There is no such thing as a natural resource, except for the mind of man. For centuries, economists have been exposing the "physical fallacy" - that is, the belief that wealth resides in tangible things, such as gold, land, raw materials, and so forth - and it seems as if we still do not understand this basic economic concept. We seem to think that matter is more important than minds, while in fact it is the exact opposite. Natural resource endowment cannot explain why Israel has a per capita Gross Domestic Product of $17,220 compared to Saudi Arabia’s $8,870. Taiwan, Hong Kong, and Singapore have no “natural resources” and yet they all have a higher standard of living than Russia and Indonesia, both rich in natural resources.
Even the conventional wisdom recited by every realtor - location, location, location - does not explain how it came to be that the 27,400 acres of Florida swampland purchased by Walt Disney in 1964, at an average price of $182 per acre, are now worth over $2,000,000 per acre.No doubt no more land is being created, yet scarcity does not explain wealth. If it did, your children’s drawings on your refrigerator would be worth at least a few months of mortgage payments.
Adam Smith brought this profound insight into his seminal book An Inquiry into the Nature and Causes of the Wealth of Nations (1776). He wanted to explain why some countries were wealthy, not why most countries were poor. Poverty needs no explanation, nor do we learn much from studying it, since it is the natural condition of man since he emerged from the cave. What would we do once we discovered the root causes of poverty? Create more of it? What needs to be explained is wealth, not poverty. Indeed, wealth is the only known antidote to poverty.
The wealth of a nation depends upon its output of production, and production itself is dependent upon the specialization and division of labor. Smith intuitively understood man was the only creature possessing the capacity to produce more of a good or service than he himself could consume to satisfy his own needs. This is one of many characteristics distinguishing humans from animals, since "Nobody ever saw a dog make as fair and deliberate exchange of one bone for another with another dog."
Money is not wealth per se, it is merely how members of a society move it around. Money simply facilitates transactions, eliminating the need for a “double coincidence of wants” necessary in a barter economy.With money, a doctor doesn’t have to spend time searching for a hairstylist that needs medical services at the same time she needs a haircut.
Real wealth is represented by the goods and services money can buy. If it were otherwise, any country could achieve wealth simply by printing more pieces of paper money. Perhaps this is better understood if we think of Nathan Mayer Rothschild, one of the founders of the international Rothschild banking dynasty, probably the richest man in the world at the time of his premature death in 1836 at the age of 58 from an infected abscess. Despite having the best medical care money could buy, he didn’t have access to antibiotics that today could be purchased from any pharmacy for a few dollars. Would you rather have Bill Gates’ income in today’s world - with its abundance of goods and services - or during the time of Rothschild? Another way of articulating this is the wealth of nations resides in consumer well-being, not profits.
In the real world, debits don’t equal credits by Ronald J. Baker
Ron Baker is the best-selling author of "The Firm of the Future: A Guide for Accountants, Lawyers, and Other Professional Services;"
"Pricing on Purpose: Creating and Capturing Value;" "Measure What Matters to Customers: Using Key Predictive Indicators;" and "Mind Over Matter: Why Intellectual Capital is the Chief Source of Wealth," from which this article has been adapted. You can reach him at (707) 769-0965, or e-mail at Ron@verasage.com. He Blogs at www.verasage.com. Copyright © 2007 Ronald J. Baker. All Rights Reserved.