What kinds of societies create wealth? What kinds destroy it?

There are some activities that are positive sum activities. That is, they are productive. They increase the total of real wealth in a society.

There are other activities that are zero sum activities…or even negative sum activities. War, for example. Excess legal wrangling. Paperwork. Too much time spent in schools. Too much support for the unemployed, the malingerers and the loafers. These things decrease the total of real wealth in a society.

Sometimes people are bright, honest and hardworking. Sometimes they are lazy, shiftless and cunning. They always prefer to get wealth and status by the easiest means possible. In some societies, the best way is by working hard. In others, it is by being clever…becoming a lawyer…a banker…or a government hack.

A new society…or a fresh economy (such as one that has just been flattened by war or hyperinflation)…or a new model for an economy…is generally a wealth-creating society.

A free society is also generally a wealth creating society. People do what they want. If they want wealth, they are free to create it.

But as societies (or economies) age, they become decadent, arthritic, and backward-looking. They shift from wealth creating to wealth shuffling…and then to wealth destroying. They evolve into societies that are more concerned with redistributing wealth than with creating it…more focused on the appearance of wealth creation than with the real thing.

People shift with their societies. When hard work and creativity pays off…they become hardworking and creative. When connections and corruption pays, they are up to the job.

That is true in almost all aspects of the society. Education, for example. In a new or free society people turn to education because they want to learn useful skills…or for the pure love of learning and contemplation. In decadent societies they covet degrees and diplomas – often in such drivel as “communications” and “political science,” not to mention “gender studies” – and count on the paper to get them a cushy job where they don’t really have to do anything. Since everyone believes “education” is such a good thing, there is little resistance to further spending by government and parents – even though the threshold of declining marginal utility for this type of education may have been passed long ago.

This is also true of military spending. A little military spending may be a good thing – it protects the society from outside predators. But “defense” spending soon becomes totemic. Eventually, the decadent state is realizing a net negative return. The private entrepreneur switches from producing work boots at a 10% margin to furnishing the Pentagon with combat boots at a 20% margin. Not only is the productive economy squeezed to support the defense establishment, the over-financed military itself increases the odds of attack by foreign powers…and decreases the real defensive position of the society.

Then, of course, there is the government itself. As Jefferson pointed out, a little of it may be a “necessary evil,” but a lot of it is unnecessary, expensive, and a nuisance. Government does not create wealth. Governments shuffle wealth and stymie it. So, the more government you have, the less wealth-creation you have.

Right now, America is beginning a transition. It is an old, decadent society…headed for bankruptcy…and trying to find a new model. One of the elements of that new model is lower wages. People who thought they should earn $100,000 a year because they have a masters degree are finding that their services are really only worth $9 an hour. More generally, people in the advanced, decadent societies – who are accustomed to earning 10 times as much as a person in China, India or Brazil – look over their shoulders and see the foreigners gaining on them. Americans’ real wages, for example, are likely to be stagnant or falling for many years. Meanwhile wages in emerging markets are likely to double every 10 years or so.

The latest figures from the US show national income still increasing at about 1.5% per year. Nominally. Before inflation. Adjust for the increased cost of energy and food (both of which are moving up fast…some setting new record highs) and the real income of the typical family in the US is actually falling.

Tomorrow, we’ll talk about the role of the Federal Reserve…the banks…and the financial industry…

Stay tuned.

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