The Creation of Mass Wealth

By Arthur Middleton Hughes

There can be no moral claim to something that would not exist but for the decision of others to risk their resources on its creation. What those who attack great private wealth do not understand is that it is neither by physical effort nor by the mere act of saving and investing, but by directing resources to the most productive uses that wealth is chiefly created. And there can be no doubt that most of those who have built up great fortunes in the form of new industrial plants and the like have thereby benefitted more people through creating opportunities for more rewarding employment than if they had given their superfluity away to the poor. The suggestion that in these cases those to whom in fact the worker are most indebted do wrong rather than greatly benefit them is an absurdity. Frederick von Hayek 1971

There are rich people in every country, but in only a few countries is there mass wealth.

Mass wealth we define as a situation in which the adults of the average household in countries with a total population of 200,000 or more have a home or apartment with running water, electricity, a refrigerator, a television set or radio, telephone, central heating and air conditioning (where needed), good food, good clothing, at least eight years of education, medical care, an automobile1, reasonable provision for retirement, and (if under 65) on average one of the adults has a full time job.2

Arthur is an Austrian Economist. He was adjunct professor of economics at the University of Maryland for 25 years. He is retired. He is the author of The Recession of 1990; An Austrian Explanation Review of Austrian Economics 10 1, (1997) 107-123

Mass wealth exists in about 34 countries with a total population of 930,606,636 where the average annual GDP per capita3 is more than $30,976 in 2013 US dollars. There are twenty others with a population of 43,024,374 who may soon attain mass wealth and are close to this level. But for those living in the other 117 countries with a population of 5,919,142,463, there is a far lower level of expectations. The world average daily per capita GDP of all countries is $28.49. For most of the peoples of the world, mass wealth does not exist, and may never do so during this century. The two biggest countries in the world: China (GDP Per Capita $9.44) and India ($3.34) are far behind the mass wealth countries but are gaining faster than many other non-mass wealth countries.

The designation of the 34 mass wealth countries is a subjective designation. GDP per capita, as determined by the World Bank and other similar institutions is an objective one, based on international trade and balance of payments statistics. Naming each country “Mass Wealth” is

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subjective. We do not have census data for each country on the number and type of dwellings, the availability of medical care, level of education, heating and air conditioning, automobiles, etc. Clearly, however, most well to do people want mostly the same things. They spend their share of the GDP on similar products and services. People in the United States, France and New Zealand are not very different in their homes, medical care, education and transportation needs. Except for the language problems, they could easily adjust to moving to one of the other mass wealth countries. Conditions of the mass wealth people’s lives are, however, far different from the life situations of people who live in Somalia or Uganda. They could not move and continue the same lifestyle as they do today. There is a real difference between living in the mass wealth and the non-mass wealth countries.

Figure 1 34 Mass Wealth Countries

Country Population GDP PerGrowt

hGDP PC

In 3Economi

c

Capita Rate Years FreedomRan

k

Macau 587,914 $82,4007.9

$101,929 63.5 1

Qatar 2,123,160 $102,100 -1.0 $99,037 62.2 2

Luxembourg 520,672 $77,900 -2.5 $72,058 71.2 3Singapore 5,567,301 $62,400 -1.1 $60,341 89.4 4Norway 5,147,792 $55,400 1.6 $58,059 68.7 5United States 318,892,103 $52,800 2.0 $55,968 73.4 6Brunei 422,675 $54,800 0.0 $54,800 73.0 7Hong Kong 7,112,688 $52,700 0.3 $53,174 71.3 8Germany 80,996,685 $39,500 5.8 $46,373 73.1 9Switzerland 8,061,516 $46,000 0.0 $46,000 67.4 10Canada 34,834,841 $43,100 2.0 $45,686 69.0 11Australia 22,507,617 $43,000 1.7 $45,193 89.4 12Kuwait 2,742,711 $42,100 2.1 $44,752 56.9 13Austria 8,223,062 $42,600 0.6 $43,367 69.9 14Taiwan 23,359,928 $39,600 2.2 $42,214 76.2 15Iceland 317,351 $40,700 0.9 $41,799 68.4 16Ireland 4,832,765 $41,300 -0.1 $41,176 80.2 17Sweden 9,723,809 $40,900 0.2 $41,145 74.2 18Japan 127,103,388 $37,100 2.2 $39,549 76.1 19Netherlands 16,877,351 $41,400 -1.6 $39,413 72.4 20New Caledonia 267,840 $37,700 0.6 $38,379 0 21United Kingdom 63,742,977 $37,300 0.3 $37,636 73.9 22Finland 5,268,799 $35,900 1.5 $37,516 72.4 23Belgium 10,449,361 $37,800 -0.9 $36,779 71.4 24

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Israel 7,821,850 $34,900 1.5 $36,471 68.3 25Denmark 5,569,077 $37,800 -1.2 $36,439 82.0 26Korea, South 49,039,986 $33,200 1.6 $34,794 81.2 27Oman 3,219,775 $29,800 5.1 $34,359 69.8 28France 66,259,012 $35,700 -1.3 $34,308 36.3 29Saudi Arabia 27,345,986 $31,300 3.2 $34,305 67.4 30New Zealand 4,401,916 $30,400 2.6 $32,771 76.5 31Bahamas, The 321,834 $32,000 0.3 $32,288 67.2 32Bahrain 1,314,089 $29,800 1.4 $31,052 72.4 33United Arab Emirates 5,628,805 $29,900 1.2 $30,976 70.9 34

There are 20 other countries that are getting close to mass wealth and may reach it within a few years:

Figure 2 20 Countries that could possibly achieve mass wealth in this century.

Country Population GDP PerGrowt

hGDP PC

In 3Economi

c

Capita Rate Years FreedomRan

kSpain 47,737,941 $30,100 -1.7 $28,565 78.7 35Italy 61,680,122 $28,375 -0.6 $27,864 68.6 36Malta 412,655 $27,500 0.2 $27,665 43.2 37Greece 10,775,557 $23,600 5.6 $27,565 58.7 38Equatorial Guinea 722,254 $25,700 1.3 $26,702 61.7 39Lithuania 3,505,738 $22,600 5.1 $26,058 74.9 40Slovakia 5,443,583 $24,700 1.6 $25,886 51.1 41Slovenia 1,988,292 $27,400 -2.7 $25,181 65.5 42Estonia 1,257,921 $22,400 3.6 $24,819 62.3 43Barbados 289,680 $25,100 -0.5 $24,724 67.6 44Cyprus 1,172,458 $24,500 0.0 $24,500 57.8 45Gabon 1,672,597 $19,200 6.6 $23,002 68.9 46Latvia 2,165,165 $19,100 6.3 $22,710 62.7 47Czech Republic 10,627,448 $26,300 -4.9 $22,434 71.2 48Chile 17,363,894 $19,100 5.7 $22,366 90.1 49Poland 38,346,279 $21,100 1.8 $22,239 67.0 50French Polynesia 280,026 $22,000 -0.5 $21,670 66.2 51Croatia 4,470,534 $17,800 7.0 $21,538 59.4 52Portugal 10,813,834 $22,900 -2.8 $20,976 65.7 53Panama 3,608,431 $16,500 8.9 $20,906 54.2 54

How do you measure mass wealth?

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One way is the look at the output of a country – in terms of products and services that others are willing to pay for. This is measured by the Gross Domestic Product (GDP) and more particularly the Per Capita GDP. Those countries with low GDP per capita do not have enough wealth to constitute mass wealth: to buy all the products and services that represent mass wealth.

Most educated people in developed countries are conscious of the difference between countries which have mass wealth and those which do not, but few have faced up to the fact that mass wealth may be unattainable in this century for most countries. The educated people assume that things are gradually getting better, that efforts by the World Bank and other assistance groups are paying off, and that one by one, each less developed country will do what Taiwan, South Korea, and Singapore did, and soon achieve mass wealth. This, unfortunately, is not true.

The purpose of this paper is to analyze the process of mass wealth creation—a comparatively recent phenomenon—and in doing so, shed some light on the difficulties which lie in the way of those who live in countries that lack mass wealth today.4

Poverty versus Wealth

“Why are there people still living in poverty?” This question is often asked. The answer varies: culture, racism, lack of governmental support programs, refusal of the “haves” to redistribute their income, etc. But, in reality, this is quite the wrong question. The proper question is “Why are so many people wealthy?”

If we look at the entire sweep of homo-sapiens for the last 10,000 or more years, it is clear that the natural condition for all mankind has always been and still is poverty. 5 With very few exceptions, most men and women have always lived in tents, caves or shacks, with primitive clothing, inadequate food during parts of the year, no education or medical care, and in generally poor health from the time they were born until they died at a comparatively early age. This is true whether they lived Sumer in 5000 BC, in Europe in 1600 AD, or in Ohio in 1800 AD. Whether they lived as hunter-gatherers or farmers, warriors or fishermen, a vast majority lived what Thomas Hobbes called, a life that was “nasty, brutish and short”. 6

Mass wealth for large numbers of people, as we know it today, has been possible only since about 1950. Even today mass wealth is still impossible for the vast majority of people in most of the countries in the world. To ask, “Why is the universe dark?” is a similar question. The really surprising thing about the universe is not the darkness, but the billions of points of light which exist. Poverty, like darkness, is the normal state, and not remarkable.

How is wealth created?

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There are only two ways to accumulate wealth: create it by work (including trade) or take it from others by force. Through most of human history, force was almost the only effective wealth creation system.7 Whether it was the Egyptian government receiving contributions from their citizens in 2000 BC, Romans demanding tribute from captured peoples in 200 AD or the English aristocracy receiving lifetime livings from peasants who worked their estates in 1700 AD, the system was essentially the same. Most people worked and produced what they could by farming or simple trades. Most of these people lived close to the poverty level. They gave a portion of what they earned—willingly or unwillingly—to create wealth for a few. There were, of course, always a few traders or manufacturers who figured out how to accumulate substantial wealth. These people, however, never represented more than a minute fraction of the population. They did not start a trend which was widely copied. The first time a profitable manufacturing method that could be copied was introduced was during the Industrial Revolution in England from 1760 to 1800. As a result of the application of what was learned during this period, in most developed countries, mass wealth is now created by work. Through work the average American today lives better that any courtier in the palaces of Henry VIII, the Roman Emperors, or the Egyptian Pharaohs.8

The reason why work did not create mass wealth during most of history is that it was not very productive work. 200 years ago, 90% of the population in the United States farmed.9 Today less than 2% of the US population farms, yet we have far more food and fiber from farms than we ever had. This is not true of the non-mass wealth countries.

In 2009, the average US farm worker provided enough food and fiber for 139 other US residents plus more than 33 people overseas.10 In 1800, however, the average farm worker in the United States supplied enough for only three other people. This low productivity in 1800 was not much better or worse than the agricultural productivity in 3000 BC, or 1600 AD. The annual increase in productivity in agriculture and other forms of industry was essentially zero throughout almost all of recorded human history—until it began to change after 1760. Productivity increases because work is done more efficiently. The efficiency may come from better fertilizer, seeds, insecticides, herbicides, irrigation, or better methods of cultivation, harvesting, storage, marketing, management or transportation. All of these efficiencies require increased use of some form of capital: transportation, buildings, machinery, purchased inputs.

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Direct Investment

Throughout most of history, increased use of capital on the farm—or in manufacturing operations—came usually from some form of direct investment. A farmer would build a barn, or save up to buy a cow, a plow or a cart. A carpenter would buy a set of tools. A weaver would buy a loom. In more successful enterprises, an extended family would pool their resources and divert a creek for irrigation, or would create an agricultural cooperative to market their crop. All such direct investment—in fact, all investment—results from some form of saving. The farmer saved some of the proceeds from his output to buy the materials for the barn. He also saved some of his time that would normally have gone into crop production, and put it into barn construction. Saving is essential to the creation of capital, and increased capital is usually the key ingredient in increased productivity.

Direct investment has distinct limitations. It can create wealth, but seldom mass wealth. In early America, we had plenty of very good land. Most of the land at that time was hundreds of miles away from the markets in the East. Direct investment in farms in Kentucky and Ohio did not create mass wealth. It is hard to create mass wealth by growing crops if you can’t get them to a market. By opening up eastern markets to the western farm land, the railroads made more impact on farm productivity than any direct investment that individual western farmers could possibly mobilize.12 Railroads—created by indirect investment -- were a catalyst that enhanced the growth of mass wealth in the US.

How Mass Wealth is created

The secret for creating mass wealth was discovered during the industrial revolution in England in 1760-1800. It has six essential ingredients:

1) Private property protected by a government that defends the country from external invaders and maintains internal law and order. 13

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2) Accumulation of Capital. Capital is used to conduct work more efficiently than could be done without it. Capital consists of the money equivalent of all assets minus liabilities of goods, machinery and cash used in the operations of definite business units. 14

3) Macroeconomic stability. This requires a government whose budget deficit is small and which holds increases in the money supply to a modest percentage. 15

4) Entrepreneurship and competition—a culture and regulatory system that welcomes entrepreneurs who form new businesses and also tolerates competitors to established businesses and government programs.16

5) Access to the world market permitting the division of labor to operate in which thousands of workers in many countries specialize in particular parts of an overall production process. 17

6) Indirect investment through financial intermediaries which puts savings to their highest and most productive use. 18

These are the six absolute minimum requirements for the creation of mass wealth. Eliminate any one of them, and mass wealth will be very difficult to achieve. Let’s look in detail at each one of these requirements:

1) Private Property

A system that respects and defends the right to private property is needed to create mass wealth. As long as criminals or government officials are free to seize private property, there will be little capital invested and little wealth generated. One has only to look at Somalia, or Zimbabwe today, or Russia or Cuba during the past fifty years, to see what happens to the wealth creation process when law and order breaks down, or private property rights do not exist.

Respect for private property is also the only way to guarantee freedom and human rights. As long as a man’s property is subject to seizure, he is not free. He is a slave of the state or the criminals who can confiscate what he owns. Entrepreneurs are essential to mass wealth creation. Entrepreneurs can only operate in a climate of personal freedom. Personal freedom, therefore, is essential to the wealth creation process. Freedom depends on private property. 19

2) The Accumulation of Capital

The accumulation of capital is essential to creation of mass wealth. Capital, as defined by Von Mises, is “the sum of the money equivalent of all assets minus the sum of the money equivalent of all liabilities as dedicated at a definite date to the conduct of the operations of a definite business unit. It does not matter in what these assets may consist, whether they are pieces of land, buildings, equipment, tools, goods of any kind and order, claims, receivables, cash, or

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whatever.”20 Capital goods are usually accumulated by saving. As Von Mises said, "Every single performance in the ceaseless pursuit of wealth production is based upon saving and the preparatory work of earlier generations. We are the lucky heirs of our fathers and forefathers whose saving has accumulated the capital goods with the aid of which we are working today."

Capital goods are labor, nature and time stored up. “Capital goods are intermediary stations on the way leading from the very beginning of production to its final goal, the turning out of consumers' goods. He who produces with the aid of capital goods enjoys one great advantage over the man who starts without capital goods; he is nearer in time to the ultimate goal of his endeavors.” 21

There is no such thing as a “national stock of capital”. Capital consists of the individual assets stored up by the thousands or millions of separate producers within a nation. What is capital to Businessman A may simply be useless junk to Businessman B who is interested in producing a different product. Adding them all together produces a meaningless accumulation of odds and ends.

To create mass wealth, entrepreneurs must be free to accumulate capital. This capital makes it possible for an entrepreneur to produce consumer – or intermediate – products at a faster and more efficient rate than he could without the capital. Taxing capital accumulation is far more injurious to the growth of mass wealth than taxing consumption. “He who employs the machine is nearer the goal of production. The period of production is shorter for him than for a competitor who must start from the beginning. In buying a machine he buys the original factors of production that were expended in producing it plus time, i.e., the time by which his period of production is shortened.” 22

Those countries which have achieved mass wealth have done so by means of the accumulation of capital. “The start which the peoples of the West have gained over the other peoples consists in the fact that they have long since created the political and institutional conditions required for a smooth and by and large uninterrupted progress of the process of larger-scale saving, capital accumulation, and investment. Thus, by the middle of the nineteenth century, they had already attained a state of well-being which far surpassed that of races and nations less successful in substituting the ideas of acquisitive capitalism for those of predatory militarism. Left alone and unaided by foreign capital these backward peoples would have needed much more time to improve their methods of production, transportation, and communication.” 23

3) Macroeconomic Stability

Why did Latin America fail to develop from 1950 to 2014, while East Asia surged ahead? There are many reasons, of course, but government macroeconomic policies are the most to blame.

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As Edwards notes: “Fiscal imbalances traditionally have been at the heart of Latin America’s macroeconomic disequilibrium. The inability, or unwillingness, of governments to raise sufficient tax revenues to cover expenditures has forced them to rely on money creation, or seigniorage, to finance the public sector deficit.” 24 The huge levels of inflation were not an accident. They were caused by deliberate policies of lowering interest rates (through seigniorage and controls) to achieve full employment. Raul Prebisch, a key figure in the direction of CEPAL (Commission Economica Para America Latina) which provided the intellectual reasoning behind most Latin American governments economic policies from 1950 to 1990, contended in 1947 that lower interest rates encourage savings and that government should “lower interest rates to a level where full employment is achieved”… “Regarding investment, it is likely that it should be socialized as the only means to achieve full employment, since the manipulation of the interest rate will not be sufficient.” 25

The effect of these policies was to increase inflation, discourage savings, increase the size of governments, increase the public debt, discourage private investment, and reduce exports. Exports from Latin America actually decreased by about 1% per year between 1965 and 1980.26 Hundreds of inefficient and money losing government owned industries came into existence through nationalization, creating unsustainable debts and a huge cadre of surplus government employees opposed to economic reform. Edwards explains: “One of the most important determinants of the distribution of direct foreign investment across countries is the soundness of economic policies. Foreign investors tend to avoid countries with major distortions and controls and are attracted to nations with consistent and predictable macroeconomic policies.” 27

4) Entrepreneurship and Competition

Successful enterprises don’t start themselves. They are started by people—entrepreneurs who seek to achieve subjective goals of their own. Every year in the United States more than a million new enterprises are started. Within five years, two thirds of them go out of business.28 Of the rest, a few will eventually become large successful businesses. Those that do are the product of entrepreneurs who invest their own skills and futures and (usually) other people’s money in their efforts to create and expand the businesses.

There are many obstacles to success in business. Normally, the biggest obstacles are cultural, regulatory and governmental. In many countries, government places major hurdles in the way of new enterprises. In Peru, for example, the government issues an average of more than 26,000 new economic regulations each year, most of which make it difficult to start a new business which would compete with established businesses. As a result, two thirds of the businesses that exist in Peru operate outside the law.29 They can be shut down by the police at any time. Most have to pay small or large bribes to stay in business. The situation in Peru is not

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unusual. 30 It is typical of the obstacles faced in most underdeveloped countries in the world. It is a key reason why they are, and will remain, underdeveloped.

The essential role of competition

Intense, cut-throat, dog-eat-dog competition is essential to creation of mass wealth. In 1949, the average family in the United States spent thirty percent of its household budget on food.31 By 2002, this number was down to 13.6%32, and the food that it bought with this 13.6% was better in quality and quantity than what it bought in 1949. This change made possible a major increase in mass wealth. It came about because of intense competition from supermarkets, food manufacturers, mass marketing, and mass production. Being freed from the burden of heavy expenditures for food purchase, after 1949 the average family went on to save money and to buy homes, automobiles, washers and dryers, television, VCRs, telephones, medical insurance, and thousands of other products and services that accompany those who have mass wealth.

In Chile in December of 1966, the first of twenty new superstores for farmers was opened in Curico. Set in a rural area 200 km from Santiago, the capital, it contained 54,000 square feet of space for sale of fertilizers, seeds, insecticides, herbicides, tractors, plows, disks, and five thousand other products for farmers which farmers in the area had never seen before. More than 500 farmers came to the grand opening. It spelled the death knell for a dozen medium sized agricultural supply stores that had been operating in the radius of 30 km for the past fifty years. It reduced the price of farm inputs in the trade area by 10-15%, extending mass wealth to a backward sector of Chile. Doing for farmers in Chile what Wal-Mart was doing for rural America, this type of competition is essential to mass wealth creation. It is disruptive, annoying, vulgar, and highly profitable.

Beginning in 1978 US airlines were deregulated. Prior to that time, there were a small number of “certificated” carriers which were regulated by the government. The result was a system with a few large airlines that were careful not to compete with one another. When government removed the controls, scores of small airlines sprang up--some to compete in the most traveled routes, some to begin service in neglected niche markets. The result was a tremendous expansion in air travel and significant reduction in rates. From 1975 to 2006 the number of passenger miles flown increased by 400% while the price per mile dropped from about twenty four cents to six cents in constant 1982 dollars. The number of passengers also increased by more than 400%.33 Consumers could travel less expensively, and businesses used the dramatic reduction in travel costs to expand in all directions. Each reduction in cost per passenger mile represents an increase in the ability to generate mass wealth. This was all made possible by competition.

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In the computer field, competition produced even more dramatic changes. In the early 1980’s. Apple Computer created the first popular small desktop computer. They had it almost all to themselves for a number of years until IBM realized that there was money in this field. The resulting competition created the PC and led to the entire computer revolution. IBM did not win the battle. Apple did not win the battle. The battle was won by the consumers of the world. The mass produced chips became standard in hundreds of products: automobiles, toys, household appliances, telephones, etc. The intense competition led not just to dramatic cost reductions, but to an explosion in the uses for this new technology, expanding wealth creation possibilities in all directions. Competition made it happen.

5) Access to the World Market

Adam Smith identified the division of labor as a key ingredient in the process of creating wealth. He described the work of a pin factory as an illustration. In this factory, “ten persons could make among them upwards of forty-eight thousand pins in a day…but if they had all wrought separately and independently…they certainly could not each of them have made twenty, perhaps not one pin in a day.” 34 He explained that the division of labor is limited by the extent of the market. The bigger the market, the greater the opportunity for more and more people to become a part of the division of labor and therefore the greater the opportunity for it to produce its miraculous results.

The division of labor is infinitely more complex and widespread today than it was in Adam Smith’s time. We now have a true world-wide market. Because of the expansion of the market there are millions in this country and abroad who are participating in a world-wide division of labor. For each worker in an office—such as a personnel officer, an industrial designer, or a computer programmer---there are hundreds of thousands of other people in many different countries whom the person does not know, will never meet, and yet who are essential for his success in his work. This includes the people who constructed his computer and wrote his software, the people who supply his inputs and buy the products of his business

I worked for many years in the direct mail business. When we began in the early 1980’s no one had fax machines. We got our first fax in 1986. It was very slow—turning out a page every three minutes. We installed it because our best customer asked us to. At that time he was the only one that we could communicate with. It saved us about $2,000 per year in delivery costs—sending proofs to this customer and getting his approval. Within a few years we had a modern fax that produced several pages a minute. Every customer we had—and every business of any size in the industrialized world at that time—had a fax that we could communicate with.

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Later, with the Internet, we no longer used faxes. We sent proofs using e-mail. How much did the changes save us? Who knows? We really could not maintain our business today without the Internet. But we are not relying just on the functioning of our access to the Web. We depend on all these other businesses to link up to the Internet. We depend on the telephone companies to provide the connection service to the Web and the electric utilities to provide the power. These things are all part of the division of labor that runs almost any business today.

For the division of labor to function in the world-wide market so as to create mass wealth, there are two requirements:

1) There must be few, if any restrictions on the flow of raw materials, semi-finished goods or final products and services into and out of the country.

2) Capital must be able to flow into and out of the country without controls. Foreigners must be able to create 100% owned corporations within the country, and to repatriate their profits without restriction.

Most countries in Latin America, for example, do not meet either requirement. Mass wealth has passed them by, and will continue to do so until they join more fully in the world wide division of labor. 35

The reason for these two requirements is that world-wide competition has become so intense that countries or areas seeking to insulate themselves from it will automatically condemn themselves to an economy that cannot create mass wealth. It was possible to manufacture bed sheets profitably in Massachusetts in 1935. By 1955 such sheets could be made much more profitably in North Carolina. The plants in Massachusetts closed their doors forever. By 1975 profitable bed sheet manufacturing the plants were located in Taiwan. In 1997 they were located in Thailand. By 2009, the lowest cost sheet manufacturers can be found in India. Any attempt to use government restrictions to maintain textile production in Massachusetts, North Carolina, Taiwan, or Thailand would have resulted in higher costs, lower profits and a reduction in the creation of wealth for the country that tried it. Americans import most of our textiles today because we produce products that create far more wealth for us than textiles. The world-wide division of labor is wonderful, but it also ignores traditions, established relationships, and the skills of workers in any particular location at any particular time. Edwards reports: “A fundamental role of direct foreign investment is to allow the host country to come in contact with new techniques and new management styles. Even if its volume is modest, direct foreign investment helps to diffuse innovations, encourages the imitation of best practices in more industrial countries, and accelerates the pace of productivity growth…Openness affects the speed and efficiency with which small countries can absorb technological innovations developed in the industrial world…Openness affects growth not only through one channel alone, but also through a combination of channels, including the introduction of new

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goods, the adoption of new methods of production, the organization of new industries, the expansion in the number of intermediate goods available, and the conquest of ne markets that permit the expansion of exports.”36

6) Indirect Investment

One of the most important reasons for mass wealth today is our system of indirect investment, which involves a) savers, b) intermediaries and c) entrepreneurs. It is best illustrated by a model. To understand the model, imagine a few people—savers—who have accumulated funds which they place with a financial intermediary—a bank, insurance company, stock broker or pension fund. The financial intermediary loans or invests these funds with an entrepreneur who uses them in running his business. In the use of this operating capital, he will generate employment for a number of workers, and will create products and services that he markets to customers.

Savers Intermediaries Entrepreneurs

Resources

Buyers

Profit Profit Profit

The Indirect Investment SystemWealth is created. Everybody wins.

From these products and services, the entrepreneur—if he is successful in his enterprise—will generate a return on his borrowed capital—let us say 20%. He keeps 10% of this, and pays the balance—10%--to the intermediary as interest or dividends on the borrowed or invested money. The intermediary keeps 5% and pays the balance to the saver as an interest on his deposit. Each group participates in the wealth creation process.

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.

The wealth is generated by the entrepreneur who sells products for more than it costs him to make them. As a result, the intermediaries and the savers participate in his wealth. Significant here is the fact that the savers do not know the entrepreneurs. They only know their particular intermediary. The intermediaries select the entrepreneurs to support. In this indirect way, mass wealth creation has begun.

The mass wealth is the return on the saver’s investment, and the wealth saved by the entrepreneurs and the intermediaries. It is not the employment generated for the workers. Employment is useful to the employees—but it is not wealth. The employees may create wealth with their salaries, depending on whether they save or consume their wages.

All three participants are essential to the wealth creation process. Let’s outline their functions individually:

a) The Savers

Savers are essential to indirect investment which leads to mass wealth creation. They are as important as the entrepreneurs and the intermediaries. Savers, in general, are not as conscious of their role in the process as are intermediaries and entrepreneurs. Some, of course, may think of themselves as wealth creators when they buy a mutual fund, or embark on a conscious savings program with an objective in mind. For most, however, the saving is incidental to some other desired objective, such as life insurance or investment in a pension. Whether they know it or not, the savers are the ones who make it all possible. Indirect investment is used to create mass wealth. Savers provide the funds for indirect investment. There is no other source which works. 37

Savers have a lower time preference than non-savers. Someone with a low time preference reasons this way: “I have this money which I have accumulated from somewhere. I could

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Note to the reader: The charts in this paper are illustrative only. Economics is not an exact repeatable science. It does not contain constants or laws that can be manipulated by mathematics. Economics is the study of how men and women act when faced with varying opportunities, problems and choices. There are thousands of economic variables that affect every economic agent in any developed country at any given time. Some are important, and some less important. The conditions are always changing, since most of them are the result of actions by independent agents (competitors, employees, suppliers, customers, other participants in the division of labor) who are motivated by subjective and changing values of their own. So why do we have the diagrams? So you can get an idea of how wealth is created, and how various changes in policy might affect the creation of wealth. The point of the charts is to get the reader thinking about the interrelationships of savers, intermediaries, entrepreneurs and government policies in mass wealth creation

spend it right away on something I want, or I could wait, let it accumulate some more, and spend it later when I may need what it will buy more than I need it right now. I think that I will wait.” 38

As a result of millions of people with a low time preference putting their money into intermediary institutions, there is a fund of cash available to be loaned or invested with entrepreneurs who use it to create mass wealth.

Sometimes events force people to change their time preferences. War or instability can cause people to lose faith in financial institutions. They see exchangeable goods as offering them a more solid basis for survival than an account in a bank that may go out of business or be seized by the government. In this situation, some savers decide to buy gold. Savers owning gold does not advance the wealth creation process. It may bring it to a halt. Overnight, the pool of savings available for investment will dry up. Entrepreneurs will not be able to obtain financing for their projects, and the mass wealth creation process will grind to a halt. This is happening today.

There are scores of countries where the populace has a very high time preference. Wherever the government does not protect private property, control crime, keep out foreign invaders, savers always have a high time preference. They want to convert their paper money rapidly into gold or silver or foreign currency or some form of exchangeable goods. In such countries, mass wealth is seldom if ever created. Where the time preference is high, mass wealth creation is low.

Savers help to determine the natural rate of interest by their choice of time preference. The other participants in the natural rate determination process are the entrepreneurs who seek capital to finance their activities plus other borrowers. Savers determine the slope and position of the supply curve for investment funds. Entrepreneurs and other borrowers determine the position of the demand curve for these funds.

People who do not understand the role of the savers argue that government could just as well provide the funds for the entrepreneurs. Funds could come from taxation, borrowing, or money creation. The Federal Reserve, for example, often expands the money supply through open market operations. This money could be loaned by intermediaries to entrepreneurs, just like money from savers. It pushes interest rates below their natural level, and, in the process, temporarily expands the wealth creation process. But this inflation of the money supply also leads eventually to price increases. Worried over price hikes, the Fed cuts back on their money supply expansion.39 This leads to sharp increases in interest rates, followed by bankruptcies of some borrowers who had counted on the continued flow of easy money. Millions of workers lose their jobs in the ensuring recessions. 40

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Unlike the Fed, savers seldom act in unison. Each is guided by personal self-interest to seek subjective goals which may or may not agree with other’s goals. They provide a sound basis for interest rate determination, and for mass wealth creation.

b) Intermediaries

Entrepreneurs use indirect investment (the saver’s money) to produce mass wealth. Of course, small entrepreneurs use direct investment: their own savings, or wealth created from previous periods. This has always been true. We are studying the mass wealth creation process, however. Mass wealth creation involves mass marketing and mass production. These processes require lots of external capital which can only be obtained by indirect investment.

As already noted, indirect investment requires three kinds of people: savers, entrepreneurs, and intermediaries who provide an essential link between the first two. Intermediaries include banks, insurance companies, pension funds, mutual funds, brokerage houses, credit unions, etc. They create and sell programs to people which result in the people’s saving flowing to the intermediary. The ordinary person—the saver—may think that he is buying an insurance policy, paying off a mortgage, or making payments on a pension plan, but he is really, at the same time, creating savings. The intermediary then looks for places to invest these savings so as to increase their own personal or corporate wealth, and to make the arrangement more attractive to the saver by paying him a higher return for the use of his savings.41

The investment process in the US today is extremely complex and varied. If we skip the details, we can sum up the process by saying that intermediaries seek out what they hope will be successful entrepreneurs to whom they can loan or invest some of other people’s savings that the intermediaries have accumulated by their marketing activities. The return to the intermediaries has to be enough so that they can use part of the proceeds to reward the savers and encourage them to save more, and the balance (after paying off their administrative costs) can be used to create wealth for the intermediaries themselves which is why they are in business in the first place.

Are intermediaries entrepreneurs? Of course. But they are a special type of entrepreneur which we call by a special name because of their special function. They screen entrepreneurs to find those with the best prospects for success. Intermediaries are essential to wealth creation because of their dual marketing functions: they find and encourage savers, and they find and encourage entrepreneurs. The fact that they are entrepreneurs makes them successful. Their question for each of their actions is: “How can we create wealth for ourselves by pursuing this program?”, whether the program is a pension program, a small business loan program, a home mortgage program, or the creation of a mutual stock fund. They are not creating this program for the savers or for the entrepreneurs. They are creating it for subjective

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reasons of their own. If the program is not appealing to the savers or the entrepreneurs, however, it will fail. That is how wealth is created. Once the intermediaries stop thinking about personal wealth creation and pleasing their customers, and start thinking about loftier goals such as investment in inner cities, special loans to boost exports, or loans to save protected industries, the wealth creation process slows down, or grinds to a halt.

Some have looked at the intermediary’s functions, and assumed that non-profit public policy-oriented government agencies could do this job just as well—if not better—than private profit-seeking intermediaries.

The World Bank is organized on this basis, and for the past sixty years has loaned trillions of dollars—mostly to government agencies in countries throughout the world—in the attempt to create a better life for the populations of the recipient countries. From 1990 to 1995, the World Bank loaned $1,640 billion dollars to “developing and transition countries” for “infrastructure, economic reconstruction and private sector development”.42 Huge amounts of multilateral and bilateral aid has been given by scores of developed countries with the same objectives. In general, these programs have all failed to create mass wealth. How can we possibly know and say this? In the case of the World Bank, we can look at more than a hundred countries where aid has been provided. We look in vain for even one country—like Singapore, Taiwan, Korea, Malaysia, or Chile—where the World Bank or other donors provided significant financial assistance, and the where the process created mass wealth for the residents.

Why should this be? Because the World Bank (or a US government agency) is not an entrepreneur. It is not motivated by a dream to create wealth for itself. It is not trying to create wealth for anyone else. It is just trying to do good: to help poor farmers, to provide infrastructure, to reduce overpopulation, to improve communications. The programs may or may not achieve these objectives, but they certainly do not and have not created mass wealth anywhere.

Another reason why international or indigenous government agencies are unlikely to further the creation of mass wealth is that they have social goals which are seldom related to wealth creation. Government agencies, by definition, are part of the political process. The job of politicians is to respond to constituent’s needs by passage of legislation. Such legislation in the lending field usually directs public lenders to lend to “the poorest of the poor”, the underprivileged, minorities, inner cities, rural areas, import substitution industries, “sick” industries, “green” industries, infrastructure creation, etc. In the case of the World Bank, their external assistance to Eastern Europe and the Newly Independent States in 1991-93, for example, took the form of “balance of payments and budgetary support of debt relief”. This aid “accounted on average for about 2.7 percent of their combined GDP in 1991-93”.43 Profit making is seldom, if ever, stated as a public lending goal. As a result, the funds do not go to

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those who would be most likely to use them to create mass wealth. Mass wealth does not result.

Why does the fact that private intermediaries are entrepreneurs assist the mass wealth creation process? Because mass wealth comes about most rapidly if investment is channeled into its most productive use. What use is that? The one that returns the highest profit. The market for capital investment, like all markets, is filled with ignorance and misinformation. No one knows what the next hot industry will be. Will it be software? The Internet? Condominiums? Resort Communities? Plastics? Solar Panels? There are a million guesses and most of them are wrong. The easiest way to make a correct decision is to pick the industry that has the most credible evidence that it will return the highest profit to the lender. Entrepreneurs adapt easily to this way of thinking. Government agencies, burdened with scores of competing objectives, cannot make the correct choices. They end up funding losers or less successful enterprises. These poor decisions do not further the creation of mass wealth. In fact they slow it down by wasting resources on less desirable investments, and putting the recipients further into debt.

The followers of Keynes never understood intermediaries. They seem to operate under the assumption that savings, once entrusted to an intermediary, are taken out of the spending stream and result in a frustration of “Say’s Law”. French Economist Jean Baptiste Say formulated his “Law of Markets” which said that the cash handed out to workers, materials suppliers and others would find its way into consumer’s pockets. The consumers could use this cash to pay for the output of the enterprise that set the process in motion. Keynesians said that if consumers put some of the money in their pockets into a savings account instead of spending it at a store, the total money in circulation would gradually be reduced, demand would slacken, and enterprises would have to begin laying off workers. If this pernicious saving continued, mass unemployment would soon produce a serious recession.

What these Keynesians fail to understand is that intermediaries are entrepreneurs. They are motivated by self-interest, and seek to become wealthy. They cannot do so if they freeze the savings entrusted to their care. Their principal source of wealth is the investment of the savings of others in projects that pay a sufficient return to pay their administrative costs, pay interest to the savers, and have enough left over to increase their personal wealth. This type of thinking is based on a misunderstanding of the role of the intermediaries—a disaster for the economics profession and for the governments of the free world which adopted these theories as policy and law. 44

c) The Entrepreneurs

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The entrepreneurs are the reason why the mass wealth creation process exists. They have the vision to assemble the capital, workers, materials, management, and marketing program into a viable enterprise which provides products or services for customers.45 These products or services are sold for more than the cost of producing them, producing a profit for the Entrepreneurs. This profit is the heart of the wealth creation process.

We cannot know precisely what motivates the entrepreneurs, for their motives are subjective and unknowable to anyone outside of their enterprise. Some are motivated by the desire for profits. Others want to become the directors of large enterprises with many employees. Others seek to create something unique and wonderful—such as a major motion picture or a new cell phone. Others enjoy the roll of the dice and seek to turn a hundred thousand dollars into ten million dollars by taking huge risks. There are as many motives as there are entrepreneurs. Since their objectives are so varied, we cannot quantify them as many economists have tried to do by assuming “profit maximizing” as a universal enterprise goal.46

Most entrepreneurs fail. Two thirds of all new businesses in the US close their doors forever within the first five years of life. Enough succeed, however, for wealth to be created in many instances. What the successful entrepreneurs all have in common is the ability to provide a product or service that customers want to buy at a price that exceeds the cost of production. This is the wealth that they create: the profits from the enterprise.

As already explained, the wealth is not the products or services themselves: the capital goods—the machines, plastics or chemicals, or the consumer goods—the hamburgers, the movies, the automobiles. Many of these things (both capital and consumer goods) have little exchange value once they have been sold to the customers. To the extent that some exchange value remains, or that they can be converted into goods with an exchange value, and that there is a functioning exchange market which the customers can and do use to profit from reselling them, some part of them may represent wealth. By reselling them, however, the customers become entrepreneurs themselves: they must do the marketing and work to accumulate the wealth. 47 These resellers show up on the chart above as entrepreneurs.

Entrepreneurs begin with a dream. They have the drive, ambition, alertness, marketing and management ability and the willingness to accept risks necessary to turn their dreams into reality. Governments sometimes try to stimulate entrepreneurs by providing inexpensive credit, tax free sites, government advice and assistance. Such programs are seldom, if ever, successful. Why? Because no outside program can create the dreams and put them into the entrepreneurs’ heads. No one can give another person drive, ambition, alertness, marketing and management ability, or the willingness to accept risks. There are inspiring examples of successful individuals who have helped to create mass wealth. Bill Gates, Sam Walton, Fred Smith and Steve Jobs are recent examples.

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So why are entrepreneurs active and successful in some countries and hard to find in others? Because of cultural and regulatory differences. In parts of Africa, the absence of law and order inhibits entrepreneurs. In much of Latin America, where there is law and order, governmental regulations make it extremely difficult to start a business, or to conduct it within the law. Much is made of the idea of “corruption” as being a restraint on the wealth creation process. This is probably wrong. Corruption usually comes about through the efforts of entrepreneurs to obtain a monopoly or to get around some government regulation which is standing in the way of wealth creation.48 Take away the regulations, and the corruption disappears as well. Corruption is a sign that governmental laws or regulations must be modified or removed so that mass wealth can be created. Societies that wink at corruption and fail to remove its causes, destroy respect for law and order which is essential to mass wealth creation.

In the former Soviet Union, seventy years of communism left a system and populace that frowns on the idea of private property, profits, and entrepreneurs. In many cases, their court system will not uphold and enforce private contracts. The state still has the right in some cases to expropriate private property. While some entrepreneurs have become very rich in Russia by discovering how to get around existing regulations, few of the mass wealth creation processes normal in developed countries are functioning. Few people in the industrialized world today can go to a store and purchase a competitive consumer product made in the former Soviet Union. Until that happens, we can be sure that mass wealth creation is not going on there.

Entrepreneurs are not only essential to mass wealth creation, they are the most difficult for outsiders to create. It is far easier to set up financial institutions, or encourage people to save than it is to find individuals with vision, imagination, alertness, drive, management ability, marketing effectiveness and guts who are willing to become entrepreneurs. The entrepreneurs have to create themselves. Most economists overlook these essential people because they cannot understand or quantify them. Like Keynes and his followers, they just assume that entrepreneurs will automatically spring into existence49, motivated by “animal spirits” and “profit maximization” to create “given outputs” with “given scarce inputs.” By ignoring them, they overlook the most important essential ingredient in the mass wealth creation process.

How Wealth Grows

While entrepreneurs are busy providing products and services for their customers, and jobs for their employees, wealth is growing in the hands of savers, intermediaries and entrepreneurs. What creates the wealth? The indirect investment of savings in the accumulation of capital which is used in the division of labor. When a farmer invests in new seeds, fertilizer, or machinery that increase his output per acre by X%, and profit by Y%, he has created wealth – but seldom mass wealth. When Intel creates a new PC chip that works ten times as fast as the previous chip—and thereby sells millions more chips which build their net profit by Z%, they are

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creating wealth for themselves, and for the intermediaries and savers involved in the process. This type of wealth is usually created by indirect investment.

The rich get richer

Many analysts deplore the gap between the wealth of the rich and the poverty of the poor in wealthy countries like the United States or Canada. Listening to their complaints, it sometimes sounds as if they are saying that it would be better for the poor if there were not so many rich people. Somehow, the wealth of the rich is an affront to the poor. But how could that be? The only people in society who are capable of generating more wealth are those who already have some that can be saved and lent to others (intermediaries and entrepreneurs) who use it to generate more wealth. Wealth creation involves providing employment for workers, and products and services for consumers. Both of these directly assist the poor. Without the wealthy savers, the US economy would be as poor as most of those in Africa. Neither intermediaries nor entrepreneurs would be able to prosper.

Such contrasts between rich and poor are usually illustrated by showing that the lowest quintile of the population receives a very small percentage of the nation’s income. In reality, such a comparison is totally misleading. In a typical situation, the lowest quintile in terms of income would have about, let us say, 10% of the national income. Enter a group of multi-national corporations which set up dozens of factories. The factories create a lower middle class group of factory workers who for the first time have a decent income. They are not rich, by any means, but they have enough income to own a dwelling or an automobile. National income goes up. The top four quintiles (80% of the population) now have 91% of the income, instead of 90%. What happens to the lowest quintile? Their income is higher than it was, but their share went up by very little. The left cries “Foul…The rich are getting richer and the poor are getting poorer”, but actually the income of the poor is going up. Using this reasoning, any economic progress at all is cause for complaints and recriminations. 50

Share 2011 Share 2010Lowest 3.40% $11,552 3.26% $10,994Second 8.61% $29,257 8.47% $28,532Middle 14.57% $49,534 14.59% $49,167Fourth 23.15% $78,694 23.41% $78,877

Top 50.27% $170,884 50.27% $169,39

1

TOTAL 100.00%

$339,921

100.00%

$336,961

Actual change in income US 2010-201151

Figure 4 Rich get richer and so do the Poor

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How would reducing the wealth of the wealthy improve the situation of the poor? It would not. Every additional dollar that a rich man saves and places with intermediaries provides more opportunity for the poor to prosper. Every rich man whose wealth is reduced or taxed away reduces the potential of the wealth creation process, and therefore reduces the employment opportunities for the poor. Furthermore, the rich help the wealth creation process without doing anything particularly heroic. All they have to do is keep their savings in a bank or other financial intermediary. As Edwards points out, “There is ample evidence that over the medium and long run, faster growth is the main determinant of poverty reduction, improved social conditions, and reduced inequality… In Costa Rica, GNP per capita grew 41 percent between 1961 and 1971 and poverty was cut in half.” 52

Government to the rescue

What about government assistance in the wealth creation process? Why do we need savers, intermediaries and entrepreneurs? Couldn’t our wealth grow through effective placement of government funds? This has been a basic argument of socialists for the last 100 years. They seek to eliminate private wealth, and substitute public wealth—goods and services that can be owned and enjoyed by all. Let’s look at our model and see how this works.

For the government to create wealth in this way, it would need money. Where could the government get this money? There are only three possible sources: a) increased tax revenues, b) borrowing, or c) expansion of the money supply. As we will show in the following sections, all three methods retard the wealth creation process. Once the government has accumulated the revenue, however, it might be able to use it to create wealth which would exceed the reduction in wealth caused by the revenue raising process. This we will explore in a later section. Right now, let’s concentrate on the effect on the economy of raising the revenue. Let’s begin with taxes:

a) Raising Government Revenue through Tax Increases

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Savers Intermediaries Entrepreneurs

Resources

Buyers

Profit Profit Profit

The Indirect Investment System With Taxes

Taxes Taxes Taxes

Lower profit=> lower savings=> lower investment=> lower wealth creation

LowerLower

Let us suppose that the government wants to institute a wealth creating program financed by means of higher taxes. If the government raises new taxes, normally all three wealth creators—savers, intermediaries, and entrepreneurs will pay a part of these taxes. What will be the result? Well, if the government raises income taxes on savers, they may pay for these taxes partly by reducing their consumption, but mainly by reducing their savings by much more – so as to maintain their standard of living (housing, medical care, etc.).

The reduction in savings will produce a reduction in wealth creation. The reduction in consumption does not reduce wealth, since consumption goods in the hands of consumers normally do not represent wealth. But the loss of sales by this drop in funds available for consumption will inhibit the entrepreneur’s ability to sell his products and therefore to create mass wealth. The entrepreneur’s profits will go down. So will the profits of the intermediaries and the savers. Increased business taxes on intermediaries and entrepreneurs account for an additional reduction in profits.

There are more subtle changes due to the taxes which may reduce wealth creation even more. Since the saver’s return on his savings will be reduced – say from 5% to 3.3%, this reduction may reduce his incentive to save in future years. Both the intermediary and the entrepreneur have also taken a hit on their return for their efforts. Some entrepreneurs, in particular, may decide that the game is not worth the candle. Loss of entrepreneurs is a fatal problem in a society intent on generating mass wealth.

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The net effect of the tax is to reduce wealth created, but at the same time to increase government revenue. Later in this paper, we will discuss what the government could do with this revenue to create wealth.

What does government at present do with tax revenues? Small percentages of government revenues do go towards spending which contributes to the maintenance or growth of wealth: defense, police and judiciary and some capital investment—principally the building of roads and schools. Unfortunately this government “Investment” is not really investment in the sense that we have been using it here (entrepreneurs using capital to generate wealth). The government does not realize a profit from its investments as the entrepreneurs do on theirs. The, police, court, schools, and the defense departments do not return a profit. So, while they are essential to wealth creation, they do not create wealth in themselves. The percentage of government revenue devoted to these functions is modest—typically about 20%. We are not counting public services (water, electricity, education, postal, land management, etc.) which could, and probably should, be conducted more efficiently by the private sector. The bulk of government revenue in the US and most developed countries is spent on income redistribution. 53If we look ahead, unless present laws are changed, income redistribution will increase as a percentage of the budget year by year. As you can see from the diagram, taxing people to redistribute their wealth has the effect of reducing the wealth creation process.

Left leaning politicians today speak of governmental expenditures for such services as education and health care as “investments” – the idea being that through education or better health, workers will be able to produce more – just as investment in capital equipment makes workers more efficient. There is a flaw in this reasoning. As pointed out by Brian M. Riedl “Government spending fails to stimulate economic growth because every dollar Congress "injects" into the economy must first be taxed or borrowed out of the economy. Thus, government spending "stimulus" merely redistributes existing income, doing nothing to increase productivity or employment, and therefore nothing to create additional income. Even worse, many federal expenditures weaken the private sector by directing resources toward less productive uses and thus impede income growth.”54 Private capital investment, on the other hand, comes from saving; a process which does not reduce national wealth.

b) Increase in government debt

What about borrowing? Government can easily issue bonds which would seem not to have the pernicious effect on wealth creation that taxes have. Suppose, in their efforts to set up a mass wealth stimulation fund, the government sells a few billion dollars’ worth of bonds, rather than obtaining the funds through taxation. Intermediaries are particularly susceptible to the blandishments of government. Government bonds are safe investments. The Federal Reserve smiles on those who invest in them. Many banks buy them, even though they pay a return that

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may be considerably less than that paid by entrepreneurs. Bonds have almost no administrative costs. What happens to wealth creation when government finances itself through borrowing?

Savers Intermediaries Entrepreneurs

Resources

Buyers

Profit Profit Profit

The Indirect Investment System With Government Borrowing

Taxes Taxes Taxes

Lower profit=> lower savings=> lower investment=> lower wealth creation

LowerLower

Government Bonds

Less investment because funds go

to government bonds

Taxes will be lower, but still needed to pay bond interest

Deficit financing actually reduces wealth more than comparable increases in taxes. When the government runs a deficit, it sells bonds in the financial markets. Who buys these bonds? In general it is the financial intermediaries who find government bonds a better investment than private placement.

Deficit financing appears to savers to affect them less than taxes. They receive their normal return on their investment but the real impact of deficit financing on overall wealth creation is more disastrous for two reasons:

1) Deficit financing creates an obligation on its citizens to repay the debt. Citizens are not aware of this obligation. They see the interest coming to them from the bank as a result of their savings deposit. No one told them that as a result of what the intermediary did with their money, they are now responsible for repaying a large government debt. A tax increase contains no such hidden obligations.

2) Deficit financing requires annual interest payments. Since government does not generate profits which could be used to make these payments, these interest payments also must come from the savers through taxes, not just this year, but year after year until the government debt is repaid.

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In other words, if the government is going to finance increased spending, the effect on wealth creation is more straightforward, and has fewer long term implications if it is taken directly through increased taxes than if it is generated by selling bonds. Unfortunately, taxes are harder to enact. There are political problems (passing an increased tax law), and collection problems (the savers will hire accountants and tax lawyers to get around the new taxes). It is much easier to issue new bonds since there are few effective political restraints on borrowing, and few administrative problems. Bonds always sell easily. The process is painless. No one realizes that their wealth is being traded away.

c) Money Supply Creation

There is the final case, where government gets its increased revenues from selling its bonds (seigniorage) to the Federal Reserve which creates the necessary funds by increasing the reserves of member banks. The bonds pay interest, of course, like all bonds, but the Federal Reserve does not make a profit. They turn all profits back to the Treasury each year. In effect, there are few, if any, real interest payments required on these bonds. The money for the bonds does not come out of the pool of savings needed by the entrepreneurs, since the bonds are not sold in the open market. The resulting picture is quite different:

Savers Intermediaries Entrepreneurs

Resources

Buyers

Profit Profit Profit

Government sells bonds to the Federal ReserveValue of money goes down, prices go up

Interest rates go down and entrepreneurs are stimulated by lower interest rates and higher prices.

Government Bonds

Federal Reserve

Somewhere, off stage, the government has borrowed from the Federal Reserve. It uses this money to finance its activities. The Fed’s open market operation lowers the market rate of interest by increasing member bank reserves. This, in turn, increases the supply of loanable funds and reduces the interest paid on savings. Their incentive to save is reduced. For intermediaries, it means lower interest rates received from lending which they adjust for by

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paying savers less. For entrepreneurs, it means lower gross profits due to a combination of causes: lower interest rates in the market generally, and higher prices paid for inputs. On the other hand their bank loans are cheaper, so they have the same net profit as before. Entrepreneurs are not discouraged, initially, by the process, as they would be by increased taxes or deficit financing in the capital market.

US Federal Debt 1940 – 2020 55

Since 2008, as shown on this chart, the US Public Debt has grown at an unprecedented peacetime rate. Every month, the Treasury prints and the Federal Reserve buys about $85 billion worth of bonds in a process called Quantitative Easing (QE). What has been the effect on the US economy of QE?

1) Interest rates from 2008 to 2014 have been held to an unprecedented low rate – close to zero percent.

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56

2) The stock market has been on an increase.

Inflation has been kept to an extremely low rate.

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57

The extra money which the Fed has created, and the government spends, should inflate the money supply, and lead to an increase in prices. The amount of the price increase depends on the extent of the borrowing. If we look at the experience in 2008 to 2012, we see that the average annual increase in the money supply due to Federal Reserve actions was less than 2% The effect on prices is harder to measure, since an expanding economy and technological advances tend to compensate for inflation of the currency. Let us assume a net effect of 2% per year in reduction in the value of total wealth. This means that the saver’s funds are reduced in value by about 2% per year.

One effect of the practice is to maintain interest rates below their natural level. Savers get a lower return than they deserve, but borrowers have a field day. To prevent serious price increases, the Federal Reserve periodically reverses course, and uses open market operations to make drastic increases in interest rates. The up and down movement creates a business cycle.58 The effect is to put a lot of entrepreneurs out of business every few years. It is mainly those whose businesses depended on the artificially low interest rates. The ensuing recession puts several million workers on the unemployment rolls. Temporarily, savers get more for their money, and borrowers pay more for their loans. Within a couple of years, the Fed is back playing its inflationary game again. How can we quantify the reduction in wealth created by increased unemployment and by putting many entrepreneurs out of business due to this process of “fine tuning” the interest rates? This is hard to do since the impact is felt over a ten year (or longer) cycle.

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What about the debt created? The treasury has printed billions of dollars’ worth of bonds which have been sold to the Federal Reserve. At some point these bonds will mature and have to be paid back. How will the Treasury do this? By printing more bonds which the Federal Reserve will pay for by further increases in the money supply. Since it is all an internal government sleight of hand, the taxpayer is not burdened as he would be by bonds sold to financial intermediaries or foreign governments.

One often hears complaints that the government debt (currently US: $17,555,437,713,940) 59

in 2014) represents a terrible burden on future generations when the bond buyers (often pictured as Chinese) demand repayment in cash. That is a scary thought. In reality the picture is somewhat different. The Chinese accumulated the bonds by selling products to American markets. The US dollar is still a world reserve currency which the Chinese can use to buy oil, gas or coal (and other products and services) on world markets. At any time that the Chinese want more oil, they can pay for it using accumulated US Treasury bonds. Much of the national debt is held by US government agencies and private companies and individuals.

Here is the breakdown of the owners of the $17 Trillion US national debt as of May 2014:

Foreign - $5.724 trillion Federal Reserve - $1.794 trillion State and Local Government, including their pension funds - $703.5 billion Mutual Funds - $946.4 billion Private Pension Funds - $457.7 billion Banks - $341.4 billion Insurance Companies - $263.3 billion U.S. Savings Bonds - $181.7 billion Other (individuals, government-sponsored enterprises, brokers and dealers, bank

personal trusts and estates, corporate and non-corporate businesses, and other investors) - $1.497 trillion. 60

Which revenue generating method reduces wealth creation the most?

Of the three methods of generating additional revenue, inflation of the money supply seems to reduce wealth creation by the least amount. Wealth creation with inflation seems to be positive, not negative. It is the only one of the three, however, that causes business cycles which will eventually throw millions of people out of work for temporary periods. Whether this is bad or good, we will let the reader judge.

Government Directed Mass Wealth Creation

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Suppose, however, that through taxes, or borrowing, or money supply creation, the government sets up a fund for the purpose of creating mass wealth. “Instead of having profit-seeking private savers and costly intermediaries doing the work, public spirited, altruistic government officials will allocate government investment funds to their highest and best use, using the opinions of the best economists, engineers and policy planners in the land. Here will be mass wealth creation without all the wasteful competition and production of useless luxuries that accompany the free market,” the government policy planners will explain.

“Here will be an economy directed at maintaining full employment, keeping established industries going, helping develop underdeveloped areas and helping underprivileged citizens. Mindful of the future, the fund will, of course, seek out the latest technology here and abroad to be sure that the economy is kept up to date and does not become backward as so many socialist regimes have in the past. The fund will avoid wasteful competition by having individual firms compete for government contracts to manufacture products. The best competitors will win and will get all the business without competition. The losers can compete on the next round, just as defense contractors do. What could be fairer than that?” our policy planners will exclaim.

Of course, the answer is that through government wealth creating programs, wealth is not created, it is destroyed. The money taken for government programs comes out of the private sector which – with all of its inefficiency, ends up creating wealth. Government programs put the funds into the public sector which has much greater levels of inefficiency. The result is the destruction of wealth, as we shall see.

The Gini Coefficient

The Gini coefficient is a measure of statistical dispersion intended to represent the income distribution of a nation's residents. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" (Italian: Variabilità e mutabilità). 61

To understand it, you have to think like a Gini economist. The basic idea is that the income generated by people working in an economy does not belong to them. Instead, the income is considered to be general income for society from whatever source. The question is, to whom should this income be distributed? A fair answer is “Equally to everyone in society”. If someone does something wonderful like generating a new product like a IPhone or a major motion picture, who should get the revenue from this new product? How should we distribute the revenue? The answer is a Marxist one: equally to every resident in this country. Those who created the new product should be congratulated but not rewarded with income. A society that rewards some people with the profits from their work is an unfair society,62

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The Gini coefficient measures the inequality among values of a frequency distribution (for example levels of income). A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income). A Gini coefficient of one (or 100%) expresses maximal inequality among values (for example where only one person has all the income).63 Gini coefficient is commonly desscribed as a measure of inequality of income or wealth.64 For OECD countries, in the late 2000s, considering the effect of taxes and transfer payments, the income Gini coefficient ranged between 0.24 to 0.49, with Slovenia the lowest and Chile the highest. The countries in Africa had the highest pre-tax Gini coefficients in 2008–2009, with South Africa the world's highest at 0.7. The global income inequality Gini coefficient in 2005, for all human beings taken together, has been estimated to be between 0.61 and 0.68 by various sources. 65

You will note that, using the Gini index, the United States is one of the world’s most unequal ecoonomies. That is not an accident. It was one of the objectives of economists who developed

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and publicized the Gini index. The US is the leading capitalist country. The good countries, like Norway, Denmark and Sweden (socialist countries) are those to be emulated.

What’s wrong with income inequality? Does it hurt the poor that there are rich people in the country? It does not. If you wiped out all the rich people in the country, would the poor people be better off or worse off? Clearly they would be worse off. The rich people provide jobs for the poor, and their savings permit the economy to grow faster than it would without their saving.

Human Development Index

The Human Development Index (HDI) is a composite statistic of life expectancy, education, and income indices used to rank countries into four tiers of human development. It was created by the Pakistani economist Mahbub ul Haq and the Indian economist Amartya Sen in 199066 and was published by the United Nations Development Programme.67 It is based partly on the GINI coefficient.68

In the 2010 Human Development Report a further Inequality-adjusted Human Development Index (IHDI) was introduced. While the simple HDI remains useful, it stated that "the IHDI is the actual level of human development (accounting for inequality)" and "the HDI can be viewed as an index of "potential" human development (or the maximum IHDI that could be achieved if there were no inequality)".69

To produce the Human Development Reports, Mahbub ul Haq brought together a group of well-known development economists including: Paul Streeten, Frances Stewart, Gustav Ranis, Keith Griffin, Sudhir Anand and Meghnad Desai. 70 Working along with Nobel laureate Amartya Sen, they worked on capabilities and functionings that provided the underlying conceptual framework. Haq was sure that a simple composite measure of human development was needed in order to convince the public, academics, and policy-makers that they can and should evaluate development not only by economic advances but also improvements in human well-being. Sen initially opposed this idea, but he soon went on to help Haq develop the Index in the future. Sen was worried that it was going to be difficult to capture the full complexity of human capabilities in a single index but Haq persuaded him that only a single number would shift the attention of policy-makers from concentration on economic to human well-being.

New calculation method (2010 Report onwards)

Published on 4 November 2010 (and updated on 10 June 2011), starting with the 2010 Human Development Report the HDI combines three dimensions:

A long and healthy life: Life expectancy at birth Education index : Mean years of schooling and Expected years of schooling A decent standard of living: GNI per capita (PPP US$) 71

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2013 report

The 2013 Human Development Report by the United Nations Development Program was released on March 14, 2013, and calculates HDI values based on estimates for 2012. Below is the list of the "very high human development" countries:

Note: The green arrows ( ), red arrows ( ), and blue dashes ( ) represent changes in rank when compared to the new 2012 data HDI for 2011 – published in the 2012 report.

1.  Norway 0.955 ( )2.  Australia 0.938 ( )3.  United States 0.937 ( 1)4.  Netherlands 0.921 ( 1)5.  Germany 0.920 ( 4)6.  New Zealand 0.919 ( 1)7.  Ireland 0.916 ( )8.  Sweden 0.916 ( 3)9.   Switzerland 0.913 ( 2)10.  Japan 0.912 ( 2)11.  Canada 0.911 ( 5)12.  South Korea 0.909 ( 3)13.  Hong Kong 0.906 ( )14.  Iceland 0.906 ( )15.  Denmark 0.901 ( 1)16.  Israel 0.900 ( 1)17.  Belgium 0.897 ( 1)18.  Austria 0.895 ( 1)19.  Singapore 0.895 ( 7)20.  France 0.893 ( )21.  Finland 0.892 ( 1)22.  Slovenia 0.892 ( 1)23.  Spain 0.885 ( )24.  Liechtenstein 0.883 ( 16)25.  Italy 0.881 ( 1)26.  Luxembourg 0.875 ( 1)27.  United Kingdom 0.875 ( 1)28.  Czech Republic 0.873 ( 1)29.  Greece 0.860 ( )30.  Brunei 0.855 ( 1)31.  Cyprus 0.848 ( 1)32.  Malta 0.847 ( 4)33.  Estonia 0.846 ( )34.  Andorra 0.846 ( 1)35.  Slovakia 0.840 ( )36.  Qatar 0.834 ( 1)37.  Hungary 0.831 ( 1)

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38.  Barbados 0.825 ( 9)39.  Poland 0.821 ( )40.  Chile 0.819 ( 4)41.  Lithuania 0.818 ( 1)42.  United Arab Emirates 0.818 ( 12)43.  Portugal 0.816 ( 2)44.  Latvia 0.814 ( 1)45.  Argentina 0.811 ( )46.  Seychelles 0.806 ( 6)47.  Croatia 0.805 ( 1)

Inequality-adjusted HDI

The Inequality-adjusted Human Development Index (IHDI) is a "measure of the average level of human development of people in a society once inequality is taken into account." 72

1.  Norway 0.894 ( )2.  Australia 0.864 ( )3.  Sweden 0.859 ( 3)4.  Netherlands 0.857 ( )5.  Germany 0.856 ( )6.  Ireland 0.850 ( )7.   Switzerland 0.849 ( 1)8.  Iceland 0.848 ( 3)9.  Denmark 0.845 ( 3)10.  Slovenia 0.840 ( 7)11.  Finland 0.839 ( 6)12.  Austria 0.837 ( 3)13.  Canada 0.832 ( 4)14.  Czech Republic 0.826 ( 9)15.  Belgium 0.825 ( 1)16.  United States 0.821 ( 13)17.  Luxembourg 0.813 ( 4)18.  France 0.812 ( 2)19.  United Kingdom 0.802 ( 2)20.  Spain 0.796 ( 1)21.  Israel 0.790 ( 8)22.  Slovakia 0.788 ( 6)23.  Malta 0.778 ( 3)24.  Italy 0.776 ( 4)25.  Estonia 0.770 ( 2)26.  Hungary 0.769 ( 3)27.  Greece 0.760 ( 3)28.  South Korea 0.758 ( 18)29.  Cyprus 0.751 ( 4)30.  Poland 0.740 ( )

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31.  Montenegro 0.733 ( 8)32.  Portugal 0.729 ( 1)33.  Lithuania 0.727 ( 1)34.  Belarus 0.727 ( 3)35.  Latvia 0.726 ( 1)36.  Bulgaria 0.704 ( 5)

Note that in the new index the United States has fallen to 16th from 3rd place, due to the great unequality in income distribution present in the United States.

Criticism The Human Development Index has been criticized on a number of grounds including alleged ideological biases towards egalitarianism and so-called "Western models of development", failure to include any ecological considerations, lack of consideration of technological development or contributions to the human civilization, focusing exclusively on national performance and ranking, lack of attention to development from a global perspective, measurement error of the underlying statistics, and on the UNDP's changes in formula which can lead to severe misclassification in the categorization of 'low', 'medium', 'high' or 'very high' human development countries. The index has also been criticized as "redundant" and a "reinvention of the wheel", measuring aspects of development that have already been exhaustively studied. It has been further criticized for an inappropriate treatment of income, lacking year-to-year comparability, and assessing development differently in different groups of countries. 73

Economists Hendrik Wolff, Howard Chong and Maximilian Auffhammer discuss the HDI from the perspective of data error in the underlying health, education and income statistics used to construct the HDI. They identify three sources of data error which are due to (i) data updating, (ii) formula revisions and (iii) thresholds to classify a country’s development status and find that 11%, 21% and 34% of all countries can be interpreted as currently misclassified in the development bins due to the three sources of data error, respectively. The authors suggest that the United Nations should discontinue the practice of classifying countries into development bins because the cut-off values seem arbitrary, can provide incentives for strategic behavior in reporting official statistics, and have the potential to misguide politicians, investors, charity donors and the public who use the HDI at large. In 2010 the UNDP reacted to the criticism and updated the thresholds to classify nations as low, medium, and high human development countries. In a comment to The Economist in early January 2011, the Human Development Report Office responded to a January 6, 2011 article in the magazine which discusses the Wolff et al. paper. The Human Development Report Office states that they undertook a systematic revision of the methods used for the calculation of the HDI and that the new methodology directly addresses the critique by Wolff et al. in that it generates a system for continuous updating of the human development categories whenever formula or data revisions take place.74

Each year, UN member states are listed and ranked according to the computed HDI. If high, the rank in the list can be easily used as a means of national aggrandizement; alternatively, if low, it

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can be used to highlight national insufficiencies. Using the HDI as an absolute index of social welfare, some authors have used panel HDI data to measure the impact of economic policies on quality of life.

Ratan Lal Basu criticises the HDI concept from a completely different angle. According to him the Amartya Sen-Mahbub ul Haq concept of HDI considers that provision of material amenities alone would bring about Human Development, but Basu opines that Human Development in the true sense should embrace both material and moral development. According to him human development based on HDI alone, is similar to dairy farm economics to improve dairy farm output. To quote: "So human development effort should not end up in amelioration of material deprivations alone: it must undertake to bring about spiritual and moral development to assist the biped to become truly human." For example, a high suicide rate would bring the index down.

A few authors have proposed alternative indices to address some of the index's shortcomings. However, of those proposed alternatives to the HDI, few have produced alternatives covering so many countries, and that no development index (other than, perhaps, Gross Domestic Product per capita) has been used so extensively—or effectively, in discussions and developmental planning as the HDI.

However, there has been one lament about the HDI that has resulted in an extending of its geographical coverage: David Hastings, of the United Nations Economic and Social Commission for Asia and the Pacific published a report geographically extending the HDI to 230+ economies, whereas the UNDP HDI for 2009 enumerates 182 economies and coverage for the 2010 HDI dropped to 169 countries. 75

Further Criticism

The whole idea of adjusting a country’s ranking for inequality is actually nonsense. Notice that using the adjustment the United States slips from number 3 in the world to number 16. Why? Because there are 960,000 millionaires the US. Does this mean that poor people have a harder time to advance in income or education in the US than they do in Slovenia (Number 10) where there are less than one thousand millionaires? How does having many millionaires make life difficult for the poor? It doesn’t. In general, millionaires own businesses that provide jobs for the poor. The lowest income tax rate in Slovenia is 16%. The lowest income tax rate in the US is zero. 43% of Americans pay no income tax.76 This is another reason for unequality in the United States.

In summary, using the unequality adjusted GDP index for policy purposes is useless. It may make the leaders of Slovenia feel good that their country is doing so well, but it would never persuade US congressmen to raise taxes on the poor (and thereby reduce our economic growth rate) just to look good on our international comparisons.

Economic Freedom

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Wealth can only be created in countries where there is economic freedom. Economic Freedom is measured annually by the Heritage Foundation and by the Wall Street Journal. 77

For much of human history, most individuals have lacked economic freedom and opportunity, condemning them to poverty and deprivation. Today, we live in the most prosperous time in human history. Poverty, sicknesses, and ignorance are receding throughout the world, due in large part to the advance of economic freedom.

This year marks the 20th anniversary of the Index of Economic Freedom. With its user friendly format and straight-forward analysis, readers can track up to two decades of advancement in economic freedom, prosperity, and opportunity.

The Index covers 10 freedoms – from property rights to entrepreneurship – in 186 countries.

Frequently Asked Questions

Q.1. What is economic freedom?

Economic freedom is the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.

Q.2. What are the benefits of economic freedom?

Economic freedom brings greater prosperity. The Index of Economic Freedom documents the positive relationship between economic freedom and a variety of positive social and economic goals. The ideals of economic freedom are strongly associated with healthier societies, cleaner environments, greater per capita wealth, human development, democracy, and poverty elimination.

Q.3. How do you measure economic freedom?

The list measures economic freedom based on 10 quantitative and qualitative factors, grouped into four broad categories, or pillars, of economic freedom:

1. Rule of Law (property rights, freedom from corruption);2. Limited Government (fiscal freedom, government spending);3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom); and4. Open Markets (trade freedom, investment freedom, financial freedom).

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Each of the ten economic freedoms within these categories is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these ten economic freedoms, with equal weight being given to each. 78

Q.4. Which components of economic freedom are most important?

The Index of Economic Freedom considers every component equally important in achieving the positive benefits of economic freedom. Each freedom is weighted equally in determining country scores. Countries considering economic reforms may find significant opportunities for improving economic performance in those factors in which they score the lowest. These factors may indicate significant binding constraints on economic growth and prosperity.

Q.5. What is the period of study?

For the 2014 , most data covers the second half of 2012 through the first half of 2013. To the extent possible, the information considered for each factor was current as of June 30, 2013. It is important to understand that some factors are based on historical information. For example, the monetary policy factor is a 3-year weighted average rate of inflation from January 1, 2010, to December 31, 2012.

Q.6. Can people access the data online?

The Index of Economic Freedom can be easily explored using a variety of tools on the Heritage interactive website, including:

Country Rankings : See where your country ranks in the Index and compared to its peers, and keep up with political and economic developments on each country’s page.

Graph the Data : Customize and compare country scores in up to three countries using interactive graphics.

Explore the Data : Download 20 years of historical Index data, including macroeconomic indicators, and a regional breakdown of Index scores since 1995.

Heat Map : Visualize the 2014 Index of Economic Freedom in this stunning and interactive map of the world. Find out how competitive your region is in achieving the ideals of economic freedom.

Downloads : Download the entire Index of Economic Freedom book, or pick individual chapters, the methodology, or regional maps.

Q.7. How is the Index of Economic Freedom used?

The Index of Economic Freedom is a helpful tool for a variety of audiences, including academics, policymakers, journalist, students, teachers, and those in business and finance. The Index provides an objective tool for analyzing 186 economies throughout the world. Each country page is a resource for in-depth analysis of a country’s political and economic developments. Historical Index data can provide long-term insights. Furthermore, the 10 economic freedoms

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provide a comprehensive set of principles for those who wish to understand the fundamentals of economic growth and prosperity. The freedom index is shown with other data on the country comparisons.

How governments plan to create wealth

How can government use a large fund of money taken from the private sector to create mass wealth? Let’s explore the options. There appear to be four methods, all of which have been tried at one time or another by various governments and international institutions.

1) Government Enterprises: create wealth directly through well run government enterprises

2) Training: provide training to entrepreneurs and workers3) Infrastructure: build the necessary infrastructure for private wealth creation4) Assist worthy entrepreneurs: provide credit or tax incentives to worthy entrepreneurs

1) Government Enterprises

We don’t need to spend much time on this option. Almost all government enterprises in all countries of the world have ultimately proved to be failures from a profit making point of view. They almost all lose money. Why? Because most of them are not supposed to make money. Government enterprises always are saddled with multiple objectives, specified in their enabling legislation, few or any of which are directed at making profits. Once a government enterprise is created, politicians always insist in controlling their price structure (to favor the poor), their employment methods (to favor unions or the handicapped, or minorities, or some other politically active group), their pensions (made generous through the efforts of a government sanctioned union), their location (to help rural areas, or inner cities, or areas of high unemployment), etc. These things are inevitable. This is democracy.

There is a second, and more powerful reason for the failure of socialized enterprises. They are run by civil servants who do not know how to make a profit, and are not supposed to have any personal stake in the outcome of the enterprise they are running. Most private enterprises fail within five years of inception. As a result only the fittest survive. Government enterprises never fail. The unfit majority survives along with the fit minority. The inefficiency of public enterprises was shown in a dramatic way in the privatization efforts of Latin American countries after 1980. Argentina, Brazil, Chile, Mexico and Venezuela privatized 1,666 enterprises from 1980 to 1982. 79 In the case of Aeromexico, labor productivity more than doubled after privatization. A second airline, Mexicana increased labor productivity by 47% after sale. Chile and Mexico reduced their costs of shipping by 50 percent by deregulating. When Argentina

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privatized its railway system, the total labor force was reduced from more than 95,000 to a mere 5,000 full time employees.80 Virtually all the 1,666 firms privatized were unprofitable and had to be subsidized before they were sold. Virtually all made a profit after privatization.

As we have shown, the only way for an enterprise to create mass wealth is for it to make a profit. Since few state owned enterprises ever make a profit, and most of them do not, they cannot succeed in creating mass wealth. Moreover, because they lose money and must be subsidized, they destroy mass wealth.

Perhaps the most outstanding recent example of government sponsorship of industry is federal loan guarantees to Solyndra in 2009-2013. Solyndra made solar panels by a new and unique system. The US Energy Department selected Solyndra as an ideal governmentally supported industry for several reasons. 1) It provided solar power which was considered ideal because solar energy did not involve CO2. Solar was considered good because it did not involve global warming. 2) It would help towards a governmental objective of becoming independent of imported oil. 3) It was a new technology which could be speeded up by governmental assistance.

After a few years, Solyndra went bankrupt. The solar panels which it created were higher in cost than those of the competition and could not be sold. Ultimately the investment cost the Department of Energy $535,000,000 which was a total loss and as a result reduced mass wealth.81

U.S. taxpayers think they lost around $535 million in the Solyndra federal loan guarantee by the Department of Energy. But, in fact, the loss could be as high as $849 million, more than 50 percent higher. After Solyndra went bankrupt in August of 2011, the U.S. Department of Energy approved a deal to attract more private investment to the company. Part of the deal was that the private creditors could write-off more than $350 million in taxes, making the total loss to American taxpayers for Solyndra as much as $849 million.82

The Solyndra Debacle Gets Even Bigger

After filing for bankruptcy in August of last year, Solyndra sold its manufacturing plant, fired around 1,000 employees and proved that its business model was not viable. But, according to the Internal Revenue Service (IRS), Solyndra still had real assets that the IRS refers to as “tax attributes,” totaling between $875 million and $975 million in net operating losses that can reduce future taxable income by as much as $350 million. Besides the ‘tax attributes’, Solyndra also had a total of $12 million in solar tax credits that can reduce tax liabilities by an equal dollar amount.

The Department of Energy allowed private investors to capture these tax attributes and get first dibs in the case of bankruptcy in exchange for $75 million to keep Solyndra in business. 83

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2) Training the Entrepreneurs and Workers

Where did anyone ever get the idea that government bureaucrats have anything of value to contribute to the post graduate education of entrepreneurs or workers? Successful entrepreneurs have to be dreamers who have alertness, management ability, marketing ability, drive, imagination. Only about 20% survive. How can you teach these things? You can’t. On the job training and rough experience is what works in the private field.

The US government has more than 50 programs to train workers for private industry. Almost all are total failures.84 There are multiple reasons. Most are directed at retraining displaced or unemployed workers. This is hard to do, and seldom works well. The placement rate of graduates is dismal. To do post graduate training well, the schools have to anticipate the needs of industry. This is hard to do since the needs are constantly changing as new industries with new skills (chip manufacture, software development in new languages, multimedia design) come along. There are only two successful methods that work in the private field: on the job training by employers, and organized, worker financed, training in skills like computer programming, nursing, accounting, etc.

Schools like the Computer Learning Center require their students to pay $6,000 or more to learn programming. They guarantee placement for successful graduates. To assure success, they have to screen entrants carefully, and work closely with prospective employers. Why are they successful? Because their students have spent a lot of money on the training and have a drive to succeed. Government training programs usually lack all of these features. Their students, typically, pay nothing for the training. If they are screened at all, it is to assure that the poorest and least employable are selected for training. Training is provided by government employees who, in many cases, know little about the current needs of industry.

Private employers seldom hire the graduates of government programs. Why not? Because of their dismal failure rate. Private employers have two employment sources (in this order): 1) Steal employees from other enterprises and 2) Find likely looking young people and train them on the job. Both methods work well. Government cannot contribute to this process and is not needed.

3) Creating Infrastructure

In 1950, Raul Prebisch pointed out that most developed countries had industrial economies, while less developed countries sold raw materials. He suggested that tariffs to support indigenous manufacturing industries were essential for development. 85 His ideas led to more than three decades of miserable economic performance for the foolish countries that adopted them. To assume that manufacturing or infrastructure creation are essential to mass wealth is confusing cause and effect. Most wealthy people have expensive clothes and powerful

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automobiles. It does not follow that countries that lack mass wealth can achieve it by giving their peoples expensive clothes and powerful automobiles. These things, like well-developed infrastructure, come after the mass wealth is achieved, and cannot by themselves bring about mass wealth.

Chile had the most successful economy in the Western Hemisphere from 1985 to 1995—with GNP growing at a real rate of 7% per year,86 as contrasted with less than 3% per year during the same period for the US and Canada, the next two most successful economies. It is the only country in Latin American that came close to achieving mass wealth. But during this period, in comparison with the US and Canada, Chile had terrible roads, inadequate telephone service, very high cost electricity, poor quality drinking water, and only one major seaport on a coastline of more than 2,000 miles. Their postal service ranked quite low in comparison with others. Mail recipients had to pay to receive mail, in addition to the stamps put on the letters by those who sent them. Postal delivery in rural areas of Chile was almost non-existent. Supermarkets and capital goods markets were ten years behind the US and Canada. So, if infrastructure is essential to successful wealth creation, why did Chile do so well for that ten year period? The answer is that good infrastructure is the result of wealth creation, not its cause.

For many decades the World Bank financed public infrastructure projects. It is not allowed (by charter) to finance the private sector directly. Government funds spent on infrastructure may or may not have been wasted. But they did not of themselves create wealth. Taking funds away from wealth creating private processes to create public infrastructure reduces the overall wealth creation of the society as a whole. This has been one of the chief reasons why the World Bank has failed to create mass wealth. It has concentrated on infrastructure building projects which, as we have seen, are usually not required for mass wealth creation. Furthermore, the trillions of dollars of funds accumulated by the World Bank have been taken out of the private spending stream which would have contributed to the creation of mass wealth. Creating the infrastructure before the wealth needed to pay for it slows down the wealth creation process by burdening a developing country with debt for facilities that it does not currently need. As Edwards pointed out, “The economic history of Latin America is replete with cases of gigantic public sector projects—many of them in infrastructure—with very low, and even negative social returns.” 87 Much of the infrastructure created by the World Bank failed to produce the returns expected by the bank. Major projects such as irrigation projects in Asia and roads in Africa end up being poorly maintained by the state agencies responsible for them. 88

Lack of infrastructure (electricity, telephone service, roads, credit), resource markets (locations where you can buy the materials needed as inputs for the business), and modern marketing systems are seldom responsible for lack of development. In most cases these are not obstacles

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to the creation of mass wealth. Good infrastructure usually is developed after societies have achieved mass wealth, not beforehand. Spending money on creating infrastructure before the mass wealth exists probably retards development rather than advances it. It puts the society into debt for facilities that are not currently needed.

4) Providing Credit to Entrepreneurs

We come to the final and most common method for government to help in wealth creation: hand out loans and grants to farmers, rural credit institutions, economic development institutes, specially created public intermediaries, or to new established industries so as to spur wealth creation.

The World Bank seldom loans money directly to profit making institutions. Instead, it makes loans to host governments and intermediaries, which, in turn, loan the money to profit seeking firms and individuals. Hundreds of billions of dollars have been loaned to less developed countries in this way in the past fifty five years. What has been the result? Von Pischke explains: “…promoters of credit projects bring boundless enthusiasm to trying to get the poor into debt while generally failing to deal with the ensuing credit risk, which is rarely borne by the international or governmental agency designing the project. This occurs with the unswerving conviction that credit projects and financial adjustment projects, designed according to no particular financial standards or under ill-defined and unrealistic financial guidelines, promote development. Yet, the principal objective of the design process is obviating failure”. 89

We can sum up 50 years of failure in this field with a few simple truths:

1) The principal shortage in wealth creation is entrepreneurs, not credit or infrastructure. Government programs cannot create entrepreneurs.

2) Government credit administrators seldom know which are the most profitable uses for their funds, and are usually restrained by their corporate charters or politics from lending to these most profitable uses, even if they knew them. Market forces sort out the best uses of funds, which are seldom those predicted by expert panels of economists and engineers.

3) Success in wealth creation comes from those whose financial future depends on their making a profit. Failure means serious loss to them. Two thirds of entrepreneurs experience such failures. Government programs seldom if ever fail. They take a long time to close or be abandoned. When they fail to succeed, they are often resurrected. They seldom have the stringent repayment requirements imposed by private intermediaries. Government program administrators are usually judged on the amount of money they can lend, or the number of workers employed, not on the wealth that they create, or the repayments they collect.

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In summary, governments cannot create mass wealth. Only private savers, intermediaries, and entrepreneurs can do this. Taking money away from these three to create government wealth creation programs is an activity doomed to failure.

Why few countries will succeed in creating mass wealth.

There are about 173 independent countries with populations of 200,000 or more in the world. Only about 34 of them have reached the mass wealth status, of which only six have joined the mass wealth club in the past thirty years.90 This is a rate of one every three or four years. At this rate, it will take more than 100 years for all countries to achieve mass wealth. There are reasons to believe that this is a highly optimistic estimate. Unless there are very drastic and unlikely changes in most of these remaining countries, most of them will never achieve mass wealth. Why? Let’s return to the six basic requirements for mass wealth:

Private property. Accumulation of Capital Macroeconomic stability Entrepreneurship and competition

Access to the world market Indirect investment

What are prospects for meeting these six requirements in the underdeveloped world?

1) Private Property and Law and Order. Most of Africa has no hope of achieving mass wealth in the foreseeable future. Why? They do not have the type and degree of law and order which respects private property. How close is law and order? In most cases not close at all. With a few exceptions, almost all countries in this continent have been suffering from civil war and instability. This has been going on for more than five decades, and shows no signs of stopping. After independence, most countries were left with governments which were eventually overthrown by corrupt military regimes. For the past 50 years in Nigeria, Zaire, Rwanda, Burundi, Somalia, Sudan, Libya, Liberia and a dozen other countries prospects are remote for the establishment of law and order as it exists in mass wealth countries. The whole concept of private property is problematic in many of these cultures. The law on the books in colonial times would seldom have been applied to protect locals. Mass wealth is not even a theoretical possibility. This is true also in Cambodia, Laos, Afghanistan, Bosnia, Armenia, and Azerbaijan. Furthermore, the United Nations, NATO countries and the United States have shown a reluctance to being the world’s policemen, particularly in regard to civil wars and domestic insurrections. No one wants to do this, and no one is going to do it.

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Countries have to do it for themselves. Most of those without mass wealth cannot do it.

2) Accumulation of Capital. In most of these poor countries, the conditions for accumulating capital do not exist. Governments often control the banks and other intermediaries, preventing them from investing with entrepreneurs. Laws and regulations prevent entrepreneurs from starting or expanding businesses. Government borrowing has so depreciated the currency that savers have little to invest with intermediaries. As Von Mises pointed out, “If such a country is under a democratic government, the problems of capital preservation and accumulation of additional capital become the main issue of political antagonisms. There will be demagogues to contend that more could be dedicated to current consumption than those who happen to be in power or the other parties are disposed to allow. They will always be ready to declare that ‘in the present emergency’ there cannot be any question of piling up capital for later days and that, on the contrary, consumption of a part of the capital already available is fully justified. The various parties will outbid one another in promising the voters more government spending and at the same time a reduction of all taxes which do not exclusively burden the rich.”91

3) Macroeconomic stability. This does not exist in most poor countries. Edwards explains: “Populist regimes historically tried to deal with income inequality by using overly expansive macroeconomic policies. These policies, which relied on deficit financing, generalized controls, and a disregard for basic economic equilibria, almost unavoidably provoked major macroeconomic crises that hurt the poorer segments of society… At the end of every populist experiment, inflation is out of hand, macroeconomic disequilibria are rampant and real wages are lower than they were at the beginning of these experiences. The overriding historical lesson is that macroeconomic policy should not be used to pursue social or redistributive goals. Every time this principle is violated, the most vulnerable and poor segments of society are severely hurt.” 92

Macroeconomic instability due to government policies has been the fate of most countries in Latin America since 1950. Some countries, particularly Chile and Argentina, recognized this as a major problem. For these countries, mass privatization of nationalized government enterprises reduced their debts and the deficits that always accompany government owned enterprises. But despite this progress, most countries in the region have been unable to muster the democratic will to stop inflation, and mass wealth redistribution programs. The economists have learned the lesson, but the politicians and the voters have not. This will take some time.

4) Entrepreneurship and competition. Here is where most underdeveloped countries fail the test. For the past 50 years, countries like India, Pakistan, most countries in Latin

46

America, most countries in the former Soviet Union and Eastern Europe have been in the grip of socialist regimes that favored central control of economic activity. Entrepreneurs are difficult to control. They try to get around regulations, and to use resources in ways not approved by central authorities. Many, if not all countries in this group have laws and regulations that make it difficult to start a business. Even worse are the restrictions on competition. Once a business is firmly established in such countries, apparently the first order of business is to work with governmental authorities to ensure that competitors are discouraged. Government enterprises (telephone companies, electric companies, water companies, postal services, etc.) are particularly successful in stifling competition.93 As already pointed out, development of mass wealth is impossible without competition. In some countries it may be possible to create the conditions where competition is possible. It is easier to get rid of laws and regulations than it is to restore law and order and respect for private property, or to restore macroeconomic stability.

The countries of the former Soviet Union had to recover from seventy years of socialism. In the years since the overthrow of communism in 1989, many of them have gone backward rather than forward in terms of their gross national output. Instead of working to promote exports, they have each year gone more deeply into debt to the World Bank and other foreign lenders, borrowing money to maintain socialist enterprises and welfare programs, rather than converting rapidly to a market system. There seems little hope of their recovery in the foreseeable future. Government regulations still are hostile to entrepreneurs, particularly foreigners.

5) Access to the world market. There is progress. Multinational corporations are having their products manufactured in China, India, Pakistan, Mexico, Thailand, The Philippines, Indonesia, and Costa Rica. As a result, there is great hope for wealth creation in these countries. But even though they are doing well, these countries are the exception, and they are far from creation of mass wealth. As already noted, creation of mass wealth through the division of labor requires that:

a. There must be few, if any, restrictions on the flow of raw materials, semi-finished goods or final products and services into and out of the country.

b. Capital must be able to flow into and out of the country without controls. Foreigners must be able to create 100% owned corporations within the country, and to repatriate their profits without restriction.

None of these countries comes close to meeting these requirements. Their peoples and those of the rest of the underdeveloped world are doomed to generations of slow growth because of self-inflicted wounds.

47

6) Indirect Investment. This is by far the easiest condition to meet. Once the first five requirements are installed, indirect investment could become established without governmental approval or participation. Of course, the government has to denationalize the banks, if they have not already been nationalized, and has to control the urge for taxing savings, deficit spending, or excessive currency inflation. Once these things are under control, the private market can create indirect investment. Mass wealth is within reach.

Where are the conditions likely to be met the soonest? Spain, Italy, Greece, Lithuania, Czech Republic, Chile, Poland, Croatia, and Portugal and a few others could possibly make it in a decade or two. The other one hundred and eighteen countries have little hope for many decades to come.

Conclusion

Mass wealth94 has been created in 34 countries95. Twenty more countries are close. Most of the 118 remainder appear unlikely to ever attain it, unless something very unexpected happens that would enable them to create the conditions essential for mass wealth. It is hard to see what this something might be.

End Notes

48

1 “Nearly all officially poor US households, moreover, are equipped with basic modern plumbing including hot and cold running water, indoor flush toilets and indoor baths. While 30 percent of all Americans were without indoor toilets in 1950, less than 2 percent of poor Americans lacked them by 1987. ..Sixty two percent of ‘poor’ households own a car, truck or van and 14 percent own two or more color television sets…Among the poor today, fewer than 1 percent lack a refrigerator…The average low income person eats 95 percent as much meat as the average person in the upper middle class…Today’s poor Americans have a material standard of living that would have been considered middle class or better by Americans earlier in the century. ‘Robert Rector in “How Poor are America’s Poor’ in The State of Humanity by Julian Simon (Cambridge, Blackwell 1995) p 241.

2 Since data on these measurements in most countries are not available, we use purchasing power parity to approximate them. See following endnote. 3 The gross domestic product (GDP) is one of the primary indicators of a country's economic performance. It is calculated by either adding up everyone's income during a year or by adding the value of all final goods and services produced in the country during the year. Per capita GDP is sometimes used as an indicator of standard of living as well, with higher per capita GDP being interpreted as having a higher standard of living4 173 Countries that are at the bottom of the mass wealth index in 2014:

Country Population GDP PerGrowt

hGDP PC

In 3Economi

c

Capita Rate Years FreedomRan

kArgentina 43,024,374 $18,600 2.7 $20,107 38.5 55Timor-Leste 1,201,542 $21,400 -2.3 $19,923 55.5 56Russia 142,470,272 $18,100 3.0 $19,729 61.1 57Malaysia 30,073,353 $17,500 3.9 $19,548 66.4 58Hungary 9,919,128 $19,800 -1.2 $19,087 57.8 59Uruguay 3,332,972 $16,600 3.6 $18,393 60.9 60Mauritius 1,331,155 $16,100 2.8 $17,452 81.6 61Belarus 9,608,058 $16,100 1.6 $16,873 57.1 62Mexico 120,286,655 $15,600 2.5 $16,770 63.4 63Turkey 81,619,392 $15,300 2.6 $16,493 50.1 64Lebanon 5,882,562 $15,800 0.4 $15,990 61.3 65Kazakhstan 17,948,816 $14,100 3.5 $15,581 59.4 66Venezuela 28,868,486 $13,600 4.0 $15,232 52.4 67Bulgaria 6,924,716 $14,400 0.7 $14,702 69.8 68Suriname 573,311 $12,900 2.9 $14,022 51.2 69Colombia 46,245,297 $11,100 7.3 $13,531 75.5 70Romania 21,729,871 $13,200 0.7 $13,477 76.5 71Costa Rica 4,755,234 $12,900 1.1 $13,326 60.4 72Brazil 202,656,788 $12,100 3.3 $13,298 58.5 73Peru 30,147,935 $11,100 5.0 $12,765 72.2 74South Africa 51,190,000 $11,500 1.2 $11,914 66.9 75Thailand 67,741,401 $9,900 6.2 $11,741 70.7 76Montenegro 650,036 $11,900 -0.6 $11,686 64.9 77Iran 76,424,443 $12,800 -3.2 $11,571 51.3 78Ecuador 15,654,411 $10,600 2.6 $11,427 51.4 79China 1,355,692,576 $9,800 4.6 $11,152 57.4 80Azerbaijan 9,686,210 $10,800 0.9 $11,092 64.6 81Macedonia 2,091,719 $10,800 -0.3 $10,703 75.9 82Serbia 7,209,764 $11,100 -1.2 $10,700 69.4 83Tunisia 10,937,521 $9,900 1.2 $10,256 72.6 84Turkmenistan 5,171,943 $9,700 0.9 $9,962 55.1 85Cuba 11,047,251 $10,200 -1.7 $9,680 35.5 86Libya 6,244,174 $11,300 -5.1 $9,571 NA 87Guyana 735,554 $8,500 4.2 $9,571 57.1 88Belize 340,844 $8,800 2.8 $9,539 58.3 89Maldives 393,595 $9,100 1.4 $9,482 59.5 90Dominican Republic 10,349,741 $9,700 -2.1 $9,089 40.3 91Namibia 2,198,406 $8,200 3.1 $8,963 55.7 92Jamaica 2,930,050 $9,000 -0.7 $8,811 44.6 93Bhutan 733,643 $7,000 7.6 $8,596 60.1 94Albania 3,020,209 $8,200 1.3 $8,520 63.5 95Iraq 32,585,692 $7,100 6.5 $8,485 NA 96Sri Lanka 21,866,445 $6,500 9.2 $8,294 28.7 97Bosnia and Herzegovina 3,871,643 $8,300

-0.6 $8,151 58.4 98Kosovo

5 http://pjmedia.com/instapundit/?s=%22poverty+is+the+normal+condition+of+man%22+heinlein6 “English peasants in 1086 had little more than enough food to keep them alive, and sometimes not even that. Houses were crude, temporary structures. A peasant owned one set of clothes, best described as rags, and little else. As late as the fifteenth century, expenditures of the masses on non-food items such as clothing, heat, light and rent were probably only 13 percent of all expenditures.” Simon Op. cit. p 1377 “In the ages of caste privileges and trade barriers there were revenues not dependent on the market. Princes and lords lived at the expense of the humble slaves and serfs who owed them tithes, statute labor and tributes.” Ludwig von Mises, Human Action (Chicago, Contemporary Books, 1949) p 3128 “’Poor’ Americans today are better housed and fed and own more property than did average Americans during much of this century [the Twentieth Century]…Many Americans officially classed as poor would be considered as living in comfortable conditions by most Americans and more than comfortable by most foreigners” Robert Rector in ‘How Poor are America’s Poor’ in Simon, op cit. p 241.9 http://www.econedlink.org/lessons/index.php?lid=206&type=student10 Statistical Abstract of the United States 2008 2,204,792 farm workers for a population of 305 million. Agricultural exports represented 24% of total US Agricultural production. 11 Source: Mark j. Perry University of Michigan creator of the Carpe Diem Blog.12 “The intensity of cultivation before the transport revolution was inversely related to distance from major metropolitan markets for food…A study in Bangladesh found that new roads typically raised crop production by about a third.” Simon, op. cit. p 386, 36813 “Private property of the material factors of production is not a restriction of the freedom of all other people to choose what suits them best. It is, on the contrary, the means that assigns to the common man, in his capacity as a buyer, supremacy in all economic affairs. It is the means to stimulate a nation’s most enterprising men to exert themselves to the best of their abilities in the service of all of the people. “ Liberty and Property by Ludwig von Mises quoted in The Free Market Reader edited by Llewellyn Rockwell, jr. (Auburn. AL The Ludwig von Mises Institute 1988) p 61.14 http://mises.org/humanaction/chap15sec2.asp15 https://mises.org/daily/6100/Fractional-Reserves-and-Economic-Instability16 “Where resources within a society leave opportunities for improvement via exchange, production, or some combination of both, they will appear as opportunities for entrepreneurs to discover profit. The lure of profit will lead entrepreneurs to discover these opportunities and pursue them until, through the competitive entrepreneurial process, resources have been reallocated in an equilibrium that eliminated both the profit opportunity and the misallocation. Freedom of entry is crucial to this process…For this actually to occur it is necessary that no one who has perceived such an opportunity be barred from exploiting it.” Israel Kirsner, Perception Opportunity and Profit University of Chicago Press 1979 p 9217 “The factor that brought about primitive society and daily works towards its progressive intensification is human action that is animated by the insight into the higher productivity of labor achieved under the division of labor.” Von Mises, Human Action op. cit. p 160 18 “Financial intermediation is a process consisting of value, risk and relationships. The developmental objective is to improve the process in order to mobilize and allocate resources more effectively. Finance at the Frontier, by J.D. Von Pischke (Washington: The World Bank, 1991) p 31619 “What our generation has forgotten is that the system of private property is the most important guaranty of freedom, not only for those who own property, but scarcely less for those who do not. It is only because the control of the means of production is divided among many people acting independently that nobody has complete power over us, that we as individuals can decide what to do with ourselves.” Fredrich Hayek The Road to Serfdom pp 103-4 (Univ. of Chicago Press 1972).20 Von Mises Human Action op. cit. P 26221 Von Mises op. cit. p 49322 Von Mises op. cit p 49323 Von Mises op. cit. p 49724 Crisis and Reform in Latin America by Sebastian Edwards (New York, Oxford University Press 1995) p 8325 Edwards ibid p 20026 Edwards ibid p 11927 Edwards ibid p 24728 In 2005 there were 5.671 million corporations in the US which filed tax returns. Approximately half of these firms showed a net profit. Statistical Abstract of the United States. 2008 Table 73229 The Other Path, Hernando de Soto (New York, Harper & Row 1989) p 19730 “Historically most Latin American countries imposed significant barriers to entry into the financial sector. Permits for the creation of new institutions were either not granted or subject to substantial red tape. In Uruguay, for example, the banking law effectively froze the number of banks and bank branches at their 1965 level.” Edwards op. cit. p 204

31 Historical Statistics of the United States 1975 p 31832 US Dept. Labor Issues in Labor Statistics June 2002 pg. 133 RITA US Department of Transportation table 1-37. Passenger Miles 1975 147,400 million. 2006 590,673 million an increase of 400% 34 Adam Smith The Wealth of Nations p 1735 “For many years Latin American countries severely restricted direct foreign investment. In the early 1970s the countries of the Andean Pact implemented a regulation – resolution 24 of the Cartagena Accord – that restricted the right of foreigners to remit profits to their home countries. In other cases, foreigners could not participate in sectors deemed to be strategic. As a result of these regulations in most countries, direct foreign investment played a minor role in the process of capital accumulation during the 1970s; in most countries it amounted, on average, to less than 1 percent of DFP a year” Edwards, op cit. p 24636 Edwards op. cit. p 24637 “Saving is the first step on the way toward improvement of material well-being and toward every further progress on this way… The sacrifice made by restricting consumption in nearer periods of the future is henceforth not only counterbalanced by the expectation of consuming the saved goods in remoter periods; it also opens the way to a more ample supply in the remoter future and to the attainment of goods which could not be procured at all without this provisional sacrifice.” Von Mises Op. Cit. p 490 38 “Economics owes the time-preference theory to William Stanley Jevons and its elaboration most of all to Wugen von Bohm-Bawerk… It was on the foundation laid by him that later economists – foremost among them Knut Wicksell, Frank Albert Fetter and Irving Fisher – were successful in perfecting time-preference theory.” Von Mises, op. cit. P 488-48939 This is illustrated in depth by The Recession of 1990: An Austrian Explanation by Arthur Middleton Hughes Review of Austrian Economics 10 No. 1 (1997) p 107-12340 “But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears… If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.” Von Mises, op.cit. p 42841 “Financial transactions monetize promises, exchanging cash in the present for a promise of future reciprocity. Credit markets create value in the form of loans in the present that are exchanged for promises to pay in the future… Exchange of cash for promises has tremendous social benefits. First, almost everyone can participate in this process. Second, it permits individuals and organizations to transcend the limitations of their present situation… Borrowers are the originators of promises that help them obtain funds that enable them to demonstrate their abilities, to define their place in the future. Lenders are buyers of promises who support and participate in the activities of those offering promises. Transactions among buyers and sellers of promises spread risks and returns, both actual and expected, over a large number of economic units. “ Von Pischke Op. cit. p 5-642 From Plan to Market – World Development Report 1996 (Washington: Oxford University Press) p 137-13843 Ibid p 13844 In the United States the law was the Employment Act of 1946 which translated Keynesian theories into governmental policies. In Latin America Keynes’s theories were imposed on virtually all countries through the activities of CEPAL which promoted not only Keynes’s theories but also the idea that foreign investment is evil, exports are unimportant and high tariff barriers product wealth. 45 “Mises concept of human action embodies an insight about man that is entirely lacking in a world of Robbinsian economizers. This insight recognizes that men are not only calculating agents but are also alert to opportunities… This alertness is the entrepreneurial element in human action… entrepreneurship converts the theory of market equilibrium into a theory of market process” Perception, Opportunity and Profit by Israel M. Kirzner (University of Chicago Press 1979) p 6-746 “Choice, for the economist, has come to mean the solution of a maximization problem. The economist sees the decision maker, whether consumer, producer or resource owner, as allocating given means in such a way as to maximize the value of ends attained, with the relative ranking of the various ends seen as given. Freedom of choice refers to the agent’s liberty to select those courses of action he sees as maximizing his utility (for profit or whatever else is seen as being maximized). As Mises, Shackle, and Lachmann have again and again reminded us … the notion of given ends and means may be useful for certain purposes, but it does serious violence to the full reality of choice… For the Robbinsian decision maker freedom to proceed to where one (already) wishes to be; for the Misesian entrepreneurial human agent, freedom means freedom to discover and to determine for oneself where it is that one wishes to be.” Kirzner, op. ciot. P 226-22847 “every actor is always an entrepreneur” Von Mises op. cit. p 25348 “There are hardly any acts of government interference with the market process that, seen from the point of view of the citizens concerned, would not have to be qualified either as confiscations or as gifts. As a rule, one individual or a group of individuals is enriched at the expense of other individuals or groups of individuals… There is no such thing as

a just and fair method of exercising the tremendous power that interventionism puts into the hands of the legislature and the executive. The advocates of interventionism pretend to substitute for the – as they assert – socially detrimental effects of private property and vested interests the unlimited discretion of the perfectly wise and disinterested legislator and his conscientious and indefatigable servants, the bureaucrats. In their eyes, the common man is a helpless infant, badly in need of a paternal guardian to protect him against the sly tricks of a band of rogues. .. Whatever they themselves do is always right because it hurts those who selfishly want to retain for themselves what, from the point of view of this higher concept of justice, ought to belong to others.” Von Mises Op Cit p 734-73549 “A number of writers have treated the classical neglect of entrepreneurship as reflecting an approach that sees production as being an automatic process not calling for active decision making at all.” Kirzner op. cit. p 4850 Census Bureau Historical Income Tables. Tables H1 and H351 http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=33052 Edwards op.cit. p 26153 http://www.ilo.org/wcmsp5/groups/public/---dgreports/---inst/documents/publication/wcms_193159.pdf54 Brian M. Riedl The Heritage Foundation Backgrounder 2208 November 12 2008 http://www.heritage.org/research/budget/bg2208.cfm55 Source: Congressional Budget Office 201456 http://newmonetarism.blogspot.com/2014/03/monetary-policy-and-financial-crisis.html57 http://www.usinflationcalculator.com/inflation/current-inflation-rates/58 Hughes, op.cit. p 12359 https://www.google.com/#q=how+much+is+the+us+national+debt+today60 http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm61 http://en.wikipedia.org/wiki/Gini_coefficient62 http://en.wikipedia.org/wiki/Equality_of_outcome63 http://nationaldebate2012.blogspot.com/2012/01/gini-coefficient.html64 http://en.wikipedia.org/wiki/Gini_coefficient 65 http://en.wikipedia.org/wiki/Gini_coefficient

66 Human Development Report, The Real Wealth of Nations: Pathways to Human Development (2010) 87

67 Fukuda-Parr, Sakiko (2003). "The Human Development Paradigm: operationalizing Sen’s ideas on capabilities". Feminist Economics 9 (2–3): 301–317. doi:10.1080/1354570022000077980.

68

Country Population PC GDP Growth 3 yr GDO PC Freedom Dev IndexNorway 5,147,792 $55,400 1.6 $58,059.20 1 67.4 0.955Australia 22,507,617 $43,000 1.7 $45,193.00 2 82.0 0.938United States 318,892,103 $52,800 2.0 $55,968.00 3 76.5 0.937Netherlands 16,877,351 $41,400 -1.6 $39,412.80 4 74.2 0.921Germany 80,996,685 $39,500 5.8 $46,373.00 5 73.4 0.920New Zealand 4,401,916 $30,400 2.6 $32,771.20 6 81.2 0.919Ireland 4,832,765 $41,300 -0.1 $41,176.10 7 76.2 0.916Sweden 9,723,809 $40,900 0.2 $41,145.40 8 73.1 0.916Switzerland 8,061,516 $46,000 0.0 $46,000.00 9 81.6 0.913Japan 127,103,388 $37,100 2.2 $39,548.60 10 72.4 0.912Canada 34,834,841 $43,100 2.0 $45,686.00 11 80.2 0.911Korea, South 49,039,986 $33,200 1.6 $34,793.60 12 71.2 0.909Hong Kong 7,112,688 $52,700 0.3 $53,174.30 13 90.1 0.906Iceland 317,351 $40,700 0.9 $41,798.90 14 72.4 0.906Denmark 5,569,077 $37,800 -1.2 $36,439.20 15 76.1 0.901Israel 7,821,850 $34,900 1.5 $36,470.50 16 68.4 0.900Belgium 10,449,361 $37,800 -0.9 $36,779.40 17 69.9 0.897Austria 8,223,062 $42,600 0.6 $43,366.80 18 72.4 0.895Singapore 5,567,301 $62,400 -1.1 $60,340.80 19 89.4 0.895France 66,259,012 $35,700 -1.3 $34,307.70 20 63.5 0.893Finland 5,268,799 $35,900 1.5 $37,515.50 21 73.4 0.892Slovenia 1,988,292 $27,400 -2.7 $25,180.60 22 62.7 0.892Taiwan 23,359,928 $39,600 2.2 $42,213.60 23 73.9 0.890Spain 47,737,941 $30,100 -1.7 $28,564.90 24 67.2 0.885Italy 61,680,122 $28,375 -0.6 $27,864.01 25 60.9 0.881Luxembourg 520,672 $77,900 -2.5 $72,057.50 26 89.4 0.875United Kingdom 63,742,977 $37,300 0.3 $37,635.70 27 74.9 0.875Czech Republic 10,627,448 $26,300 -4.9 $22,433.90 28 72.2 0.873Macau 587,914 $82,400 7.9 $101,928.80 29 71.3 0.868Greece 10,775,557 $23,600 5.6 $27,564.80 30 55.7 0.860Brunei 422,675 $54,800 0.0 $54,800.00 31 69.0 0.855Cyprus 1,172,458 $24,500 0.0 $24,500.00 32 67.6 0.848Malta 412,655 $27,500 0.2 $27,665.00 33 66.4 0.847Estonia 1,257,921 $22,400 3.6 $24,819.20 34 75.9 0.846Slovakia 5,443,583 $24,700 1.6 $25,885.60 35 66.4 0.840Qatar 2,123,160 $102,100 -1.0 $99,037.00 36 71.2 0.834Hungary 9,919,128 $19,800 -1.2 $19,087.20 37 67.0 0.831Barbados 289,680 $25,100 -0.5 $24,723.50 38 68.3 0.825Poland 38,346,279 $21,100 1.8 $22,239.40 39 67.0 0.821Chile 17,363,894 $19,100 5.7 $22,366.10 40 78.7 0.819Lithuania 3,505,738 $22,600 5.1 $26,057.80 41 73.0 0.818United Arab Emirates

5,628,805 $29,900 1.2 $30,976.40 42 71.4 0.818

Portugal 10,813,834 $22,900 -2.8 $20,976.40 43 63.5 0.816Latvia 2,165,165 $19,100 6.3 $22,709.90 44 68.7 0.814Argentina 43,024,374 $18,600 2.7 $20,106.60 45 44.6 0.811Croatia 4,470,534 $17,800 7.0 $21,538.00 46 60.4 0.805Bahrain 1,314,089 $29,800 1.4 $31,051.60 47 75.5 0.796Bahamas, The 321,834 $32,000 0.3 $32,288.00 48 69.8 0.794Belarus 9,608,058 $16,100 1.6 $16,872.80 49 50.1 0.793

69 Mean years of schooling (of adults) (years) is a calculation of the average number of years of education received by people ages 25 and older in their lifetime based on education attainment levels of the population converted into years of schooling based on theoretical durations of each level of education attended. Source: Barro, R. J.; Lee, J.-W. (2010). "A New Data Set of Educational Attainment in the World, 1950–2010". NBER Working Paper No. 15902.

70 http://en.wikipedia.org/wiki/Human_Development_Index71 http://ec.europa.eu/environment/beyond_gdp/download/factsheets/bgdp-ve-hdi.pdf72 http://en.wikipedia.org/wiki/Human_Development_Index73 http://en.wikipedia.org/wiki/Human_Development_Index74 http://en.wikipedia.org/wiki/Human_Development_Index75 http://en.wikipedia.org/wiki/Human_Development_Index76 http://www.cnbc.com/id/10101506577 http://www.heritage.org/index/78 http://cnsnews.com/news/article/ali-meyer/usa-falls-again-12th-place-index-economic-freedom-report79 http://repositorio.ipea.gov.br/bitstream/11058/1760/1/td_0354.pdf80 Edwards, op.cit. p 195-197

81 https://www.google.com/#q=what+did+solyndra+cost+taxpayers82 http://instituteforenergyresearch.org/analysis/83 http://www.canadafreepress.com/index.php/article/5057684 An analysis of these programs is contained in Chapter 8 “ The Seductive Appeal of Government Retraining” in The American Job Machine by Richard B. McKenzie (New York: Cato Institute Universe Books 1988)85 Edwards, op. cit. p 24586 http://en.wikipedia.org/wiki/Miracle_of_Chile87 Macroeconomic Stabilization in Latin America: Recent Experience and Some Sequencing Issues Sebastian Edwards University of California, Los Angeles - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER) April 199488 http://elibrary.worldbank.org/doi/abs/10.1596/0-8213-3977-X89 Von Pischke, op. cit. p 30190 Portugal, Spain, Ireland, Israel, Singapore, Hong Kong91 Von Mises op. cit. 84992 Edwards, op cit p 26193 “Groups that for decades had benefited from excessive regulation the growing public sector – state-owned enterprises, unions, bureaucrats and private agents that had been able to ‘capture’ regulators – were unwilling to give up their advantages [when privatization was proposed]” Edwards op. cit. p 17494 Defined as Daily GDP per person of $60 or more in 2008 dollars. 95 Defined as states with a population of two hundred thousand or more.