The simple truth is that you cannot run an economy without creating real wealth. Real wealth has not and never will be created from financial speculation. Aristotle made that point some time ago. He was right at the time and he is right now. Labour generates wealth by the application of its skills to the natural resources of the world. Finance merely facilitates the process. That is not to denigrate finance. It is important. But by itself it is not capable of generating wealth, and cannot be the basis for an economy.

We\’re using Aristotle in economics now?

Blimey.

So, let us try and unpack this set of assumptions. Only labour applied to natural resources can create real wealth, eh?

So let\’s take a form of financial speculation shall we?

How about insurance? It is nothing at all but financial speculation. It is the simple act of working out the statistical likelihood of something happening (a car crash, house fire, early death), charging a pool a premium slightly above that statistical risk and paying out the damages to those unfortunates who suffer the disaster (or, obviously, their heirs).

In fact, you end up charging slightly less than the premium due to the statistical risk because you can invest the money in the interim (this is essentially what Warren Buffett has done. He realised that instead of investing his own money in his extraordinarily good stock picking skills he should buy an insurance company and invest the float in his extraordinarily good stock picking skills) and since your competitors are doing this basic insurance underwriting is usually a money loser. The profit comes from the, erm, financial speculation with the premiums while you have them, the float.

Now, is the existence of insurance real wealth or not?

I certainly think it is although your opinion might differ.

But much more interesting even that this is Ritchie\’s absolute insistence that all of the things which tax buys us is real wealth. I mean he has been endlessly saying that, hasn\’t he?

That the reduction in child poverty as a result of income redistribution is real wealth? That the education of such children is real wealth?

And, erm, what are the natural resources of the Earth to which labour is applied to create this real wealth?

Err, yes, quite. Hoist, petard, QED.

For, with his very restrictive definition of \”real wealth\” and how it is created he\’s just insisted that fully 80% of our economy isn\’t wealth producing: you know, all those pesky services?

For example, everything done by his paymasters in the PCS union is not producing real wealth: for taxmen do not apply their labour and skills to the natural resources of the Earth, do they?

I do, working with rare earths, but taxmen do not. So I, on my tod, produce more real wealth than Serwotka\’s Army, eh?

17 thoughts on “Eh?”

  1. As I recall, Aristotle did not deny that financial speculation could create “real” wealth. Rather, he criticised usury as “sordid” and “unnatural”, because he saw money as no more than an “inert” medium of exchange. His criticism of financial speculation was moral and nothing to do with whether it generated “real” wealth.

  2. On a bit of a tangent Thales of Miletus, whom Aristotle regarded as the first philosopher of the Greek tradition, used financial speculation to prove the worth of his philosophy.

  3. Labour generates wealth by the application of its skills to the natural resources of the world.

    Well this is arguably true. Take for example Mr W. Shakespeare. He took his brain, ink and paper, all of which are manufactured from natural resources, and arranged them in ways that create ongoing pleasure and amusement.

    Nowadays people who deliver their knowledge over the internet do so by rearranging the locations of electrons, which are of course a natural resource. And this knowledge can take the form of great poetry, singing, or trading financial products.

    Personally I can’t think of anything that humans do that doesn’t involve the application of skills to the natural resources of the world. But then I’m the sort of person that whenever I see a product advertised as “real x”, I want to know where I can buy the complex version.

  4. I do, working with rare earths, but taxmen do not. So I, on my tod, produce more real wealth than Serwotka’s Army

    You probably do generate more real wealth than Serwotka’s minions.

    They have a tendency to reduce wealth by creating red tape and other hinderances to a free life for us proles.

    They also tend to increase in number whilst their work reduces.

  5. As for those pesky services, let’s just do a little thought experiment.

    Let’s imagine that the entire economy of the whole world were given over to services.

    Now, what’s wrong with this picture?

    Yes, that’s right – services can only make money if there’s someone out there to provide services to; and you’d better hope that person, who wants to buy your services, is actually making something tangible, otherwise you look a bit like old Midas – trying to eat your money, or wear it.

  6. “Let’s imagine that the entire economy of the whole world were given over to services.”

    Let’s do another little thought experiment:

    Let’s imagine that the entire economy of the whole world were given over to manufacturing.

    That’s right: no trade, no transport, no waiters. Sounds pretty nice now doesn’t it?

    Tim never said that manufacturing doesn’t add value, he simply said that services do, the two statements are not mutually exclusive

  7. Actually, are we sure that manufacturing adds any ‘real wealth’ whatsoever?
    Let’s take a washing machine for instance:
    It’s made out of various quantities of metals & plastics.
    At the point which it exits the production line whats it worth?
    Considerably less than the value of the materials that are now tied up in its construction.
    It only starts to aquire value when it’s transported, sold, paid for, installed etc etc.
    And those are all services.
    Without them it’s just an inert mass taking up space in the factory loading bay

  8. Pete – you can go back even further, say to the mine. What value is there in metal ore? Unless someone does the service of digging it out and transporting it to a refinery (or whatever you do to iron ore), it’s just an inert mass taking up space underground. Arguably the only thing there is in the economy is services.

  9. Tracy @ 9

    Can go back much further than that.

    The primordial hunter/gatherers.

    Never manufactured anything.

    Pure service industry.

  10. “Let’s imagine that the entire economy of the whole world were given over to manufacturing.”

    And let’s further imagine it was completely automated. What then would humans do? Why, they would provide services to each other, with the manufacturing done by robots.

    Imagine the further step: that this is already happening. Tim loves to point out how we make more stuff than we used to, even before the Evil Thatcher Destroyed British Industry (TM). But with a vastly smaller workforce. As a consequence, we’re all richer. And those of us who aren’t whining bitter Trots are happier, too.

  11. Pete @ 10:45

    The hunters must have manufactured hunting equipment pretty early on – even digging a mammoth trap goes faster if not done with bare hands.

  12. IF this is the kind of quote Murphy is referring to
    (Aristotle’s Politics on Usury), he has a point:
    “The most hated form (of wealth) and with the greatest reason is usury which makes a gain out of money itself and not from the natural object of it.For money was intended to be used in exchange but not to increase at interest.”

  13. No he doesn’t, DBC, unless you can prove that money is ‘intended to be used in exchange but not to increase at interest.’ You can’t take it as axiomatic. (Well, you can, but you shouldn’t.)

    Dante thought that usurers and sodomites belonged in the same circle of Hell, because the former make what should be sterile, fertile (by making money breed), and the latter make what should be fertile, sterile. Did he have a point, too?

  14. DBC Reed – do you have any evidence that people receiving fully-funded pensions are really hated that much? I rather thought that the general population was in favour of pensions being more extensive and more fully funded (ie having interest-bearing securities to back them) than otherwise, with some caveats of course.

  15. Dunno about sodomites but Aristotle’s whole point was that making sterile money breed was
    unnatural and so, to his way of thinking ,wrong.The quote I’ve given goes on in the same vein if you can be bothered to look it up.
    The whole justification of interest payments is somewhat fraught: Islam and all that.The idea that lending at interest is axiomatically justifiable is equally suspect.

  16. DBC Reed – what point are you trying to make? Do you agree with Aristotle? With Islamic prohibitions on lending at interest? Or do you disagree with them, but think the history is interesting in some other way?

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