What creates our wealth?
Summary
When most people are asked "what creates wealth", they miss the most crucial aspect of all - our investment in common assets. Our institutions, infrastructure, stable and prosperous society, all the things which provide us with the markets and ability to trade effortlessly and securely. It's taken considerable time and money to build all of this, but to take it for granted is a serious mistake. To believe it no longer requires investment and development, weakens the very thing which underpins our wealth creation.
Article
When you ask people what creates wealth most answer in a myopic manner. They talk about having the right ideas, innovation, service, hard work, raising capital, managing financials, finding and motivating the right staff, and a hundred other operational issues. And, yes, they are right - all contribute to creating wealth. However, most people - almost everybody, miss the most crucial aspect of all. They forget about the supportive business environment, which enables all this to happen. It's all taken for granted if you live in a developed economy. It has taken millennia to build all of this infrastructure and institutions to allow people with ideas and abilities to start from a garage and build an empire. Such infrastructure and institutions are unavailable to the same extent in developing economies. Starting from the bottom with very little in a developing country, and succeeding is considerably more difficult. The same applies to established businesses in these countries - trading is significantly more difficult unless they are part of the local crony capitalism circle.
It's this foundation, of infrastructure and institutions, built and invested in over millennia, we have to thank as our primary source of wealth creation. These are our "common assets", which we need to continually invest in, to ensure business remains competitive and successful. However, most people seldom give common assets a second thought; to preoccupied with their own self-interest, they argue for small governments and lower taxes. This means we can't invest and develop these common assets. What makes us strong is progressively weakened. It's like burning through capital. Perhaps we can live off the capital during our generation, but it will all be gone when the next generation inherits our short-sighted approach to wealth creation and prosperity for all.
If you are unaware of or given insufficient thought to the important role of common assets, then consider the difficulties people face in developing economies, and you may change your mind. You should then become a staunch supporter of investing in common assets.
There are creative and innovative people all around the world. In fact, as a percentage of the population, there are far more entrepreneurs in developing countries than in developed economies. This, to a large extent, maybe as a result of a lack of employment opportunities, which forces people into self-employment. This does not detract from the fact that there are millions of people trying to make a success of life, with limited resources. Unfortunately, they will never succeed, not because of a lack of ability or hard work, but because they don't have the supportive infrastructures we enjoy. Our supportive infrastructure allows people to start businesses with limited resources and make the progression from micro to small, and small to medium-sized business relatively easily. The inability to progress is an institutionalised problem. Poor infrastructure and cooperation among businesses are to blame for this lack of upward mobility. In these economies, micro businesses show signs of early success, but then the influx of competition destroys them. The reasons for this is, early entrants cannot make the transition to the next level and progress up the ladder, allowing space for new entrants. Markets become overcrowded and unprofitable and collapse. Everybody remains at the bottom, and ultimately only a few make a meagre living.
In developed economies, we have considerably better supportive business infrastructures. We have financial systems, legal systems, relatively efficient governments, limited corruption, functioning policing, educated labour, advanced technology, effective transport and communication systems, reliable energy supplies. The list goes on. In developing economies, most of these services barely exist, or if they do, don't function well. We stand on the shoulders of others in developed economies and can start and run successful micro-businesses because of this; many of which will grow into big businesses. For example, here in the UK, one could start an artisan bakery on one's own, supplying local businesses and community. It could then be fairly easily scaled-up to serve a wider market competitively. However, a micro-bakery in some parts of Africa will find it considerably more difficult to start and scale-up because of this lack of supportive infrastructure. Further, as there are few job prospects in the area, the likelihood of another micro-bakery starting up are high, making the prospects of expansion for the first bakery impossible. The bakery at best may survive, although it probably won't. Such failure is no reflection on the ability of individuals but of poor supportive infrastructure.
There is another aspect to this supportive infrastructure, which helps small business in developed economies, and that is cooperation. Similar businesses band together to cooperate with one another to tackle problems too big for an individual business. Establishing cooperative activities in developing economies is often fraught with difficulties not encountered in developed economies. Cooperatives work well in countries with effective governments and legal systems. In other words, where effective infrastructure exists, cooperative agreements can be formed and enforced. In developing economies, this is considerably more difficult.
We must learn the lessons taught us by developing economies, recognising how crucial supportive infrastructure is. Although our supportive infrastructure is far better than developing economies, it's far from perfect and needs to be developed much further. Take our judicial system as an example. Our judicial system is too complicated, cumbersome and slow moving, making it costly. This makes it an institution which serves the needs of the rich, not the poor. Small, emerging businesses need an effective and affordable system to help them grow, not a system used to threaten and bully them. Other rent-seeking activities such as money lending and patents are roadblocks to effective development. So, while developed economies are better than emerging economies, they still have a long way to go. We need to keep investing in infrastructure and institutions to make them work better for us.
An important part of our success lies in ensuring the growth of small business. As we have learnt, having a supportive infrastructure is key to this, but we have to go even further. Developing small business does not start with training, funding or support as so many believe. It begins by creating a society which provides social support in the form of decent unemployment benefits, health benefits, housing support, and pension support. This environment makes the prospects of failure less onerous. Nobody starts out to fail, but if we minimise the risks associated with failure, more will undertake the risk. That's the first building block and one vigorously opposed by vested interests. They attack it because it involves a higher tax burden on them. They claim this leads to a welfare state where people become lazy. More importantly, it leads to an environment where people are less afraid of change and risk, and this is important for a vibrant and dynamic economy, not only small business.
Let's not forget, the investment in common assets builds a strong, prosperous society, which provides the markets which are so attractive to most businesses. It's nonsense to say investment in common assets, or the common good, doesn't make business sense. It's the basic building block for a successful business. Let's not forget this.
When most people are asked "what creates wealth", they miss the most crucial aspect of all - our investment in common assets. Our institutions, infrastructure, stable and prosperous society, all the things which provide us with the markets and ability to trade effortlessly and securely. It's taken considerable time and money to build all of this, but to take it for granted is a serious mistake. To believe it no longer requires investment and development, weakens the very thing which underpins our wealth creation.
Article
When you ask people what creates wealth most answer in a myopic manner. They talk about having the right ideas, innovation, service, hard work, raising capital, managing financials, finding and motivating the right staff, and a hundred other operational issues. And, yes, they are right - all contribute to creating wealth. However, most people - almost everybody, miss the most crucial aspect of all. They forget about the supportive business environment, which enables all this to happen. It's all taken for granted if you live in a developed economy. It has taken millennia to build all of this infrastructure and institutions to allow people with ideas and abilities to start from a garage and build an empire. Such infrastructure and institutions are unavailable to the same extent in developing economies. Starting from the bottom with very little in a developing country, and succeeding is considerably more difficult. The same applies to established businesses in these countries - trading is significantly more difficult unless they are part of the local crony capitalism circle.
It's this foundation, of infrastructure and institutions, built and invested in over millennia, we have to thank as our primary source of wealth creation. These are our "common assets", which we need to continually invest in, to ensure business remains competitive and successful. However, most people seldom give common assets a second thought; to preoccupied with their own self-interest, they argue for small governments and lower taxes. This means we can't invest and develop these common assets. What makes us strong is progressively weakened. It's like burning through capital. Perhaps we can live off the capital during our generation, but it will all be gone when the next generation inherits our short-sighted approach to wealth creation and prosperity for all.
If you are unaware of or given insufficient thought to the important role of common assets, then consider the difficulties people face in developing economies, and you may change your mind. You should then become a staunch supporter of investing in common assets.
There are creative and innovative people all around the world. In fact, as a percentage of the population, there are far more entrepreneurs in developing countries than in developed economies. This, to a large extent, maybe as a result of a lack of employment opportunities, which forces people into self-employment. This does not detract from the fact that there are millions of people trying to make a success of life, with limited resources. Unfortunately, they will never succeed, not because of a lack of ability or hard work, but because they don't have the supportive infrastructures we enjoy. Our supportive infrastructure allows people to start businesses with limited resources and make the progression from micro to small, and small to medium-sized business relatively easily. The inability to progress is an institutionalised problem. Poor infrastructure and cooperation among businesses are to blame for this lack of upward mobility. In these economies, micro businesses show signs of early success, but then the influx of competition destroys them. The reasons for this is, early entrants cannot make the transition to the next level and progress up the ladder, allowing space for new entrants. Markets become overcrowded and unprofitable and collapse. Everybody remains at the bottom, and ultimately only a few make a meagre living.
In developed economies, we have considerably better supportive business infrastructures. We have financial systems, legal systems, relatively efficient governments, limited corruption, functioning policing, educated labour, advanced technology, effective transport and communication systems, reliable energy supplies. The list goes on. In developing economies, most of these services barely exist, or if they do, don't function well. We stand on the shoulders of others in developed economies and can start and run successful micro-businesses because of this; many of which will grow into big businesses. For example, here in the UK, one could start an artisan bakery on one's own, supplying local businesses and community. It could then be fairly easily scaled-up to serve a wider market competitively. However, a micro-bakery in some parts of Africa will find it considerably more difficult to start and scale-up because of this lack of supportive infrastructure. Further, as there are few job prospects in the area, the likelihood of another micro-bakery starting up are high, making the prospects of expansion for the first bakery impossible. The bakery at best may survive, although it probably won't. Such failure is no reflection on the ability of individuals but of poor supportive infrastructure.
There is another aspect to this supportive infrastructure, which helps small business in developed economies, and that is cooperation. Similar businesses band together to cooperate with one another to tackle problems too big for an individual business. Establishing cooperative activities in developing economies is often fraught with difficulties not encountered in developed economies. Cooperatives work well in countries with effective governments and legal systems. In other words, where effective infrastructure exists, cooperative agreements can be formed and enforced. In developing economies, this is considerably more difficult.
We must learn the lessons taught us by developing economies, recognising how crucial supportive infrastructure is. Although our supportive infrastructure is far better than developing economies, it's far from perfect and needs to be developed much further. Take our judicial system as an example. Our judicial system is too complicated, cumbersome and slow moving, making it costly. This makes it an institution which serves the needs of the rich, not the poor. Small, emerging businesses need an effective and affordable system to help them grow, not a system used to threaten and bully them. Other rent-seeking activities such as money lending and patents are roadblocks to effective development. So, while developed economies are better than emerging economies, they still have a long way to go. We need to keep investing in infrastructure and institutions to make them work better for us.
An important part of our success lies in ensuring the growth of small business. As we have learnt, having a supportive infrastructure is key to this, but we have to go even further. Developing small business does not start with training, funding or support as so many believe. It begins by creating a society which provides social support in the form of decent unemployment benefits, health benefits, housing support, and pension support. This environment makes the prospects of failure less onerous. Nobody starts out to fail, but if we minimise the risks associated with failure, more will undertake the risk. That's the first building block and one vigorously opposed by vested interests. They attack it because it involves a higher tax burden on them. They claim this leads to a welfare state where people become lazy. More importantly, it leads to an environment where people are less afraid of change and risk, and this is important for a vibrant and dynamic economy, not only small business.
Let's not forget, the investment in common assets builds a strong, prosperous society, which provides the markets which are so attractive to most businesses. It's nonsense to say investment in common assets, or the common good, doesn't make business sense. It's the basic building block for a successful business. Let's not forget this.
Copyright © Adrian Mark Dore 2019.
adrian.dore@growingvalue.net
adrian.dore@growingvalue.net