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12. How is wealth created?

When four European explorers set out to cross the interior of Australia in 1880, with food to last them three months and camels and horses to carry both them and their supplies, they thought they were well prepared. But three months later, with one of the party dead from dysentery, all food gone (including horses and camels which they killed and ate), they were in desperate straights — saved by a local aboriginal group, the Yandruwandrha, who fed them up with fish, beans and some cakes made from a local seed called nardoo.

Once they were nursed back to health, the explorers decided to move on. They didn’t have the tools to do fishing or trapping like the Yandruwandrha, but they had watched them harvest the nardoo. So they made nardoo cakes of their own. Miraculous! Their hunger was gone. They felt perpetually full. They thought they were safe.

But soon they began to complain of fatigue. With ever worsening stomach upsets they got weaker by the day. Two more of them died. The last man standing, Robert Burke, was once again saved by the Yandruwandrha who fed him until a relief expedition arrived.

What had the explorers done wrong?

It turns out that unprocessed nardoo is actually toxic. It contains a vitamin B1-destroying agent called thiaminase which leaches the body of thiamine, causing beri beri and with it the extreme fatigue, muscle wasting and hypothermia Burke and his compatriots suffered from.

The Yandruwandrha knew how to process nardoo to get rid of the thiamianse. After grinding the nardoo seeds, they washed them in copious amounts of water. They exposed the flour directly to ash while cooking. And they consumed nardoo only using mussel shells, which creates a chemical reaction which further destroys the thiamianise. Together, these processes turned a toxin into a food. But Burke and his compatriots knew none of this. In eating large quantities of nardoo cake they were actually starving and poisoning themselves at the same time.

The power of ‘recipes’

Let’s think about what Burke and his compatriots lacked. They didn’t know the recipe for nardoo.

There are countless things you can do to not create wealth. I’ve explored many of them in this blog series: believing that money = wealth and money-making = wealth creation; focusing on financial conjuring; ignoring underlying productive capacity; believing the magic wand/’hidden hand’ of free markets will automatically do it all for you.

But if these are not the answer, what is? It’s an important question because we can only successfully and sustainably create wealth if we know what its fundamental building blocks are.

The answer (I think) is very simple. Wealth isn’t represented by gold, money stockpiles of materials or consumable goods. It’s not created by abstract ‘factors of production’ such as ‘land’, ’labour’ or ‘capital’ or by ‘markets’. It is created by human beings developing and applying production recipes: discrete modules of applied know-how that enable us to make and do useful things. The more recipes we have — how to make nardoo, how to grow wheat, how to thresh wheat, how to make bread, how to make wine, how to make iron, how to make rockets, how to send a man to the moon, whatever — the richer our lives and our society become.

Bringing it all together

The idea of a recipe looks simple. But as the case of nardoo illustrates, it can be both subtle and complex, requiring the perfect combination of many different things.

Think about what you need to do to make a more familiar type of cake, say a Victoria sponge cake. You need some raw materials: flour, eggs, butter, sugar. You need some tools such as a bowl, a mixing device, a tin to bake the mix in, and so on. You need a piece of infrastructure — a fire or oven to bake it in. You need to follow a precise set of steps to make the mix (no point in adding the egg unless you break it first). You need associated instructions (how much flour, butter and sugar? how many eggs? what consistency should the mix have? how long should it be baked? at what temperature?) You need the skill and energy to do the necessary work (‘labour’). You need a source of energy to fuel the oven and perhaps drive the mixing machine.

To make your cake, you need know-how relating to all these different inputs and ingredients — raw materials, tools, infrastructure, energy, instructions — including how to put them together in the right way.

Let’s tease this out in a little more detail. As the cake example shows, most production recipes — specific modules of know how — presuppose and tell us how to combine:

  • ingredients (raw materials, resources) which need to be obtained, processed, transformed (which are, themselves the product of their own specific recipes).
  • tools, equipment and infrastructure which enable you to do so. (The first such tool was the human hand. But most tools, equipment and infrastructure are also the product of their own specific recipes.)
  • actions such as ‘mixing’, ‘frying’, ‘dicing’ or ‘filleting’ brought together in sequences to create the desired outcome.
  • instructions for these actions/processes: their order, quantities, qualities to be achieved, etc
  • energy sources to drive these processes, whether it’s human or animal energy, fossil fuel or other source of energy
  • human agency (action, work, effort, skill)
  • human purpose (an intended outcome, which places it in a specific context). After all, there’s no point baking your cake if no-one is going to eat it.
  • the know-how itself — the knowledge that brings all these things together into an integrated whole, that creates the recipe

Everything we do to create material wealth is the product of some sort of production recipe. And the more recipes we have to hand, whether it is making cake or wine, or curing a disease, or getting from A to B, the greater our wealth creating potential.

A different view of wealth creation

You could use other words to describe what I’m getting at with recipes: algorithms, programs, code (as in a computer programmer’s code), processes, routines, blueprints. But I prefer the term ‘recipe’ because these other words bring unhelpful connotations.

For example, like a recipe, an algorithm is basically a set of instructions. But in today’s hyped environment the word ‘algorithm’ has too great a digital aura. Also, when I talk about developing and applying recipes, I’m assuming the availability of all those other enablers — the raw materials, tools, infrastructure, energy sources and so on (all of which are created by their own recipes). Likewise, a blueprint is also a set of instructions. But the term ‘blueprint’ conjures very rigid connotations. Blueprints have to be followed exactly, whereas one of the joys of recipes is that you can adjust them. So I’ll stick with the word ‘recipe’.

In my next blogs I’ll explore the rich, diverse nature of recipes and their implications. I’ll examine how recipes turbocharge wealth creation by freeing us from the burden of having to ‘reinvent wheels’, how they are almost always shared and hardly ever function as ‘private property’, how they empower us by transcending trade-offs and overcoming limitations thereby triggering further innovation.

I’ll explain the modular nature of recipes and why this is so important, their intrinsic connection to human purposes (with far reaching implications for the measurement of value), how they create and define what each particular society’s pivotal resources are, how they spur the creation and operation of institutions — and who has power and how it is wielded.

And I’ll show how we can explain wealth creation without reference to without money, price, ‘profits’, ‘markets’ or any of the other unworldly abstractions, obfuscations and confusions created by modern economics. By focusing on what recipes are and what they do, we can peer through the Money Mirage to see the real economy in action. We can see what makes an enterprise or activity truly productive and economic .And by doing so we can focus on the things that truly improve the human condition.

But to start, let’s address a really simple question: What do recipes help us do?

Next in this series: 13. Know-how: the foundation of all wealth creation

Previous: 11. Are Markets Engines of Wealth Creation?

Bibliography

Books and articles I found particularly useful researching this blog include:

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