Cookies on the Cash-is-Cool web site


Editor's Blog
Editor's Blog
Blogs » Editor's Blog

The totem of Capitalism is "wealth creation"

The "wealth creation" concept really emerged during the Industrial Revolution. This was the era in which for the first time it became possible to convert raw materials into manufactured goods on a large-scale.

The progression of raw cotton from farm produce to finished garment is often cited as a classic example of wealth creation.

Here is a simple flow of supposed wealth creation events:

Farmer plants cotton » farmer pays labourers to pick cotton » farmer sells cotton to a processor » processor converts the raw cotton into cloth » processor sells the cloth to a garment manufacturer » garment manufacturer pays labourers to make garments » garment manufacturer sells garments to retailers » retailers sell garments to consumers.

At each stage in the process, economists would argue that value is being added or, put another way, wealth is created.

Expressed simply, a quantity of cotton worth £1 when picked in the farmers’ field can end up being sold as a garment for £300. The £299 difference is supposedly wealth creation.

As ever, however, the devil is in the detail.

As we all know, anything is only worth what some one is willing and can afford to pay for it.

In the process that brings a cotton garment to a retail premises to be offered for sale, the rewards for the participants are small. Put plainly, none of those providing the labour to move the cotton through the process would receive enough money to allow them to afford the £300 garment on display at the retailer.

The same process could be outlined for any raw material produced in the World. The result would be the same. Low rewards for those providing the labour and high price tabs for end consumers.

It is well documented that more than 5 Billion of our planet’s 7 Billion population live on less than $5 dollars a day (around £3.50). In the main, these people are those providing the labour in the processes that change raw materials into manufactured products. They cannot themselves become consumers of those manufactured products since they do not have the money. They are not "wealthy".

So "wealthy creation" is a myth for the majority of the World’s population. That majority must live in poverty so that a relatively small number of individuals can be wealthy.

In recent years, many Europeans have become poorer. Witness Greece - or Spain. Many seek to explain this as the result of local factors. They are wrong to do so.

The reason many Europeans are now poorer is because some Chinese and Indians have become better off. It is as simple as that.

What we call wealth can sometimes be swapped between countries but, in the long term, there is no creation of wealth. If 1 Billion Chinese become rich, somewhere else in the World 1 Billion other people will slip into poverty.

China is in fact an excellent example of the fallacy of wealth creation.

The Chinese are now struggling to export goods because other people in other countries, notably the poorer Europeans, can no longer afford to buy them.

Faced with declining export potential and with hundreds of millions of their population clamouring for the extra wealth they think their hard work deserves, the Chinese Government believes it can sell more goods to their own people.

This is of course nonsense. Those working cannot buy the things they make from what they are paid to do so. We have seen that from the example of cotton processing earlier in this article.

So the only way the Chinese can afford to buy what they produce is if they are getting money from another source.

The other source in China, as in other countries, is escalating lending on property and State spending. So China now has a classic property "bubble", with house prices soaring and massive Government infrastructure projects.

Of course, such injections of "wealth" cannot last. Property bubbles always - yes ALWAYS - burst and State spending runs up deficits that at some stage cannot be funded.

Ask Greece - or Spain - or the USA, where the ridiculously high Government deficits cannot any longer be financed.

Wealth creation? It is a big lie.

Our World is one with institutionalised poverty, where a small percentage of the population are better off at the direct expense of the 5 Billion plus who are not.

Friday, 14th September 2012

Registered in England No.: 7231878