produce significantly less.
Somewhere around 4,000 B.C. Egypt became the first nation to emerge from the ancient world. Blessed with the Nile’s gift of fertile land, Egyptians were the most prosperous people in the world.
Prosperity is a relative concept. In ancient Egypt it meant you had a job (forced labor), sufficient food to sustain yourself and your family, and you were relatively secure from external threats. You and your extended family also lived in the same mud-brick house.
In spite of having a head start on every other nation, Egypt is no longer a rich country. In 2015, the living standard of Egypt’s workers was 13% below the world’s average.
For over a century the United States had the largest economy in the world in terms of the creation of goods and services. In 2014, China passed the US in terms of overall output and has continued to move ahead. While China’s economy is currently the largest in the world, China isn’t wealthy. It is, at best, a middle class country.
Of all the world’s largest countries, the United States is by far the most productive in terms of providing its people with the greatest amount of goods and services. As a result, its people enjoy the world’s highest living standards. However, the United States isn’t the most productive nation. In 2015 Singapore’s workers produced $85,000 of output per person, well above the $56,000 of the United States. Moreover, while the productivity of certain other countries has recently increased, there are indications productivity in the United States is no longer increasing. From the standpoint of people, changes in a nation’s economic condition can be even more important than the level.
There has always been a dynamic ebb and flow of wealth among nations. This ebb and flow provides hope for every nation seeking to enhance the wealth of its citizens. It also provides a warning to successful nations not to take prosperity for granted.
While it takes many generations for a nation to achieve wealth, it can take less than a generation to lose it. Each nation’s destiny depends on the ability of its citizens to recognize and embrace the forces that contribute to the original creation of wealth.
The Wealth Creating Process
Golden Rule for prosperity: The best way to become rich is to serve others
There is a fundamental principle behind the creation of wealth—you receive in proportion to what you give. This is as true for an individual as it is for a nation.
Workers who acquire above-average skills, and put forth above-average effort, tend to receive above-average earnings. In doing so, they make above-average contributions to their nation’s wealth.
People who run successful businesses receive the greatest rewards when their businesses are the most effective at providing the things others want. Those who have the discipline to postpone spending and save for the future build their own wealth, while their savings provide the funds necessary for investments in future growth.
While some people attribute individual wealth accumulation to “luck”; the assertion is generally a convenient excuse for a perceived lack of success on the part of the person making the assertion. Luck may play a role in the accumulation of wealth in a few isolated instances. In the vast majority of success stories, wise choices, dedication, and staying power play a decisive role in the outcome.
Many economists have a naive view of the wealth-creation process. Some claim government spending increases a nation’s wealth. Still others believe wealth creation is a natural process that occurs amid periodic outbursts of innovations and technological advancements. As we will see in subsequent chapters, the evidence shows neither view is correct.
While government is essential to providing the proper environment for creating wealth, all wealth is created in the private sector. Every dollar government spends is a dollar that was first earned in the private sector. The spending power associated with those dollars is transferred from those who earned it to government.
In most cases the transfer is direct. Government takes the money by taxing the person creating wealth. The transfer from the private sector to government is indirect when government borrows funds from the private sector to support its spending. As with a tax, the funds the government borrows were first earned by those in the private sector. Public spending itself can be indirect; as it is when government orders the private sector to use the funds it earns to comply with certain laws and regulations.
Since all wealth is created in the private sector, it should be apparent governments cannot provide for the original creation of wealth. Government’s role is to create the right environment to maximize the wealth-creating forces in the private sector.
For government to make a positive contribution to the creation of wealth, it must spend its funds in a more productive manner than if the funds had been left for use in the private sector. This can happen when government spends to provide for public safety, for a just and efficient legal system as well as other crucial public services. However, without the discipline imposed by a system of profits and losses, there is a strong tendency for government spending to be less efficient than private spending. This is why government-run businesses destroy wealth instead of enhancing it. This is the case whether the example consists of factories run by the old Soviet Union or by China, or Mexico’s oil company or the Postal Service in the United States. Government-run businesses tend to deplete a nation’s wealth.
The reason for emphasizing the role of the private sector as the original source of all income is not to denigrate the role of government. It is to recognize explicitly the natural constraints on government spending and power. Without the creation of income in the private sector, the public sector cannot exist. Hence, the more government expands its power by reaching deeper into the private sector for its funding, the more government limits the creation of wealth. And the less wealth it can redistribute, the less effective government becomes at achieving its objectives.
The key to the process of creating wealth is to identify the type of system or organization best able to turn innovations into goods and services valued by consumers. Every country in the world has innovators with clever ideas on how to better serve the needs of others. Ideas are the easy part. Turning ideas into reality is the real challenge.
The creation of wealth is an immensely complex process. Many things must come together to fully realize the benefits of innovations and new technologies. Funds are necessary to begin to implement the ideas. Skilled managers need to be brought on to organize the process. Talented, industrious workers have to be hired. There must be a system to provide information about the most efficient uses of various resources for implementing innovations. The system also must be able to assure all necessary resources to complete the project are always in the right place, at the right time and at the right price.
These are daunting tasks, far beyond the talents of any individual or bureaucracy. While new technologies and innovations play a role in increasing wealth, it should be obvious much more is involved. Classical economists explained why a free-market system providing the maximum amount of individual freedom was best able to maximize the wealth-creating process.
For most of recorded history neither individual freedom nor free markets existed. As a consequence, in spite of numerous innovations, living standards were essentially unchanged from the birth of Christ until the latter part of the Middle Ages. It wasn’t until around the 14th and 15th centuries that the first glimmers of freedom began to appear in Europe. As individual freedom emerged, so did the first increases in living standards. At first, this relationship appeared tenuous. As subsequent chapters will show, there is substantial evidence to show how individual freedom and free markets are the motivating force—the wellspring—of the wealth of nations.
