Wealth: Where Does It Come From?

“Large profits are an inherent proof of dysfunctional market economies.”
— Adam Smith

“We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can’t have both.”

– Louis D. Brandeis, American Judge

When Mark Zuckerberg was still young, his well-to-do dentist father taught him computer programming. As he grew up, he started writing software for games, helped by some of his artist friends. Then he went to Harvard University, where he designed a social network platform, which is presently worth Rs. 74 lakh crores (US$1000B) of which Zuckerberg personally owns about Rs. 7.4 lakh crores. Just to put things in perspective, this is roughly the amount the Indian government spends on education in an entire year.

In 2020, Facebook made US $1.2B annual sales in India, as per filings with the Registrar of Companies. This sale came by virtue of advertisements that Indian citizens watched on Facebook and Instagram platform, while sharing their pictures and other private activities, for which Indian corporates and small and micro businesses paid huge sums. In any economic activity, there is something called input which provides another thing called output (which also contains a thing called profit). Input is what you pay for, and output is what you get paid for. This is what we are taught at the level of high school economics. Strangely, in the case of Facebook, this input is being provided for free by its users. Not only are they providing content, but they are also paying for internet charges to go online to supply Facebook with free inputs. This is like asking your employees to work for free but also pay the cost of transport to the office. Smart business indeed.

How is Wealth Created?

Seemingly, the earth is endowed with many resources (such as iron ore) lying buried underground. Clever businesspeople add value to these resources by extracting them for use in industrial processes and converting them (into steel) which is used in making cars and constructing buildings that contribute to progress and prosperity. Thanks to the invisible hand of markets and the efforts of capital providers, this “value add” creates wealth in the form of rising GDP and the creation of jobs. This wealth finally “trickles down” to ordinary people”.

The accepted wisdom is that in the beginning, everyone was equally wealthy (or equally poor). The process of wealth creation started with ‘economic growth,’ which essentially means some people used their own ‘intelligence and innovation’ and ‘hard work’ to add to the existing ‘stock’ of wealth and without making anyone worse off, they made themselves better off. Indeed, their selfish behavior had an unintended consequence — the process of economic growth — for which they were solely responsible, and which ended up making everyone rich.

“If Wealth is the outcome of an action, so it must follow that poverty is what exists before or in the absence of action. In other words, poverty must be a default state, a lack of abundance, which is counterintuitive given that natural resources are in fact verily abundant. So, there must be something that reduces the abundance, rather than expands it, for wealth to make sense.”

Power as Wealth

In pre-industrial societies, wealth was power if you defined it in terms of its ability to extract materials from nature and exercise control over the labor of ordinary human beings. Therefore, wealth always belonged to kings and feudal lords with the power to inflict violence on the masses and appropriate their lands and force them into free or subsidized labor. Economic growth in such societies mostly came through conquering foreign territories and appropriation of lands and forced labor (slavery). This added to the wealth of the kings, which in some cases percolated down to the masses as a result of ensuing economic activity.

Joe Brewer, the co-founder of Evanomics magazine, in his blog “The Real Story of Wealth Creation” has identified three ways transfer of wealth took place in medieval Europe. A similar process played out in slightly different ways in most countries.

Enclosures

Before the Industrial Revolution began in England, most of Europe’s population lived as peasant farmers. Clearly, they did not have the consumer lifestyles that we take for granted today, but they did have the most important thing they needed to determine their own futures: secure access to land for growing their food. They also had access to “common” land, which was managed collectively for overlapping uses: grazing for livestock, timber for homes, and firewood for heating and cooking. Peasants may not have been rich, but they enjoyed basic rights of “habitation” that were protected by longstanding tradition. However, this system came under attack in the 17th and 18th centuries. Wealthy merchants and aristocrats began a systematic campaign to remove peasants and privatize the common lands, which they turned into sheep farms for the highly profitable wool industry. This became known as the “enclosure” movement, and historians regard it as the birth of capitalism as we know it today.

Millions of people were forcibly displaced. For the first time in English history, the word “poverty” came into common use to describe the masses of people who literally had no way of surviving. They poured into cities like London and scratched out a living in sprawling slums. The enclosure movement gathered even more steam once it became clear that it offered a secondary benefit: The impoverished refugees provided the cheap labour necessary to fuel the Industrial Revolution, since they had no choice but to accept the slave-like conditions and rock-bottom wages of factory work. Even small children were sent to the factories by families desperate to survive. The more people who were displaced from land, the lower the wages went.

Colonialism

Ordinary people in England — and in the rest of the developed world — have become richer over the past hundred years, and their quality of life has improved dramatically. These riches were unfortunately acquired from abroad through the unimaginable exploitation of natives and the forcible extraction of their wealth — which in some cases had been preserved for centuries from before.

Dispossessed by enclosures and suffering miserable conditions in factories, England’s working-class began to riot, and by the 19th century, the country was on the brink of outright class war. England’s industrialists realized that unless they40 sacrificed some of their own newfound power, the only way to solve these social tensions was to find new sources of wealth abroad, and new lands and opportunities for the country’s now “surplus” population.

This is what came to be known as colonialism. Land and resources were grabbed across America, India, and Africa at an astonishing pace, and the wealth was funneled back to Europe where, beginning in the 1940s, it was used to build hospitals and schools and generally improve the lives of the “lower” class.

This strategy succeeded in solving many of the social problems at home, but the colonized populations didn’t fare so well. Land grabs in North America caused the mass dispossession of the continent’s indigenous inhabitants: Tens of millions died of starvation and disease. In Africa, European capitalists found that the only way to get Africans to work on their plantations and mines was to appropriate their land and impose taxes. People who had been working their own farms for thousands of years found themselves compelled for the first time to sell themselves for wages simply in order to survive.

International Trade

First popularized in Europe during the 1500s, mercantilism was based on the idea that a nation’s wealth and power were best served by increasing exports. Mercantilism replaced the feudal economic system in Western Europe. At the time, England was the epicenter of the British Empire but had relatively few natural resources. To grow its wealth, England introduced policies that discouraged colonists from buying foreign products, while creating incentives to only buy British goods. For example, the Sugar Act of 1764 raised duties on foreign refined sugar and molasses imported by the colonies in an effort to give British sugar growers in the West Indies a monopoly on the colonial market.

Mercantilists believed that a nation’s economic health could be assessed by its levels of ownership of precious metals, like gold or silver, which tended to rise with increased new home construction, increased agricultural output, and a strong merchant fleet to provide additional markets with goods and raw materials.

By the early 16th century, European financial theorists understood the importance of the merchant class in generating wealth. Cities and countries with goods to sell thrived in the late Middle Ages.

Consequently, many believed the state should franchise out its leading merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and (if needed) military force to protect these monopolistic corporations from domestic and foreign competition. Citizens could invest money in mercantilist corporations in exchange for ownership and limited liability in their royal charters. These citizens were granted “shares” of the company profit, which were, in essence, the first traded corporate stocks. The most famous and powerful mercantilist corporations were the British and Dutch East India companies. For more than 250 years, the British East India Company maintained the exclusive, royally granted right to conduct trade between Britain, India, and China with its trade routes protected by the Royal Navy.

Mercantilism is considered by some scholars to be a precursor to capitalism since it rationalized economic activity such as profits and losses. Today, mercantilism is deemed outdated. However, barriers to trade still exist to protect locally entrenched industries.

Well after the ravages of colonialism were over, there was a time when things started getting better for poor countries. During the 1960s and 1970s, poor countries made careful use of trade tariffs and subsidies to build their economies with great effect. Incomes grew quickly and the gap between rich countries and poor countries began to narrow. In fact, some poor countries42 like the Asian Tigers, Singapore, Malaysia, Thailand, Indonesia, etc. in particular, became almost as wealthy as their Western counterparts.

But these two decades of hope were brought to a crashing end in the 1980s. The World Bank and the IMF began to impose “structural adjustment programs” on developing countries as a basic condition for receiving international finance. These programs forced poor countries to abandon their tariffs and subsidies and required them to private local assets that foreign companies could purchase.

According to the “free market” theory popular at the time, this was supposed to improve economic growth. But it turned out that exactly the opposite happened. Per capita income growth was slashed from 3.2% per year to 0.7%. In Sub-Saharan Africa, the average GNP shrank by around 10%, and the number of people living in absolute poverty doubled.

“Similarly, in 1994, the North American Free Trade Agreement forced Mexico to cut barriers to imports from the U.S. As cheap American corn flooded into Mexico, some 2 million farmers were forced to leave their land. Many had no choice but to seek work in the sweatshops that sprang up along the border. By 2004, there were 19 million more Mexicans living in poverty than before NAFTA45. Today, more than half the population lives below the poverty line, and 25% do not have access to basic food. NAFTA turned out to be like the modern-day equivalent of the enclosure movement in England.”

The above examples indicate how unfair trade practices, even in modern times, can prevent countries from progressing. Is this colonialism by a different name?

Common Property (and its Denial)

We have seen how peasants in 17th century England were simply evicted from their lands, forcing them to seek a living elsewhere. Most communities in India never had land in the first place. Land reforms were therefore an obligatory part of the Indian Constitution. They, however, had common lands, which for instance the cowherd communities used for grazing their cattle. Over the years most of this land has been appropriated by traditional landholders using unscrupulous means, or by the government for the construction of industrial zones.

Take the case of a man living on the pavements of New Delhi. Obviously, the pavement does not belong to him (it belongs to an artificial owner called the public) and every morning when he must empty his bowels, he is forced to go to a nearby toilet and make a small payment to use the facilities. One could argue that the person is being denied (and forced to pay) for such bodily needs as defecating.

It is inconceivable that such basic human necessities could be denied in primitive societies where the idea of property itself did not exist. Nature was available in such abundance, the need to make it a private property made little sense.

Wealth and Money?

In theory, wealth is created when value gets created, captured, and recorded as property. It is the result of voluntary exchange between people who can benefit from things others have produced. This exchange can happen through barter or by using money as a medium of exchange. The use of money simply increases the number of wealth-creating transactions that can happen. (This is because money overcomes the requirement of a double coincidence of wants that is necessary for barter4. Thus, wealth is measured not just by the current riches you own, but also by its ability to create more riches in the future. A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year.

Wealth can be contrasted to income in that wealth is a stock and income is a flow. Income poverty, in fact, is only part of the story. Poverty also includes such deprivations as poor health, ignorance, and a lack of self-respect. Another kind of poverty is powerlessness or poverty of power. Individuals and communities suffering from underdevelopment are controlled by forces outside themselves. Victims of underdevelopment are not authors of their own lives but are passive objects dominated by forces they cannot understand or control. Sometimes these forces, such as hurricanes or tsunamis, are natural. More often the dominators are other human individuals and groups. The dominators can be so powerful that they are able to make allies of their victims, who then believe that it is right and proper (“fate,” “God’s will”) that others rule and use them: “The poor themselves are transformed into accomplices of the very system which keeps them poor.”

Scarcity

When a desirable or valuable commodity (transferable good or skill) is abundantly available to everyone, the owner of the commodity will possess no potential for wealth. In contrast, when the desirable commodity is in scarce supply, the owner of the commodity will possess great potential for wealth.

Wealth is a key component of the economic system, valued as a source of finance for future consumption, and for reducing vulnerability to shocks such as unemployment, ill health, or natural disasters. Some wealth in the hands of Radheysham could have prevented his death. But the present economic architecture that believes in trickle-down economics is not conducive to such generosities. Wealth enhances opportunities for entrepreneurs in the informal sector, given it can be used either directly or as collateral for loans. This is particularly important for India, unlike other countries that have generous state pensions, adequate social safety nets, good public healthcare, high-quality public education, and well-developed business finance.