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 Comment Guidelines
Other Dr Kelvin Kemm News
Updated 4 hours ago South Africa’s current account deficit narrowed during the fourth quarter of 2013 as the value of imports fell while exports rose on improved global demand and a cessation of the strike action of the third quarter of 2013. The fourth quarter’s current account...
Updated 5 hours ago The National Union of Metalworkers of SA (Numsa) will demand a double-digit wage increase, deputy general secretary Karl Cloete said on Wednesday. "They [the demands] are developed against the backdrop of high cost of living and the heavy socio-economic burden...
Updated 5 hours ago Tower Property Funds’ flagship property, the Cape Quarter, in Cape Town, is set to undergo an “extensive greening transformation” as part of the fund’s greening and occupancy cost-reduction strategy. The fund, which listed under the JSE’s new real-estate...
Recent Research Reports
Automotive 2014: A review of South Africa's automotive sector (PDF Report)
The report provides insight into the business environment, the key participants in the sector, local construction demand, geographic diversification, competition within the sector, corporate activity, skills, safety, environmental considerations and the challenges...
Construction 2014: A review of South Africa's construction sector (PDF Report)
Construction data released during 2013 hints at a halt to the decline in the industry during the last few years, with some commentators averring that the industry could be poised for recovery. However, others have urged caution, noting that the prospects for a...
Electricity 2014: A Review of South Africa's Electricity Sector (PDF Report)
This report provides an overview of the state of electricity generation and transmission in South Africa and examines electricity planning, investment in generation capacity, electricity tariffs, the role of independent power producers and demand-focused initiatives,...
Defence 2013: A review of South Africa's defence industry (PDF Report)
Creamer Media’s 2013 Defence Report examines South Africa’s defence industry, with particular focus on the key players in the sector, the innovations that have come out of the defence sector, local and export demand, South Africa’s controversial...
Road and Rail 2013: A review of South Africa's road and rail infrastructure (PDF Report)
Creamer Media’s Road and Rail 2013 Report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Liquid Fuels 2013 (PDF Report)
Creamer Media’s 2013 Liquid Fuels report examines South Africa’s liquid fuels market, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing,...
This Week's Magazine
This month’s roundup includes details of TSX- and NYSE-listed Alderon Iron Ore’s power purchase and security agreement with Newfoundland and Labrador Hydro for the Kami iron-ore project, in western Labrador; US aluminium refiner and products manufacturer...
Creamer Media’s Electricity 2014 report provides insight into South Africa’s electricity generation, exploring the issues of State-owned power utility Eskom's generated power, coal supplies, electricity tariffs and demand-focused initiatives, as well as the...
This month’s report includes details of junior miner Papillon Resources’ mining permit for its flagship Fekola gold project, in Mali; the Waterberg Coal Company’s feasibility on the development of an opencast mine, in Limpopo, to produce ten-million tonnes a...
A structured approach, wherein managers personally engage at each level of the project, is necessary to mitigate delays to the workflow on mega construction projects, says State-owned Eskom Kusile power station projects GM Abram Masango. The 4 800 MW Kusile power...
Construction of transmission lines to evacuate power from a regional hydroelectric project in East Africa, which was hanging on the balance following the withdrawal of financing by key partners, is now back on track. After six months of uncertainty, the African...
Next ArticleTechnologywise, one size does not always fit all