Friday, November 03, 2006

The Rich

A lot of people seem to think the rich got rich by either being lucky, or by stealing it. If the rich became so by stealing it, they could only have done so through government, or the definition of theft being used is different from mine. So in this post, I'll address the "You get rich by being lucky" idea.

Becoming rich is a course of action guided by a way of thinking.

Money is made through production. Production is the allocation of resources to meet demand. Whose demand is irrelevant. You can produce for yourself (i.e. grow a tree that bears fruit for you to eat) or for others (transfer the fruit to others), it really is not important. What is important is the allocation of resources.

The poor and middle class are trapped in a little thinkbox. That thinkbox is "The way to make money is to work for it." In effect, they think that the only resources they can allocate to production are their time, effort, and talent. They allocate these resources to meet demand by finding an employer that demands it and selling it. They create a surplus of value, earn a wage, and spend that wage. How they spend it depends on their class. The poor spend it on their day-to-day needs and the occasional toy and their bills. The middle class spend it on a new car, a new house, et cetera, which they always buy with debt and create recurring expenses.

The rich don't think that way. They see that everything they own is a resource to be allocated. They do own their time, effort, and talents, so those are certainly resources which may be allocated. But what the rich do is think of everything they own as something that can be allocated to meet demand. Their money, real estate, all their property can be allocated and create a surplus of value. The rich might start by working just as a poor or middle class person does, but what they do with the money is very different. Rather than buy things to satisfy their own demands, they allocate the money they earn to meet someone else's demand. This is one of the essential principles of becoming wealthy. You must produce more than you consume. The rich do not consume their money, they use it to produce. They might loan it out, for example, to someone who needs the money now, and get a return on the investment, the interest. They might buy a house, for example, and then rent the house out to tenants, creating a recurring income. Pay attention, because this is how the rich become rich. I've heard it called the "Infinite Bootstrap Principle". What does the rich man do with this surplus of value he created? This income from rent? He buys, for example, another house. Now he has two sources of income, two tenants renting to him, and now the money is coming in twice as fast. This takes absolutely no effort on his part, he can keep his day job while he is earning these passive incomes. Soon he buys a third house to rent out. Then a fourth. And a fifth. He can buy each one in less time than the last one because the money is rolling in faster than when he had fewer houses and fewer rent paying tenants. At this point, he can quit his day job, as he has enough income coming from the renters that he no longer has any need to work. He can devote an extra 40 hours of his week to allocating his resources, figuring out what he has, looking for people that might need what he has, creating a surplus of value, and spending that surplus on additional resources that other people might need.

That is how the rich get rich. It's not by magic, it's not by sheer luck. It's not because they were born rich, and it's definitley not because they steal it.

When someone attacks the rich for being so rich, keep in mind that they are rich because they are allocating resources to those who want them more. They might own property worth billions of dollars, yes. But that money is all tied up in business ventures seeking to meet demand. Also keep in mind I'm not just talking about consumer demands. Employees make demands as well, they demand a paycheck, and supply something valuable in return. The rich's money is all tied up in investments and real estate. It's all tied up. They don't have a 500 million dollar house with 400 rooms filled with millions of dollars worth of fine art, furniture, servants and maids, or anything of the like. They more likely live in 10 million dollar homes with good furniture and a great view, but that's just not where their money is. They are not surrounded by their wealth, their wealth is out at work looking for workers to hire and customers to satisfy.

And the only reason the gap between the rich and poor is so wide is because the poor don't know this. If they did, the poor would be doing exactly what the rich did. And there are two possibilities for what this might do, both are a good thing in the eyes of those seeking 'economic justice'.

1. It would bring the poor up to the standard of living enjoyed by the rich.
2. It would reduce the opportunities of the rich such that they will eventually be pulled closer to the poor.

I do care about inequality. I just don't care about it the same way those that won't shut up about it care about it. I don't think the gap between the rich and poor is a good thing. I want that gap closed, but I want it closed by the poor bringing themselves up to the rich. I am not happy to hear that 90% of the wealth is in the hands of 10% of the population. The amount of wealth in the world is not static, it's not a big pie where one can gain only at the expense of another, the poor can bring themselves up without bringing down the rich. That is what I want to see.

If you care about the gap between the rich and the poor, do not focus on penalizing the rich. No good will come of that. Focus your efforts on helping the poor bring themselves up. That way, everybody wins.


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