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Jul 13, 2012

Interfering in ‘wealth distribution’ systems is dangerous

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Of late, there has been a lot of talk in public and in the media about the need for “the redistribution of wealth”, a “more equitable division of wealth”, and so on.

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
Creamer Media Senior Deputy Editor

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