The Wealth of a Nation: Why Capitalism Works

Politicians and policymakers don't understand where wealth comes from. They don't understand the very basics of why capitalism works, they don't understand how the wealth of a nation can increase - and as a result, almost every single policy is counterproductive to a country's competitiveness. This is despite the observation that the free market builds wealth due to one of the simplest of reasons, and once policymakers understand this, a completely different support structure would emerge.

Politicians and activists frequently regard the economy as a zero-sum game, where somebody must lose for another to gain. This is despite the quite trivial observation that we have built quite a lot of wealth from the Ice Age up until present day, and almost nobody is as bad off today as everybody was during the Ice Age. In this, it is baffling why politicians and pundits focus on redistribution, when the focus should be building of wealth.

Lots and lots of wealth

But it's counterintuitive for politicians to focus on building wealth, because doing so requires relinquishing control. Regulators can't build wealth and competitiveness. They can only destroy it to various degrees. A lot of this comes from not understanding just why, and how, capitalism and the free market works to increase overall wealth, and not just redistribute it.

The free market brings 179,000 people out of extreme poverty every day. Not politicians. Not foreign aid. Not siezed and redistributed wealth (minus the usual cuts to the redistributors). In my work in the European Parliament and elsewhere, I have rarely met a politician who understands the very fundamentals of why capitalism builds wealth - despite it being so ridiculously simple.

Capitalism works because it is voluntary.

It works because people seek to maximize their wealth, on a completely subjective basis. Some people value free time, some value money, some value happiness, some value rare Pokémon. That's fine, all of it. The only thing you need to do as a politician is to get out of the way of millions of people trying to maximize their own value by trading something with other people.

In order to maximize overall wealth, you want to maximize the quantity of voluntary trades. That's it.

Since every trade is voluntary, both voluntary parties consider themselves gaining in value from the transaction. This is key. As a result, a voluntary transaction adds value to the nation as a whole. Every voluntary trade adds a small bit of value, with both parties having gained from it, and maximizing wealth is about merely maximizing these voluntary trades on a purely quantitative basis. The more trades you have, the more increases in value you get.

Now, every person's perception of "value" is arguably subjective. Some of it can be measured in terms of GDP, other subjective value is just happiness in various forms. The good part about the many forms of value is that you don't have to concern yourself with this at all; people's completely subjective understanding of value is much better than yours when distributed across millions of people.

The distributed free market is better even at determining and valuing the precise definitions of "value" than any bureaucrat has ever been.

Now, compare this with how politicians today try to "build wealth" or "create jobs" and thump themselves over the chest about it.

It usually involves creating horrible burdens on every single transaction. At minimum, a receipt must be created (usually with penalties for not offering it). Moreover, transactions must be summarized to some kind of tax authority at regular intervals, and often to more than one authority. Meticulous bookkeeping is required - not for your sake, but for the sake of authorities. All this creates a wet blanket of unhappiness smothering the will to make voluntary transactions.

And then, of course, other politicians have the idea that regulated transactions are good for wealth, transactions which aren't voluntary and therefore contain at least one losing party, if not two. These don't build wealth. They may make the politician or regulator look good, but they aren't a transaction in the free-market sense because they're not voluntarily agreed upon by two consenting parties.

To top this off, all of the burden is usually directed toward subsidizing obsolete industries because they're a vested interest and/or contributed a lot to somebody's election campaign.

Politicians basically behave toward the free market and wealth-building like drunken elephants trumpeting about in a porcelain factory.

No, I don't have an illustration for that.

Let's do a thought experiment if we really wanted to create wealth in a nation, and just quantitively maximize the number of voluntary trades. How far can we go in making a nation competitive in this measure?

We're eliminating all requirements to tell authorities about your transactions. No wet blanket of despair. That means no income taxes, no sales taxes, no bookkeeping requirements. You let people trade and be happy. This means you can't have a corporate registry, there's no regulation of employment (as that's a special form of regular transaction), there's possibly not even a concept of a corporation at all. There's just people trading and taking entrepreneurial investment risks. Such risks can be detailed contractually in a project-by-project basis to eliminate the need for bankruptcy law and therefore the need for corporate legal entities and the heavy supporting authority bureaucracy.

There is still a need for a social safety net of some kind, not for compassion reasons, but for straightforward competitiveness reasons. You could solve this with a universal basic income like Friedrich Hayek and Milton Friedman have suggested. That would also be cheaper than building a bureaucracy for somehow determining who's "worthy" of support. With such a general safety net, you create competitiveness for the nation overall as a lot more people will try out business ideas in entrepreneurship.

Society as a whole benefits from a risk-positive environment, and if you can provide a mechanism where anybody can try any stupid commercial idea without risking becoming homeless and indebted, more people will innovate and take risks – and the society using this mechanism will get a competitive edge.

So what you need is a population register with people who qualify for UBI (citizens or similar). You also need a land registry, for reasons I'll be returning to. But that's it. All other registers can be scrapped. Every one. Car plates, drivers licenses, corporate registers, boat registers, every other database that requires data collection, and therefore puts obstacles in the way of maximizing the sheer quantitative amount of voluntary trades.

All this is perfectly doable today. It's just that politicians think that Regulating More is the answer to creating wealth. It's not, obviously. They Regulate More instead of focusing on something really simple - like the mere quantity of voluntary trades - and just doing everything possible to maximize that number, to get rid of obstacles for voluntary trades. As it turns out, you don't even need taxes. Taxes require paperwork. There are ways to fund a state-construct maintenance that don't require taxation and therefore don't require paperwork.

I'll be returning to that with a proposal for a Simplified Taxless State in a three- or four-part series over the coming days.