Wealth

Part 2 - How we got to be rich

     Spears   https://www.youtube.com/watch?v=YQkP7KNrWq4&t=8s

About 100,000 years ago, our ancestors lived in self sufficient, extended families (tribes) and made all their possessions themselves, but there was already a division of work. Some people prepared animal skins for clothing and looked after the children. Others collected fruit and vegetables, dug up edible roots, hunted animals for food and fought off intruders from neighbouring tribes. In their spare time they made weapons and simple tools from wood, bone, antlers or stone.

Bill was a typical hunter gatherer but he was especially good at making tools. He could make a stone hand axe in 1 hour and a spear in 2 for a total of 3 hours work but instead he made 2 axes in 2 hours.His friend, Tom, could make an axe in 4 hours and a spear in 3 hours for a total of 7 hours but instead he made 2 spears in 6 hours. Then Bill exchanged one of his axes for one of Tom's spears, so they each had one spear and one axe. 

 But they had each worked ONE HOUR LESS than they would have, if they had each made one axe and one spear themselves. 

This is so astonishingly NOT obvious that even many educated people do not understand it. Bill was so much more efficient than Tom! Check the maths again. Self sufficiency makes us poorer. Specialization and trade (exchanging goods and services) makes us all richer . . . even the less skilled workers benefit.

https://www.youtube.com/watch?v=kyiH1xtmN_w     Hand axe

One day Bill and Tom had just killed a wild pig near the edge of their tribal boundary when they spotted a stranger with a head injury. He was a hungry-looking man from another tribe but he was alone. Bill wanted to chase him away, but Tom felt sorry for him and offered him a piece of meat. He said his name was Joe and he spoke in a funny but understandable dialect as he quickly sliced the raw meat into small pieces with a tiny knife before stuffing the meat into his mouth. He had lost his spear when he fell from a cliff and then, in an unfamiliar area, he had lost contact with his hunting companions.

Bill and Tom were intrigued by the knife and asked if they could look at it. It was made from a translucent dark brown stone with extremely sharp edges and had string wrapped around one end to form a handle.

Joe offered the knife to Bill in exchange for Bill's spear and agreed to meet them at the next full moon with some of the translucent brown stone he called stone from the volcano (obsidian or volcanic glass).

Joe was waiting for Bill and Tom at the full moon and he had a leather bag full of volcano glass pieces. He showed them how to carefully chip the glass to make spear points and knives and gave them some of his tools made from antlers. In return they gave him some eggs they had collected and some of Tom's hand axes and arranged to meet him again next month.

Bill and Tom practised with the volcano glass until they could make knives. Everyone in the tribe wanted them so they were very busy and quickly ran out of volcanic glass.

The rest of the tribe were hopeless at making good knives, spears and axes and so instead of wasting time making their own, they spent more time hunting so they had extra food to trade for new axes and spears. Bill and Tom saved even more time using quantity production techniques so they had enough spare time to build really nice homes.

Bill and Tom had no idea that they were creating wealth but they knew that they no longer needed to spend all of every day simply finding enough food to eat. They could get all the food they needed from people who were much better at hunting than they were.

Much later, people started to grow crops and raise animal and began to live in villages where some people gave up farming to specialize in "trades" like iron and steel working (blacksmiths), grain milling, boot and shoe making, mining, stone cutting and building and carpentry, spinning, weaving and making clothes. 

 Farmers then brought their produce to weekly markets for sale or to trade for products of the "tradespeople".

And thousands of years later, in 1817, David Ricardo devised the theory of comparative advantage. Trade between countries benefited both, even if the workers in one country could make everything more efficiently than workers in another other country. 

Of course specialization and trade are not the only reasons we are rich. A third reason is also counter-intuitive. Population growth makes us all richer.    Why? Because a small population does not need mass production of goods and services to supply its limited needs. No farmer will waste time making tools to produce more food than she can eat or trade for something else.

A larger population provides more buyers which drives the need for the production of more food, goods and services and a greater variety of each. This drives specialization and the invention of more tools and ways to make more food, goods and services with less work. 

The fourth reason is competition. Farmers, manufacturers and service providers (like traders and banks) must constantly find ways to reduce the time (cost) required to provide food, objects or services to match their competitors. Otherwise, they would not make enough money to stay in business.

https://www.youtube.com/watch?v=Kdn4bdhoUpE Obsidian knife

A thought experiment. You need soap and you have two options, either go to the store and buy a bar for $1.50, or make one yourself. Let's assume that you can earn $10 per hour working for someone else so the store bought bar is worth 9 minutes of your labour. Can you imagine skimming animal fat from a pot of beef stew and then combining it with wood ash to make a bar of soap. It would almost certainly take you more than 9 minutes even if you didn't have to collect the meat and burn the logs, and your home-made soap would probably not smell nearly as nice.