Jul 13, 2012
Interfering in ‘wealth distribution’ systems is dangerousBack
© Reuse this
This is typical talk that takes place before an election. What happens is that politicians try to imply to voters that, if they vote for them, then the voters will get some of what other people have. Even better news is that they will get it for little or no work. The mechanisms of how this will happen are usually rather vague.
When many people use the term ‘wealth’, they usually tend to mean ‘money’. They use the words ‘wealth’ and ‘money’ interchangeably. This is incorrect – they do not mean the same thing.
Money is largely fictitious; it does not really exist as an entity. Think about it. Money is a measure, and money measure is largely historic – it tells one what has happened in the past, not what will happen in the future. Ponder the state of affairs in Zimbabwe not so long ago, when the economy was falling apart. Their money, projected into the future, meant nothing. The price of bread during one week had no bearing on the price of bread the following week – it could double, or more. So their money was not at all a reliable future indicator of economic progress.
From time to time, I give MBA classes and in some cases I ask the class: “Who would like R1-million?” Virtually everyone puts his or her hand up. Then I say: “Okay, I can deliver R1-million to your house in banknotes in a big steel box, but there is one rule associated with this gift – you are not allowed to spend any of it.” I then say that they can play with the money, paper their walls with the banknotes, or whatever, but they cannot spend it. I then ask who still wants the R1-million. No one does. So people do not want R1-million; what they actually want is the things that they could get if they spent R1-million.
The R1-million cash is only a pathway or conduit to get what you actually want. That is why I say that money is not really an entity in its own right; it is merely a representation of other things.
Wealth is when you have the things that you want – a car, a house . . . Wealth is also getting people to do what you want – like wash your car, paint your house, and so on.
Wealth is associated with active production and process. Imagine if someone comes to you and says: “By the way, there is a stash of gold coins buried in your garden worth R1-million.” Your reaction would be: Wow, great! All that wealth! Then the person adds: “There is a problem; we don’t know exactly where the coins are, and they are buried 100 m deep.” All of a sudden, the wealth disappears. Now what you would have to do is work out how much it is going to cost you to dig down 100 m all over the garden. The chances are that it is going to cost R1-million. So, if you spend R1-million to find R1-million, then there is no wealth there, right?
So, when someone says: “Let us redistribute wealth – let us take his farm and give it to another guy”, is that wealth redistribution? If the farm is a well-run commercial farm, then the ‘wealth’ in the farm is in its ability to deliver a good monthly income. The selling price of the farm is not the price of the ground – it is the price of the farm’s ability to produce an income.
If the new owner takes over and imagines that the farm will just run itself, he probably believes that he can just sit on the stoep all day, drinking beer and eating steak. Reality will soon bite. The farmer is supposed to be up at 05:00 each morning, including weekends, to make sure that the cows are milked. The milk coming out of the cow is the wealth of the farm. The cow is a machine to turn grass into money – it turns grass into milk, and the farmer sells the milk. That is where the wealth associated with the farm comes from.
Sadly, many Zimbabwe farms that used to be profitable income-generating machines are now just derelict pieces of land because the new owner was not a farmer. The new owner had been given ‘wealth’ as a gift for being a loyal political party supporter. Then many new owners celebrated their new wealth with beer and steak. As we all know, Zimbabwe used to gain wealth by being a sig- nificant food exporter. Not anymore. The land ‘wealth redistribution’ merely wiped out most of the agricultural wealth.
Money only retains its value if the underlying economy retains its value. The money is a ‘thermometer’ of health. If the health of the economy collapses, so does the money. Zimbabwe proved that beautifully. They produced a fantastic business school case study of what a government should not do. In Zimbabwe, it ended up cheaper to burn banknotes in your braai than to burn charcoal. It was cheaper to wallpaper your house with banknotes that with wallpaper. This is not a joke.
So, wealth and money are not the same thing. Wealth generation is a functioning system – be it be a farm, a factory or a food preparation business.
Real wealth generation and political popularity are usually poles apart. Consider this: imagine that government decides to give away R100-million. It could choose one- million people and give them R100 each. Great – but what would happen? Everyone would go off to the pub to buy a few drinks or they would buy a new shirt. Within a day or two, the R100-million is gone.
On the other hand, government could choose ten people and give them R10- million each. If the correct ten were chosen, they would take the R10-million and start a business or expand an existing one.
They would provide work for others and generate a profit. They would produce wealth that benefits society. The option to give the money to one-million people would be seen as ‘fair’ and be popular, but wasteful. The second option would be considered unpopular and unfair but would actually be sensible and highly profitable to society at large over a long term. Interfering in “wealth redistribution” systems is dangerous.
Edited by: Martin Zhuwakinyu© Reuse this
Creamer Media Senior Deputy Editor
To subscribe email firstname.lastname@example.org or click here
To advertise email email@example.com or click here
Other Dr Kelvin Kemm News
Updated 5 hours ago The South African government received quite a pleasant surprise when it deposited some cash for drought relief in areas badly struck by the drought, and invited the public to contribute. The public poured millions into the fund, which it goes to show how much we all...
Recent Research Reports
Construction 2016: A review of South Africa's construction industry (PDF Report)
Creamer Media’s Construction 2016 Report examines South Africa’s construction industry over the past 12 months. The report provides insight into the business environment; key participants; local demand; geographic diversification; corporate activity; black economic...
Energy Roundup – February 2016 (PDF Report)
The February 2016 roundup covers activities across South Africa for December 2015 and January 2016 and includes details of a Government Gazette notice that confirms Cabinet’s decision to move ahead with the 9 600 MW nuclear procurement programme; State-owned power...
Energy Roundup - December 2015 (PDF Report)
The December 2015 roundup includes details of State-owned utility Eskom’s application to claw back R22.8-billion; South Africa’s ranking as an investment destination for renewable energy; and a nuclear expert’s thoughts on reactor designs for South Africa’s nuclear...
Water 2015: A review of South Africa's water sector (PDF Report)
Creamer Media’s Water 2015 Report considers the aforementioned issues, not only in the South African context but also in the African and global context in terms of supply and demand, water stress and insecurity, and access to water and sanitation, besides others.
Input Sector Review: Pumps 2015 (PDF Report)
Creamer Media’s 2015 Input Sector Review on Pumps provides an overview of South Africa’s pumps industry with particular focus on pump manufacture and supply, aftermarket services, marketing strategies, local and export demand, imports, sector support, investment...
Liquid Fuels 2015: A review of South Africa's liquid fuels sector (PDF Report)
Creamer Media’s Liquid Fuels 2015 Report examines these issues in the context of South Africa’s business environment; oil and gas exploration; fuel pricing; the development of the country’s biofuels industry; the logistics of transporting liquid fuels; and...
This Week's Magazine
Updated 5 hours ago Lifting, transporting, installing and ballasting solutions provider Ale has expanded its global fleet of trailers and invested in the latest range of widening trailers that can be mechanically widened from 3 m to the desired width for any project. Ale ordered 48 axle...
Updated 5 hours ago The market for the BMW 7 Series in South Africa differs quite significantly from the rest of the world. China, the US and the Middle East almost exclusively buy the long-wheel-base version, using the German manufacturer’s luxury high-end sedan as a chaffeur-driven...
Updated 5 hours ago January new-vehicle sales fell by 6.9%, to 48 615 units, compared with the same month last year. Statistics released by the Department of Trade and Industry show that the domestic new passenger-car market declined by 6.1%, to 34 936 units, compared with 12 months ago.
Updated 5 hours ago Information technology (IT) equipment and infrastructure multinational Dell is providing open infrastructure systems for clients so that they can use any systems, including innovative new systems, that suit their business needs, says Dell Europe, Middle East and...
Updated 5 hours ago South Africa’s State-owned defence industrial group, Denel, has set up another international partnership, based in Hong Kong. This new subsidiary is Denel Asia and it is a joint venture (JV) with South African private sector company VR Laser.