Wealth “Out of Thin Air” — The Proper Role of Government in Prosperity — Part 1

If you have never studied economics, you need to understand the strange and magical math of exchange before I make my next points.

Case Study 1

Baskets and Spears (borrowed from Bill Whittle)

On Robinson Crusoe island, there are two populations, mountain and lowland. The mountains are rugged and agriculture is nearly impossible. There is, however an abundance of large game to be hunted as well and wild berries, tubers and roots to be harvested. In order to hunt the large game, the mountain dwellers became expert spear makers. They extract ore from the surrounding hills, temper and polish the steel then fasten the steel point to a polished, straight stick. The spears are marvelous. They have to be in order to ensure community survival. The mountain dwellers also make baskets to haul berries, bulbs and roots. The baskets are poorly made by comparison and are in need of constant repair. Time spent to make a spear is three hours. Time spent to make and repair a basket is six hours.

The lowland population is made up of gatherers and as such, they have become expert basket weavers. Their baskets are so tightly woven that they hold water. This has allowed them to harvest fish from the sea and keep them alive for days in the village. They also plant and harvest various small crops. Their baskets are strong and light and rarely fail. They also make spears to hunt fish and small game, but the spears are poorly made, rarely effective and are in constant need of repair. It takes three hours to make a basket and six hours to make and fix a spear.

One day, a lowlander meets a mountain dweller for the first time. The lowlander admires the mountain dweller’s spear and the mountain dweller admires the lowlander’s basket. They each exchange with the other and both are benefited. The lowlander saves at least three hours and owns the best spear in the village. The mountain dweller also saves at least three hours and owns the best basket in the village. The three hours is calculated by counting the six hours saved in making an inferior basket for the mountain dweller and in making an inferior spear for the lowlander. Then subtract the time it took for the mountain dweller to make his superior spear and for the lowlander to make the superior basket and you have a three hour savings for each. Both villages are so excited about the prospect of the time savings associated with exchange that they agree to free association. Both are made wealthier and decide to take their time savings and invest that time in better plumbing, running water, recreation, and better housing.

Wealth is created out of thin air!

But the magic does not end there. Suppose that both communities made spears and baskets of equal quality. Suppose that it took the average mountain dweller 10 hours to make a spear and 11 hours to make a basket. Suppose that it took an average lowlander eight hours to make a spear and 10 hours to make a basket. The lowlanders are better at both spear and basket making. So it makes NO sense to exchange, right? WRONG.

Do the magic math!

Suppose that during a year each community wants to have 1,000 new spears and 1,000 new baskets. If they work on their own, it will take the lowlanders 8,000 hours to make to make spears and 10,000 hours to make baskets for a total of 18,000 total work hours. For the mountain dwellers it takes 10,000 hours to make 1000 spears and 11,000 hours to make 1000 baskets for a total of 21,000 work hours. The combined total is 39,000 hours.

Magic!

If the lowlanders focus on spears and the mountain dwellers focus on baskets in spite of the fact that mountain dwellers are inferior at both spear making and basket making, most assume that there is no gain or at least that there is no gain for the lowlanders. If lowlanders specialize in spears, it would take them 16,000 hours to make 2,000 spears. If the mountain dwellers specialized in baskets, it would take them 22,000 hours to make 2,000 baskets. The total number of hours worked is 38,000 hours. They have just magically created 1,000 hours of wealth out of thin air! Individually, the lowlanders are better off by 2,000 hours and the mountain dwellers are worse off by 1,000 hours. To make it work for both sides, they could split the surplus and both be better off by 500 hours each.

Wealth is fabricated out of thin air!

There is no finite pot of wealth in the universe that has to get divided up and in the division, some get richer and others get poorer on an absolute scale.

Case Study 2

The Bonus (Also Bill Whittle)

You work for an insurance company. You sit at one of several desks among several other employees that do similar work as you. One morning get a call from a vice president who asks you to come to his office. When you enter, he greets you with a warm handshake and a big smile. He thanks you for your good work over the last year and explains that the company is enjoying windfall profits. He hands you a check for your good work. As you leave his office, you look at the amount on the check. You are stunned. The check is for $100,000. At first you think it must be a typo. You look the check over carefully and realize that the amount is correct, and you start thinking of all the things that you could do with $100,000. You can pay off your student loans, buy a new car and still have money left over for a few vacations.

Later, in the lunch room, you tell your co-workers about your good fortune. They congratulate you and tell you that they all received $500,000 bonuses. You can’t believe it. Suddenly, the sweetness of the $100,000 has turned acrid as you now contemplate what you could have done with the $500,000 that you did not get.

The story describes the ugly side of human nature. A biblical parable teaches the same lesson.

Matthew 20:1-16

1 For the kingdom of heaven is like unto a man that is an householder, which went out early in the morning to hire labourers into his vineyard.
2 And when he had agreed with the labourers for a penny a day, he sent them into his vineyard.
3 And he went out about the third hour, and saw others standing idle in the marketplace,
4 And said unto them; Go ye also into the vineyard, and whatsoever is right I will give you. And they went their way.
5 Again he went out about the sixth and ninth hour, and did likewise.
6 And about the eleventh hour he went out, and found others standing idle, and saith unto them, Why stand ye here all the day idle?
7 They say unto him, Because no man hath hired us. He saith unto them, Go ye also into the vineyard; and whatsoever is right, that shall ye receive.
8 So when even was come, the lord of the vineyard saith unto his steward, Call the labourers, and give them their hire, beginning from the last unto the first.
9 And when they came that were hired about the eleventh hour, they received every man a penny.
10 But when the first came, they supposed that they should have received more; and they likewise received every man a penny.
11 And when they had received it, they murmured against the goodman of the house,
12 Saying, These last have wrought but one hour, and thou hast made them equal unto us, which have borne the burden and heat of the day.
13 But he answered one of them, and said, Friend, I do thee no wrong: didst not thou agree with me for a penny?
14 Take that thine is, and go thy way: I will give unto this last, even as unto thee.
15 Is it not lawful for me to do what I will with mine own? Is thine eye evil, because I am good?

Some people (maybe most) would rather be equally poor than unequally rich.

With these two case studies as a backdrop, we can introduce government as a party to exchange.

Stay tuned for part 2