The Wealth of the People:
Your Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
By
Fernando Urias
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SMASHWORDS EDITION
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PUBLISHED BY:
Fernando Urias on Smashwords
The Wealth of the People:
Your Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
Copyright © 2011 by Fernando Urias
The author acknowledges the trademarked status and trademark owners of various products referenced in this work, which have been used without permission. The publication/use of these trademarks is not authorized, associated with, or sponsored by the trademark owners.
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Dedication
This book is dedicated to the billions of people that live in poverty.
I hope that this inquiry may help in the improvement of any country that might need it.
Acknowledgements
The intellectual debt of this book is great. It goes back many years in my life. It starts with a paperback copy of Ayn Rand’s “The Fountainhead” that I found buried in the sand of a beach in Mazatlan, Mexico in the spring break of one of my college years. I started reading "The Fountainhead" that night and finished it before the trip was over. Back in college at the University of Texas in El Paso, I was able to read the rest of her works.
After reading Ayn Rand I was elated by the possibilities of free economies. I continued to read anything that could find that would throw any light on the subject. In this pursuit I found Ludwig Von Mises, Friedrich A. Hayek, Murray N. Rothbard, Milton Friedman, Adam Smith, and many others. This book and the book series that will follow contains what I was able to understand from all these readings as the causes of wealth in a society.
I am very thankful for the opportunity to publish a digital book and I look forward to the possibility of reaching people in their smartphones in places where printed books might still be relatively difficult to obtain. Thanks to Smashwords.com and Mark Coker for providing this media.
I am thankful to my parents, Mama Blanca (Blanca Vega de Urias) and Papa Jojo (Fernando Urias Escobar) that held as their highest priority to give a good education to their children. This education came at the cost of many other things.
Disclaimer
This book is designed to provide information and entertainment. It is published with the understanding that the publisher and author are not engaged in rendering legal, economic, accounting, political, financial, or any other type of professional service. If legal or other expert assistance is required, the services of a competent professional should be sought.
It is not the purpose of this book to reprint all the information that is otherwise available to authors and publishers but instead to complement, amplify, and supplement other texts. You are urged to read all the available material and learn as much as possible about economics and human organizations and tailor the information to your individual needs.
Every effort has been made to make this book as complete and as accurate as possible. However, there may be mistakes, both typographical and in content. Therefore, this text should be used only as a general guide and not as the ultimate source on economic or social organizations. Furthermore, this manual contains information on economics and social sciences that is current only up to the publishing date.
The purpose of this book is to educate and entertain. The author and publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to have been caused, directly or indirectly, by the information contained in this book.
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The Wealth of the People:
Your Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
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Summary
The wealth of a nation is its people. If this is true, why are there so many nations that have so many people that are not wealthy? What is missing?
Ask a citizen of wealthy country to explain why this is so and he might have some notion that he will express with insecurity. Ask a citizen of a poor country why his country is not wealthy and he will have plenty of blame to throw around but chances are that he might not even have a notion. It is a simple question with a complex answer. If it had an easy answer, everybody would answer correctly. Why some nations are wealthy and some others are not? The answer must have elements of economics, philosophy, political science, history, business, psychology, religion, and other disciplines. This series of books is an attempt to break this complex answer into simple elements that might be easily explained. This will attempted by reviewing one element in each book, starting with simple elements and building up to more complex conclusions.
This is the first book of the series. It is about the wealth of a single person in an island. The titles of the rest of the series are listed at the end of this book.
Introduction
I have been blessed with the experience of living in two countries. One is a wealthy country and the other is a country in development, which is a nice way to say that it is not wealthy. The one in development is older telling us right away that age is not a cause of wealth. I have experienced the contrast of the living, business, cultural, and political conditions in both countries and this experience has fueled a desire to try to explain the differences. This bicultural experience, an interest in economics, and an education in engineering might allow me to have a unique perspective on the subject.
The first book is about producing wealth in a desert island, just like Robinson Crusoe in Daniel Defoe's novel. Welcome to the first book.
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The Wealth of the People:
Your Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
* * * * *
Alone in an Island
Imagine that you are the sole survivor of a shipwreck in an island. Instead of having the benefits of the remains of the shipwreck as Robinson Crusoe had, all you have are the clothes that you are wearing. What would you have to do to survive?
You would have to fill your basic needs with your bare hands. You would have to find out how to satisfy your thirst and hunger. You would have to find or build a shelter to sleep at night free of any wild animals or nasty insects. Eventually you would have to make clothes to replace the ones you are wearing.
The Definition of Wealth
Upon your arrival in the island you would be poor. To be wealthy is to have plenty of resources to sustain your life. You have your mind and your body which are very valuable but they would not be sufficient to make you feel wealthy. You would want to have plenty of water, food, clothing, and a good shelter.
Your Assets
To satisfy your needs, you would have to use your mind and your body. Your mind and your body are your assets. You would have to use your mind to think where to find water to drink and you would have to use your legs to walk until you find it. You would have to think what vegetables to eat and walk to collect them. You have to use your assets, which at this point are only your mind and your body, to produce the products that you need.
The Natural Resources
To satisfy your needs you would also have to use the natural resources of the island. You would have to find fresh water in a creek that you could drink without getting sick. You would have to pick vegetables that you could eat. You would have to find out how to hunt an animal. You will have to figure out how to start a fire to cook the animal. You would have to use earth material, such as mud, stones, and sticks, to build a shelter.
The Production Process
To meet each of your needs you have to go through a production process. You have to engage your mind and your body in a process that will give you the products you need. Even the simple task of drinking water from a creek is a production process that converts the natural resource “water in the creek” into the product “water in your mouth”.
Each production process will consume your time. It will require the use of your mind, your body, and your time.
Your Labor
Every production process requires the use of your labor. Your labor is the exertion of your effort during a period of time. When you are involved in a production process, you are working. You are executing the actions required to produce the products that will satisfy your needs. You might think that the work is pleasant or that it is not but it does not matter because you have to do it to survive.
To produce the product “water in your mouth” that will satisfy your thirst, you would have to find a creek that has drinkable water. You would have walk to it and when you get there, you would have to kneel to get your face close to the surface of the water, form a cup with the palm of your hand, and carry the water to your mouth. Drinking water with the palm of your hand is one of the methods by which you can transform the “water in the creek” natural resource into the “water in your mouth” product. There are many other ways to do it.
Your Costs
There is no money in the island but you will be incurring costs to obtain the products that you want. You would measure the cost of getting a product in terms of the time that it takes you to produce it. If it takes you thirty minutes to go to a creek to drink water to satisfy your thirst, you will think that satisfying your thirst costs thirty minutes. If you have to satisfy your thirst four times per day and each time it takes thirty minutes to walk to the creek, then the cost of satisfying your thirst in a day would be two hours.
Your Income
Your income is the amount of wealth that you can produce with your work in a period of time. In society, your income is the amount of money that you are paid for the time worked. In the island there is no money but you would have an income. Your income would be the set of products that you would produce. If you spend thirty minutes to go to a creek to drink a pint of water, this pint of water is your income. If you go to the creek four times a day and you drink one pint of water each time, your income would be four pints of water at the cost of two hours of work. If you spend one hour collecting one pound of vegetables, this pound of vegetables would be part of your income. If you hunt a wild turkey in two hours, the turkey is your income for the hunting work of two hours. The sum of all these products is your income for the day. In a day like this, you might earn four pints of water, one pound of vegetables, and one turkey at the cost of five hours of labor.
The Labor Principle of Wealth Production
To produce wealth you have to apply your mind, your body, and your time into actions that will result in the products that you need. Wealth is the result of working in a productive activity. Your income is the amount of wealth produced by your work during the time that you work.
The Production of Wealth
The title of this paragraph: "The Production of Wealth" is meant to bring to mind the work that needs to be done to produce wealth. It is suited better to understand the essence of wealth than the more common title: "The Creation of Wealth". The word "creation" gives the idea that wealth is created out of nothing. Wealth has to be produced and its production requires the use of human labor. If you think of an apple as wealth, you can think of an apple hanging from a tree in the middle of a forest, like the forests that exist in fairy tales, and say that this apple was created. The reality is that an apple available in a supermarket is not created but produced. It has to be harvested, packed, refrigerated, transported and it comes from an orchard where apple trees are planted, fertilized, irrigated, pruned, and tended for several years by people that get paid to do so. An apple in a supermarket is wealth that has to be produced.
Your Time Budget
To produce the products that you need, you have a finite amount of time. The day has twenty four hours and in this time, you have to sleep, eat, and work. Your effective working hours might be fourteen hours or less. Whatever this number is, it is a finite number. You are on a time budget.
Depending on the conditions of the island, you could spend most of the day to barely complete a meal. Without any tools to produce food, you would be in a state of hunger and poverty.
The Value of Your Products
The value of the products that you would choose to produce would come from the satisfaction that they will provide to you. The value of the water that you drink comes from the satisfaction of your thirst. There is no way to measure this satisfaction and compare it to the satisfaction of eating an apple. All you know is that you are thirsty and hungry and that you need to drink and eat. You make the decision to produce these products considering your need, the cost of the products, and your budget.
The Time Budget with the Highest Value
You would have to decide which set of products that will fit in your budget will give you the greatest value. There is nobody in the island that will lend you anything so you have to stay within your time budget.
You will not be able to produce many products that are of high value because you cannot afford them. There are many things that you would like to have but you would not have the time to make them.
In the island, the set of products that would fit your budget and might have the highest value to you could be four pints of water, one pound of vegetables, a wild turkey, and other products that would bring you the highest satisfaction possible. Maybe you would spend two hours working on your shelter and one hour working on your clothes. You will also have meal times and resting periods. In doing all these activities, you would fill up your time with the production of products and the activities that would maximize the value of your time budget.
Your Time is Your Money
You probably have heard the saying that time is money. In the island, there is no money but your time is literally your money. If you want to buy a product, you have to buy it from nature using your time and your work. The famous phrase could be restated more correctly as “time and work is money”. In the process of working, you are exchanging your time and your work for the products that you need.
Increasing Your Income
Since you would not have any tools, you would spend the whole day to produce a very small amount of the products. The amount of products that you can produce with your bare hands is very limited. Your income would be low. You would be poor. You would want to consume more but to consume more you have to produce more. How can you do it? How can you increase your income?
Working for the Longest Time
One of the ways to increase your income is to work as many hours as you can. The quantity of products that you will produce will be in proportion to the hours worked. If you work ten hours instead of eight, you income should be twenty five percent greater because ten hours are twenty five percent greater than eight hours. You can maximize your income by maximizing the hours worked.
Working Fast
Another way to increase your income is by working fast. If you work slowly, you will produce very few products. To increase your income working fast, you have to work as fast as possible without causing damage to yourself or to the material that you are working with. There is no use of spending three hours collecting vegetables at a very fast pace if you hurt your back and you have to stop for a week to heal or if the vegetables that you pick spoil easily because they were damaged during the picking process. To maximize your production output across many days, you have to work with quality, as fast as possible, and at a pace that you can sustain for long periods of time. A good approach is to work with high quality and carefully initially to do a product well and increase the speed once you know how to do it right.
The income for working fast will be in proportion to the speed of the work. If you are able to pick up the pace and work thirty percent faster, your income will be thirty percent greater.
Performing a task several times makes you faster. You are always in a learning curve. The greatest improvement is experienced from doing a task the first time to the second time. This is one of the reasons that you should always have a bias for action. If a task needs to get done, get it done it even if you are not very good at it. Do it carefully the first time and as you repeat the task, you will become better and faster. You can become fast and good at any task if you do it many times.
Working Smarter
To increase your income more than in proportion to the longest working time and the fastest speed that you can sustain, you have to work smarter. You have to use your mind to think of new production processes that will increase your income many times over. These new production processes will require the use of tools.
If you think about the process of drinking water from the creek, it might occur to you that instead of walking to the creek four times a day whenever you are thirsty, you could make a pouch to carry the water that you will need for the whole day. If every trip to the creek would cost thirty minutes and you would make four trips per day, the total cost to satisfy your thirst in a day would be two hours. With a water pouch you could reduce your trips to one per day and reduce the cost of satisfying your thirst from two hours to thirty minutes. You could save one and one half hours every day.
The Investment Decision
Laboring is putting your effort and time in an existing process to obtain a product that you need. When you spend time thinking about improving the process, about designing a better method of production, and about making the tools for this better method, you are investing. If you think about a pouch to carry water, you are investing your thoughts and your time in a new process that will be more productive. When you decide to build the pouch, you will have decided to invest your time in building a tool that is needed for the new process. When you are making the pouch, you are investing your time in making a tool that will make your process more productive.
To make a wise investment decision, you need to know how long it will take to build it, how long it will last, and how much time it will save. If the water pouch takes thirty hours to build and lasts for only ten days, then the daily cost would be three hours. This is a greater cost than the one and one half hours that it would save. At this cost and durability, the pouch is not a good investment. Drinking water using the pouch would be more expensive than walking to the creek four times per day. But if the water pouch was easier to make and it would last longer, then it might be a good investment. If building the pouch would take ten hours and it would last for twenty days, the daily cost would be thirty minutes per day. This is less than the one hour and a half that it could save. The total daily cost of drinking water would be less than with the current process. The total cost would be one hour consisting of thirty minutes for one daily trip to the creek and thirty minutes for the daily replacement cost of the pouch. The net savings would be one hour since the original cost was two hours. These are pretty good savings just for the construction of a simple water pouch. You would be adding one hour to each day of the rest of your life.
Your Investment Budget
Once you know that the pouch is a good investment, you would have to decide how much time to allocate daily to the manufacturing of the pouch. You could spend ten hours in a single day building it but you would go hungry and thirsty. An alternative would be to allocate a smaller portion of your time budget. The time that you would allocate is your investment budget. If you invest half an hour every day, you can have the water pouch in twenty days. If you invest one hour every day, you can have it in ten days. This investment time would have to come from restricting your production and consumption of other products.
The percentage of your time budget that can go into your investment budget can vary from zero to one hundred percent. At zero percent investment you would be producing and consuming products with your existing production process without ever improving the processes. Your income will never increase. At one hundred percent of investing you would be thinking about new processes all the time and you would never produce or consume. You would be thirsty and hungry. The right proportion of production time, consumption time, and investment time is somewhere in the middle. You want to be producing the products that you need and investing significant amounts of time to improve your production processes to keep your income and your wealth always increasing.
The Investment Principle of Wealth Production
To increase your wealth production capability, you have to develop ideas and build tools that will increase the productivity of your time. The use of these ideas and tools will increase the output of your production process and increase your income, which is your capability of producing wealth in a period of time.
The Increase in Your Physical Assets
The water pouch would be an addition to your physical assets. When you arrived at the island you had your mind, your body, and your clothes. Now you have you mind, your body, your clothes, and the water pouch. The water pouch increases your income as many other tools will. To increase your wealth, you have to increase your capacity to produce. You have to increase the physical assets that will assist you to produce income. The pouch is a physical asset that makes the production of the product “water in your mouth” more efficient.
Your Physical Capital
The physical assets that increase your income and make your life easier are called together physical capital. The word capital came into use in the eighteen century to denote economic resources. It was used to refer to a stock of money, a stock of goods, and later it was used more broadly. It also has been used to mean a stock of tools for production. The buildings, tractors, machines, and other tools are all part of the physical capital of a business enterprise. The pouch would be your first tool in a long list of physical assets that can increase your income. Under this definition, all the tools that you build to improve your production processes will be part of your physical capital.
To increase your income, you have to develop and build many tools. You would not be able to farm a small piece of land with your bare hands but you could do it with a pick axe and a shovel. With a diesel tractor, you could farm several acres.
The Increase in Your Mind Assets
By building the first pouch, you would learn how to do one. Learning increases the capability of your mind. You would be increasing your mind assets. An increase in knowledge that can help you in the production of wealth is an increase in the power of your mind.
There are mind assets that their use in the production process is not obviously apparent, for example, the knowledge of where things are. Locating the creek the first time might have taken several hours but once you know where it is, you do not have to spend time repeating the search. The value of the knowledge of the location of the creek is worth several hours to you. Your ability to think, talk, and read are all part of your mind assets.
Your Human Capital
The idea of making a pouch, the knowledge of its manufacture, the willingness to invest the necessary time, and the method of using it are all necessary elements of the water pouch production process. These attributes of the mind are means of production. For this reason, they are called human capital.
All the tools that are part of your physical capital have elements of human capital in them. A new process starts with an idea, it needs a tool that needs to be designed and manufactured, and it will have a have a method of use once it is in production. The new process is a combination of physical and human capital.
Any idea that you have on how to make a product that you need is part of your human capital. Any knowledge that you have that facilitates your production processes it part of your human capital.
Your stock of human capital is quite considerable. It includes your ability to think, talk, read, and write. The human capital that you are born with and that you acquire through education has been building up in the human race for thousands of years.
Your labor also has an element of human capital because you have to know how to run the production process. You have to know how to produce with tools and this knowledge is also part of your human capital.
The Maintenance of Your Physical Capital
The water pouch frees one and a half hour of your time but it only lasts twenty days. To keep on drinking water using the water pouch you would have to invest thirty minutes every day making a new pouch that will replace the old pouch when it breaks down. This means that the water pouch really saved only one hour daily and not one and a half hours. If you do not invest this time for maintenance, you would fall back to a drinking time of two hours per day.
Your Investment Maintenance Budget
If you decided to invest only half an hour per day because it was all you could afford, this half hour would be consumed just in the maintenance of the pouch and you would not be able to improve your income any further. To improve your income, you have to increase your investment to a higher quantity than that required for maintenance.
From the time saved in the improved production process, you have one extra hour. If you decide to spend the extra hour in production and consumption only, you will not increase your income any further. If you want to continue to increase your income, you need to invest a good portion of the hour gained.
The Maintenance of the Human Capital
Physical assets decay with use and time. It is less obvious that is also necessary to maintain your mind assets. The knowledge of the location of the creek will be there as long as you can remember it, so it would seem that it does not require maintenance. But the knowledge of a process can be forgotten if not practiced and therefore it does require a maintenance that occurs while practicing the process.
Another requirement for the maintenance of the mind assets is to give the body the proper nutrition and not to poison it with drugs or alcohol. If you do not follow this required maintenance for your mind, you will lose the ability to remember, to think better methods of production, and its ability to produce wealth.
In society, knowledge becomes obsolete when better processes are devised by other people. Maintenance of the mind assets is understood as the knowledge necessary to compete in the market. This is not true maintenance but keeping up with competition. It is an upgrade of the knowledge necessary to stay in business.
The Investment Maintenance Principle of Wealth Production
To maintain your level of wealth production capability, you have to continue to invest in the maintenance of the tools and the knowledge of the current production process. The maintenance of this investment preserves the level of income achieved with the investment. If this is not done, the income will drop to the levels before the original investment.
Your Capital Structure
Once you have several processes that require a constant investment for their maintenance, you will have a way of producing that consists of several tools and methods. These tools and methods are your capital structure. The tools that you have, the processes that you know, and the investments that you have made form a set of capital assets that constitute your capital structure. Even the geographical location of your shelter is part of your capital structure and affects your income. If you are far from a fresh water creek, you will have to spend more time every day to get water for your needs, lowering your income.
Your labor and your capital structure determine the amount of income that you can make. Your capital structure determines how much wealth you can produce with your labor. At the same time, the assets of your capital structure are part of your wealth since they are of great value to you. The value of a physical capital asset can be calculated from the benefit it provides in the production process.
An Increase in Your Capital Structure
To increase your income you have to increase your capital structure. You have to invest in more productive tools and methods of production. The production process of drinking water was reduced from two hours to one hour with the addition of a water pouch. It can be reduced to a few seconds in a society where the capital structure makes it affordable to have metal or plastic piping reach a faucet in a kitchen. In the island you would not be able to melt metal or produce plastic. Even if you could emulate water piping with bamboo, you probably would not make the investment because the project would take too many hours to make it worthwhile. To increase your income, it is not sufficient to invest but it is also required that the investment be the right one. Your investments need to be investments in the production processes that you are using and they need to result in an overall reduction of the time spent in your production processes.
To increase your capital structure and your income, you have to invest more than the maintenance requirements of your capital structure so that the net result is an increase in your capital assets. If you enjoy the benefits of the water pouch but you only invest the half hour daily to replace it, you would be investing but you would not be increasing your income any further. If you do not invest the minimum half an hour to replace the water pouch you would be disinvesting and in twenty days, when the water pouch breaks down, your income would fall to the level before the existence of the pouch.
In society where money is available, you may think that an accumulation of wealth is an accumulation of money. Most people would not think that accumulating tools is the way that wealth should be accumulated. If you think of a shovel that you need in the island, you would only need two. When one breaks down, you would work on its replacement. You would not invest your time accumulating many shovels. But to be wealthy in the island you need to accumulate your wealth in many tools that are all different and each tool makes your work easier and increases your income in a different way. This is one of the keys to achieve wealth in the island and in society. Wealthy nations have a large capital structure that is the accumulation of many physical tools supported by their associated human capital of the people that know how to use them and makes it possible to sustain their high income.
A capital structure can deteriorate rapidly if it is not maintained. A reduction in the capital structure for lack of maintenance means that you would drop to lower levels of income. If you do not maintain your capital structure, the time to produce products will increase.
With the understanding of that physical and human capital are part of your capital structure, the investment principle of wealth production can be restated as follows:
The Capital Structure Principle of Wealth Production
To increase your wealth and your income, you have to invest in the physical and mental assets of your capital structure in a quantity that would be in excess of its maintenance requirements so that you have net increases in its size and function.
The Wealth of Your Capital Structure
With tools, you can produce a higher quantity of products in the same working time. This means that tools increase your income. Tools are wealth-producing devices and at the same time and for the same reason, they are part of your wealth.
The value of a physical capital asset is derived from the time that it saves in the production process. The water pouch that lasts for twenty days will allow you to do twenty daily trips of thirty minutes for a total of ten hours of work instead of eighty trips at the cost of forty hours. The pouch is worth thirty hours of wealth.
Tools are wealth stored in the form of production capability.
The Freedom Given by Your Capital Structure
With a tool, you become freer. The pouch frees you from having to spend two hours drinking water. With the pouch, you can walk farther distances exploring the island. You can carry water for the whole day. You would be freer because your investment would enable you to do more things.
There is a direct relationship between wealth producing capability and freedom. If you have wealth in the form of capital assets, you are freer because you can produce at a higher income using the same labor.
Upon arriving in the island, you would have been in a state of natural freedom. There would be nobody to tell you what to do. You could do anything you want with the limited capabilities and resources that you would have. If you do not have any tools, your results would be quite limited. You would not have a knife, an axe, a gun, a heater, a lamp, a bike, a horse, a car, an airplane, or any of the hundreds of things that make your life easier. You would be naturally free but your natural freedom is quite small. It is with tools and capital investment that you can raise to higher levels of freedom. A state of natural freedom is a state of poverty.
When you increase your physical and human capital structure, you increase your freedom in three ways. First, you will be able to do something that might have been impossible to do before. For example, with an axe you can cut down a tree that would have been very difficult to bring down with your bare hands. Second, in the time that you are working, you are doing more than before. You are more capable. You are freer because you are more powerful. For example, with a shovel, you can dig more holes for cultivation that with a stick. Third, since you are more productive with the use of the tool, you have more time available in your hands. You are freer because you can engage in other activities that you could not do before. Tools will free your time to do other things.
The Life Given by Your Capital Structure
A tool increases the time that you have available. It frees time that you can use to do something else. The length of your life is determined by many factors, such as your health, but the ability to do more things in less time is equivalent to increasing your life. With the extra time, you can experience more things in the same life. Crossing the Atlantic Ocean a couple of hundred years ago would take several months. Today it can be done in a few hours.
If you had to work fourteen hours a day to survive and by investing in several tools you find a method to get the same product in seven hours, this is the equivalent doubling the rest of your life. An increase in the availability of your time is equivalent to an increase in your life.
Robinson Crusoe's Capital Structure
Instead of imagining the possibilities that you would have to increase your capital structure in the island, it will be easier to review Robinson Crusoe's capital structure. Daniel Defoe starts the narration by stating that Robinson Crusoe was born in 1632 and hence, the story has many examples of the advantages that a seventeenth century person has over the cannibals that inhabit the area. Robinson has a more advanced human capital structure in his mind that would be of some use in the island and its usefulness is augmented with the physical capital that he will later find in the remains of the shipwreck.
Robinson has the bad luck of going through a shipwreck but then he has the good luck of surviving it. He also has the good luck that he has more than his clothes. He was carrying a knife with him and later he finds substantial remains from the shipwreck. How long would it take you in the island to make a rock sharp enough to cut as well as a knife? Finding or making a sharp rock would probably be the best that you could aspire because you would not be able to melt or forge the metal necessary for a knife. You would be in the Stone Age. This illustrates that having human capital is not sufficient to do many of the things that you know to be possible. You can know of the existence of a knife but you would not be able to produce one.
Robinson finds the remains of the shipwreck which allows him to transfer a great deal of physical capital from the seventeenth century to his capital structure in the island. On the other hand, if the cannibals had have found the powder and the muskets, they would have not known what to do with them. Physical and human capital goes hand in hand to constitute a capital structure.
When Robinson finds the remains of the shipwreck, his highest priority, because is the fastest way that he can increase his income and his wealth, is to build a raft to carry all the useful things that he can carry. He is able to extract food, a carpenters chest with all the tools, wood, iron, guns, ammunition, powder, swords, a grindstone, liquor, corn, rice, and many other things that were available in the seventeenth century. Many of the items that he obtains he would have not been able to produce in a very long time if at all. These items immediately increase his income and his wealth and he is able to produce much faster and with much greater capability than with his bare hands. The finding of the shipwreck objects is an illustration that in comparing two places with different capital structures, it is to the advantage of the lower capital structure to bring as much as possible from the higher capital structure.
The items that he found are enough to take care of his immediate food needs and he decides to spend considerable time in building his shelter. The shelter is a large expenditure but it is not necessarily a tool. It is called a capital good because it lasts many years. It is part of his income because he wants the shelter services but it is not a tool because it does not help him to increase his income. But if the shelter allows him to work in the shade or when it is raining, then it becomes a capital tool in addition to being a consumption capital good. The shelter is where he lives and sleeps but it does not increase his income other than the enjoyment and benefit of having a shelter. Robinson has to spend considerable time in building his shelter even when uses cables and wood that he found in the ship. For your shelter, you would not be able to cut trees without an axe and you might have to find an alternative way to build a shelter using bundles of palm leaves. You might have to use tied up bundles of palm leaves to form the walls and the roof of a shelter as some of the huts that are still being used in Africa and South America.
After having his immediate needs cared for, Robinson biggest worry is not to lose his possessions, particularly the powder. He goes to great length to split the powder so he will not lose it all in case of rain or lightning.
The first use of his powder was to kill a fowl that he found unfit to eat. Soon afterwards, he spots goats in a hill. Later he shoots some other birds, like ducks, that he is able to eat. He also finds a turtles and turtle eggs.
When he goes hunting for goats, he shows two examples of his human capital. The first one is the knowledge associated with the use of the musket. He knows what a musket is, how to load it, and how to aim with it. The second type of human capital that he shows is the one associated with the hunting process. He finds out that he is not able to hunt goats from the bottom of the hills but he learns to hunt from the top of the hill and looking down at them. The goats have very good vision looking downhill and they run away before he could be at a shooting distance.
When he wants to expand his house, he wished he had a pickaxe, a shovel, and a wheelbarrow. He is able to use an iron crow from the ship as a pickaxe but has to go through several hours of investment to produce a shovel made out of hard wood. He is never able ever to make a wheelbarrow so he has to carry earth by dragging it in a flat panel.
Another interesting combination of human capital and a physical object that he experiences by chance and he initially thinks that it was a miracle is the finding of barley plants growing next to his house. He later remembers that he threw some waste material from a sack from the ship. A few barley seeds were among the waste and managed to grow. The barley is another grain that added to the corn and rice that he had found previously adds to his capital structure and brings him it up in time to the discovery of agriculture. It takes him four years to grow enough grain until he can afford to eat some. He shows a great example of withholding consumption to have the ability to grow grain later. He could have consumed the small amount of grain that he had and never had the ability to grow larger amounts in later years. Going back to your capital structure, how many years would it take you to develop grains from wild plants in the island to reach the nutritional value of the corn, barley, or rice that you know today? Even by having these seeds, it takes Robinson several tries to find out when it is the right time to sow them and he is smart not to sow them all at once and risk losing them all. When he finally gets a good harvest, he realizes that he has to tend it and watch it constantly so that the abundant fowl in the island does not eat it all away. He hangs scarecrows and finally he manages to harvest at least two bushels each of corn, rice, and barley.
With grain in hand, he realizes that he does not have the means or knowledge to grind the grains into flour and bake it into bread. It takes him a long time to make a mortar and a pestle from hard wood to grind the grains because he never finds suitable stones.
Robinson does not mention how he drank water from the fresh water creek the first day he arrived. He might have done it with the palm of his hand or he might have used a faster method such us kissing the surface of the water and sucking up as much water as you want. After he finds the shipwreck remains, he probably had jars from the ship. Later he reports having great difficulty to produce earthen vases to hold the grain. They would fall apart when the clay would dry until he found out how to cook them in the fire to make them harder. After all this trial and error, it takes him two months to build two large earthen jars that he had to protect with hay in a basket.
He was never able to develop wax candles. Eventually he is able to make a candle that is not very good with fat from animals. This allows him the flexibility to use some of the hours at night.
He suffers from the lack of human capital when he gets sick and has no medicine. Medicine is a great deal of knowledge that is part of human capital and is associated with knowing how to administer medicine. Medicine production involves complex processes and sophisticated physical tools.
One of the improvements that he builds at a very high cost is a table and a chair. A table is a capital good that can be used for consumption, like eating meals, or it can also be used as a capital tool if it used for work.
After several years in the island, he becomes much wealthier and freer because he is able to domesticate goats, grow corn, and build more tools that help him to live better. His wealth and freedom increase substantially because he works hard in the production processes and the investments required to improve them. He takes advantage of his advanced western knowledge, maintains the tools that he found in the remains of the shipwreck, and invests significant time in new physical tools that improve his life.
Your Wealth
To increase your wealth and your income producing capability there are two principles to follow: The Work Principle of Wealth Production and the Capital Structure Principle of Wealth Production. The Work Principle of Wealth Production states that you have you work to produce wealth. Wealth is the availability of products to meet your needs and these products have to be produced by working. The Capital Structure Principle of Wealth Production states that you have to think about the production processes, discover better methods, and make the tools necessary to support these methods. These investments in the production processes make you more productive, require less of your time, and make you wealthier. The Capital Structure Principle applies to the two aspects of your capital structure, the physical tools that you need in the production process and the human capital required to design them, make them, use them, and maintain them.
Your wealth starts with your mind, your body, and your time. Your body is a source of wealth because it can produce wealth with its labor. Your mind is a greater source of wealth because it can find better ways to do things. Your time is constantly being consumed whether you decide to work or not.
The first requirement to build up your wealth is in your mind. It is your motivation to work, to invest, and to limit your consumption. Your motivation to improve your economic situation is part of your human capital. Do you have the will to work and think hard or do you prefer to indulge in the pleasure of consumption? The desire to become wealthy is the first step to produce wealth. The next steps are to work hard and to think of smart ways to increase your wealth.
In the island, you cannot accumulate a great deal of wealth in perishable goods because they would spoil. You can accumulate some wealth in non-perishable products to have available for a rainy day, such as nuts, corn seeds, and dry meat but there is also so much of it that you can have before it also starts to spoil. You can accumulate some of your wealth by putting your time in durable goods, such as your shelter. Durable goods last for a long time and they take many hours to be built but the best way to accumulate wealth is to invest in your production capability. If you can accumulate wealth by increasing your producing assets, you will have the value of the capital assets plus the increased income of the higher capital structure.
Increasing your physical capital means to increase your productivity with a tool that has to be built, used, and maintained.
Increasing your human capital means learning skills that are useful in the production process and make you more efficient. In society, accumulating human capital will mean that you can get a job that pays a higher income because you have skills that are useful to produce products for the people.
Increasing your income by increasing your capacity to produce wealth in a unit of time is the key to increasing your wealth. It is not the accumulated wealth in goods that makes a person wealthy. Consumer goods can be dissipated fairly easily. To be able to consume more, save more and accumulate more, you have to increase your capability of production both in your physical capital and in your human capital.
In the island, you have to consume less than what you produce because it is a physical impossibility to do otherwise. You cannot consume what you have not produced. If you decide to be frugal and not consume the entire product that you produced, then you can have some savings. Your savings are the quantity of product left without consumption after its production. Savings are good thing to have for a rainy day when you are not able to work. You want to have savings to eat and satisfy your needs in any day when you may fall sick and might not be able to work. But since your income in the island would be very low, it will be very difficult to have any significant amount of savings. To increase your savings, you need to increase your income, to increase your income you need to invest as much as possible independently of the savings that you might have. If you invest your time thinking of new production processes and building the tools for them, you will be doing a great deal of investment independently of the savings that you might have.
Savings can come in handy when you decide to invest because they will allow you to drink or eat while you are investing. When you decided to build the pouch, you did not think that you would have to save water or food to be able to drink and eat while you build the pouch, you just started working on it. After some time building the pouch you might get thirsty and take a break to drink water. You did not need to have savings to invest in the pouch but they facilitated the investment process.
To increase your wealth you have to increase your investment and reduce your work and consumption time. You have to increase your income and reduce your spending. It is not possible to accumulate wealth if you consume everything that you produce.
The Limits to Your Wealth
The first limitation to increase your wealth is in your human capital. It is in your mind. It is your motivation. To be wealthy in the island you have to work hard, think well, and restrict your consumption to maximize the work and the investment time. The strength or lack of strength of your motivation is your first limitation. Many people prefer to produce and consume without investing much. Maximizing your investment is particularly hard at low levels of income but if you do not it, you will not improve your condition.
Assuming that you are motivated, that you have decided to work hard, that you think about your production processes, and that you restrict your consumption to the minimum, your next limitation is your time. You have a finite time budget that has to be allocated into three buckets. The first bucket is the time necessary to work to survive. This is the time that you work with the existing process to produce the products that you need. The second bucket is the time to sleep, rest, eat, and have leisure. This is the consumption time. The third component is the time left to invest in seeking improvements in the production processes. To increase your wealth, you have to spend as much as possible in the investment bucket taking away time from consumption and work. The time that you have left for investment will be enough for only a few projects in your lifetime.
Another limitation comes from your investment maintenance budget. Once you allocate the investment maintenance necessary to maintain the tools in the current process you might exhaust your investment budget just on investment maintenance. To improve your income, your investment time has to be greater than the one required by the maintenance of your capital structure. At any given point in time, you have a capital structure that lets you make a certain income. To maintain your income, you have to maintain your working hours and you have to maintain the investment necessary to maintain your current income. To increase your income, you have to invest more that the investment time necessary to maintain and additional time to improve your capital structure. Your limitation is again your time.
Considering that you could save an additional hour per day with the simple investment in a water pouch, why wouldn't you be looking for every opportunity to invest to increase your income as fast as possible? Because you need to work and consume before you invest. If you are in a state of poverty in the island, you would have to spend most of the day just to get the products that are the minimum required for your survival. It is very difficult to invest under these conditions. The main purpose of your time budget would be dedicated to provide the products that meet your present moment needs. It is hard to prioritize time for improvements that will occur in the future when you are hungry and thirsty.
Another limitation to increase your income is the current state of your capital structure. If you are alone in the island, it is very difficult to invest the effort to melt metal. It would take society and the need to make weapons and other tools that would cause bronze and iron to be discovered.
To get out of this situation, you would need to allocate as much of your budget as you can in the right investments to improve your income capabilities. This means that you would have to split your budget between present day activities and activities that will improve your production processes in the future. Your income will increase fast if the percentage of your time that goes into investment is great.
To see how the time budget would be allocated, you can think of allocating it to each of the two extremes and you will see that you have to be somewhere in the middle. One extreme would be to spend all the time working and consuming and you would never improve your situation. The other extreme is to invest all your time and not drink and eat. The first extreme is quite common and could be one of the reasons that a society is not progressing. A lot of people produce and consume without ever investing to improve their income. The second extreme is very difficult to do because of the sacrifice that it entails. Your solution could be somewhere in the middle where you can enjoy life but a great part of this enjoyment is working hard and investing to see your economic situation improve. Working should be fulfilling and investing should be exhilarating because you will enjoy the use of your mind to solve your problems.
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