The great contamination.

Have we polluted wealth creation to a point of self-destruction?

Adding value to each other is not only the essence of our humanity, it is the basic cell of our economic life. It has been the core of our coexistence from the Stone Age; the foundation of barter, exchange, trade and money.

It accounts for our supremacy as a species. It is powerful and robust, shaping systems or destroying them. It accounts for prosperity, is measurable, drives innovation, transformation and progress, and is the ideal template for self-empowering conduct. But it is not indestructible. If it dies, we die as a species. It has to be nurtured, protected, strengthened, and not contaminated.

Adding value needs an environment of maximum freedom of choice, many suppliers, competition, consumer awareness, free moving prices, stable money, and adherence to the natural laws of supply, demand and price. A very large part of all economic study, research, and theories revolve around these issues and I am sure you have your own view on the extent to which these rules have been broken both globally and nationally. Despite the fanatical stances many often adopt, there clearly are no absolutes and no universal formula that can be applied in all circumstances.

That may be a subject for a separate article, but for now let’s focus on the contamination of the wealth creation cell itself; where value gets added to accumulate into national prosperity and abundance. This is perhaps more important and far more in our direct control both as companies and individuals.

A dual economy

Can one have wealth without adding value? Yes, through debt. You can live like a king and amass a fortune on borrowed money if you have no concern about repaying it and leaving the problem to your children and their children’s children. That’s difficult for an individual, but less so for a company and certainly easy for a government or country in a flawed banking system. So we have created two economies: one based on production, the other on debt; one tangible and the other financial; one real the other virtual. Not only have they been drifting apart but the latter has begun to engulf the former with the main effect being greater global inequality (see latest Global wealth report here) and financial instability. (See IMF GFS report here.)

Perverting purpose

Existentially tangible wealth is always created by serving another. It has no concern about motive or purpose: it simply has to serve and be served. I have dealt with this subject frequently and remain convinced on two points. The first is that we have inappropriately attributed great individual and company achievements to profit maximisation. In all my years of exposure to the subject I have found very little evidence supporting that – indeed overwhelmingly the opposite. More evidence of this can be found in the philosophy of the latest business superhero, Elon Musk.

The second is that a service motive does not and need not detract from sound business practices. It is not “charitable” and “non-profit”. It has to stick to the rules of legitimate transaction to be sustainable.

There are a number of business behavioural models or hybrids of these models in wealth creation: profit driven; wage driven; both profit and wage driven; state driven and service or market driven. Being service driven is not synonymous with any of the other models. That speaks to sincerity of purpose and ultimately trust. You may not care, but you certainly have to behave as if you do. Being service driven focuses on contribution and wealth creation itself. The other focus on reward and distribution.

The accounting deception

I’m often amazed at how many “informed” people still believe that mathematically profit equals wealth creation, and that other constituents such as labour and state are a cost to profit and therefore a drag on wealth creation itself. That’s pure accounting nonsense! Value-added = wealth creation involving three contributors: labour (wages and salaries); capital (profits) and state (taxes).

This deception has entrenched capital supremacy and the “profit motive” as being the real and only driver of wealth creation.

Divisive abstracts

In my wood carver example, I made the point that wealth creation and its growth make no distinction between labour and capital. In that simplified example, they are indeed one. Of course the bigger the business gets the more roles have to be defined. This ultimately leads to the creation of abstracts such as labour and capital, falsely attributing to them a generic behaviour and inevitably creating a jockeying for supremacy.

That detracts from a common purpose of service and an obsession with wealth distribution rather than wealth creation. It becomes particularly destructive when you have wage and profit driven conduct like in South Africa.

The labour market myth

The standard view that labour is a cost and a drag to wealth creation enforces a commodity expression of labour and the concept of a labour market. Few people actually understand it because it implies buying and selling bags of kilojoules. For the most part, it is a myth! Yes, there is a market for skills, qualifications, and experience backed by a track record. These may guide a basic minimum and differentiated pay, but the most important part, and the real value of labour’s efforts are priceless. They are willingness, enthusiasm, reliability and those human attributes that will always set us apart from bags of kilojoules. In the end, an unwilling engineer has not much more value than an unwilling janitor. Even less so from a cost/benefit point of view.

The value of that part of human endeavour – as I say by far the most important – is best determined by a proven end result, the real contribution to value added. There is no stronger case for variable pay. It’s made even more imperative because the so-called market price for labour, restricted as it is to those less important features is itself severely flawed both by remuneration criteria and factors that have nothing to do with supply and demand.

Capital supremacy

It’s one thing to create an abstract. It’s another to deify it. That’s economic paganism. Again, it’s a subject I have dealt with extensively such as in this Moneyweb article here.

Creating an abstract assumes some generic behaviour. We know that’s false. Shareholder and investor involvement can differ vastly in size, term, motive and conduct. Despite that, one could argue that “capital” is more suited to a passive commodity definition than labour.

We have somehow accepted that the highest price customers are ultimately charged for a company’s use of capital – i.e. profit – is desirable because amongst other things it is by nature a permanently scarce resource, whose deployment creates jobs and wealth. The scarcity of capital is also a myth in part based on a theoretical distinction between money (debt) and capital (equity). Debt capital is the cheapest it’s been for many years, and there’s certainly no shortage of equity capital given demand for equity on stock markets, high levels of corporate reserves, a relatively low level of new venture IPO’s and rights issues, and share buy-backs.

Few investments are being made in new ventures, plant, production and jobs, not because of a scarcity of capital, but because of a lack of demand. That destroys the theory that jobs are created because of capital deployment. One first needs relatively debt free demand, then a desire to serve that demand, and then the deployment of both labour and capital in that service.

There are many points in this article that justifiably can be challenged. The question in the title, however, remains relevant. Are we not so overwhelmingly obsessed with wealth distribution (specifically wages and profits) that we have ignored wealth creation itself, the most important and meaningful of all?

Sustainable wealth is not created by debt, investment, and speculation. Nor is it created by the pursuit of either wages or profits. It is always the result of adding value to other people’s lives. Wages, profits and taxes are a consequence, not a cause.

We have known that since the Stone Age.