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14. The 3As of wealth creation

Would you read at night if your reading light cost you £35,000 a year? I doubt it. But that’s how much two and a half hours’ worth of candle light a day would have cost you in the middle ages. Today, the same amount of reading light would cost you just £3 a year: a twelve-thousand fold cost reduction.

Every day, day in and day out, hundreds of millions of people in industrial nations flick switches for light and power without even thinking about it. Yet, behind this ‘simple’ flick lies awe-inspiring feats of engineering and decades’ worth of eye-watering investments of time, energy, resources, human ingenuity: learning how to generate electricity in the first place; how to build the electricity distribution networks that power it; how to make wonderful inventions like the LED or incandescent light bulb, and so on.

In my last blog I said that ‘recipes’ are the fundamental building blocks of material wealth creation. Recipes encapsulate and sum up the know-how needed to bring necessary inputs and ingredients — raw materials, energy, tools, infrastructure and so on — together in the right ways, via a set of instructions, to produce something of value — something human beings can use to help them achieve a particular outcome or purpose.

But to really create this value recipes need to do three things:

  1. make what they are doing achievable (like taming, generating and distributing electricity)
  2. make it available (bringing it within easy practical reach of everyone who needs it)
  3. make it affordable (making it cheap enough for them all to afford it).

Whatever we are talking about — whether it’s electric light and power, food, medicines and health services or transportation — material wealth creation boils down to this triple challenge of achievability, affordability and availability.

Let’s dig in to the crucial ‘3As’ in a little more detail.

Achievability

Compare your daily life to your medieval forebears. Hot and cold water at the turn of a tap, light and power at the flick of a switch; the world’s information at the tip of your finger tips; the ability to hurtle through the air from one side of the world to the other in safety and comfort; the ability to talk to people or watch a sports match on the other side of the world; drugs and operations to treat all manner of ailments and diseases. And so on, and so on.

Material wealth creation starts with making new things possible and achievable. That’s down to the application of human imagination, ingenuity, experimentation, discovery, skill and knowledge. But it is just a start. Why? Because only when these wonderful new things become affordable and available do they really impact most peoples’ daily lives in a positive way.

Affordability

If the story of electric light, with its 12,000 fold reduction in cost, was a one-off, we wouldn’t be where we are today. But behind everything we touch and use today lies a similar story of dramatic cost reduction.

Take the motor car. Motorised transport became theoretically possible in 1876 when the German engineer Nicolaus Otto invented the first internal combustion engine. But for the next three decades cars were so expensive that they remained a mere toy for the very rich. Only when Henry Ford invented his moving assembly line did cars start to become more widely affordable.

Without order-of-magnitude cost reductions like Henry Ford’s, real wealth creation doesn’t happen. Back in 1919 for example, the average American worker would have to work for 1800 hours to afford another fancy new invention that would change the world — the refrigerator. By 2014, she was able to buy a much better quality product on the back of less than 24 hours work — a 75-fold cost reduction. That story has been repeated across every household item imaginable, including modern staples such as washing machines, cookers, TVs, computers, vacuum cleaners, dishwashers, and so on.

It’s the same wherever you look. When Henry Cort invented a new way of making iron in the late 19th century (using rollers rather than hammers to beat out impurities), he reduced the time it took to make a ton of iron fifteen-fold. That was when the use of iron really really took off. In the following 20 years, the price of a ton of iron fell by a third and production increased four-fold — making the next stages of the industrial revolution possible.

Earlier on, the same thing happened with cotton. In 1830, you could buy 25 times more cotton with the same amount of money than you could in 1780. That was thanks to a fifteen-fold reduction in the time it took to spin cotton, along with other productivity improvements.

And it’s been the same with food. In 1900, it would have taken the average worker 3 hours work to earn enough money to buy a chicken. A century later, it would take them less than fifteen minutes. That’s not a one-off: we can see similar cost reductions across virtually every food item available.

Such breakthroughs of the first, second, and third industrial revolutions pale into insignificance however, compared to that of the fourth, information technology revolution. Some historical info: In the 1970s, the Fairchild microcomputer was 30,000 times smaller than its earlier predecessor, the 1955 IBM 650. It used 7000 times less power, was 10,000 times more reliable (in terms of time between failures of key components) and 200 times cheaper. In 1970 the cost of a submarine cable capable of carrying one voice from one side of the Atlantic to the other was $100,000 per year. By the year 2000 it was ten-thousand times cheaper.

And that was just the beginning. While the industrial revolution made many things thousands or even ten thousand times cheaper, the information revolution has made the generation, storage and transmission of information millions, sometimes billions, of times cheaper. Never before has the world experienced such a rapid, fundamental transformation in the cost of undertaking essential tasks and activities, with far-reaching effects which I’ll return to later.

Availability

But affordability is nothing if you can’t get your hands on what you want. To contribute to real wealth it must also be easily available for people to use.

That means volume production and good distribution. Take food. It was an agricultural productivity revolution in the late middle ages that enabled a dwindling agricultural workforce to feed the rapidly expanding towns. Globally, this agricultural productivity revolution has continued. Between 1961 and 2009 the amount of land used to grow food grew by 12 percent, but the amount of food that was grown increased by 300 percent. That’s why famine is now well on its way to becoming a thing of the past. Most food shortages today are man-made — the product of wars and civil strive.

Or take another example: aluminium. Aluminium is a wonder material. It is extremely light, extremely strong, durable, corrosion-resistant, non-toxic, easy to manipulate and brilliant at conducting electricity. Modern society depends on it in multiple ways: in transportation (we wouldn’t have an aerospace industry without it); in packaging (cans, foils, frames); in construction (windows, doors, roofing), in motors and other electrical products; and a wide range of household goods including cooking utensils and furniture.

Yet when it was first discovered it was so expensive to make that, per ounce, it cost more than gold. Its basic raw material — bauxite — is one of the most common materials on earth. But it takes a huge amount of energy (very high heats) to turn bauxite into aluminium. When energy costs fell, aluminium production took off with global volumes rising from 6,800 metric tons in 1900 to over 63 million tons in 2017, making it the cheap, ubiquitous commodity that it is today.

Affordability and availability don’t always advance hand in hand however. In many parts of Africa fresh drinking water is plentiful and free. But to use it you have to fetch it. In a bucket. From a water source miles away. UNICEF estimates that women in Africa spend the equivalent of 22,800 years of labour time every day collecting water — about an hour a day for each woman (yes, it is mainly regarded as ‘women’s work’).

Because water is not freely available, millions of peoples’ lives are dominated by the quest to access it. Just imagine all the human energy and potential that could be unleashed if the women of Africa could save the 8.3 million years they collectively spend each year fetching water! This is the huge wealth creating potential of infrastructure, which I’ll return to in a future blog.

The fact that people in advanced industrial nations don’t have to invest huge amounts of time and effort accessing basics of life like water or energy means that they can devote their time, attention and energy to doing other things — opening up new possibilities, making even more things achievable, affordable and available. Or perhaps just enjoying being alive.

Economic fundamentals

The 3As are absolutely fundamental to real wealth creation. Yet you won’t find them mentioned in any economics textbooks. That’s because modern economics is more akin to astrology than astronomy — a pseudoscience parading as science.

One thing the 3As are not about, for example, is ‘making money’. Historically, economics is concerned only with those things which are “directly capable of a money measure”. But money hardly enters into anything I’ve talked about here. If it does, it’s only as a byproduct of changes in more fundamental physical, operational real world costs such as use of raw materials, energy or labour.

Likewise, the 3As are not about the (financial) profit motive. They are about ‘betterism’: people wanting to improve their lives by making better things and making them better. And they aren’t about ‘markets’ and ‘market forces’ either. As I’ve explained elsewhere, markets don’t actually create or make anything. They only trade/exchange what has already been made. It’s making real things that people can use that matters. Everything else, including trade, depends on this.

Whatever the item we use in our lives today, from the most trivial to the most grand, there’s a recipe lying behind it; a recipe (along with the associated work and organisation to implement that recipe) that makes what we are using achievable, affordable and available.

But no recipe is perfect. Every recipe has its drawbacks and limitations. When humans first started making iron, for example, the most they could make in one go was around 20kg. And it was full of impurities. People have spent centuries trying to improve, extend and adapt the iron-making process (with great success) and are continuing to do so. While the motor car opened up all manner of possibilities to make peoples’ lives better, it also brought with it horrific accidents, traffic jams and pollution. Modern farming may have accomplished wonders in terms of human nutrition but at what cost to the environment, animal welfare and multiple broader aspects of human health such as obesity?

So making things better is a constant challenge. It’s forever challenging us to transcend trade-offs, clear hurdles, overcome obstacles and barriers and avoid harmful side-effects. Achieving this is the cutting edge — the frontier — of real wealth creation. To which I turn to next.

Next in this series: 15. Transcending Trade-Offs: The Engine of Improvement

Previous: 13: Know-How: The Foundation of Wealth Creation

Bibliography

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

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Understanding real wealth creation

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Alan Mitchell

Alan Mitchell

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