What is wealth?

Houses and hotels are often given a static valuation, at some figure such as R1m, which includes the unstated dynamic assumption that their skilful daily maintenance and operation will continue. That value can quickly evaporate if the asset is not well run.

Formerly the world's ninth richest country, Argentina's two decades of Peronist socialism left it one of the world's poorest countries. Allende redistributed Chile's land which then simply lost its value when no longer utilised properly. Post-independence, the rich mineral deposits of Angola's Shaba province were no longer accessible by land and thus went back to the bush.

Redistributionists overlook the fact that wealth is not, or not mainly, a matter of the old 'factors' of production, namely land, labour and capital. Many intangible factors are more important, including skill, foresight, intuition, attitude, relationships, and security of property. An asset as such has no value - its value is a function of the institutions that surround it.

Thus even an expensive pen has no value without the writer who will use it. Redistributed to an illiterate person who does not know how to use it, the pen becomes worthless. Likewise, agricultural land depends on roads, markets, tractors and so on for its value. All theories of value presuppose such complex surrounding assumptions.

Redistributing farms to non-farmers is exactly analogous to redistributing pens to illiterates. But net harm is still done if you redistribute pens and farms to equally capable writers and farmers, because of the double disincentive whereby government loads both losers and winners with reduced motivation to be productive.

Abraham Lincoln noted that you cannot help the poor by destroying the rich. Pulling the rich down only retards growth, because in an economy rich and poor either prosper or slide backwards together. But it is certainly true that the rates at which rich and poor prosper or slide can differ. In Argentina and Chile, the rich took a knock but the poor were really hammered. In Cambodia, the rich were wiped out while the poor merely suffered.

South Africa has a choice. We can continue with redistribution and slow growth, and blacks will prosper gradually while the white-black income gap declines. Or we can have faster growth with both whites and blacks prospering more rapidly, while the income gap may even widen in rands.

What does not happen as economic freedom brings growth and prosperity is a widening of the rich-poor income gaps as a ratio. On the contrary, and despite widespread opinion, they shrink. It is the world's richest countries that show the smallest differentials, and the poorest ones that show the largest.

But that is no comfort to the envious. Fast growth without closing racial income gaps in actual rands cannot satisfy those motivated by greed, envy and megalomania. It may however make sense to those concerned about the quality of life of ordinary people. And the fact that fast growth also appeals to rich whites (and blacks) who would prefer to be "less redistributed from" ought not to disqualify this win-win solution.

Source: Leon Louw is the Executive Director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement. The patrons, council and members of the Foundation do not necessarily agree with the views expressed in the article.

FMF Feature Article 9 October 2001 - FMF Policy Bulletin 14 July 2009