Friday, June 4, 2010

Wealth ... How is it created? Not by the banking and finance sector!

Dear Colleagues

Throughout history there has been interesting accumulations of wealth ... look at the buildings that have been built throughout history ... or the last few thousand years at least. If the buildings are a proxy for wealth ... then a lot of wealth has been created, and the question then becomes how did this wealth come about.

The quick answer for most of history is that powerful people concentrated economic power and gained wealth ... and people with no power toiled to live and to contribute further to powerful people's wealth.

In the industrial revolution ... or was it the various political revolutions a little before ... the efforts of ordinary people resulted in ordinary people getting a little wealthier and eventually a thriving middle class. The improvements in the housing stock accessible to ordinary people during the industrial revolution was a big thing ... and still important.

All of this wealth was created by people doing things of value and ... post slavery ... being paid for it. When land, labor, technology and knowhow come together there can be great outcomes. Money helps bring these things together. Wealth can get created. This is real wealth creation.

Labor becoming more productive helped to create wealth for most of the industrial era. In the last three decades technology has become more productive and is a power for the creation of wealth. In all of history those with power and control have tried to concentrate power and concentrate wealth ... with more or less success.

Excessive concentration of economic power is, however, counterproductive. In the end poor people cannot support a rich economy ... and this is going to be a challenge for the USA unless less people are in the poor category and more are in a solid middle class.

What goes on in the banking and finance sector does nothing to create wealth ... except help to bring land, labor, technology and knowhow together. The banking and finance sector is really nothing more than "overhead" that is useful to help make it possible to make wealth doing real things.

But worse, the capital markets encourage corporate profit no matter what it is doing to society. In the typical business profit model ... poor workers are better than middle class workers ... exactly the opposite of what a prosperous society really needs!

This seems to me to be a fairly straightforward proposition. What am I missing?

Peter Burgess

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