Working your way to wealth

The law of the harvest cannot be overlooked as we consider sound economic principles.  One must plant before one may harvest.  Work is the key to production and wealth.  There is no food to eat, no clothes to wear, and no house for shelter without someone working to produce these necessities.  Even the luxuries available in our society would not exist were it not for the labor ot someone.

In my last post, I discussed the importance of saving as a way to wealth.  Without work, there would be nothing to save.  To better understand this principle, let's imagine a world without money.  A world without banks, loans, credit or any financial services.  All we have are the goods and services provided by working people.  In this world, as in the world we actually live in, none of the things we enjoy each day exists without someone producing it.  Seeds must be planted, watered and cultured to produce the food we eat.  Cotton must be grown, harvested and turned into thread to produce the cotton clothes that we wear.  The elements of the earth must be dug up, refined and molded to have cars, planes and trains.  The buildings we sleep in, work in, and worship in had to be built from materials produced and assembled.  A tremendous amount of effort goes into building bridges to cross rivers, roads to transport goods, and airports to launch planes.  Mankind would not have put foot on the moon without the efforts of thousands of people working in concert to produce a desired outcome.

All that we have to enjoy comes from work to produce it.  Wealth consists of producing these goods and services quite independently of the money we use as we barter and trade.  More money, in and of itself, does not produce wealth.  As a nation, we must promote work as the means to prosperity.  We cannot expect that our nation will become richer by simply redistributing what already exists--we must continue to work and produce the goods and services we desire.  We need to help everyone understand that our labor is required to increase our wealth.  Every able person should be encouraged to contribute to increasing the wealth of our nation.

Saving your way to wealth

The first basic economic principle of wealth generation applicable to individuals, families, organizations and governments is to consume less than you produce.  In monetary terms, spend less than you make.  In business and government terms, expenses have to be less than revenue.  The excess amount becomes wealth.

This sounds so proverbial that people often ignore it.  However, it is a true principle that is being neglected by so many people and by nearly every level of government around the world that our current economic well-being is at severe risk.  Too many people now believe that society can spend its way to prosperity--sort of a "pass the wealth around" attitude.  Without a return to the age-old wisdom of saving our way to prosperity (or wealth), rather than insisting that we can spend our way to prosperity, we are positioning ourselves for challenging economic conditions in the future.  The consequences will surely follow our choices.

Frederic Bastiat's classic story may help illustrate why saving (spending less than you make) is much better in the long run: Two brothers were both left a trust paying an annual income of $50,000 per year.  The first brother spends lavishly and is adored by those in the community who are the recipients of his careless behavior.  To those locally who receive his money, he is praised for his contribution to their well-being--after all, he is providing employment to them.  Seeing the benefits of his spending, he dips into his capital and spends more than his $50,000 per year, mistakenly believing that his actions are actually benefiting society.

The second brother, on the other hand, lives much more modestly and spends about $25,000 per year.    The community that observes the lavish spending of the first brother believes that the second brother is not helping them by spending his money in their establishments and denying them the opportunity for additional income--they don't see the long-term benefits of his prudence.  Unfortunately, they are not aware that the second brother's savings is actually providing employment to those unseen to them.

When the second brother invests his savings, that money is used by banks to fund new businesses and capital that is used to produce more goods and services.  The $25,000 being saved is actually funding as much employment as the same amount spent directly on consumption.  In other words, saving is only another form of spending,

After many years, the first brother is broke.  The people he was providing employment are no longer receiving his business and after seeing the consequences, consider him a fool.  He now looks to his brother for relief and claims that it isn't fair that he doesn't have any money and his brother is wealthy.  He believes that the government should provide him with at least a minimum amount of money for sustenance and argues that wealthy people should be taxed to provide for the poor.

The second brother, having practiced sound economic principles, continues his ratio of spending to saving and provides even more jobs because his income through investment has grown.  His capital wealth and income are greater and he has contributed to the nation's productive capacity.  The first brother has not.