Capitalism's Missing Question

We are currently experiencing an assault on capitalism by socialists, communists, progressives, and certain regimes in the world that clearly have an agenda that is different than human endeavor for their citizens.

As a student of finance, economic history, human endeavor, and capital markets since the 1970's much energy has been spent to understand the very foundation of our financial world. This led us to the question: How is wealth created?

Before answering the question another basic question needs to be considered; what is wealth?

Wealth is many things to different people; it's not just about money and capital. However for the purpose of this missive our focus is on the money type of wealth. This is the type of wealth that provides for the standard of living for a society. Historically the greater the amount of wealth that is created the higher the standard of living for a society and its citizens. The ability to create wealth is a primary factor that has made the United States exceptional. There is a direct correlation between the creation of wealth and a society's standard of living.

It is an easy observation to understand that the standards of living and the amount of wealth are quite varied around the world. In the modern economic world the level of human and economic endeavor has never been equal around the world or within specific societies and countries. In fact, those that have most often attempted to make economic equality a reality are the very ones that have some of lower standards of living. Their result has been to make their people equally poorer, except for the ruling class.

Before mankind can even consider wealth creation certain perquisites of human endeavor must be in place. They are: 1) adequate food and shelter; 2) health; 3) literacy; 4) the rule of law; and 5) private property. However these factors by themselves are not wealth creators.

When we hear much of the rhetoric today, whether it is political or economic, it seems to me that very few of those making comments either have never thought about how wealth is created or they simply do not care. As we have asked the question; how is wealth created, to many people over the years and we have simply found that it is a question that very few have even considered. This is even true of those in the financial industry. As an exercise ask your friends, associates, and family members the question; how is wealth created? See what answers you get if you get one.

The answers we have received the most are: win the lottery or work hard, neither one of which actually creates wealth. Winning the lottery represents a transfer of wealth or money from the losers to the winner. Working hard by itself does not create wealth, we all know people who work hard but do not have any real economic wealth. One needs to understand another dynamic; the accumulation of wealth is not the same societal function as the creation of wealth.

Accumulation of wealth is a positive achievement but should not be considered or confused with the creation of wealth.

The answer to the missing question, how is wealth created is; wealth is created by the ownership of a growing business over time.

Can you think of anything else that actually "creates" wealth?

When we put this perspective in historical context it becomes clear that the industrial revolution was a primary event that allowed our world to evolve from an agrarian based society to a society where businesses were started and the creation of wealth transpired as those businesses grew. We have evolved from a society that included the ruling class and the rest of society which was often referred to as peasants and serfs. Consider how much wealth was created prior to the industrial revolution? Your conclusion has to be: not much. (See GDP per Capita Chart).

Prior to the industrial revolution wealth was often the result of birthright. The accumulation of wealth was often a process of hostile takeover via conflict and conquering. This allowed the winners to take wealth of those they had conquered.

In today's society Warren Buffet and Bill Gates represent two of the world's richest people in terms of monetary wealth. How did they get there? Bill Gates' wealth was created through the ownership of a growing business (Microsoft) and Warren Buffet through the ownership of many individual businesses via Berkshire Hathaway. Some of those businesses are public companies and some are private.

A primary objective of investors is to use the wealth creation process of our global economic system in the quest to accumulate or preserve personal wealth and what it represents for our families and favorite charities. However, we need to understand that capitalism, which represents the wealth creation process, is under attack.

The more people understand how wealth is created, the less opportunity to have attitudes, politics, and behavior swayed by those with a flawed belief system. This may prove critical to maintaining the path to a higher standard of living. If very few within the financial industry have actually thought about this concept we have to know that main street has little understanding of how wealth is created and what role it plays in their personal standard of living.

There will be very few Warren Buffets and Bill Gates within the whole of capitalism. But if we lose capitalism because of political agendas where will the innovation, jobs, productivity and growing businesses come from? Not from our government buildings.

We absolutely need as many citizens as possible to understand how wealth is created and how it relates to our standard of living. Ask your family members, friends and associates the question and have them do the same for their circle. The more people who understand this concept the better chance we have to sustain capitalism and our standard of living. Even Fidel Castro has finally come to the conclusion that capitalism is necessary for the betterment of people after 50 years of failed policy.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Charles H. Ballou, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

Past performance is not indicative of future results.

Microsoft (NASDAQ Listing MSFT) and Berkshire Hathaway (NYSE Listing BRK.A [preferred stock] & BRK.B [common stock]) are not closely followed by Raymond James Research. Raymond James makes a NASDAQ market in shares of MSFT. Charles H. Ballou, CFP®, Raymond James Financial Services, Inc., its affiliates, officers, directors or branch offices may in the normal course of business have a position in any securities mentioned in this report. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein.

Charles H. Ballou, CFP® is a CERTIFIED FINANCIAL PLANNERTM professional and President of ASSET PLANNING, MANAGEMENT & RESEARCH, INC. as well as a Branch Manager with Raymond James Financial Services, Inc. Member FINRA/SIPC located at 4672 Larwell Drive, Columbus, Ohio. ASSET PLANNING, MANAGEMENT & RESEARCH, INC. is an Independent Firm licensed with the State of Ohio. Charles H. Ballou, CFP® can be contacted at (614) 457-8171 ext. 2# or at charles.ballou@RaymondJames.com. Additional information can be obtained at www.thewealthmanager.com.