Capital and Human Productivity

The old saying in Marathi says “Laxmi attracts Laxmi”. Which basically means richer get more richer while poor people remain poor. Interestingly, I do not remember saying this in a negative way, people would rather use this phrase to explain why rich people continue to get more richer and why we should focus on saving money in order to attract more wealth.

One of the most important lesson in life is that money != wealth. Money and wealth are two separate things. Wealth represents the underlying goods and services where as money simply represents them. That is why even if government prints more money it wont make anyone richer.

Even more fascinating part about wealth is that it is never a constant. It can increase and decrease drastically. For example if a farmer somehow managed to grow more vegetables than usual he is generating more wealth. Every person out there is constantly struggling to find some way to generate wealth. Almost all human progress is made possible because some person was trying to figure a way out to generate more wealth. From oil industry, to automobile industry to telecom industry to medical industry it was this selfish human endeavor that made it possible.

Human beings thinking the unthinkable and then actually making it happen end up generating exceptional amount of wealth. But there is one more important factor that people often forget. “Capital”. It appears that human ability to think radically improves drastically with the amount of capital they have. For example a programmer like me is worthless if I do not possess a computer. But if you give me Rs 50K worth computer and Rs 12K year worth internet connection I might as well generate 12X wealth in a year. An ordinary man with Rs 50000 capital might start a Chai shop and earn say 5x that amount. Someone might gamble than more in a Casino and lose it all.

It appears that the kind of innovative ideas people can come up with improves with the capital availability. Silicon Valley where investors invest billions of dolllars every year in numerous small startups end up generating life shattering products which make even more money. Facebook, Apple, WhatsApp, Yahoo, Tesla,Twitter and many more examples are before us. More capital -> more success -> more jobs.

Things that did not exist and year back suddenly become viable just because more investment flows in. More wealth gets generated than the amount of investment that comes in. Ignoring this reality leads to very bad results.

Example 1:

Government decides to collect 10% more tax to fund a food security bill which is supposedly meant for poor. The result is that 2 Lakh Crore rupees are sucked in by the government from the hands of private individuals. This is same as negative investment. So technically government is not just sucking in 2 Lakh Crore Rupees but 2 Lakh Crore Rupees + additional wealth that this capital could have generated. So it is quit possible that Indian society loses 5 Lakh Crore Rupees and innumerable job loss further driving up the poverty.

Example 2:

Goans demanding a prohibition on land purchase from the outsiders. We see that fat cats from Delhi and elsewhere are buying huge chunk of land and real estate in Goa. Some Goans demand that this should be stopped as the land prices are hitting roof in Goa. [ I am not sure why interests of Goan land owners should be compromised for the interests of those who don’t own the land. ] A lot of people totally ignore that this money that is coming from outside Goa is driving innumerable number of businesses which otherwise could not have happened in the first place. We can look at the neighboring Karwar or Sawantwadi to see the rate of progress in the absence of outside investments.

Example 3:

Swadeshi. This patriotic misconception originated from the RSS camp. It made perfect sense to adopt Swadeshi during pre-independece era because the British forcibly destroyed India’s industrial capacity because the British product could not compete with Indian products on either price or quality. In modern day or time Swadeshi is a meaningless or rather dangerous concept. Imagine India forcing Suzuki and Toyota out of Indian markets. In such cases Indians will be forced to buy inferior Tata Indica. A lot of middle-class Indians will end up spending more money on an inferior product. This is exactly same as Exmaple 1 where government sucked the money from people, here that additional money people would spend would be a negative investment leading to more negative consequences.

Walmart is reported to save around $3000 for low income families in United States every year. This is approximately 10% of their income. If Walmart has to be closed down or if government imposes additional tax on Walmart it is likely that this $3000 saving would reduce and will have even bigger consequences for poor people down the line.



2 thoughts on “Capital and Human Productivity

  1. Even right to education leads to govt sucking more tax and providing inferior quality of education.
    Another example is equal pay for women. Milton Friedman explains why it is bad for women-

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s