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Chapter 2: The Process

of Wealth Creation

In the introduction it was pointed out that because we live in material bodies, we must convert raw materials into consumable goods. This is because our bodies require feeding on a regular basis and they must also be maintained within an acceptable temperature range. I call these demands placed on us by nature our metaphysical slavery because this is the price of survival. The only other option is death. (The concept of metaphysical slavery will be explained further in Chapter 3.)

Wealth is defined by the Dictionary as follows: "1. An abundance of valuable material possessions or resources; riches. 2. The state of being rich; affluence. 3. A profusion or abundance. 4. Economics. All goods and resources having economic value."¹ The first three definitions portray common usage's of the term wealth, meaning comparative abundance. The last definition is the economist's definition&emdash;anything that sustains human life is considered wealth. Converting raw materials into consumable goods is therefore called wealth creation.

This chapter will stick with the economist's usage of the terms "wealth" and "wealth creation" for two reasons. First, even life at a bare subsistence level indicates that some wealth creation has taken place. (Even the poor are "rich" compared to those presently dead or yet unborn.) Second, wealth creation is not an accidental phenomenon. People have even been known to work up a sweat in the process of wealth creation. In the common vernacular, "wealth creation" is simply "making a living."

The subjects we will cover in this chapter are: the complexity of simple production processes, the four components of the production process, the production process and the human life cycle, and finally, a look at exploitation and the production process.

The Complexity of "Simple" Production Processes

Harking back to Thomas Paine's quote,² let's look at what is involved in converting raw materials into the goods and services many of us take for granted. When making even the simplest products, a great deal of knowledge is required. The best summary of the complexities of production that I know of is an article titled, "I, Pencil&emdash;My Family Tree As Told to Leonard E. Read." Early in Mr. Read's article, his impetuous pencil declares, "I, Pencil, simple though I appear to be, merit your wonder and awe, . . . not a single person on the face of this earth knows how to make me."³

Of course, this is a boastful claim that deserves to be challenged. Surely, with very little reflection, we should be able to divine the mysteries of such a simple thing as a pencil! What are the essential components? Wood, paint, lead, rubber, and a thin metal band. This can't be too complex. Let's consider them one at a time.

Let's start with wood. Straight-grained cedar trees are cut down in Northern California and Oregon, and then shipped to a mill. There they are "cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted . . . waxed and kiln dried again."⁴ From here they are shipped from California to Pennsylvania only to be "given eight grooves by a complex machine, after which another machine lays leads in every slat, applies glue, and places another slat atop&emdash;a lead sandwich, so to speak."⁵

How about the paint? The pencil is coated with six coats of lacquer and then labeled with "a film formed by applying heat to carbon black mixed with resins."⁶ The development of lacquer spans thousands of years. Initially, people depended on nature directly for their materials, but today it is made of synthetic materials as well as linseed and/or castor oil. How many people, with their lifetimes of knowledge are involved in just the creation and application of lacquer? Add to that the skill and technology behind applying labels in such a way as to not quickly rub off onto children's fingers!

Next is the lead. In reality it is not lead&emdash;it is graphite "mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow&emdash;animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions . . . cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats."⁷ Of course there is much more knowledge that goes with making pencil lead. Grolier's Encyclopedia, under "Carbon", notes that the hardness of the lead is determined by how much clay is put in the mixture. No doubt the variables are endless, and so is the knowledge required.

Next is the eraser. Did you know that British scientist Joseph Priestly, observing this elastomer's ability to rub out pencil marks, gave rubber its English name? However, in modern erasers, "An ingredient called 'factice' is what does the erasing. It is a rubber-like product made by reacting rape seed oil from the Dutch East Indies with sulfur chloride. Rubber, contrary to common notion, is only for binding purposes. . .The pumice comes from Italy, and the pigment which gives 'the plug' its color is cadmium sulfide."⁸

Finally, we get to the thin metal band, or the brass "ferrule." Brass is an alloy of zinc and copper, which means both metals must be mined, smelted, and shaped into that thin flat shape. Many people and lots of equipment are used for those processes. As for the black rings around the ferrule, they are black nickel. "What is black nickel and how is it applied? The complete story of why the center of my ferrule has no black nickel on it would take pages to explain."⁹

Thus far, we have focused only on the direct production of the pencil itself. This does not include the services and products consumed by those who make the pencil: food, shelter, and ideally a few luxuries to provide the inspiration needed for people to return to work the following day. Leonard Reed wrote "I, Pencil" to demonstrate the complexity of the production process with the intention of demonstrating just how much of a challenge central-planning ideologues are facing.

The Four Components of the Production Process

Now that we have established the complexity of the production process by considering something relatively simple like a pencil, we are ready to look at its four components: labor, invention, management and capital. These components of production exist regardless of which political system prevails. Ideology can change how we address the demands of nature, but it cannot change the demands themselves. Therefore, it is useful to survey the basics because they will provide a foundation upon which a better understanding of subjects like economics and government can be developed later.

Figure 2-1 below gives us a visual overview of these four components. In the following paragraphs, each component will be examined individually.

Because each type of labor represents work performed in the past, present or future, they will be referred to as physical labor, invention-labor, management-labor, and capital-labor throughout this chapter. By the end of this chapter it should become clear that defining people as enemies simply by their place in the production process is the result of fallacious reasoning.

Physical Labor

According to Karl Marx, "labor" was the victim, and "capital" was the oppressor. This made "capital" an enemy to be dethroned. In the book, Political Economy, Mr. A. Leontiv argues in defense of Marx's theory of "Surplus Labour and Surplus Value".

Upon what does the value of a commodity depend? Some commodities are dear, others cheap. What is the reason for this difference in value? Use values of commodities differ so widely that they cannot be compared quantitatively. For example, what is there in common in the use of pig iron and roast beef? Consequently we must look for the secret of value not in use value but in something else. Marx says: "If we then leave out of consideration the use value of commodities, they have only one common property left, that of being the products of labor."¹⁰

In the above statement, "use value" is not debunked because it is not real, but simply because it is impossible to quantify.

Now that we have conveniently discarded the "use value" of a commodity, we still have to deal with the "price of a commodity" which may be above or below its labor value. Of course, if the price is above the labor value, then we are confronted with the evil P-word: profit.

To return to our example . . . the capitalist will pay his workers a sum of money equivalent to 500 hours of labour.
Let us now total up. The capitalist's expenditures then amount to 3,000+500=3,500 hours. But the value of the commodities, as we have seen, was 3,000+1,000=4,000 hours of labour.
Where does the capitalist's profit come from? It is now easy to answer this question. The profit is the fruit of the unpaid labour of the workers. This profit is the fruit of the additional or, as it is called, the surplus labour of the workers, who during 5 hours of the day produce a value equal to their wages and during the other 5 hours produce surplus value which goes into the pockets of the capitalist. The unpaid portion of labour is the source of surplus value, the source of all profit, all unearned revenue.¹¹

From this, we would conclude that only physical labor deserves reward. The 3,000 hours of capital-labor which was directed toward tool creation instead of immediate consumption apparently does not deserve reward. Nor does the management-labor which found the market, and organized resources, capital and labor in order to meet the demand of that newly discovered market. (Invention-labor was not mentioned at all.)

As this section on the four different types of labor progresses, it will become apparent that it is hard to find instances of people who are limited to purely physical labor. Creativity, organization and tools are found in all aspects of human productive activity (as they should be).

There is a common misconception that needs to be cleared up. Much conceptual damage has been done by using the terms "wages" and "prices" as though they were totally unrelated. Also, for some reason, wages are not considered to be profit. In reality, what we call wages is simply the price of labor. What we call a paycheck is also the profit we make for labor we perform for an employer. Just as the employer would like to sell his product for a high price with no investment, so would most employees like to receive a nice check for only thinking about showing up to work. As it turns out, nature respects the wishes of neither the employer or the employee.

What is labor but the opposite of leisure? If we choose to sell our labor, we have decided the pay we receive is more valuable than the leisure we have given up for it. (However much we might grumble about it.) While it is common for people to see themselves working for businesses as "employees," it may be more useful to think of ourselves as being in the business of offering "labor services." Instead of being an employee, with all the dependency and servitude that title implies, we become subcontractors, or better yet, fellow business-people. Hence, our paycheck is our profit from having invested what would otherwise have been leisure time. (Also, if we manage our personal lives better, more like a business, we can establish ourselves in a stronger position in relation to our employers. When I was in the military&emdash;where I couldn't leave and they couldn't fire me&emdash;I noticed that my confidence and negotiating power at work improved when I had savings in the bank. In general, having a reserve allows us to take more risks.)

Invention-Labor

Now we are ready to consider the second component of the production process: invention. Innovation is very fascinating. It presumes we have already met our basic needs and have time and resources to spare. It also presumes a belief that it is possible to find better and more efficient ways to do things. Finally, we must have the freedom to experiment with and apply new ideas, and the motivation which comes from the hope for future reward. With these factors in mind, let's consider why human development has been so slow and arduous throughout history.

The first condition of invention is having free time left over after we have met our basic needs. As one speaker put it, "we must take time out from chopping wood to sharpen the ax." Taking this idea one step further, we need to stop chopping wood and sharpening axes long enough to invent saw mills, chain saws and other tools.

The second condition necessary for invention is the belief that it is possible to improve the way we do things. This requires a belief in our own ability to solve problems, and a belief that our culture will allow us to benefit from our efforts. I mention this second point because in my younger years I was always experimenting with new ideas for doing things better. However, as I researched the patenting process, I discovered companies routinely requisition copies of patent applications, start producing the product ideas they like, and then use the profits to pay a battery of lawyers to fight the inventor. Not having factory owners in my sphere of influence, I stopped inventing for reasons other than for my personal convenience.

This leads us to the third condition necessary for invention&emdash;the freedom to create. Around 100 A.D., a man named Hero invented the first steam engine.¹² Although it was crude, it did harness steam power. According to some sources, it was used to open and close temple doors, keeping them unsoiled by human hands.¹³ From such an early beginning, one can't help but wonder where humankind might be, had people been able to continue the steam engine's development. In any case, another 1600 years had to pass before the steam engine was developed any further.

During Hero's time, slavery was an established and respected institution. "The abundance of cheap labor, including much slave labor, was certainly a disincentive to the development of power-driven machinery."¹⁴ The institution of slavery&emdash;the ownership of one human being by another&emdash;cannot be anything but stultifying. The slaves, who had the greatest need for innovation, were forbidden creative activity. The slave holders, who had the freedom for creative expression, did not have the need. Consequently, where slavery is pervasive, old ways of doing things can persist for centuries.

In America, the old South enjoyed the institution of slavery until the Civil War. Conditions were not ideal in the North either, but there was still greater freedom for ordinary people to develop new ideas, and many people went from extreme poverty to wealth in a matter of decades. Today, as we enter the Third Millennium, the North still enjoys higher average incomes than the South. In the short-run, the slave-holders may benefit, but in the long-run everyone loses. When the whole of history is considered, one can only wonder how many thousands of George Washington Carvers have gone to the grave with their creativity still locked up inside.

To illustrate the value of invention-labor, let's consider this scenario. In this story we have two men who spend their days working at the same factory. One man partied in his spare time and saved nothing for the future, while the other man spent all his spare time and money in his basement developing a revolutionary new idea. After a period of twenty years passed, the inventor introduced his idea, and within a couple of years made three-million dollars. Of course, the partier was still living from paycheck to paycheck.

Advocates of social justice will often look at these two outcomes and assume that it is inherently unfair. "The rich plan for future generations while the poor only plan for Saturday night," laments these advocates for the poor. What is not discussed, however, is "which came first, wealth or planning?"

However, let's look a little closer at this story. Before the inventor came out with his new product, it cost everyone ten dollars to solve a particular problem. That "everyone" included the inventor's partying neighbor. Then one day, through no one's effort other than the inventor's, people walked into the store and discovered they could solve that same problem for five dollars. What's more, from then on, everyone needing to solve that problem would have an extra five dollars available to spend any way they liked.

What did the people do to deserve such a windfall? They simply left the inventor alone to live his life while they lived their lives. In the final analysis, we can say that the people who gain the extra five dollars are enjoying a much greater return on investment than the inventor who gained three million dollars in exchange for twenty years of spare time and savings. Instead of envying the inventor, people should instead be celebrating their own windfall.

To sum up these ideas, it is sufficient to offer this warning: Sabotage the creativity and productivity of others at your own risk. While you are crippling the productive efforts of others, you are simultaneously eliminating a market for your own production.

Management-Labor

The next component of the production process is management. What is management? Grolier's Encyclopedia says, "Management includes planning, administering, and controlling. These are separate functions, but they must all be handled competently if a company is to achieve its goals."¹⁵

In the three aspects of management&emdash;planning, administering, and controlling&emdash;there is one thing in common. Management develops a conceptual framework which organizes labor, tools and resources in such a way as to increase efficiency over what would happen without a conceptual framework. The larger the organization, the more comprehensive the conceptual framework must be if it is to remain viable in a competitive market.

At an earlier time in America this was taken into consideration. "Generalists," who had a larger philosophical outlook to work from, were more likely to make it to the top. Now we see "specialists" being given first preference for the top jobs, and the causes that stir mens' souls have been replaced by the "bottom line." (Of course, the specter of long-term inflation coupled with a 100% capital gains tax has also contributed much toward making the quarterly statement the new god for American business.)

It has been said that "the fate of individuals and nations are determined by the values which guide their decisions." A manager who is a leader, and not just a "mechanic", will offer a philosophical framework that gives meaning and honor to the task at hand.

The larger the organization becomes, the more important a working philosophy becomes. Once an organization grows beyond a certain point, the top manager cannot directly control all aspects of the production process. Nevertheless, when top management projects positive and production-oriented values, middle management will translate those values into their everyday equivalent. After much research, Thomas J. Peters concluded, "we found that companies whose only articulated goals were financial did not do nearly as well financially as companies that had broader sets of values."¹⁶

The next question that comes up is, how much are these conceptual skills worth? There is quite a range of opinion. Hazrat Inayat Kahn asserted, "one man of responsibility is worth a thousand who labor."¹⁷ Most likely, Mr. Kahn exaggerated to make his point, but his point still deserves serious consideration. At the other end of the spectrum was Karl Marx who implied that these conceptual services should be provided "free of charge," compliments of the process of nationalization and bureaucratization. (Everyone knows that government imposes no costs, right?)

In the last chapter, intellectual processes were divided into the categories of perceptual thinking and conceptual thinking. "Managerial work&emdash;the organization and integration of human effort into purposeful, large-scale, long-range activities&emdash;is, in the realm of human action, what man's conceptual facility is in the realm of cognition."¹⁸ In short, management-labor is conceptual labor.

Like any other form of labor, conceptual and organizational services must be paid for&emdash;either in profit or in taxes. One popular way of determining our investment in conceptual labor is to determine how the rate of executive pay compares to that of the rank and file. Surprisingly, cultures who claim to be most dedicated to fighting exploitation have the highest ratios.¹⁹

In Chapter 4, we will further explore the process of determining the value of each component of the production process and how rewards are apportioned.

Capital-Labor

One question I enjoy asking people is, "what is capital." Most of the time they will say "money." Actually, the essence of capital is tools, and in terms of money, it is money not-yet-spent, which is therefore available for the purchase of tools. The American Heritage Dictionary backs me up with this definition: "Any form of material wealth used or available for use in the production of more wealth."

Very often, the meaning of "capitalism" is also assumed to include the "free market." This "philosophical package deal"²⁰ is nurtured by both the detractors and the defenders of capitalism. Once again, it is useful to follow Benjamin Franklin's advice against making words do too much work. Eric Hoffer, in the early 1950s, observed that "Soviet Russia is realizing the purest and most colossal example of monopoly capitalism."²¹ Other authors have referred to the Soviet Union as "state capitalism." Barbara Ward authored an article titled "The Economic Revolution" in which she observed:

Communist Russia could not, any more than could capitalist Britain, avoid the iron necessity of beginning to save. There had to be capital&emdash;for the new sources of energy, the new factories, the new machines&emdash;and only the people at large could do the saving. But driven by his totalitarian daemon, Stalin pushed the percentage of national income devoted to saving far above the western figure. He compelled the Russians to save not 15 percent, but 25 to 30 percent of the fruits of their labors. Nor was this the end of the matter. Fearing an independent peasantry, he forced the farms to deliver their entire surplus to the government.²²

In Chapter 5, three types of capitalism will be considered: free-market capitalism, government-owned capitalism, and government-controlled capitalism. All humans and some animals are capitalists because a capitalist is an entity that uses tools.²³ Ultimately, arguments about capitalism are not so much over whether or not we should use tools, but over who should control them (and the products of their use).

Summary of the Four Types of Labor

This concludes our exploration of the four components of the wealth creation process. In every day life, these divisions are not so neatly drawn. A production worker may discover that by standing six inches to the left of her work station, she reduces her fatigue and increases her production by ten percent. A janitor might amaze architects by suggesting they build an elevator on the outside of a building, thereby eliminating the need to tear the building apart in order to put a shaft up through the center.

All in all, each category explored above is a form of labor. If the challenges inherent in mastering the different types of labor were better understood by more people, we might spend less time in envy and more time in production.

Let's consider an expanded version of the first diagram now that we have finished this section:

The Production Process and the Human Life Cycle

The final issue we need to consider is the production process and the human life cycle. Knowledge of how cultural approaches to resource allocation can either encourage or discourage productive activities will help us anticipate social and economic outcomes. The way a culture organizes itself plays a decisive role in determining whether people give their best throughout their lives, or whether they will simply try to tip-toe safely to the grave.

Nature is very resourceful and benevolent when it comes to programming our organisms. In youth, we are given lots of energy, and this energy enables us to perform lots of physical labor while our judgment is maturing.

Although youthful vanity is usually offended (as mine was) by the notion of performing "lowly" physical labor, such labor is both appropriate and valuable for it keeps us busy and alive while our knowledge and judgment improves. Of course, some people are self-motivated and are able to advance more quickly to the types of labor we will consider next: invention and management.

Inventive inspiration usually starts at an early age, with the outstanding geniuses peaking out at an average age of 37. Consequently, a more open economy is in a better position to benefit from this creativity because people are more free to follow their inspirations. On the other hand, a bureaucratic, top-down culture is invested in fighting young inventors much like the church of the Middle Ages was invested in fighting heretics. If any genius should accidentally make it to the top, she will probably arrive there late in life&emdash;a time when preserving the past is more important than forging a new future.

Management skills, if good, have an inventive quality to them, but overall, they depend on a more accurate and balanced assessment of daily situations as they unfold. An inventive genius can start a new project out of a garage and develop a new industry, but until they develop a perspective that allows for differences in gifts and values among various people, they are wise to hire seasoned managers.

Management is the art of finding a market, and then organizing labor, tools and resources in such a way as to provide a product or service at a price people will pay. Once again, management is to human action what conceptualization is to cognition. While labor is largely perceptual in nature, as management responsibility increases, it becomes ever more conceptual in nature. Several books on management I have read indicate that as one progresses up the ladder, time dedicated to routine tasks should decrease while the time dedicated to creative problem solving should increase. (Consequently, many managers have trouble because they try to hang onto their old functions in order to avoid new responsibilities.)

As our lives unfold, and as we progress through the first three forms of labor, we also have the opportunity to participate in the fourth form of labor: capital accumulation. Anyone, regardless of where they are on the first three rungs of the "labor ladder", has the possibility of consuming less than they produce, and in turn the possibility of saving and investing. Investment income is nothing more than a reward offered for consuming less than we produce. Typically there are three ways to be rewarded. The first is through interest on saving, where we accept a lower rate of return so someone else can invest on our behalf. The second approach is to manage our own investments in the hope of earning more through dividends and capital gains. The third option is to start one's own business, combining capital with direct management. In any case, labor not consumed and instead invested in the tools of production is the essence of preparing for a time when we may no longer be either able to or inspired to perform the first three types of labor.

For the purpose of visualization, here is Figure 2-3: Four Components of the Production Process and the Human Life Cycle.

Finally, this approach to retirement planning allows people to reach old age with dignity and without being a burden on younger generations. In fact, younger generations become benefactors under this system because power tools make work easier for all who use them no matter who owns them.

Should we fail to plan for replacing and upgrading our power tools, we will regress to the use of hand tools, and if we make the same mistake twice, we will go from hand tools to teeth and fingernails. (This fact may be too basic to be worth mentioning, but on the other hand, after observing modern economic policies and the underlying assumptions they betray, we might ask our leaders, ". . . isn't it all the same to you whether you have a mule or a hare to do your farm work? Haven't both these animals four legs?"²⁴)

In America, as in many parts of the world, the capital-base available for future generations to use is being eroded by well-meaning, but irresponsible policies that discourage planning and investing. In the final analysis, "If a father likes to ride though it be but a child's sled, his son must obligatorily be prepared to drag the great village sleigh up the mountainside."²⁵

Exploitation and the Production Process

It has been mentioned several times in this chapter that many of the events in the last century have been inspired by the premise that different components of the production process are natural enemies. Based on these assumptions, government has been called upon to regulate even minute details of the production process in order to keep labor and capital from destroying each other and society with them.

It has been estimated that at least 120 million people have died in this century during the process of spreading this ideal around the planet. What did they die for? They died due to the social conditions that must inevitably result when people assume that management by government edict is more merciful and caring than management for profit (which means that the needs of customers must be satisfied in order to get paid).

When we carry within us an assumption that says the work necessary to maintain life is an unjustly imposed burden, we often find ourselves attempting to institute manmade slavery in order to escape our metaphysical slavery. This, of course, puts us at each other's throats when we should be focusing on meeting the requirements of nature. In turn, we are rewarded with war and poverty&emdash;the natural consequence of choosing to fight instead of work.

In Chapter 3, the importance of discriminating between voluntary association and coercion will be discussed. Our different positions in the production process, like our different racial origins, gender identities, religions, and so on, are not the root cause of our difficulties living together on this planet. Our insistence on using these differences as a pretext for initiating coercion against others is the root problem. We need to cut through all these fancy, euphemism-laden words and get to the basics if we are to have any hope of living sane, peaceful and prosperous lives.

To conclude this chapter, we need to recall the basics of wealth creation: labor, invention, management and tools. To be most effective, they must work together instead of leaping at each other's throats during fits of envy. How well these functions are performed is determined by our attitudes toward them, and of course, the social mores and political policies that shape those attitudes. In the following chapters we will explore those deeper issues in greater detail.