and explains why the definition is important. In order to measure and test economic concepts it’s important to clearly define the terms involved.
Chapter 3 describes the wealth-creation process. It’s necessary to describe this process since too often there is a belief that wealth is a natural consequence of technological innovations or is something that can be created by increasing government spending. Chapter 4 deals with measuring the concept of wealth, its relationship to wages, and how best to compare the wealth of one nation to others.
Chapter 5 focuses on the extreme differences between the world’s wealthiest and poorest nations. It explains why attempts to redistribute wealth cannot be an effective means to reduce poverty. It also discusses the only practical solution to minimize poverty throughout the world. Chapter 6 summarizes the broad overall relationship between economic freedom and wealth among countries.
Chapter 7 begins the process of looking at the evidence for the creation of wealth in specific countries. The objective is to determine the extent to which economic progress, or a lack of progress, is related to a specific set of policies. The United States is the first, and most unique, example of a country founded on the principles of economic freedom.
The next six chapters are devoted to major shifts in economic policies during the past century in the United States. Periods where policies moved clearly in the direction of economic freedom are distinguished from those where policies moved away from these principles and toward the progressive or socialist agenda.
The most significant finding from this analysis is that no growth in wages occurred during those periods when economic polices moved in the direction of the progressive agenda. Almost all gains in workers’ wages since 1900 occurred during years when US policies embraced free-market classical principles. This finding explains how the disappointing performance of wages from 2004-2015 is not unusual. It is typical of every historical period when economic policies have enhanced the power and control of government at the expense of individual economic freedom.
The remaining chapters analyze economic performance in countries throughout the world. Chapter 14 compares wealth in the United States to Canada, Australia, and New Zealand. Chapter 15 compares the United States to Europe's wealthiest countries. The three —Norway, Switzerland and Ireland—provide important lessons regarding the European experience with creating wealth.
Chapter 16 describes policies in the two most extreme real world examples of countries following free- market classical principles—Singapore and Hong Kong. Although neither country is blessed with natural resources, each has progressed from being among the poorest nations in the world to being among the world’s wealthiest countries.
The next two chapters examine the role of classical principles in the resurgence of growth in China and India. Chapter 19 deals with Russia’s failed experiment with communism and its recent attempts to restore growth. Chapter 20 examines how Japan moved from being a world leader in terms of economic growth to a quarter century of economic stagnation.
Chapters 21 and 22 look at recent developments in Latin America and Africa from the perspective of economic freedom. A final chapter summarizes the evidence.
Two and a half centuries after Adam Smith wrote The Wealth of Nations, and more than half a century since Milton Friedman updated the case for freedom, our analysis confirms their insights. There is clear, overwhelming evidence over the course of history and throughout the world. The evidence is fully consistent with the conclusion classical economists reached over two centuries ago: Economic freedom is the key to the wealth of nations.
What is Wealth?
I don’t want to be a millionaire, I just want to live like one. — Walter Hagen
Wealth is an elusive concept. While everyone has an idea what it is, it often means different things to different people. When we refer to the wealth of nations, the potential for confusion is even greater.
For purposes of this book, wealth has a specific meaning. Wealth is the value of those goods and services originally created to meet the demands of others. Defined in this way, wealth is what determines the living standards of people throughout the world. Since this meaning of wealth differs from the more common meaning, it helps to clarify the difference.
People often view wealth from a personal perspective. Wealthy people—the rich—have substantially more income or assets than we have. The poor have substantially less. One problem with this view is there are various ways to become wealthy that have nothing to do with the creation of wealth. We can inherit wealth. Win it. Steal it. Even marry it. In each of these cases, the wealth was created by someone else.
While hard work and effort can produce wealth, it’s not the essential ingredient. Individuals in some of the poorest nations in the world work much harder than those in wealthier nations but have little to show for it. Those who marry into wealth may have worked very hard and sacrificed a great deal. While their efforts can enable them to become personally wealthy, their wealth represents a transfer of something created by others.
A similar distinction can be made for politicians, lawyers and accountants, whose work enables them to become wealthy. These professionals can enhance a nation’s wealth when they use their skills to help their clients keep or enhance the wealth they have created. However, politicians, lawyers and accountants can also undermine a nation’s wealth when they use their skills to shift wealth from those who created it to others.
The title of P.J. O’Rourke’s hilarious book, Eat the Rich, captures the resentment some people have for the rich. Most who resent the rich likely do so out of a suspicion their wealth came at someone else’s expense. There is seldom resentment for the wealth of famous sports heroes or other celebrities. It’s obvious their wealth is the result of their unique talents. They earned it!
It is not always obvious how those running businesses earned their wealth. Without such knowledge, it is easy to assume their financial success came at the expense of others. Resentment of the rich can be justified if wealth was at the expense of others. However, the most successful businesses are those that provide the greatest improvements in the living standards of their customers. Microsoft, Apple, Amazon and Google have made their owners fabulously wealthy by serving the needs of others. They have been among the leading businesses contributing to improving the wealth of their customers and, in turn, the wealth of nations.
Although wealth is usually associated with the accumulation of assets, it isn’t a static concept. It’s dynamic. Wealth involves an ongoing creative process, one where individuals continually work to provide others with things they value.
All material assets lose most, if not all, of their value when individuals stop producing things. A mansion might one day be worth millions of dollars. Without people constantly working to provide food, water, electricity, security, communications and other essential accompaniments, the mansion’s value would quickly plummet. The real value of every asset is tied to the ongoing work of an extensive supporting cast of hardworking people.
Wealthy nations are those whose workers produce significantly more of the things its people value than an average nation. Poor nations are those where workers produce significantly less.
Somewhere around 4,000 B.C. Egypt became the first nation to emerge from the ancient world. Blessed with the Nile’s gift of fertile land, Egyptians were the most prosperous people in the world.
Prosperity is a relative concept. In ancient Egypt it meant you had a job (forced labor), sufficient food to sustain yourself and your family, and you were relatively secure from external threats. You and your extended family also lived in the same mud-brick house.
In spite of having a head start on every other nation, Egypt is no longer a rich country. In 2015, the living standard of Egypt’s workers was 13% below the world’s average.
For over a century the United States had the largest economy in the world in terms of the creation of goods and services. In 2014, China passed the US in terms of overall output and has continued to move ahead. While China’s economy is currently the largest in the world, China isn’t wealthy. It