Wealth is Created by Action Based on Rational Thought

One little bit of high-tech wealth brought to you by a lot of human thought.

One little bit of high-tech wealth brought to you by a lot of human thought.

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, wrote actions day after day in a pre-industrial smithy might produce twenty-four steel horseshoes in a twelve-hour workday. A laborer performing memorized, wrote 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.)

Conclusion

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:

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(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.

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Related Posts:

Wealth is Not Money — Monetary Wages vs. Real Wages

How Business Executives and Investors Create Wealth and Earn Large Incomes

What Caused the Financial Crisis: It Wasn’t Capitalism or Deregulation

The REAL Fiscal Cliff

How to Show That Taxation is Robbery

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6 thoughts on “Wealth is Created by Action Based on Rational Thought

  1. Outstanding, as always.

    However, I do think that in this description, again as always, Objectivists shy around people who make lots of money but do not contribute anything in terms of intellectual productivity. Why do NASCAR drivers earn so much? Why does Robin Thicke earn so much? Why are strippers paid more than nurses?

    The answer is that, although we would like to live in a world where wealth is based on intellectual work, wealth is a reflection of a culture’s values, and our culture does not value intellect to the extent that it should. Neither does it value women to the extent that it should. And it shows in people’s bank accounts.

    Fortunately, I think that Objectivism gives us a starting point for developing healthy values, which allows us to transform the world according to our own vision.

    • ‘Outstanding, as always.’

      Thanks. Glad you enjoyed the post.

      ‘However, I do think that in this description, again as always, Objectivists shy around people who make lots of money but do not contribute anything in terms of intellectual productivity. Why do NASCAR drivers earn so much? Why does Robin Thicke earn so much? Why are strippers paid more than nurses?’
      The answer is that, although we would like to live in a world where wealth is based on intellectual work, wealth is a reflection of a culture’s values, and our culture does not value intellect to the extent that it should. Neither does it value women to the extent that it should. And it shows in people’s bank accounts.’

      First of all, I did say this in a footnote:

      (2) [Pay scale reflecting mental intensiveness] 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.

      Second, I’m not sure that it’s true that strippers are paid more than nurses (do you have statistics to that effect?) But even assuming it is true, we should remember that the health care industry is highly regulated. We cannot really take the current pay of nurses as indicative of what they would be paid in a free market.

      Third, how much wealth one creates is not dependent solely on how critical one’s function is for one’s customers. It also depends on how many people need what one provides. Thus, someone who cures seasonal allergies may create more aggregate wealth than someone who cures a fatal but rare disease.

      But here’s the main distinction you’re getting at: there is a difference between actual, objective wealth and illusory, “subjective wealth.” If people are irrational, they may desire things that are bad for them: cocaine, street prostitutes, excessive liquor, etc. They may pay for things on a continuum from “sub-optimal” (values that result from minor immoralities and mental laziness) to downright self-destructive (values that are expressions of major immorality/irrationality.)

      Much of The Fountainhead deals with architectural clients who value buildings that are a combination of objective value and subjective “value.” The fact that Francon & Heyer’s buildings are basically safe structures that can be used for various purposes gives them some objective value. The creation of this objective value is what requires genuine mental effort: calculations and construction techniques that ensure that the building won’t collapse. Where the buildings lack objective value is precisely where no independent thought was put into them: in the sub-optimal layouts and hackneyed facades.

      For someone like Roark in a free market, if there are rational people in the market that are willing to pay him a just price for what he produces, then he can set that price and it becomes the market price. Only those rational people get his buildings, and they constitute his “niche” in the market. If there aren’t any rational people in the market willing to pay a just price for his buildings, then he may voluntarily accept a profit margin that is less than just for what he produces, rather than switch to a different occupation. This is an instance of non-coercive injustice in material compensation. But he accepts it, because a large part of his compensation is psychological, and it makes it still worth it to him.

      His irrational clients, you might think, have succeeded in “voluntarily robbing” him through the market, since he produces more objective wealth for them than the material compensation he accepts. But it is precisely the fact that injustice is irrational that prevents them from “fleecing” him with impunity. Remember that real, objective wealth is constituted by objective values, and values are the product of a relationship between a particular agent and an object. For man, things being objective values depends on both their natures as objects and the rationality of the agent. The same irrationality that leads the clients to pay a less-than-just commission also reduces the value of Roark’s building to them. (They can’t make as effective use of it, they can’t deeply appreciate its aesthetics, etc.)

      So when people value things (and don’t value others) as a result of irrationality or mental laziness, the joke is on them; they are the primary losers. The more common such rabble is, the more preciously rare are those who can and do produce things of real value to rational people. Rational people become a sub-market, or market niche among themselves. Yes, there is less objective wealth available to the rational than if virtually everyone were rational and more intellectually active. But the same lack of objective wealth applies to everyone else in the economy, as well.

      It behooves us all to take full advantage of the products of rational individuals and to offer just compensation whenever we come across them. Some of these products might be valuable for the sake of clarifying and spreading good ideas, such as persuasively written blogs. Others might consist of beautiful still lifes that can enrich our computer desktops with objects that represent our values. 🙂

      So, to conclude, when it comes to the real end-in-itself, which is not material things alone, but a flourishing life, the rational and mentally active are always better off than the irrational and mentally inactive.

      • You raise some great points! Hadn’t thought about the issue in the same light. The only thing that led me to raise my eyebrows is that you are surprised at the disparity in earnings between women who degrade themselves to be objects of whim-worshipping thugs versus rational individuals who use science to cure ills and in some cases save lives; having had close friends and acquaintances in both fields, I can personally speak to this disparity. Certainly many women in the U.S. can earn ridiculous sums of money for abandoning all independent thought because there are sick misogynists who would pay them money for it in stripclubs – granted, they will suffer from public humiliation and threats not only during their jobs but also away from work, where people may recognize them and publicly harass them or worse yet stalk and abuse them. Anyway as you point out the irrational minds will only further wallow in their own filth and spiraling self-destruction, provided that they don’t make friends in Washington, D.C. as many of them do, after which they attempt to take down the producers and intellectuals into the mud with them.

  2. Part of of Tiffany’s response (above) is correct. But her assumption that NASCAR driving, or even stripping, requires no intellectual work is unequivocally false (and comes from a failure to fully see the integration of mind and body). A NASCAR driver HAS TO THINK. In fact, I would say that the skills he acquires through (mostly inductive) thinking are more important to his driving than his physical strength. Even a stripper has to think. Granted, it probably would not be the most valuable form of thinking, and may well be thinking laced with evasion. But a body cannot act without an active mind directing it.

    Recognizing this is crucial to grasping the Objectivist principle that the thinking mind–reason–is the source of every penny of wealth ever produced.

    • Hi Hammad,

      Thanks for sharing your commentary. I might clarify that I did not claim, and I would not claim, that people in unintellectual occupations do not reason – to the contrary I consistently assert that we all reason, some of us just better and more deliberately than others. My point was not that strippers and NASCAR drivers do not reason – that would be an altogether insulting conclusion. My point is that consumer choice, which directs how much certain occupations earn, is intellectually sick in our disgusting anti-human culture, reflecting how we as consumers are choosing to pay into things which are evil or stupid rather than things which are beautiful and intelligent. In a rational culture, nurses would be valued highly as they use their minds to save lives, whereas worthless assholes like Robin Thicke would be penniless as they (sort of) use their minds to release anti-human garbage and treat it like art. The idea of being a stripper wouldn’t even exist in a rational, pro-human culture, let alone be more profitable than occupations where individuals are regarded with dignity and have opportunities to excel.

      Ayn Rand actually talked about this very phenomenon in Capitalism: The Unknown Ideal, when she talks about objective value versus subjective value of goods and services. It’s not a new idea, and my intention was simply to draw attention to the anti-intellectual, anti-human values which direct the market today, with tragic consequences for those who seek to produce anything other than trash and filth.

  3. Pingback: Laissez Faire Links: Rational Production, Debt Hysteria, Economic Ignorance, and Obamacare | kapitalcon

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