Wealth

From time to time people caught up in the Love of Money try to engage me with their currently favorite method for getting rich or preserving assets, or some such. It's an easy trap to fall into, and so deceptive. But it got me to thinking about the nature of wealth, and what has intrinsic value.

Value

As near as I can tell, the value of something is whatever people in a free and open market are willing to buy and sell it for, nothing more nor less. That makes it somewhat relative, but for things that everybody needs, like food and energy and clothing, the market does a pretty good job of establishing a reasonably stable value.

Food is an interesting example. Defined by the limits between gluttony and starvation, everybody needs pretty much the same number of calories, and requires the same amount of protein and minerals. There are luxury foods, but that's a different issue. The cost of staples in grocery stores is tied pretty closely to the cost of producing them in the farms, plus the transportation to market, with a little bit of overhead to pay for marketing and profits along the way. Profits never become excessive because anytime they start to look good, some other vendor or supplier will enter the market at just a little bit better price and slightly lower profit. So the profits tend to stabilize at a resonable "return on investment" (ROI).

So what really controls food prices? Mostly the cost to farm them, as affected by supply and demand. When demand exceeds supply, prices rise until supply equals demand; if there is too much product on the market, prices fall and the demand goes up. Market Economics 101.

Various factors affect the amount of food staples the farms produce. There are always "Acts of God" such as good or adverse weather, but there is also the perception of demand in the farmer's decisions about which crops to plant. There is a relatively stable labor cost per ton of produce, but that can be affected by political concerns (minimum wage, unions, etc). In Watsonville (California) where the apple-sized strawberries are grown, the unions came in to organize the pickers, and the farmers responded by plowing the berries under. The labor threatened to become more expensive than the farmers were willing to pay, and the farmers refused. The next year the pickers came back without unions. That established (in an open market) the value of the labor, which in turn determed to some degree the price of strawberries. If the farmers don't pay enough, the workers will go elsewhere and work for better wages. There is balance, so long as people are free to choose to work or not, to plant strawberries or artichokes or neither, to buy strawberries or oranges or apples, and so on. Deprived of choice, the market ceases to function as a determiner of value.

Anyway, people will do anything to avoid starvation. Once over that threshold, however, if they can afford better-tasting food, they will buy it. Maybe that means working harder, or getting a better education, or otherwise seeking higher income. Sometimes it means they will settle for less. I happen to like lobster thermidor, but I'm unwilling to pay that much, so I eat "meat pudding" (ground-up meat products reshaped to resemble ribs or chicken breasts or ham). I still get the necessary protein, but I can eat for a whole week on what one thermidor would cost me, and that's as it should be.

Labor

This starts to look like circular reasoning, until you realize there is one constant here: day labor. The strawberries don't magically jump from the farms in coastal California to the produce aisles in Kansas. Somebody must bend over each plant and pick the berries, put them into a basket, lift those baskets onto a truck, drive the truck across country, lift the baskets back off the truck, and then stack them neatly on the produce counter of the grocery store 2000 miles away. That does not count the labor to plant and weed the strawberry plants, to pump the diesel into the truck and its refrigeration unit, and to ring up your purchase at the checkout counter, nor to figure the taxes on each of those businesses, and to pay the electric bill at the store, and so on. Some of those duties require specialized training, but most of the labor in the process is "day labor" which any able-bodied person can do with a minimum of instruction.

Jesus told a story about a farmer who needed some day labor on his farm. He went out and contracted some workers, and they agreed to work for the prevailing wage, one denarius. Jesus had other stories about money, and we understand them by dividing the stated amounts by that specified day's wage. 5000 men (not counting women and children) would take "over 200 denarii to feed," which tells us that a day laborer's wage might buy 25 minimal lunches. Minimum wage today for one day will buy about the same number of cheap hamburger+fries lunches. That seems to be a constant -- unless politics messes things up, as in Zimbabwe today. But those cases are not free markets.

What happens when you consider the day of labor as the unit of value? Inflation pretty much disappears as a factor, because as the cost of labor drives up other prices, everything stays constant.

There is another important aspect: everybody has exactly the same 24 hours in each day, 168 hours in every week. If you are going to have wealth and poverty -- and we do -- then there must be some way to multiply (or diminish) the value of that labor.

Education is the most obvious way to increase the value of labor. We have in this country a standard set by law, that every person must expend some 14,000 hours of unpaid labor (school), which establishes a baseline for paid day labor. People who pay for and expend an additional 6000 hours (aka college) generally enjoy a substantial increase in employability and pay level, because their employers deem them to be worth more to their businesses, but it helps if you major in subjects that actually contribute to the economy.

Another way to increase the value of labor is through technology. One man can drive a 40-ton truck halfway across the country far more cheaply and quickly than a thousand men can carry the same burden. The vehicle (with its fuel) has multiplied the labor of the driver by more than 1000. Many hours of labor went into the manufacture of the truck, and more still into extracting the raw materials from the ground, and pumping out the oil, and this labor is reflected in the cost of the truck, but that labor can be amortized over many trips, which has its own multiplying effect. A $100,000 truck driven for 10 years costs the owner $10,000 per year in capital costs (there are additional costs for fuel and interest on the bank loan to buy it, and the labor for maintenance), which increases the cost of the driver's labor by only $40, perhaps doubling or tripling it when all factors are considered, for a net multiplification of 300 times. Actually it's less, because there are other support people involved (such as loading and unloading), but the technology had nonetheless substantially improved the value of the driver's labor. Other technologies can have greater or lesser multiplying effects.

Control

Another multiplier is the matter of control. The more people whose labor you control, directly or indirectly, the more wealth you effectively have. That works out to be equivalent to any other measure of wealth you choose to use. If you are an employer, you control the 8-hour days of your employees, and they produce for your gain, rather than their own. You still must pay them market-rate wages, but intelligent use of their labor makes it more valuable than what you pay, and the difference is profit, also known as wealth. Slave owners have a bigger differential, because they must feed and house their slaves, but that typically costs slightly less than they would pay in wages.

The cash profit of the business owner, or money in the bank obtained by whatever means, is another form of control over the labor of other people, which further solidifies the identity between labor and wealth. This control is indirect, because you are not telling individual people what to do, but by buying their products you are encouraging them to continue investing their labor in producing those products. They say money talks, and what it says is "Do this for me!"

Money

Money is an indirect measure of wealth, because inflation or other government action can destroy the connection between the numerical face value on the cash and the labor it controls. It's the labor that is the true wealth, not the number of zeroes on a piece of paper.

Some people argue that gold or other precious metal has intrinsic value, but this is an illusion. The price of gold fluctuates far more rapidly than the price of labor or food, and measured against labor as the constant, gold and precious metals are intrinsicly unstable as a measure of wealth. The only thing they have going for them is the fact that it takes a lot of labor to extract the metals from the ground and refine them, which limits the supply; free market demand drives the price up from time to time, and the lack of demand brings it back down. Governments can also affect supply by selling off (or buying up) gold from their reserves, and they regularly do this.

Capital

If labor is the measure of wealth, then the large company with many employees controls the most wealth, and its stockholders participate in that ownership and wealth. A small company might have a single investor-owner who can grow his business only slowly because of his limited financial resources. Except for the unlikely case he has a monopoly product or market, he cannot make a huge profit from his product or service, because if he did, some competitor would slip in at a lower price for a slightly lower profit, and take his business away. Slow buying new equipment (technology) to multiply his labor will be slow. He might get a bank loan, but the bank is going to look at the risk of business failure and charge an interest rate that covers their risk, which will eat up his profits faster. The bank might also demand additional security like title to his home.

So the business owner who wants to grow his business without losing his shirt can sell shares of his business to investors. This limits his freedom to run his business as he sees fit, because they have a right to demand that he do so prudently, so as to maximize their profits. Their asset value in his company effectively gives the shareholders partial control of the manager's labor, while at the same time increasing his ability to multiply the labor he controls through capital equipment purchase and additional funds to pay employees until the sale of product replenishes those working funds. The investors accept some of the risk of the business in exchange for control and the right to future profits. Those anticipated and realistic future profits represent a net present value (NPV) asset to the investor. If he and the company selling shares agree on what that NPV is, that is the price of the stock. Otherwise, if the investor believes the NPV to be higher than the asking price, he can expect capital gains by reselling the stock to another investor at something closer to its NPV. If he believes it to be less, there is no sale. The NPV is a derivative valuation, not the direct control of labor, but a fiction invented by the accountants to establish value for the sale of stock, or issuing a bank loan, or whatever financial instrument that can be paid out over time.

Our investor is buying his shares in this company in a private transaction. If he needs cash for an emergency and wants to sell the shares, he must find another willing buyer in another private transaction. That may be hard to pull off. I've been there, and I know. So he is not going to tie up more cash in such investments than he can safely do without. The stock market is a public mechanism for trading stock among anonymous buyers and sellers, with rules to protect investors. Once a company has offered (and sold) its shares in what is called an "initial product offering" (IPO) it has no further control over what happens to those shares -- except of course it can buy them back at then-current market rates, if the sellers are willing to sell. There are rules for forcing the sale, but only if a majority of the stockholders agree to a complete buyout. The point is, the rules disconnect the stock from the business NPV, so buyers and sellers of stock can establish any price they agree to.

The stock market does not relieve the investor of business risk, but he can spread his risk over multiple companies, and the risk in running a single company is spread over multiple shockholders (see "Risk Management"). The result is that as a statistical number of those businesses fail, the expected profits from the rest more than compensate the losses. The liquidity of market transactions establishes the value of the stock among willing buyers and sellers, even while decoupling that value from the NPV of the company. And because it's the buyers and sellers who establish the value of the stock, people can -- and mostly do -- enter the market with the expectation of realizing capital gains far in excess of the NPV profits of the underlying companies. Is this realistic? Some people actually succeed, and boast of it enough to encourage others in the attempt. But the stock market is a zero-sum game. Every dollar an investor takes out of the market in profit, some other investor put in (and did not get back out) as loss. It only works because some people's idea of a profitable investment is different from somebody else's idea: you need both buyers who think this stock is worth more than the listed price and sellers who think it's worth less; otherwise there are no trades and no capital gains (and losses). The liquidity drives both the social value of the market in encouraging investment in the underlying companies creating wealth, and also the social ill of greedy investors preying on the gullible.

Population

There are those who claim that the market itself creates wealth. This is nonsense. Only the underlying companies producing labor-saving technology, or using that technology to multiply labor actually create wealth. Everybody else -- including especially the stock market -- only consume wealth. Why then does it seem that more and more people are becoming richer and richer in the stock market? There is a simple explanation: population growth. This happens in two ways with two corresponding (and different) effects, both nearing or at the end:

First, and most directly, the population of the country has been growing, resulting in more people with labor to sell and more wages paid to enable them to buy products, which companies can grow and produce at greater profitability, representing a greater NPV seen by the stockholders, so wise investors can reasonably expect the stock to be worth more (as a measure of its NPV expected profits). However, (except for immigration) the USA population has stopped growing. The continued invention of new technologies multiplies labor values somewhat faster than population growth, resulting in new companies listed in the stock exchange, but that does not result in capital gains, only that there is a greater total market capitalization.

Second, and more importantly, the population of people with excess money to invest (think: 401(k) pension funds) has been radically increasing over the last fifty years. That drives up demand, which raises prices far above the NPV of the underlying companies. The people who came in early and bought low are now selling high and making out like the bandits they are. This is effectively a Ponzi scheme which cannot last. The boomers are now beginning to pull money out of their 401(k)s, but the slack thus far has been taken up by the newly rich Chinese business tycoons. The Chinese economy is also beginning to flatten out as their wage levels reach parity with the rest of the industrial world, and also as they near the limits of atheist morality (corrupt management resulting in inferior products and falling sales). When that happens, the population of investors will stop growing, and the demand will drop, ultimately reducing stock prices to something closer to corporate NPV. Everybody now buying high will be forced to sell low. It's the nature of a zero-sum game.

God told people to "Be fruitful and multiply and fill the earth." When we did that responsibly, people got rich in every way measurable. Now that the Enemy is telling people to stop reproducing and to kill off babies before they are born, wealth tied to population growth is also at its end. The lovers of money have only one remaining way to increase their own wealth, and that is to take it from the poor. They can encourage their victims to invest in the stock market and persuade them to get into obscure derivatives they cannot hope to understand. They can limit education choices so the poor cannot multiply their wealth in that way, as the teachers unions are already doing.

But I do not wish to list all the ways evil can triumph. I want to work on ways to overcome evil. Buying into the stock market at today's inflated prices is probably not a good way to accomplish that.

Tom Pittman
2010 December 13