Wealth consists of the life-promoting goods and services that people have access to. Wealth, (beyond fruit) does not grow on trees. Luxury homes do not spring up from the earth by themselves. Seasoned pork roasts do not fall from the sky. Wealth must be created by human activity.
But what kind of human activity generates wealth? Is it desiring? Does simply wanting a new car make it appear? Despite what most Keynesians will tell you, I’m afraid that it will not. (1) People have to act to create wealth. But what kind of action? If you flail your arms about mindlessly, will that create wealth? Obviously not. What is needed is action based on rational thought: That is, taking stock of one’s surroundings and the actual needs of oneself and/or others, then figuring out how to use one’s surroundings to create what is needed for the promotion of such human life, (i.e. wealth.)
To provide food, people need to think about how to plant and harvest, how to hunt, how to maintain livestock, how to store crop yields without spoilage, how to keep and prepare meat safely, etc. If no one thinks at all, everyone starves. But is all that’s required to reach today’s level of wealth, minimal, routine, low-level thought?
Higher Levels of Thought Create More Wealth
Imagine a company that manufactures shoes. The company uses an automated process as part of making the shoes. This automated process requires the entry of a large quantity of numerical values into a file for the machines to operate (say, ten thousand values.) The company could hire Allen, a low-skill worker, to calculate and input each value, one by one. This process doesn’t take much thought on Allen’s part, but it will take two full days for him to calculate and enter all the values. But the company could also hire Bob, instead of Allen. Bob is a programmer who can create a computer script that will tell the computer how to calculate and enter the values on its own. Bob’s work takes more mental effort, more training and a higher level of abstraction, but he can write the script and have the computer execute it in one hour. Bob can produce the same result in one sixteenth the time that it would take Allen, which means that Bob is sixteen times as productive as Allen in that job. Bob saves the company a lot of time and enables it to produce shoes during 15 hours that it would have remained idle with Allen.
Both Allen and Bob’s work requires some thought, but Bob’s work is much more productive because his higher level of thought and knowledge made it possible for him to take advantage of a time saving device. Thus, the company can produce more shoes with Bob and can afford to pay him much more per hour than Allen.
This applies not only to this case, but to all other industries: A farmer who knows how to fertilize, rotate and protect crops and how to use advanced machinery, will produce much more than a simple farmer who only thinks about the basic plant-water-harvest cycle. A water transporter who thinks about how to construct a pump and pipe system, then builds it, can transport much more water to where it’s needed than a man who carries water in buckets. These examples could be multiplied on and on: using one’s mind to a greater extent in a job makes it more productive.
Innovations in Thought Make Physical Work More Productive
It’s clear that wealth creation requires both thought and physical action: physical action without thought is useless flailing; thought without physical action is useless daydreaming. But as we look through history, we see that the amount of wealth per person in the world has risen dramatically. People in the Middle Ages were destitute compared to the modernized countries of today. There was much less wealth per person, and even European kings were physically worse off than your average US citizen of today. What happened? Did individual people gain the ability to do much more physical work than in the Middle Ages? No, the capacity of each individual to do physical labor is roughly constant throughout history.
What changed, and enabled unprecedented per capita wealth creation, was that human thought created new technologies and new organizational innovations that made the same amount of physical labor much more productive. The mental effort of scientists generated new ways of thinking about nature and about the problems faced by mankind. The mental effort of inventors brought forth new technologies that reduced the physical labor needed to accomplish various goals. The mental effort of entrepreneurs brought forth new, more efficient ways of organizing businesses and producing wealth, (including ways of applying new technologies.)
Now a worker working on the same intellectual level as before produced much more: A laborer performing memorized, rote actions day after day in a pre-industrial smithy might produce twenty-four steel horseshoes in a twelve-hour workday. A laborer performing memorized, rote actions day after day in an industrial forge might use a press-mold system to produce a hundred steel horseshoes in an eight-hour workday. The post-industrial worker has benefited in his productivity from the thought of the scientists, inventors, entrepreneurs and business executives who made it possible for him to work with a press-mold system in a manufacturing company.
Watch how quickly and how much steel is forged with modern equipment, and how effortless it is for the operator (you can skip to 1:24):
This was brought to these workers essentially by the thought of engineers.
The Physical / Mental Division of Labor
In modern business, the division of labor increases overall efficiency by allowing each individual to specialize in certain skills, while not having to worry about others. In manufacturing, some workers are responsible for the direct operation of the tools that create the product, others for the maintenance of the machines, (mechanics, engineers and electricians) others are responsible for the day-to-day coordination of the physical workers, (foremen/middle managers), still others for the overall organization and direction of everyone else (executives/upper management). The productivity and smooth operation of each tier is dependent on the thinking (mental effort) of the tiers above it. The higher tiers increasingly take the burden of the mental part of the mental-physical process of wealth creation.
Each tier is necessary to create wealth, but the jobs in higher tiers tend to be more mentally demanding. The higher jobs tend to require rarer and more specialized skill sets, including a great deal of knowledge of the particular industry of the company. Thus, the number of people capable of performing the higher jobs is smaller, and they produce more wealth per person.
Laissez-Faire Capitalism Allows Just Rewards for Wealth Creation
This tiered division of labor is the overall basis of the pay scale under laissez-faire capitalism. Fewer people can perform the higher, more mentally intensive jobs, and fewer do. Thus, they are responsible for the creation of more wealth per person than the workers on the “lower,” more physical end of the scale. (2)
That the inequality of wealth creation is naturally reflected in the inequality of wages, under laissez-faire capitalism, is the economic basis for calling it the system of justice. People get back in pay the proportion of wealth that they create for the use/consumption of others. (3)
When socialists and leftists say (or imply) that large inequalities in wealth are unjust, they ignore the fact that there are large inequalities in wealth creation. When they intimate that it is an injustice of capitalism that a CEO makes so much more than a maid working two jobs, even though the maid “works just as hard,” (i.e. the same number of hours) they are ignoring the fundamental fact that different types of work create vastly different amounts of wealth. The CEO has much greater mental work, knowledge, legal responsibility and is responsible for the production of much more wealth. Ignoring that fact of reality and attempting to force equality is the real injustice. It is the attempt to make slaves out of those who are most productive, via government: to make them do their highly productive work for whatever alms the mass of less productive members of society deign to give them, through government. (This is instead of their earning what the people, with whom they deal, are voluntarily willing to pay them for their work.)
Each human being has a limited ability to do physical labor in every year of life. This limit has changed very little throughout history, up to the present day. It was only when human minds were freed from church and state to focus on innovation in this world, that per capita wealth production started to soar. The explosive upward growth of real income for average American workers in the Nineteenth and Twentieth Centuries was made possible by the explosion in thought that happened in the Renaissance, Enlightenment and the Industrial Revolution.
Further reading on values, wealth, money and capitalism:
- Capitalism: The Unknown Ideal by Ayn Rand
- Loving Life: The Morality of Self-Interest and the Facts that Support It by Craig Biddle
- Capitalist Solutions: A Philosophy of American Moral Dilemmas by Andrew Bernstein
- For the New Intellectual: The Philosophy of Ayn Rand by Ayn Rand
- Economics in One Lesson by Henry Hazlitt
(1) Keynesian economics holds that the main driving force for economic growth (wealth creation) is monetary demand: the willingness of consumers to spend money on goods and services. When consumers are able to spend money, someone, somehow will automatically provide the goods and services on which consumers spend their money. This is, in essence, the idea that the desire to consume wealth creates wealth.
But in fact, it is the productive activities on both sides of the trade, not merely the consumer’s desire for wealth, that makes both supply and demand possible. The consumer’s production of wealth in earning money becomes his demand in terms of wealth. It is always the productive, rather than consumptive, activities that create wealth for people to consume. Many people in Cuba desperately want more wealth. What limits them is not their desire, but their ability to produce it without proper protection of their private property rights.
(2) This is a general trend that a truly free market (laissez-faire capitalism) approaches. But not all jobs will necessarily align their degree of mental intensiveness with the amount of their compensation, perfectly. This is dependent on people’s choices and culture. Some industries may pay better than others for a given level of mental intensiveness. The economic principle that operates is supply and demand. (See: “Objective Theory of Values” and “Market Value” at the Ayn Rand Lexicon.)
(3) This is true to the extent that the social system approaches laissez-faire capitalism. What we have in modern, Western countries is actually rather far from laissez-faire capitalism. We have mixed economies: mixtures of some capitalist freedom with socialist and fascist elements. Also, it is not really economics that has the final word on justice, but morality, and a rational morality supports the freedom of laissez-faire capitalism.