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What is the “Wealth of a Nation"?
It’s time to break the curse of “Voodoo Economics”; a return to manufacturing must be at the core of the effort to rebuild the “wealth of this nation”
China just surpassed America as the nation with the greatest wealth in the world.
But what does that mean? What is “wealth”?
Look around you. If you’re at home, you may be seeing a living room with furniture and a television. In the kitchen there are appliances, dishes and cookware. Other rooms have beds, a desk, bookshelves and tools.
The house or apartment itself sits on a foundation and is made of 2x4s and sheetrock and copper wiring and piping, covered with siding and roofing to protect it from the elements.
All of those things are wealth. They have value.
“Value,” in this sense, isn’t “cost.” It’s intrinsic to the items themselves; while their cost will vary with scarcity, condition, and age, their value is mostly intrinsic to their usefulness, their ability to make life easier, more comfortable, more convenient and more meaningful.
They were purchased at a particular price or cost with something else of value — for example, money derived from hours of your work — but because most are manufactured goods that will last for years, decades or even centuries, they represent lasting wealth, as does the aggregation of them, your house itself and the things in it.
Now add your home to all the others in the country, of all sizes and sorts. Add in all the commercial space in the country, all the buildings and land. The farms and farmland. Everything touched and made more valuable by human hands or machinery.
From the point of view of economics (which often ignores the value of nature, so we’ll pass on that for this discussion), when you consider all of that “stuff” in America, you’re viewing the “wealth of our nation.”
How is wealth created? If there’s a factory down the street that’s taking in freshly-sawed wood and turning it into furniture, they’re creating wealth. They’re taking the raw material of a forest, applying human labor to it, and producing things of lasting value: wealth.
But what if they’re making hamburgers instead of furniture? There, too, is a continuous thread from nature to your mouth: plants were grown and transported to cows who ate them and were eventually slaughtered and shipped to your burger joint. The burgers are assembled by cooking the meat and adding other ingredients like bread, pickles and catsup.
But do they represent “wealth?” In this context, no: that’s merely “economic activity,” effectively a form of market masturbation.
No more “wealth” was created making burgers than would be created by my loaning you $1000 and you paying me back $1000 plus $100 interest. There’s money there, prices and costs, but when everything is said and done, nothing of lasting value persists except my hundred dollars, which I took from you rather than either of us creating it from scratch out of a raw material.
That’s financial activity — just moving money around — rather than manufacturing, which involves turning raw materials into finished goods.
This application of labor to raw materials is what creates “The Wealth of Nations,” the title of Adam Smith’s 1776 book. And he captures its essence in the title of the first chapter of that book: “Of The Causes Of Improvement In The Productive Powers Of Labor, And Of The Order According To Which Its Produce Is Naturally Distributed Among The Different Ranks Of The People.”
It’s all about “The Productive Powers of Labor,” as Smith notes in that first chapter:
“The most opulent nations, indeed, generally excel all their neighbours in agriculture as well as in manufactures ; but they are commonly more distinguished by their superiority in the latter than in the former.”
When President Reagan tried to call fast food “manufacturing,” William Serrin in The New York Times called him out. The May 31, 1982 article titled 'Big Mac' Supplants Big Steel As Manufacturing Jobs Lag noted:
“When steel is made, for example, jobs are provided not only in the steel mills, but ultimately in the production of items made from steel, such as cars, farm equipment and home appliances, and in the sale and repair of those items. When a hamburger is sold, it is merely consumed; no further jobs are created. … But jobs in the steel industry decreased 14 percent, and today the industry has 30 percent unemployment.”
I lived and studied in Beijing for most of the month of November 1986. It was then one of the poorest countries in the world per capita, and, standing in Tiananmen Square, I watched an ocean of bicycles passing on the nearby main road; every ten minutes or so a lone car would pass.
The air was thick with smoke from the coal, piled in neat 3-foot-high pyramids on most residential streets, used to heat a single room during the dreary winter. There were no skyscrapers, no neon lights, no vibrant storefronts. The streets were covered with coal dust, houses and apartments gray and drab, and everybody dressed similarly in cheap cotton clothing.
And then the very next year Deng Xiaoping decided to reject the neoliberalism being pushed on China at the time by the Chicago School Boys and instead threw in with Alexander Hamilton’s “American Plan” to build a great manufacturing power.
China now creates wealth by making things.
When we buy those things, we give them our dollars which they must, eventually, use to buy things in America, which is why so much of our industry and so many millions of acres of American land and millions of homes are owned by Chinese investors.
Have you seen what housing prices are doing? Foreign purchases of US housing were over $11 billion and made up 4 percent of all home sales in 2020. It’s slowed down a bit recently: it was over $100 billion a year through most of the previous decade. In just 2017 and 2018, Chinese buyers alone picked up over 80,000 US residential properties.
Foreign buyers now own 30 million acres of American farmland (an amount that has doubled in the past 2 decades). Remember the massive Smithfield Foods, the huge industrial meat-packing operation where Donald Trump ordered workers back to the slaughter lines even thought there was a pandemic? They have over 500 industrial-style animal operations, “factory farms,” the largest producer in America, and it’s Chinese-owned.
Fully 40 percent of the asset value of all companies in America are now foreign owned: that’s the “wealth of nations” created by manufacturing outside America being used to buy our country piece-by-piece. Chinese investors and the Chinese government also own over $1 trillion in US Treasuries, our national debt.
We’ve moved so much manufacturing to China that we can’t make much of anything — from missiles to cars to airplanes — without Chinese parts.
And this doesn’t begin to touch the damage China could do to America if they were to decide, for example, that they’d cut off all exports and begin to dump our treasuries because we were defending Taiwan — an increasingly likely scenario. If you think we’re having a crisis today, imagine if within two months every Chinese product was gone from every American store.
Reagan, Bush and Clinton’s implementation of Milton Friedman’s neoliberal “free trade” agenda has gutted the American middle class, sold off our companies and real estate to foreign interests, and in 2021 caused “supply chain disruptions” that threatened any semblance of an economic recovery.
As a direct result of neoliberal trade policies, there’s too much finished product coming into America and not enough leaving our factories for foreign shores: this is called our trade deficit. To quote NPR’s Planet Money headline, it’s: “Too Much Import, Too Little Export.”
As noted in Forbes: “So, we send dollars abroad to pay for those things made by foreigners. Very few of them set fire to those dollars, they nearly all use them to do something with.” Ultimately, that something is to buy American infrastructure.
Our trade deficit in 2020 was over $610 billion and averaged around $700 billion a year in the lead-up to the Great Recession of 2008. Eventually every one of those dollars will come back here in exchange for ownership of part of America going overseas.
In 1975, we had a $16 billion trade surplus ($81.5 billion in today’s dollars). We had a mere $13 billion trade deficit when Reagan came into office in 1981. By his last year office in 1988, the cumulative trade deficit for his presidency was $685 billion ($3.4 trillion in today’s dollars).
That deficit was offset by foreign entities buying US real estate, US companies, US land, US securities, and US debt. It made a lot of already-morbidly-rich asset-selling Americans a lot richer.
Since Reagan embraced neoliberal “free trade” and China embraced Alexander Hamilton’s “American System,” China has gained wealth while we’ve spent the past 40 years feeding each other hamburgers (or veggie-burgers, in my case) and sending our money over there to buy their manufactured goods.
And, of course, it’s not just China. Vietnam and other countries have adopted Hamilton’s system while we’ve been embracing Reaganism and Milton Friedman’s neoliberal policies and “financializing” the largest parts of our economy.
When massive parts of our economy are solely devoted to buying and selling stock, insurance, investments, and merging and breaking up companies, nothing of value is created. Lots of money changes hands, and billions stick to the hands of the traders, but nothing of value is created by our financial sector.
“Our financial system today is basically a bloated parasite…. During the 1960s, the financial industry accounted for 6.2% of all employment income and 14.5% of all corporate profits. In 2004-2014, it accounted for 12.5% of all employment income and 26.1% of all corporate profits.”
Finance doesn’t make a damn thing, but does a startlingly good job of moving money out of the pockets of working class people and into the hands of morbidly rich “investors.” Only manufacturing produces real wealth, rather than just shuffling money from one person to another.
I learned this principle in fourth or fifth grade in public school in Lansing, Michigan back in the 1950s. Lansing, of course, was a manufacturing town in the state that was the auto manufacturing center of America, so that may have influenced our curriculum, but I suspect most people of my generation grew up knowing that the way a nation becomes wealthy is by manufacturing things.
If they didn’t know it intellectually, they sure knew it intuitively. Japan, Germany, South Korea — and now China — all stand in testimonial to that simple truth, as once did America.
If we are to again create real and lasting wealth in this country, we must stop depleting our wealth by shipping our remaining natural resources overseas and return to manufacturing.
We export around $700 billion a year in cash as well as coal, iron ore, cotton, soybeans and freshly logged trees to China; they send us back appliances, furniture, clothing, computers, and pretty much everything else you see in the store. That’s our trade deficit.
China has surpassed the wealth of America in fewer than 40 years: they did it by transitioning from an agricultural and service economy into a manufacturing one, starting in the 1980s.
Instead of saying, “Do you want fries with that?” the workers of China produced the computer on which you’re reading these words, the routers and networks that brought them to your house, and, most likely, the majority of the clothes you’re wearing right now.
We must educate ourselves about basic economics, if we aspire to ever break out of the economic death-spiral that Reagan’s neoliberal austerity and free trade policies have thrown us into.
And then use that education to repudiate and reverse neoliberal Reaganism. It’s time to break the curse of “Voodoo Economics”; a return to manufacturing must be at the core of the effort to rebuild the “wealth of this nation.”