Creating wealth

I should preface this post with a warning and a good dose of pre-emptive humility: I am no economic theorist and have no formal training whatsoever in economics or the philosophy of economics. I write based on my own reflections, and am highly likely to be exceedingly wrong.

Every time that I hear somebody -- more often than not a Conservative politician -- claim or imply that the private sector is the creator of wealth it grates on me. The claim seems to assume a completely naïve idea of wealth, but seems to be widely held amongst a worrying number of people who are notionally in charge of our economy (and any brainless Tory-Clone Blog-Troll you care to pay attention to).

It’s a very tempting view on first thought. The thought process goes as follows: Everything that the public sector does, whether it is doctors doctoring, bureaucrats bureaucratising or MPs MPing, is paid for by the exchequer; the exchequer derives almost 100% of its money, ultimately, from the taxes that it takes; taxes are drawn from people and corporations through direct and indirect taxation; those taxes which come from people employed by the public sector can be ignored, as that is just the circulation of wealth and not its creation; therefore all of this wealth comes ultimately from the private sector, which must therefore create it.

Too often, leftists defend the work of the state by arguing that government spending is a pre-condition of private sector wealth creation. They say “Ahh, but without the Government’s roads Mr Tesco’s lorries couldn’t deliver their wonderful wealth to his wealth-creating stores!“ or “But Mr Goldman-Sachs relies on the profound wealth-creating knowledge of his highly-talented employees, some of whom (I’m sure…) attended state schools!“. This line of argument defends only a fairly minimal state, and a more fundamental defence needs to be made for the kind of state most progressive people want to see. Fortunately, you’ve only got to look at a couple of consequences of this theory of wealth to realise that things aren’t quite as they may seem.

Firstly, it would mean that there is literally no wealth at all in an entirely communist society, whose entire economy is public sector. Even if this is true in a gerrymandered and technical sense of “wealth”, it certainly isn’t true in any sense that the ordinary person would recognise.

Secondly, it would seem to imply that there is something fundamentally different going on economically when a private landlord rents out their property from when a council rents out theirs. I realise that a private landlord makes a profit whilst a council may turn a loss, but the point is that the profit comes from other people’s money and is not created by a landlord. Just because money didn’t go via Mr Osborne’s budget books doesn’t mean that the money going to the landlord wasn’t wealth “created” by somebody else.

What is the profound economic difference between the work done by a database assistant in a bank and a database assistant in the Department for Social Development, Inclusive Governance, and Societal Engineering? Is it just that there is somebody we can point to who profited from the actions of the former? In which case, why would that mean that the former helped “create” wealth whilst the latter used up the wealth created by somebody else?

The above view of wealth seems to rely on a misunderstanding of the -- though I cringe to use the “o” word in a blog -- ontology of wealth. It treats it like an object, or like water flowing from one pot to another, that if it exists in one pot must have been poured from another. Wealth isn’t like this: inasmuch as it is created, it is created only by our labours and exists only because we perceive it to. Our labours are not fundamentally different because the cheque is signed by Mr Osborne. The private sector does not create wealth which the public sector leeches onto. My suspicion is that the distinction between a wealth-creating private sector and a non-wealth-creating public sector is mostly an artificial one, convenient for those who want the state to do as little as possible in our society.