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The Immateriality of Wealth

Thursday, January 27, 2011

In his recent book, Arthur Brooks has shown that happiness isn’t correlated closely with merely having money but rather with earned success.

If you’re like me, when you think of wealth and poverty, you picture its material manifestations. To have wealth, we imagine, is to have money, stocks, real estate, or valuable commodities, which, in turn, gives us the means to achieve various material ends, such as food, clothing, cars, housing, and healthcare. Poverty, in contrast, is the lack of such goods, which, in turn, leads to a lack of food, shelter, basic medical care, and other such items. These mental associations can make it hard to discover the preconditions of wealth creation, many of which are immaterial, even spiritual, rather than material.

For most of human history, discovering the sources of wealth creation would have been devilishly hard, since most economies, such as there were, tended to be static. If a Mesopotamian farmer or Greek shepherd in the second century BC ever asked, “Where does wealth come from?” he would have assumed that wealth came from rain, common labor, good luck, or some combination of these. He probably also would have assumed that to get really wealthy, you need to plunder other people.

But we now have concrete examples of cultures that have created vast new wealth, moving the majority of their citizens from poverty to relative prosperity. And when we look at these cultures retroactively, we discover answers that, for most of us, are counterintuitive. I’ve argued elsewhere that we’re able to discern ten crucial features allowing such cultures to alleviate poverty and create wealth. The more of these a culture has or does, the more likely it is to be prosperous.

The Top Ten Ways to Alleviate Poverty

1) Establish and maintain the rule of law.

2) Focus the jurisdiction of government primarily on maintaining the rule of law, and limit its jurisdiction over the economy and the institutions of civil society.

3) Implement a formal property system with consistent and accessible means for securing a clear title to property one owns.

4) Encourage economic freedom.

5) Encourage stable families and other important private institutions which mediate between the individual and the state.

6) Encourage belief in the truth that the universe is purposeful and makes sense.

7) Encourage the right cultural mores.

8) Instill a proper understanding of the nature of wealth creation and poverty.

9) Focus on cultivating your comparative advantage rather than protecting what used to be your comparative advantage.

10) Work hard.

There is a striking correlation between societies that exhibit these traits, or some subset of them, and the large-scale wealth creation. But notice that only one of them describes a material good. All the others are intangible, immaterial, spiritual. You can’t find economic freedom or cultural mores on a map or put them in a safe. You can’t bottle diligence or weigh the ingredients for stable families and voluntary institutions on a scale. These goods involve beliefs, social conventions, institutions, commitments, virtues, and creativity. Having listed them in brief, now I want to hold each of the ten immaterial ingredients up to the light and consider how each helps a society move from poverty to prosperity.

Number 1: Rule of Law

Economists in recent years have begun to focus on the importance of rule of law, a precondition rather than a hindrance to a free market. A free market is not anarchy where the strong prey on the weak. As Adam Smith recognized, it requires a system of rules that prods even selfish motives toward socially beneficial outcomes. The butcher, the brewer, and the baker may primarily have regard for their own interest, but in a free market their self-interest encourages them to provide beef, beer, and bread that others will freely buy.

Number 2: Limited Government

Free marketers have tended to emphasize the other side of the coin: while economic freedom may require a government strong enough to maintain the rule of law, it also requires a government limited enough not to trammel the rule of law under its boots.

Number 3: Formal Property System

Mental associations can make it hard to discover the preconditions of wealth creation, many of which are immaterial, even spiritual, rather than material.

Peruvian economist Hernando de Soto has emphasized the economic importance of a formal titling system, which allows land to become property. He argues that the system by which we represent land allows it to become property. Securely titled property, in turn, changes the habits and attitudes of those who own it, as well as others, who must respect it. Titled property allows land to become capital, which can be priced, compared, and traded for other goods in a market. As property, that land can become collateral for a business loan, or inspiration for a farmer to invest in equipment or plant crops that yield greater profit in the long run but take years rather than months before the first harvest.

Of course, a material reality—land—is involved here; but it is the representational system—an essentially immaterial reality—that allows land to become an instrument for moving beyond subsistence and onto the ladder of economic progress.

Number 4: Economic Freedom

Champions of the free market rightly focus much attention on criticizing government barriers that prevent people from freely trading goods and services, barriers such as tariffs, subsidies, price controls, and regulations that incur more costs than benefits. Though such policies may be inscribed in material parchment, to have an effect, they must influence the immaterial beliefs, attitudes, and actions of government officials and ordinary citizens.

Number 5: Strong Civil Institutions

Economists have begun to document the economic importance of vibrant “mediating institutions” such as the family, churches, private charities, and the like, which limit the power of the state. But much of this is common sense. Does anyone now doubt the bad economic consequences of broken families and out-of-wedlock births?

Number 6: Belief in a Meaningful Universe

Though it would obviously be an overstatement to say that wealth creation requires everyone always to believe in God, a number of scholars, such as sociologist Rodney Stark, have pointed out the economic importance of Judeo-Christian assumptions to the emergence and success of Western capitalism. And even common sense suggests that if the majority of a population either languishes in existential despair, or fritters away its time appeasing capricious gods, it will be less economically fecund than a population that sees its daily labors as part of a larger cosmic drama within a rational, orderly universe.

Number 7: Right Mores

This relates to the practical habits and mores that breed economic success, emphasized by Max Weber and others. These include orientation to the future; belief that progress but not utopia is possible in this life; a willingness to take thoughtful risks and delay gratification (which in turn encourages thrift, saving, and investing); habits of diligence; and respect for the rights and property of others. These mores allow wealth not only to be created, but also encourage individuals to save and reinvest some wealth—ultimately creating more—rather than merely consuming it.

Number 8: Right Understanding of Wealth

A cluster of basic economic beliefs also encourages wealth creation. They include the belief that wealth can be created and in creative new ways, that free trade is typically win-win, that risk is essential to enterprise, that trade-offs are unavoidable in the real world, that the success of others need not come at your expense, and that you can pursue legitimate self-interest and the common good at the same time.

Notice that only one of these traits describes a material good. All the others are intangible, immaterial, spiritual.

A good economic education should teach the wealth-creating power of sound economic beliefs, but properly tutored common sense suggests many of the same things. For instance, imagine a world where young people are taught that wealth is acquired by transferring wealth from one person or group to another (burglary, plundering, taxation). Now imagine another world where young people are taught they can create new wealth through diligence, creativity, and enterprise, through ventures that find new ways to serve potential customers in win-win exchanges. Which world do you think will be better off in the long run?

Number 9: Focus on Your Comparative Advantage

This ingredient is a partial exception to the rule. Though your comparative advantage might be an immaterial asset, such as a good education or a sunny disposition, it often involves access to fertile soil, abundant sunlight, or an oil field. And that leads us to sources of wealth creation that may have occurred even to an ancient Mesopotamian farmer.

Number 10: Work Hard

The most intuitively obvious way to create wealth is to apply muscle to increase the natural creative capacities of field, herd, and factory. Even Karl Marx got this one right. But hard work is much more likely to create large amounts of wealth in a setting that includes the other nine ingredients.

Again, this should be common sense. Which country is likely to do better in the long run, the one with a hard-working population, or the otherwise identical one with a population of lazy freeloaders? Obviously, the former. In his recent book, The Battle, Arthur Brooks has extended this intuition by showing that happiness isn’t correlated closely with merely having money, but rather with earned success. Two people may have the same amount of money, but the one who earned it will likely be far happier than the one simply given it by, say, government largesse. The money is the same in either case. But the way it is perceived and received (that is, its immaterial aspect) is entirely different.

So, with the partial exception of number nine, the top ten ingredients for wealth creation all involve immaterial rather than material realities. Indeed, the more advanced an economy, the more important the immaterial and intangible becomes. Recently, even the World Bank has come to appreciate this. In 2006, it released a study highlighting the importance of so-called “intangible wealth,” as distinct from “natural capital” and “produced capital.”

Richards A 1.26.11

Richards B 1.26.11

Ironically, many religious people believe in an immaterial reality and yet, sometimes, are the last to understand the immaterial nature of wealth creation. Jews and Christians, for instance, believe that God is essentially spiritual rather than material. And they believe that human beings, a unique hybrid of matter and spirit, are the only creatures made in the image of the creative God. They believe that the spiritual is as real as the material—that, in the ultimate scheme of things, mind precedes matter. Christians believe that in the beginning was the Word and that “the Spirit gives life.” Given all this, most religious believers should not be surprised that immaterial things are the great drivers of wealth creation in human culture.

Yet when it comes to the nature of wealth and poverty, many religious people have accepted the same materialistic assumptions held by many of their non-religious counterparts. These religious people may earnestly desire a solution to third-world poverty, but they support counterproductive wealth-transfer schemes and ignore the moral, cultural, and legal preconditions for long-term wealth creation. This needs to change. If we really want to alleviate poverty, then, whether we’re religious or not, we should seek ways to spread the top ten, mostly immaterial ingredients for wealth creation, and not the many popular, well-meaning plans that fail or do more harm than good.

Jay W. Richards, PhD, is a senior fellow and director of research at Discovery Institute, a contributing editor to THE AMERICAN, and author of Money, Greed, and God: Why Capitalism is the Solution and Not the Problem.

FURTHER READING: Richards ponders other immaterial questions in “Did Physics Kill God?” explains “When to Doubt a ‘Scientific Consensus,’” and considers Ayn Rand in “The Miser versus the Entrepreneur.” Arthur Brooks explains why “The Secret to Human Happiness Is Earned Success,” how “American Fairness Means Equality of Opportunity, Not Income,” and discusses “The New Culture War.”

Image by Rob Green/Bergman Group.

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