Blessed are the meek, for they are the “wealth creators” (part two)

Many people understand these issues instinctively, “it can’t be right to profit from doing that”. The same goes for when a person’s wage rate is mispriced due to a strong bargaining position usually but not always with the employer; the employer makes a profit, but they may or may not create wealth; we don’t know. The calculation should be redone if they paid a fair price for labour.

So allowing people or companies to profit from wealth destruction is a bad thing, too much of it and in the long term it sends our wellbeing into reverse. There are some studies that suggest that average wellbeing is not increasing nowadays, not in rich countries anyway, perhaps too much profit and not enough wealth creation is part of the reason?

In the UK we have entrusted much of our economic system to free enterprise, not so in North Korea, nor for hunter gatherers. In a free enterprise system it has been thought right that people and business should claim profit as their own as it’s the best mechanism for stimulating commerce, innovation and increased well-being.

Yet as we have just seen, profit is no guarantee that wealth is being created, profit can be made from destroying wealth too or taking advantage of strong negotiating power. If this becomes a significant issue then it should be Government’s role to correct the incentives to minimise wealth reduction and make sure the costs are paid for by business. If not there will be plenty of rich people around but most, those who haven’t appropriated profit, will share in less and less of any wealth and well-being left over, suffer increased pollution, more obesity, worse housing, infrastructure and nature will be ravaged……if this sounds familiar then surely its time something should be done.

What I like about this way of defining wealth and contrasting it with profit is that it shows that non business activities create wealth too: a nurse by saving someone’s life (increasing human labour) or just by providing palliative care is adding to wealth by fulfilling needs and wants efficiently and even though they don’t appropriate much profit they do create lots of wealth (human resource), similarly a university professor adding to society’s knowledge systems (social wealth) or a council worker clearing the rubbish and recycling (natural wealth). These people are wealth creators too, it’s just they don’t or aren’t allowed to keep the profit for themselves.

Profit is not wealth creation. Profit comes from a business owning the output, it is possible in a different situation where the ownership of the cake or invention is a common good and so although the business loses money (no ownership of the three pound fifty) the wealth is still created. The nature of profit is about whether or not the inventor or cake maker is able to claim ownership of the output, if he or she can, then it’s called profit. So profit is the ability to claim wealth creation as one’s own? Well yes and then again no...

There are instances where the above doesn’t work and they are quite revealing. There are many situations when the valuation system fails as it is quite normal that not everything is costed in. So for example if you take natural resources plus labour plus tools and create a useful good but also create some pollution then the impact, i.e. the cost of that pollution needs to be added to the cost of the natural inputs too. So the wealth calculation becomes one pound of nature plus one pound of pollution (pollution being a negative natural resource) plus one of labour and one pound of tools totals four pounds of inputs. But if this only makes three pounds fifty’s worth of output (e.g. cake or invention) then this is clearly a wealth reduction of fifty pence. But the producer might still be able to extract a profit of fifty pence if the pollution isn’t paid for. So here we have a private profit even though there is wealth destruction, oh dear, not good. This is because our current economic system using pounds or dollars doesn’t price in all the costs in the system. In the example it was due to pollution but in general terms it could be the cost of harm of any sort, whether illness, climate change, noise or other detriments. Profit therefore comes from either ownership plus wealth creation or ownership plus wealth destruction when the inputs aren’t properly costed in.

There is another occasion when profit can come from wealth destruction and that’s when a natural resource becomes scarce. The analysis is similar to that above but in this case it’s the depletion of nature’s silo without replenishment that allows profit to come from wealth destruction.