All Commentary
Thursday, August 1, 1985

The Ultimate Source of Wealth

“Is Saudi Arabia rich? Is Mecca Muslim? one might respond.”[1] With this seemingly trivial question, George Gilder introduces a subject of profound importance: the nature of wealth. And when Gilder points to history as showing that “the most prosperous countries—from Phoenicia to Venice, from England to Japan, from Hong Kong to Singapore—have been domains rich not in ‘natural resources’ but in human freedom and rights to property,”[2] he opens up an even more profound matter: the source of wealth.

What, then is “wealth”? For the economist, wealth is anything having economic value measurable in price. For most people, wealth means great amounts of worldly possessions. For nearly everyone, wealth is synonymous with money.

From the perspective of history, however, it is instructive to note that money has not always been the chief symbol of wealth as it is today. The concept of wealth has varied in different periods of history. For example, wealth in the medieval era was not thought of primarily as the possession of large amounts of money or material possessions, but in having power over other people. Still later, wealth came to mean the ownership of large tracts of land and great houses.

The Industrial Revolution again transformed the idea of wealth. Wealth no longer was viewed primarily as the possession of landed property, but the ownership of the means of production—e.g., factories, looms, mines, railroads. Then insidiously, over the last 150 years, the idea of wealth has changed from the ownership of the means of production to the possession of money.

Is Saudi Arabia rich? She is, if “rich” means money. But is Saudi Arabia wealthy? Warren Brookes remarks “that most, if not all, of the economic mistakes we have made (and continue to make) over the last generation have resulted from a fundamental misconception about the nature of substance or wealth,” and insists that if our economy is to be re-established on a sound basis we must have “a more correct understanding of what wealth really is and (perhaps more important) what it is not.”[3]

Adam Smith vs. Karl Marx

Among economic thinkers over the past 200 years, there have been two dominant schools of thought on the nature of wealth. According to men like Adam Smith and J.B. Say, wealth is primarily a matter of the human spirit, “the result of ideas, imagination, innovation, and individual creativity, and is therefore, relatively speaking, unlimited, susceptible to great growth and development.” The other dominant school, represented by such men as Thomas Malthus and Karl Marx, believes “wealth is essentially and primarily physical and therefore ultimately finite.”[4]

George Gilder makes clear his conviction that wealth is basically a product of the human spirit and not of natural resources. He argues, moreover, that “riches”—i.e., money—is not the same thing as wealth. “Wealth consists,” he writes with reference to Saudi Arabia, “in assets that promise a future stream of income. The flows of oil money do not become an enduring asset of the nation until they can be converted into a stock of remunerative capital—industries, ports, roads, schools, and working skills—that offer a future flow of support when the oil runs out.” In the 16th century Spain became “rich” much like Saudi Arabia, flooded by money in the form of silver from the mines of its colonies in Latin America. “But Spain failed to achieve wealth, and soon fell back into its previous doldrums, while industry triumphed in apparently poorer parts of Europe” [My emphasis]. Gilder is certain the oil-rich nations of today will achieve wealth when they “transform the transitory streams of income from oil into capital goods at home with a yield for the future.”[5] Is wealth, then, “the consequence, possessed by the oil-rich lands . . . . or the cause, manifested for centuries, for example, by relatively barren islands like Japan and Great Britain, and now by Hong Kong and Taiwan?”[6]

One cannot undertake a serious examination of the subject of wealth without at the same time clearly understanding what economists call capital. While wealth and capital can be distinguished, they cannot be separated. Capital is a form of wealth. It is a unique form of wealth, however, in that its function is the production of additional wealth. Capital is wealth in the form of tools or resources which are employed to generate a greater quantity or quality of various kinds of wealth.

Productive, Static, Transcendental and Human Capital

It is possible, in the context of the United States in the waning years of the 20th century, to distinguish at least four kinds of capital. The first, productive capital, is the conventional form—i.e., any tool or resource used to create additional goods or services for sale in the marketplace, for example, seed corn used to produce corn, a carpenter’s tool chest, a writer’s typewriter. Productive capital is usually capable of being measured in terms of monetary value.

Second, there are those who speak of static capital It differs from productive capital in that, while it has tangible value, it is not employed in the production of additional wealth; for example, a diamond, or a rare stamp.

Third, it is possible to speak of a new kind of wealth which is not capital at all in the usual sense, something called transcendental capital.[7] This new form of capital is a product of political or legal coercion by which an individual or a group “enjoys returns on the capital owned by someone else.”[8] There is the taxation of the productive and provident for the purpose of subsidizing through government transfers the lazy and improvident. Politics in our time has become as powerful a means of achieving personal wealth as innovation and productivity; and that means is the possession of transcendental capital claims.

Fourth, in the free world “the major productive resource is personal productive capacity—what economists call ‘human capital.’”[9] Human capital includes things like character, knowledge, skills, creativity, health, imagination and liberty. Michael Novak rightly protests that when the classical economists discussed “the components of economic wealth—land, rents, capital, and la- bor—they nearly always overlook the most important ingredient: practical intelligence and the organization of personal life.” “The cause of wealth,” Novak believes, “lies more in the human spirit than in matter.”[10] While productive or physical capital increases the productive capacity of a people by putting the tools or resources with which to work in their hands, human capital makes possible more efficient tools, or superior resources, and organizes more effective means of utilizing both physical and human capital to achieve desired ends.

Thomas Sowell argues that human capital is ultimately decisive for the economic performance of a nation or people. Throughout history men have seen the destruction of their physical wealth by war, persecution or natural catastrophe, but armed with substantial human capita] they not only have survived but regained their former prosperity. It was human capital, not natural resources or luck, which enabled Germany and Japan to emerge from the rubble of World War II to become the economic powers they are today. The same is true of Chinese immigrants who left their homeland and arrived in new lands impoverished and uneducated. In these new lands they have frequently been victims of persecution and have often been excluded from occupations deemed desirable by the host country’s majority. Yet almost everywhere, they have ended up achieving astonishing economic success.

Capital Deteriorates

“Visible physical capital—factories, power dams, oil refineries—is always in a process of deterioration,” writes Sowell, “whether at a slower or a faster rate. Financial assets likewise are constantly being consumed in order to live. Wealth in both forms will have to be replaced, even in the normal course of events. What war or expropriation does is to speed up this process of wealth’s exhaustion and its need for replenishing. But the real source of wealth in both normal and abnormal times is the ability to produce—human capital—not the inventory of goods, equipment, or paper assets in existence at a given time.”[11]

The person or people possessed of substantial human capital is characterized by a strong future-orientation. That is, they are willing to delay present satisfaction in order to enable either themselves, their children, or someone else to enjoy greater satisfactions at some later time. The future-oriented father is concerned to develop his children’s potentialities to the full, and toward this end he stresses the values of hard work, self-discipline, initiative, honesty and unselfishness.

Living in the Present

By contrast, the present-oriented person “lives from moment to moment . . . things happen to him, he does not make them happen. Impulse governs his behavior, either because he cannot discipline himself to sacrifice a present for a future satisfaction or because he has no sense of the future. He is therefore radically improvident: whatever he cannot consume immediately he considers valueless.”[12]

Family life and the rearing of children are crucial arenas for human capitalization. “Human capital,” writes Victor Fuchs in this context, “refers to the development in the child of a healthy body and mind, general and specific skills, and other qualities that will help determine how well the child will fare later in life. The development of these traits typically requires investment by parents and society—that is, an expenditure of resources when the child is young in the expectation of a return to the child, parents, and society when the child matures.”[13]

Economic Progress

Economic achievement and progress, thus, depends largely on human aptitudes and attitudes, and upon the political, social and economic institutions and arrangements which derive therefrom. Alexis de Tocqueville, in his book Journeys to England and Ireland (1833) sums up in a powerful statement the transcendent importance of human capital for the life of nations and individuals. He writes, “Looking at the turn given to the human spirit in England by political life; seeing the Englishman, certain of the support of his laws, relying on himself and unaware of any obstacle except the limit of his own powers, acting without constraint; seeing him, inspired by the sense that he can do anything, look restlessly at what now is, always in search of the best; seeing him like that, I am in no hurry to inquire whether nature has scooped out ports for him, and given him coal and iron. The reason for his commercial prosperity is not there at all: it is in himself.”

1.   George Gilder, Wealth and Poverty (New York: Basic Books, 1981), p. 47.

2.   George Gilder, National Review, “The Disease of Government,” December 31, 1980, p. 1569.

3.   Warren T. Brookes, The Economy in Mind (New York: Universe Books, 1982), p. 12.

4.   Ibid.

5.   George Gilder, Wealth and Poverty, p. 48.

6.   Ibid., p. 49.

7.   James Dale Davidson, The Squeeze (New York: Summit Books, 1980), p. 41.

8.   Ibid., p. 43.

9.   Milton and Rose Friedman, Free to Choose (New York and London: Harcourt Brace Jovanovich, 1980), p. 21.

10.   Michael Novak, The Spirit of Democratic Capitalism (New York: Simon and Schuster, 1982), pp. 102-103.

11.   Thomas Sowell, The Economics and Politics of Race (New York: William Morrow and Company, Inc., 1983), p. 249.

12.   Edward C. Banfield, The Unheavenly City (Boston: Little, Brown and Company, 1968, 1970), p. 53.

13.   Victor R. Fuchs, How We Live (Cambridge: Harvard University Press, 1983), p. 52.

  • Mr. Dykes is a businessman, free-lance writer and enthusiastic advocate of the free market.