When we make a distinction between the creation of wealth and the accumulation of wealth a number of windows open up before our eyes and a slew of insights are generated in our minds, a development that allows us to reach conclusions we could never reach otherwise. So let me begin with the definition of wealth-creation starting with the word creation. We create something if and when there is nothing and we make it so that there is something. If what we make is desirable and if someone is willing to pay for it or to exchange it for something valuable, what we have created is wealth. Now that we know what wealth-creation is, I define the accumulation of wealth as the activity by which someone acquires evermore of what is desirable whether he creates it himself or someone else does. To sum up, the creation of wealth is the making of things; the accumulation of wealth is the owning of those things without necessarily creating them.
The subtle implication buried in the preceding statement is that wealth is something that is both good and concrete. In fact, the word good is sometimes used in the English vernacular to mean merchandise. But this is an incomplete picture of reality because a service rendered is also something that is desired even though it is not a concrete thing. Consequently, we must consider the generation of a service of any kind to be a creation of wealth especially that services of all sorts have been exchanged for goods or for other services throughout time. Such exchanges were done when a service was bartered for something or when it was sold for money that was then used to buy goods or buy other services. People have no trouble considering education, healthcare, hospitality and such as services worth paying for. In fact, a service done where the recipient deals directly with the creator of the service such as a teacher, doctor, cook or handyman, is seen as a legitimate service worth paying for.
And even if we do not see the labor that goes into the making of a piece of merchandise, we know that the thing did not make itself thus, we accept paying for the work that went into it. Most of the time, however, we determine the value of a merchandise not by the work that might have gone into it but by its usefulness to us - meaning its utility. For example, I would pay a hundred dollars for a pair of shoes marked one hundred dollars because I know I shall wear it. But I will not pay as little as ten dollars for a bicycle marked one hundred dollars because I will not know what to do with a bicycle given my age and my long lost experience riding a bicycle. You see, I take it that the shoes will be useful to me but the bicycle will not be even if it could be to someone else.
But if we question the price of a good or a service on principle alone regardless as to how useful it may be to us or to someone else, what we do in effect is question the salary that someone is receiving to produce that good or that service. For example, we all bristle at the thought that someone is willing to pay ten thousand dollars for a pair of shoes because we know that the ultimate value of something is determined by the cost of the labor that goes into it. Thus, when told about a case like this, we ask: How many hours went into the making of this pair, what was the hourly pay and who deserves to be paid this much?
As you can see, it is getting complicated already but brace yourself because there is more to come for, a modern wrinkle has been added to these concepts. It is that life has become increasingly more complex as did the processes by which goods and services are produced nowadays. When commercial exchanges were done through barter as they did in an earlier era, you could see who you were bartering with, even see them produce the merchandise or the service you were bartering for. You could then compare the work they did with the work you did for a living thus had the opportunity to judge whether or not the price you were paying was fair or not. Nowadays, however, the line through which must go the production of a merchandise or a service has become so lengthy and convoluted, it is difficult to put a price on the labor that goes into a final product or a service. This compels us to surrender to the one factor that ultimately determines the price of something, the law of supply and demand. But be careful now because this method has its consequences.
Knowing that the price of a commodity rises when the supply diminishes - a reality that has held true since the beginning of time - people look for culprits at the supply end of the equation when the price of something goes inexplicably high. And it is here that matters become murky because this is where we encounter something unsettling. We discover that most of the time when the price of an item is inflated, the culprits are not those who create the thing but those who hoard it having created nothing themselves. Hoarding causes the temporary shortage of the item which is what pushes the price up and allows those that have it in storage to sell it at a high price and get rich quickly. The sad irony is that these people get very rich very quickly without adding a speck to the wealth of the nation which means they take a great deal from society and give nothing in return. They are the accumulators of wealth that many people consider to be parasites living off the labor of everyone else.
It must be said, however, that not everyone who is wealthy hoards what someone else produces. In fact, there are people who get wealthy by accumulating the wealth they create themselves such as the Bill Gates of this world. These are people that must be admired because they do what is good for themselves and what is good for all of society in that they employ other people and strengthen the economy. There are also people such as Warren Buffet and other investors who accumulate wealth by managing their money intelligently and by investing in other people. The latter would be mostly young individuals who have ideas about new products or new services but lack the ability to turn them into something they can take to the market. Buffet and the other investors take these talents under their wing and support them till they turn the ideas in their heads into useful products that ultimately add to the wealth of the nation and bode well for the future of these youngsters.
But there are many who get wealthy by adopting dubious methods which, in general, fall in one of two categories. The first category is better adapted to the use of goods as a vehicle by which they transfer wealth from the holdings of other people to their own holdings. The second category is better adapted to the use of services to make the same sort of transfers. In the goods category, there is - as mentioned earlier - those who hoard the goods to push up the price and make a quick profit. A famous example in this category is the infamous Enron company where they hoarded the natural gas to create a shortage and milk the state of California and other concerns of billions of dollars. In the services category there are those who rely on the ineptness and corruption that exist inside the authorities regulating the financial systems to play a dishonest game. They pretend to deliver to their customers honest financial services but deliver to themselves the fleece they spirit away from those customers. A famous example in this category is that of the infamous Bernie Madoff who solicited money to invest on behalf of his customers but spent the money on himself and lived a life of luxury as he deprived the others. When all was said and done, it turned out that Madoff had played the zero sum game where he gave himself the sums and gave his customers the zero.
Even though these two examples were black and white extreme cases, it took a long time to catch the culprits. In fact, the fall of Enron and of Madoff did not even happen because the authorities uncovered something and blew the cases open but because the cases cracked under their own weight when the economy weakened. This is when Madoff and those in charge of Enron realized they could no longer maintain the false facades they had erected and let the edifices tumble. Following that, a number of other cases came to light where the players were not as extreme as these two but played the same sort of game and met a similar kind of fate. What this says is that the practice is widespread which prompts us to ask: Who are the people that engage in these practices? The answer is that in most cases, you find them to be people who have neither the skill nor the talent to create products or services that can compete in the marketplace and give their authors a decent standard of living let alone a high standard of living. But these people hunger to be wealthy, and since they find it hard to make money competing legitimately and harder still to make the money quickly enough to satisfy their hunger, they delve into the manipulation of the system where they get to be good at it till something goes wrong and they are good no more.
Being average human beings, we find this situation to be too depressing so we hurry and ask: Is there a solution and if yes what is it? Unfortunately there seems to be no surefire solution that can be implemented to fix the problem in a way that is tidy. We can, however, make a few observations that will help the authorities put down preventative measures to reduce the frequency of the occurrences and the intensity of the transgressions. We observe that to be in a position to benefit from hoarding a merchandise you must place yourself between the primary producers who are on the side where the farmers, miners and manufactures sit – and the ultimate users who are on the side where the retail stores and their customers sit. In effect then, to be in a position to hoard and profit from hoarding you must be a middleman of some sort such as a jobber, wholesaler, importer or distributor, all of whom own storage facilities where the usual order of business would be to place the goods in temporary storage till the time they are sent to the end users but where some operators choose to hold on to the goods for a while longer with the intent to manipulate the market.
As for the financial services sector, the banks are the institutions that play the role of middlemen between the central bank that sits on one side and prints the money it lends to the banks -- and all sorts of financial institutions that sit on the other side and borrow from the banks along with everyone else. Therefore, the banks are responsible to a large extent for what goes on in the economy, and it is here that we see the importance of the financial instruments they put out. There is no doubt these instruments play an important role in our lives because more than anything else they make the economy work such as we see it thrive most of the time or they wreck it such as we see it happen once in a while.
Since wealth is defined as the creation of goods or services, the accumulation of wealth by those who do not create it can only be done through the manipulation of the financial instruments put out by the banks. These instruments are used essentially to play a shell game where the players sell what they do not have and hoard what belongs to someone else. To accomplish these feats the players trade in instruments ranging from the bank certificates to the commercial papers; from bonds to stocks and to all sorts of notes. Worse, those same players have now extended their madness to the more exotic derivatives such as the swaps, the hedging and the betting that they do on the rise or fall of the securities; on their indexes and even the indexes of the markets themselves. What a sordid mess this is!
Because madness begets more madness we conclude that to make progress protecting society from the bad actors who would wreck the economy and feed on the wreckage, we must deal more firmly with the middlemen that trade in merchandise and those that trade in financial services. In the area of merchandise, a middleman will be defined as someone who is neither the producer nor the end user of the product that he or she trades in. The firms that deal in commodities, especially those related to food, energy and strategic materials must register with a competent authority set up for the purpose and they must maintain an up to date weekly inventory of what they keep in their storage facilities. If the price of a commodity rises inexplicably, the authority will have the power to requisition what is in stock throughout the nation and force its sale at a price that matches the level before the rise. The prediction I make is that it may never become necessary to take such action because the existence of the authority alone will act as a deterrent and discourage the hoarding of goods thus prevent the rise in prices. I say the battle can be won without firing a shot.
As for the financial services sector, we must recognize that it is not enough to license the traders who work in the related industries because the moment that these people obtain a license, they take it to mean they have been licensed to do what they want. What the authorities must do instead is view the matter from an entirely different angle. In the same way that doctors and pharmacists are forbidden from dispensing drugs that were not approved, the traders in the financial sectors must be forbidden from trading in instruments that have not been approved.
The suggestion here is that new financial instruments, especially those of the derivative kind, must undergo a period of testing under limited and supervised conditions as do the pharmaceuticals before they are approved for general use. Only after it has been determined that a proposed new instrument poses no threat to the health of the economy will the traders be allowed to trade in it. However, if after approval something shows up unexpectedly and demonstrates that the approval was premature, the instrument must be withdrawn from the marketplace in the same way that a drug is withdrawn when it is proven to do more harm than good.
We do not spare a thing when it comes to looking after our health even the health of our pets. Why should we be timid about looking after the health of the economy without which we are all as good as dead? Think about that and think about all the Enrons and the Madoffs who are out there, willing and able to strike at the first opportune moment, then get off your behind and write the laws that will stop them. That's what they pay you to do.