tools or re sources which are employed to gen erate a greater quantity or quality of various kinds of wealth. Productive, Static, Transcendental and Human Capital It is possible, in the context of the United States in the waning years of the 20th century, to distinguish at least four kinds of capital. The first, productive capital, is the conven tional form-Le., any tool or resource used to create additional goods or services for sale in the marketplace, for example, seed corn used to pro duce corn, a carpenter's tool chest, a writer's typewriter. Productive cap·' ital is usually capable of being mea·, sured in terms of monetary value. Second, there are those who speak of static capital. It differs from pro·· ductive capital in that, while it has tangible value, it is not employed in the production of additional wealth; for example, a diamond, or a rare stamp.

Third, it is possible to speak of a new kind of wealth which is not cap·· ital at all in the usual sense, some thing called transcendental capital.7 This new form of capital is a product ofpolitical or legal coercion by which an individual or a group "enjoys re turns on the capital owned by some one else."8 There is the taxation of the productive and provident for the purpose of subsidizing through gov ernment transfers the lazy and im provident. Politics in our time has become as powerful a means of achieving personal wealth as inno vation and productivity; and that means is the possession of transcen dental capital claims. Fourth, in the free world "the ma jor productive resource is personal productive capacity-what econo mists call 'human capital."'9 Human capital includes things like charac ter, knowledge, skills, creativity, health, imagination and liberty. Mi chael Novak rightly protests that when the classical economists dis cussed "the components of economic wealth-land, rents, capital, and la bor-they nearly always overlook the most important ingredient: practical intelligence and the organization of personal life." "The cause of wealth," Novak believes, "lies more in the human spirit than in mat ter."10 While productive or physical capital increases the productive ca pacity of a people by putting the tools or resources with which to work in their hands, human capital makes possible more efficient tools, or su perior resources, and organizes more effective means of utilizing both 482 THE FREEMAN August physical and human capital to achieve desired ends.

Thomas Sowell argues that human capital is ultimately decisive for the economic performance of a nation or people. Throughout history men have seen the destruction of their physical wealth by war, persecution or natural catastrophe, but armed with substantial human capital they not only have survived but regained their former prosperity. It was hu man capital, not natural resources or luck, which enabled Germany and Japan to emerge from the rubble of World War II to become the eco nomic powers they are today. The same is true of Chinese immigrants who left their homeland and arrived in new lands impoverished and un educated. In these new lands they have frequently been victims of per secution and have often been ex cluded from occupations deemed de sirable by the host country's majority. Yet almost everywhere, they have ended up achieving aston ishing economic success. Capital Deteriorates "Visible physical capital-facto ries, power dams, oil refineries-is always in a process of deteriora tion," writes Sowell, "whether at a slower or a faster rate. Financial as sets likewise are constantly being consumed in order to live. Wealth in both forms will have to be replaced, even in the normal course of events.

What war or expropriation does is to speed up this process of wealth's ex haustion and its need for replenish ing. But the real source of wealth in both normal and abnormal times is the ability to produce-human capi tal-not the inventory of goods, equipment, or paper assets in exis tence at a given time."ll The person or people possessed of substantial human capital is char acterized by a strong future-orien tation. That is, they are willing to delay present satisfaction in order to enable either themselves, their chil dren, or someone else to enjoy greater satisfactions at some later time. The future-oriented father is concerned to develop his children's potentialities to the full, and toward this end he stresses the values of hard work, self-discipline, initiative, honesty and unselfishness. Living in the Present By contrast, the present-oriented person "lives from moment to mo ment ... things happen to him, he does not make them happen. Im pulse governs his behavior, either because he cannot discipline himself to sacrifice a present for a future sat isfaction or because he has no sense of the future. He is therefore radi cally improvident: whatever he can not consume immediately he consid ers valueless."12 Family life and the rearing of chil dren are crucial arenas for human 1985 THE ULTIMATE SOURCE OF WEALTH 483 capitalization. "Human capital/,' writes Victor Fuchs in this context, "refers to the development in the child of a healthy body and mind, general and specific skills, and other qualities that will help determine how well the child will fare later in life. The development of these traits typically requires investment by par ents and society-that is, an expen diture of resources when the child is young in the expectation of a return to the child, parents, and society when the child matures."13 EconomicProgress Economic achievement and prog ress, thus, depends largely on hu man aptitudes and attitudes, and upon the political, social and eco nomic institutions and arrange ments which derive therefrom.

Alexis de Tocqueville, in his book Journeys to England and Ireland (1833) sums up in a powerful state ment the transcendent importance of human capital for the life of na tions and individuals. He writes, "Looking at the turn given to the hu man spirit in England by political life; seeing the Englishman, certain of the support of his laws, relying on himself and unaware of any obstacle except the limit of his own powers, acting without constraint; seeing him, inspired by the sense that he can do anything, look restlessly at what now is, always in search of the best; seeing him like that, I am in no hurry to inquire whether nature has scooped out ports for him, and given him coal and iron. The reason for his commercial prosperity is not there at all: it is in himself." f) -FOOTNOTESlGeorge Gilder, Wealth and Poverty (New York: Basic Books, 1981), p. 47. 2George Gilder, National Review, "The Dis ease of Government," December 31, 1980, p.

1569. 3Warren T. Brookes, The Economy in Mind (New York: Universe Books, 1982), p. 12. 4Ibid. 5George Gilder, Wealth and Poverty, p. 48. 6Ibid., p. 49. 7James Dale Davidson, The Squeeze (New York: Summit Books, 1980), p. 4l. 6Ibid., p. 43. 9Milton and Rose Friedman, Free to Choose (New York and London: Harcourt Brace Jova novich, 1980), p. 2l. lOMichael Novak, The Spirit of Democratic Capitalism (New York: Simon and Schuster, 1982), pp. 102-103. llThomas Sowell, The Economics and Politics of Race (New York: William Morrow and Com pany, Inc., 1983), p. 249. 12Edward C. Banfield, The Unheavenly City (Boston: Little, Brown and Company, 1968, 1970), p. 53. 13VictorR. Fuchs, How We Live (Cambridge: Harvard University Press, 1983), p. 52.