It is probably apocryphal, but Ernest Hemmingway allegedly replied to F. Scott Fitzgerald’s statement that “the rich are different” — “Yes, they have more money.” Mmmmm . . . that was true at one time, but no longer. Once upon a time, all the rich had was more and better of what everyone else had. Nowadays what the rich have is not more money, but access to money and credit to become the owners of productive technology which is closed to those of us without similar access.
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| "The rich are different" |
The fact is the world of today is a fundamentally different world from the one which preceded the eighteenth and nineteenth centuries.
Prior to the Industrial Revolution, human labor and land were the predominant factors of production. As Adam Smith pointed out, a rich man’s wants and needs were at the time essentially no different from those of a poor man. Rich people found it much easier to satisfy their desires, but regardless how luxurious their clothing or exquisite their food, they could only wear one suit or dress at a time and their stomachs could hold no more than anyone else’s.
Human labor was the key to the system. Virtually nothing could be produced without significant human input.
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| "Yes, they have more money" |
A rich man might own a vast estate, but no corn could be grown unless he employed fieldhands to care for the livestock, clear and plant the fields, and harvest the crops. He needed to employ someone to provide carriage for the grain to get it to and from the mill. He had to pay the miller to grind the grain into flour, the baker to turn it into bread, the cook to prepare it as part of a meal, the butler to serve it, and the maids to clean up afterwards. As Smith concluded,
The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, by the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. (Adam Smith, The Theory of Moral Sentiments. Part IV, Chapter I, §10.)
"They are led by an invisible hand."
Obviously, the flaw in the argument was Smith’s assumption human labor was and would always be an essential input into the production of marketable goods and services. In 1759 when Smith wrote The Theory of Moral Sentiments, and even a decade and a half later when he published The Wealth of Nations in which he reiterated his invisible hand theory, he could be excused for making such an assumption. The effects of advancing technology had not yet become noticeable, except by machinery’s capacity to supply a greater abundance of goods at higher quality and lower cost than could the artisan and craftsman.
Thus, where wealth once consisted almost exclusively of land, following the Industrial Revolution it meant possession of or access to money and credit. This change began with the invention of the world’s first true central bank, the Bank of England, in 1694.
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| Machinery more productive than mere labor |
With the advent of modern financing techniques, there was finally something to spend money on besides more or better consumer goods. People could now use money to make more money — and more, and more, and more. The availability of capital financing based on monetizing the future stream of income attributable to the very capital being financed increased capital investment — and thus multiplied wealth generating opportunities — beyond imagining.
With more financing available, new ideas became economically viable and with the invention of commercial insurance in 1689 at much less risk than formerly. Innovation, investment, and wealth creation increased at a phenomenal rate. This can be seen in the Development Curve, which was horizontal prior to the eighteenth century, and which changed to vertical when the effects of the new source of financing were felt:
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| Hilaire Belloc |
The new system of finance changed the economic equation. For the first time in history, human labor was not the primary mode of production. Where the invention of the horse collar freed humanity from being a source of unskilled power in the production process, the new machinery was itself productive.
Advancing technology produced more and better products far more cheaply than unaided human beings ever could, and displaced skilled human labor from production. Further, as Belloc noted, when the people whose labor was displaced did not own the machinery which displaced them, it also displaced their income. (Hilaire Belloc, The Servile State. Indianapolis, Indiana: Liberty Fund Classics, 1977, 100-101.)
Ordinary people were being replaced by machinery at a tremendous rate as technology advanced. It was not a one-to-one replacement of machinery for people, either, for machinery is phenomenally more productive than human beings.
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