Tuesday, March 29, 2011

Anything Evil about Capitalism? Part I

For the next two days we're going to have a mini econ class. Today’s topic is “What Is Wealth?” Tomorrow’s will be “What is Capital?” With that information in hand, we’ll be able to judge whether capitalism is good or evil.

Don’t worry, it shouldn’t be too painful. Much of this is excerpted from “The Economic World” at Spherical Model, if you happen to find yourself wanting more.

What Is Wealth?

Wealth is not some mystical entity endowed by either government or birthright. Nor is it something that the haves enjoy by depriving the have nots of their fair share. Wealth, simply, represents the accumulation of the results of labor.

Money is a representative, or symbol, of wealth, to make it easier to exchange. Wealth is not created by government; in fact government is incapable of creating wealth and can only spend it. Government can, however, regulate (that is, make standard) monetary units by coining money, or printing money, each unit of which is intended to represent a result of labor that can be exchanged for the results of someone else’s labor. (Warning: governments often don’t take this responsibility seriously; they mess with the money supply, minting more money, which results in inflation—because each monetary unit represents less work.)

In basic Econ classes, discussions usually start with very simple worlds, like Robinson Crusoe alone on an island. At first, whatever Crusoe has, it’s a matter of what he is able to obtain for himself. He fishes. He gathers. He hunts. He plants, irrigates, and harvests. And barring a catastrophic hurricane or some such disaster, he is free to enjoy the fruits of his labor. This is his wealth—the results of his capacity to recover from the shelterless, foodless situation he finds himself in right after a shipwreck.

But his wealth is limited by his personal time, talents, and energies. It might be that, once he discovers another person on the island, Friday, they commiserate about their limitations. And somewhere along the way they discover differences in abilities. Crusoe is pretty good at farming, but fishing is tedious and frustrating, so he often goes without that protein source. Friday, on the other hand, finds fishing easy, but he’d sure like his garden to yield more veggies and rice to go with it.

An idea finally dawns on them. How would it be if Crusoe gave up fishing altogether and spent more of his time farming, expanding his garden to provide for the entire population of the two of them? And at the same time, instead of struggling to farm without success, Friday would spend even more hours fishing. Then he would trade his surplus fish for Crusoe’s surplus harvest. They try this, and it works so well, they both have more to eat than they had before, and they both have more spare time for climbing coconut palms or hunting—necessary tasks which neither one is particularly good at.

But this trade thing is working out so well that, when they meet a native who has no trouble at all shinnying up those palm trees, they make exchanges with him. And another native is very handy with a spear and can easily take down a wild boar, which is much too big to use up by himself before it spoils, so he’s glad for the exchange, and the others are very glad not to have to face those wild boars any more.

They specialize. They all work mostly at what they are best at. The result of their total labor is now considerably greater than the total would be without specialization. This leaves them all more actual wealth (results of labor) and even more time to enjoy the wealth.

So, what is wealth again? The accumulated results of labor. Remember that for the quiz.

1 comment:

  1. In your example they all completely specialized, but this need not be the case. Fishing, for example, may only be lucrative in the morning, so Friday spends the afternoons helping one of the others for pay (e.g. carrying supplies for the hunter in exchange for a portion of the meat). Also, it could be the case that Crusoe is better at both farming and fishing, so then we have to look at relative advantage instead of absolute advantage.

    I know these are all minor points and don't affect the definition of wealth, but I think it's necessary to point out that all can gain from trade.