The REAL Story of Wealth Creation

August 13, 2015

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A lot of people talk about the need for . It is routinely presented as the “silver bullet” to fix all big problems in the world. Want to end world hunger? Economic growth. Rid the world of mass ? Economic growth. Tackle global warming and protect the environment? Economic growth.

This knee-jerk response is so engrained in policy circles that it is the only offering put forth by the Sustainable Development Goals. After several years of discussion and debate, the best they can do is say we’ll solve the wicked problems of the 21st Century with “inclusive economic growth”.

The mantra of economic growth is repeated so often that otherwise highly intelligent and well educated people all over the world treat it as if it were a law of nature. But hidden beneath the veneer of confidence lurks an embarrassing secret — almost no one knows what causes economic growth! It has become a belief not to be questioned, one of the great dogmas of our time. Simply ask any corporate CEO, head of state, or representative from the United Nations where wealth comes from and they will not be able to give you a straight answer.

You may hear them say that wealth comes from “innovation” and “free enterprise”. Or that it appears in the hard work of entrepreneurs who “create jobs” and introduce new “products and services” into the market. But this doesn’t say where the wealth comes from at all. It is like asking someone where the colour blue comes from in the atmosphere and having them say it comes from the sky. That isn’t an explanation; it’s a stand-in for real knowledge that lacks clarity about the physical mechanisms involved. (Side note: A proper answer would be that the colour blue comes from the diffraction of solar radiation as it interacts with air molecules that selectively absorb, scatter, and reflect solar energy in a manner highly sensitive to wavelengths of light — as computed in the sensory/perception circuitry of the human visual system in our brains.)

One might ask why there isn’t a better physics-like answer to the question of economic growth from members of the profession? The short answer is that a religious dogma has control over the official storyline of economics. Those economists who approach their work like real scientists (yes, they exist!) are not the ones who guide economic policy most of the time. Instead it is morally-driven ideologues that espouse the worldview of who routinely call the shots. And their story of is like a bucket with holes in it. Inspect it, even briefly, and you’ll see it doesn’t hold water.

The Neoliberal Story of Wealth Creation goes like this:

Once upon a time, the world was full of unused resources. Clever business people came along and found ways to add value to these resources by extracting them for use in industrial processes. Thanks to the invisible hand of unfettered markets (keep governments small enough to drown in a bathtub and only allow regulations that support the hoarding of wealth by holders of financial capital), this “value add” creates wealth in the form of rising GDP and the creation of jobs. All you have to do is let the wealth “trickle down” from the super rich as they pile up increasingly huge masses of . tweet

This story will be familiar to all of us. We’ve heard it repeated so many times by elected officials and talking heads in the media that it has the look and feel of truth, what Stephen Colbert would describe as “truthiness”. But note how this story DOESN’T ACTUALLY SAY how wealth is created. All it does is describe how money gets stockpiled by the rich — those who have money invest it in ways that make them even more money.

It’s a circular logic without a foundation. Or, to use the metaphor again, a leaky bucket that seems to hold water until we try to put something in it and voila! We get a soggy, dripping mess on the floor.

If the standard narrative doesn’t tell us where wealth really comes from, where do we need to look for a properly scientific answer? We have to look at two things: (1) The actual physics of economic systems; and (2) how poverty creation works.

The Actual Physics of Economic Systems

Pick up any introductory physics text book and you’ll find the most basic thing every physical scientist knows, that energy and mass are never created or destroyed. Energy and matter constantly dance back and forth in the spacetime continuum that makes up all the material stuff in the Universe.

Things get fuzzy at the starting point of the Universe, when our mathematical ability to describe what happened slams up against the brick wall of ignorance. We simply don’t have the tools to probe further. But as far as we can tell, once the Big Bang set things in motion there has never been a moment when mass/energy was created or destroyed. This fundamental law of nature plays out in economic systems — which are, by necessity, part of the natural world. (Have you ever seen an that wasn’t?)

Economic systems cannot “create” wealth in any way that violates the laws of physics. It can only take mass and energy and change how they are arranged in space and time — the quintessential definition of information — by building up systems of production through cooperative human activities. As obvious as this is to point out, the story of wealth creation offered by Neoliberalism fails to acknowledge the fact that value-laden material was already “information rich” thanks to four and a half billion years of planetary and (and 3.8 billion years of biological) evolution on Earth.

The physics of economic systems requires that we acknowledge a basic truth; that wealth arises from the natural world. It is part of nature. And yet, as the Neoliberal Story described above starts out, there is a presumed separation of markets from the natural environment.

Their story of wealth creation pretends that nature had no value before it was monetized by industrial activities. And this is why they don’t have a firm footing to stand on about the the origins of wealth — to presume that wealth “appears” when business activities are performed is to miss out on the real action taking place in the previously-existing ecosystems of information that came into being through physical and biological evolution.

Said in more concrete terms, the reason we place a big fat zero in the number column of our spreadsheets for the price of nature is because it is presumed to be without value. It doesn’t make the accounting books because the religious dogma of Neoliberalism rejects this physical truth as one of its core beliefs.

How Poverty Creation Works

At this point in the discussion, we can see that wealth was already there in the form of natural environments that made life possible for humans to behave as economic beings. This becomes evident when we look at the flip side of wealth creation in modern economies, where poverty creation makes possible the hoarding of wealth in Capitalist systems.

What do I mean by “poverty creation”? My collaborators and I wrote a longer article about it for Fast Company (read it here). In brief, it can be described like this:

when the political expression of an economic system (for production and allocation of material information) takes sources of wealth away from some people and transfers it into the hands of other people, often changing forms (like the conversion of mass to energy) along the way. tweet

A concrete example is the Enclosure Movement of 17th Century Britain.

English Common Lands were forcibly privatised due to Acts passed by the British Parliament.

It was a time when peasant farmers were forcibly removed from their land, where they had engaged in subsistence farming for generations. Wealthy merchants and aristocrats began a systematic campaign to privatise the land-based commons and kick the peasants off their land, which they turned into sheep runs for the highly profitable wool industry. This became known as the “enclosure” movement, and historians regard it as the birth of as we know it today.

Millions of people were forcibly displaced, creating a monumental humanitarian crisis. For the first time in English history, the word “poverty” came into common use to describe the masses of people who literally had no way of surviving. They poured into cities like London and scratched out a living in sprawling slums — fodder for Dickens’s bleakest novels.

In this example, we can see how the aristocracy “created wealth” by transferring shared ownership of land into the new form of privately held landholder deeds. Peasants were separated from the means to grow their own food and became wage labourers who worked the land to pay rent — with the corollary movement of money from merchants to landowners as they amassed ever larger amounts of financial wealth.

The same process can be seen in other places where mass poverty “appeared” during the Industrial Age — through colonial conquest by the British Empire in India; slavery followed by resource grabs across the African continent; and CIA-backed military dictators in Latin American countries that instituted “business friendly” practices for foreign investors. We have our current distribution of wealth around the world thanks to a long history of colonialism by Western empires followed by economic imperialism in the post-colonial patterns of economic development that followed.

The West is rich because they took resources from other parts of the world. And the top earners in all nations accumulated their fortunes by extracting it from the productive labor of workers within their own countries (and by forcing “free trade” agreements that used market competition to suppress wages on increasingly global labor markets).

No story of wealth creation is complete without a corresponding story of poverty creation. This has an analogue in the physical sciences — what is known as entropy (the measure of disorder in the spatial or temporal arrangement of energy). Now that we know how to translate the findings of physics into a description based on information, it should not surprise us to find that the distribution of wealth is a kind of information in its own right.

Where there is order in an economic system, there must correspondingly be a measure of disorder somewhere else in the system… as physicists would say, every thermodynamic process there is an increase in entropy. Even in ideal circumstances it can only stay the same. Entropy never goes down.

The Real Story of Wealth Creation

Now we are in a position to tell the real story of wealth creation. We know that wealth is physical, subject to the laws of nature, and rises or falls depending on how it is arranged in space and time. This tells us that wealth is a kind of information inherent in social systems.

These images show the “information complexity” of two countries as they change in time — measured by looking at the diversity of products each country was able to produce. Source: Observatory of Economic Complexity

The definition of wealth goes something like this:

Wealth is a productive capacity of any natural ecosystem that rises or falls based on the spatial and temporal arrangement of matter and energy. Thus it is a kind of “information complexity” that can be measured using a suitable set of tools. It is subject to physical laws — in particular, the Law of Conservation for Mass/Energy and the Second Law of Thermodynamics about the nature of entropy. Wealth created by transferring productive capacity from one group of people will correspondingly create poverty for any other group of people that become deprived of the productive capacity by the process. Any kind of economic growth in the real world will be subject to these constraints. tweet

It is vital that we understand the physical nature of wealth so we can envision and build economic systems that are capable of (1) reducing chronic inequality in the world; (2) recognising the inherent value of nature as a foundational building block for any economic system; and (3) exploring the ‘design space’ of all possible economic systems to find those best suited for planetary sustainability.

What we can take away from this commentary are the following:

  1. Economic growth is a process of changing the information content of human systems — which are necessarily constrained by the laws of nature.
  2. Wealth creation is ontologically bound to poverty creation as an expression of the physical concept for entropy in social systems. Any economic system that increases the hoarding of wealth for some will correspondingly keep others from accessing wealth.
  3. Economic development is fundamentally a process of evolving the social complexity of information. Some configurations of knowledge, skills, and built structures will lead to economic thriving. Others will lead to economic dysfunction.
  4. Ideology has trumped science for too long in economic policy. It is time to restore the credibility of scientific guidance and dispel the dogmas that continue to plague economics.

I hope this essay brings additional clarity to discussions you might partake in about the future of economic development. We will not get to planetary thriving with unquestioned, dogmatic, and unscientific beliefs about economic growth.

Now is the time to fully explore the science of credible economic thinking and apply the best of this knowledge to the great challenges confronting humanity.

This article originally appeared on Medium.com on 31st July 2015.

18 thoughts on “The REAL Story of Wealth Creation”

  1. Cass Martinez says:

    I wish the author had used plainer language. I intended to share this on FaceBook, but the people who would benefit from seeing it would seize up mentally at the phrase “ontologically bound” and would reject all the ideas proposed earlier in the essay, that they might have been going along with. Even “one might think” instead of “you might think” is off-putting to the USA Freedom Fry-ers I am aiming at.

    Swallow your pride! Make a dumbed-down version for export to the colony!

    1. Joe Brewer says:

      Hello Cass,

      You are right that this article is not written for the uneducated audience. I wrote it to engage with people who have training in economics and related fields (or at least are well read on the subject). It would be great if there was a magical way to rewrite it with language that those “USA Freedom Fry-ers” you hope to persuade would take in and change their minds.

      Having studied cognitive science (and political psychology in particular) for nearly ten years now, I’m afraid these ideas are quite likely to activate worldview-preservation defenses from them anyway — the facts of the matter likely wouldn’t stick even if written in plainspoken language.

      That said, there is need to translate key ideas from this sophisticated argument into simple stories people can relate to… a natural followup to a piece of analysis like what I wrote here. I don’t see this as a flaw in the article itself — rather it is one step in a long chain of idea cultivation that can grow from here.

      Hope this is helpful!

      🙂

    2. Kevin says:

      Really enjoyed this read, i think there should be some disclaimer stating that “to truly understand economics through a scientific lens you’ll need an understanding in certain laws of physics” as that seems to be your premise. Which I had trouble comprehending whether you’re arguing that as a result of the big bang all wealth possible is physically finate and tangible or wealth can be abstract and can keep being creating/accumulated without an increase in physical production. I.e cyber-wealth creation

  2. david says:

    Wealth is stored value. Value is whatever makes one’s life better. That doesn’t have to be monetized. Value is created by re-arranging matter and energy to a form that is more highly valued. The assignment of value is a subjective human function. While it is a difficult read, “The Wealth of Nations” would be instructive. Specialization of labor and its concomitant increase in productivity greatly aids the creation of wealth. Your example of the enclosure movement only highlights the rearrangement of wealth, not the creation of poverty. The farmers were always poor, aka subsistence farming. The owners put the land (resource) to higher use and created more wealth, which enabled them to build the factories that housed the erstwhile farmers. Transitions always cause displacements, which are painful for some and beneficial for others. Focusing only on the negative doesn’t do justice to history.

    1. Joe Brewer says:

      Hi David,

      I think you’ve hit on one of the key features of the argument I laid out in this article — which is that human ecology is a process of evolving the arrangement of those productive structures in society. Some activities will lead to greater shared prosperity and others will lead to hoarding and disenfranchisement. And in both cases, the ecological factors remain important because entropy is involved at the whole system level.

      My reason for focusing on the negative is that typically the stories of wealth creation blindly assume ONLY the positive dimension (e.g. increases in GDP or some other metric) and do not acknowledge that inequality is a feature, not a bug, of any economy designed for wealth hoarding by elites. It happened in pre-capitalist societies throughout the history of empires and civilizations. And it continues to this day in the form of Neoliberal capitalism that uses a set of moral arguments to justify the status quo.

      I believe we can do much better than this — cultivating a global political economy that is both inclusive and democratic and that is in harmony with the Earth’s living systems. Getting from here to there requires that we acknowledge the dark side of capitalism (while holding strong to the aspects of open market economies that are adaptive and valuable).

      Very best,

      Joe

  3. In Spire says:

    My great consern today is, that people do not get it, that we are in deep trouble in the word with these main global issues linked together, which naturally are sustainable development, unfair global economy and failing politics and democracy. And the time to change direction is very, very short.

    I have taken part into various activistic ”green”(mostly)organisations during past 30-40 years. And there has never been lack of fine and accurate information, but the question seems to remain, how to get your message trough to ordinary people.

    I have come to conclusion, that people do not care much of issues, witch are ”going to happen” in the future, like climate change. I assume, that it`s too difficult a task to take time from your personal life to get an understanding of such huge matters (and all the backgrouds behind the headlines). That´s why, I regon, people usually rather close their minds, just to protect their own personal well being.

    To wake people up, in my oppinion, there has to be something, that they can see as a treath to their ”present” personal life or at least they can feel more familiar with the issue in their own lives. Inequality and money might be the major issues, that everybody could take a stand for and could form an oppinion of?

    I wonder, if the important messages were simple and easy to take in, could it help to get them through? I belive, that YouTube short films could work to get attension at least into global economy + inequality issues (there are lots of short-films, which are as well entertaining).

    How about if your organisation sets a goal to send Tube-links to ”everyone” (by facebook etc.), could it help to wake people up and get their attention? Would they by chance after that even start to look more information, knowledge, and strt step by step get more active?

    You surely know for examble Thomas Piketty´s and Jeffery Sachs´s ideology. How many people in the world have ever heard of them, I wonder. My personal goal is to make the global economy and it´s effects better known to everybody. My wish is, that in the following few years basics of capitalistic financial structures will become a public knowledge. If not – there might be a strange looking world waiting for the younger generations.

    Best rgs and all the luck for your great organisation!
    In Spire

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    1. Elsie Bryant says:

      Hi Inspire,

      Apologies for the ridiculous delay in responding to your comment here, but I wanted to thank you for taking the time to respond so comprehensively and wondered if you’d ever thought about putting your thoughts together in a longer article as part of our community? It’s possible to self-publish on the website.

      Let me know if you need help!

      Thanks,

      Elsie

  4. Nick says:

    While I am sympathetic to the intention, and recognise some useful insight in here, overall this is pretty incoherent. At different points in the article, wealth is presented as a social construct (which I would agree with) or, where it suits the case, as a physical property (therefore subject to physical laws). I am not a physicist, and apologies to you if you are, but my sense is that you are throwing around concepts like entropy in a pretty dubious way.
    Wealth creation does often entail poverty creation, and ‘progress’ can be mere exploitation, technological gains can lead to social losses etc. All agreed. However, it does not help challenge the neoliberal worship of free markets to sugggest that all wealth creation is mere redistribution. (OK, ultimately the universe is just moving the same mass / energy around, but frankly I care more about some arrangements of mass / energy than others, and while other people will have a diversity of views – which is good – there is likely to be some common ground).
    Also, while I agree that mainstream economics is ridiculously reductionist, there are also difficulties inherent in an environmental economics that starts to put value on nature. Once we put a monetary value on a natural resource, it becomes open to ownership, manipulation, commodification, derivatives etc. Or in other words, do you really want to give more power to finance?
    I personally think that there are much simpler ways to challenge the hegemony of neoliberal economic thought, than to push grand alternative physical-economic theories of everything. That is basically buying into their frame, just moving the bits around. I agree we do need to challenge narratives, but how about instead talking about community, beauty, society, compassion, nature, family, wonder, diversity, humanity….

  5. Vince Emmer says:

    This theory is a little rough.

    Two points:

    First, people know well how wealth is created.

    Person A creates something she hopes Person B wants. Person B creates something person A can use. If they exchange voluntarily, each profits. Each is better off than before the exchange, If not, neither would agree to trade. Wealth has been created.

    Second, poverty is humanity’s base condition. Poverty is created by birth. Only when wealth creation exceeds human reproduction, can poverty be reduced.

    Your concern, I think, is not wealth creation, but power.

    1. Mike W says:

      Hear hear!

  6. Ed James says:

    For all his polysyllabic profferings, the altruistic author doesn’t understand the simple mechanism whereby wealth is actually CREATED. An explanation that is understandable by anyone with the merest modicum of analytical acumen, is in this article:
    http://conservativeread.com/the-simple-logic-of-wealth-creation/

    Cheers!

  7. Matt Bearman says:

    There is a difference between easily understandable and correct. But I will attempt a shorter, more monosyllabic version. Wealth is a relative concept. I can get wealthier than you, but I have not necessarily created any wealth in doing so. Let’s say I’m a UK private landlord. You can’t afford the deposit on a house, so you come to me and pay me rent to use the asset that I have and you don’t (housing). I become rich. You don’t die of exposure. But where has wealth been created?

    By concentrating the money in one place (my bank account) am I making the overall amount of wealth any greater than it was? By giving you the use of my roof over your head am I making anyone (apart from me) any wealthier? Not you, don’t forget I have taken from you an amount of money, not given you any. And I am now wealthier by precisely the amount that you are poorer. The fact that a roof over your head is worth more to you than having a spare house is to me is a facet of an existing inequality (and I don’t mean that in a value-laden way, just a factual one). As such, I may feel ‘up’ on the deal but actual value has not been added at any stage. The house was always ‘worth’ whatever it was as a rental property, so long as people like you were willing and able to pay for it’s use at that value. And that worth is a red herring in any conversation about ‘wealth creation’ as it’s only what I would take from you, not magically generate.

    OK, so trade. I own a company that makes biscuits/cookies. I sell lots of them. You buy a packet, and eat them. You are poorer by the cost of a packet of cookies, and I am richer. You have had the benefit of a packet of cookies. I get to keep some, the workers get some money, the cookie ingredient supplier does, the power company etc. Your money has been redistributed – horray! But where has the wealth been created? Can you point to the part of this in which money appears from nowhere? (There may be an answer to that, but neo-liberal dogmatists won’t like it).

    The article linked to above just repeats a dogma, it does not serve to explain anything. In places it segues into irrelevancies where it cannot form a coherent argument (the fact that companies do less well in a recession does not show that money is being created in a sales transaction. Any more than the fact of tides shows the earth is flat and mounted on a see-saw).

    Money is printed all the time, and the amount in circulation is carefully controlled. It economically illiterate to assume more magically appears when someone becomes wealthy – in fact it is Mad Hatter logic – and yet it is the unquestioned mantra of our age.

    In 100 years time, people will look back with the same mild amusement as we do at those who believed the earth was flat.

    1. Mike W says:

      “But where has the wealth been created? Can you point to the part of this in which money appears from nowhere?”

      I can. Your example starts with the game half-over. Before I got the money for the packet of biscuits, I didn’t have that money. I traded (for example) some of my time for some money. So in truth I traded not money for your biscuits, but a bit of my time. I valued my time less than the biscuits; you valued the biscuits less than my time. Neither of us had money before, now we both do. Or in truth, we each had a smaller amount of money prior to the exchange and now we each have more.

      Your analogy of money to matter/energy is false; I’d go so far as to say dangerous. Its simple conclusion is that my gain causes pain to others. To this I ask, how then is it possible that all humans living today are better off than all humans alive in 1100? Yes I include kings. I’m comparatively poor by the standards of my community but wouldn’t consider switching places with King Henry I of England (one word for you if you doubt me: Dentistry).

  8. M. freidman says:

    This is the dumbest thing ever written by a human.
    Why did you waste my time

    you are a fukcing idiot

    1. Randy says:

      Your inability to understand it doesn’t make it dumb.

  9. Anthony says:

    The origins of wealth from the article is nature. And society takes this from nature, then stamps logos and impales a price tag on it. You can’t say that this is mine, but deny other peoples the land that you stole from the commons. It shows that divisions in equality ‘power’ are just lines we draw to raise other peoples above others. I see it as a nice way of suggesting that we need to start valuing the existence of nature, which we share as something that bullies shouldn’t have the right to take from us. I think we are far gone. There are enough steamed brains, but I believe that the ones who are offended are the ones to which one referred to as freedom-fryers. It is an interesting allusion as you see freedom as being able to buy back something in the past was once everyones. It seems simplistic to say we can grab stuff from everyone but it happens today and is about to get worse with this next administration. They will fry our freedoms further than we know because they disrespect our nature, humanity, & many followed the hate blindly into an oligarchy.

  10. Joe says:

    What do you think of this idea?
    Wealth = idea + time + material
    Wealth therefore is produced when we take resources from the earth. When Larry Lumberjack creates wood planks from trees, he is creating wealth: the trees had no prior value. He had an idea: “Carter Carpenter could use wood planks to make chairs”. He then used his time to make the planks, and then sold them to the Carpenter. Thus the Lumberjack turned a tree of no value into something valuable.

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Trump: Join us in connecting the dots

The election of Donald Trump has left millions, maybe even billions of us in shock. Although we may be looking with bewilderment at the US today, we should remember that he is not an isolated phenomenon. He is a symptom of a sickness that is raging all around the world. People are hurting, disillusioned with mainstream politics and increasingly angry at a neoliberal economic system that is destroying lives and the planet with increasing ferocity. And in their desperation they are willing to consider extreme measures to make themselves heard.

Demagogues thrive amid fear and insecurity, which is why they paint the world in such dark terms. It’s a strategy that has put right-wing populist leaders in power in an Axis of Egos: from Brazil to Turkey, the Philippines to Russia, authoritarian strongmen like Trump are on the rise. Meanwhile, many centrist liberals, like the Democratic Party in the US, have been so intent on rejecting left-wing populist solutions, and so sure of their ability to beat anyone running on a white supremacy platform with its misogyny and homophobia, that they opened the door for Mr. Trump to walk straight through. Their preference is always to maintain the status quo that has served them so well.

As dangerous as the election of Trump is for the world, we can also see in this moment the truth that we simply cannot rely on the electoral political system to save us, because it is designed to prevent the fundamental change we need. Its own survival is at stake and it will marshal all its champions and resources to defend itself and stop the emergence of a new system. But when we work, or continue working for change from the ground up; when we build or keep on building new ways of living and being with each other where we live; when we construct or keep constructing the future we know is possible with our own hands, rather than hoping distant leaders will build it for us, we find our true power. Finally, when we combine that with the unbending hope that has powered change through the ages, we know our power has meaning.

A 400-year-old economic system is dying and another is struggling to be born. Change on this scale is not going to be smooth or easy. We should not be surprised, then, that moments like this — where the establishment is dealt a body blow — become more and more common. We can despair when that blow comes in the form of right-wing extremists, or we can step-up. We are the ones we are looking for, who can and must grasp the opportunities in these crises that are undoubtedly there.

So it’s time to come together, taking time to remember the earth. Remember all the successful struggles for justice that came before us, and imagine all those to come. Remember that social movements are growing all over the world and realising the common struggle. Remember life. Then, organise. Find each other and help midwife the inevitable transition that brings forth from the ashes of neoliberal capitalism a system that works for the good of all life on Mother Earth. This is not just activism; this is our responsibility as human beings alive as this all unfolds.

This is why we are here.