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What Makes a Country Rich?

Posted on the 31 January 2015 by Smallivy


During the election this week, Greek voters decided to oust the party that has been leading the country for the last few years and put into place many individuals from the Syriza party, which some describe as Marxist.  You will remember that Greece was facing an economic collapse just a year or so ago that was prevented only because to loans made by Germany and other European countries that were in better economic shape.  In exchange for these loans, Greece enacted “austerity measures,” which meant cutting government spending and raising taxes.  With the election of members of the Syriza party, voters are saying they wish to cast off austerity measures and open up the government spigots again.  This will no doubt upset their lenders, leaving Greece on their own.  Perhaps a total collapse is the only way that Greece could become prosperous again.

While I have no doubt that there are a lot of wonderful Greek people who don’t deserve to go through such hardships, I can’t help but watch the situation with a tinge of Schadenfreude.  I would love to see a turn-around where the citizens of Greece stopped doing the destructive behaviors that have caused their economic troubles and instead started doing things that would put them on the path to economic stability and prosperity.  Watching the situation between Greece and the rest of Europe is a little like watching your mother send checks off to your lazy brother who sits around and plays video games, spending ever dollar that comes into his hands.  You know that the situation is economically unsustainable and eventually will collapse, even if it is with the death of your mother, so you would much rather get the inevitable collapse over with so that the healing can begin.  To make it worse, the people of Greece being helped by Germany’s kindness are bad-mouthing their savior and complaining about any interruption in their leisurely lifestyle.  They should be happy to be given bread to eat, but instead they’re complaining that it’s white and not whole wheat.

So why is it that there are countries like Germany that are so wealthy and others like Greece that are bordering on the brink of insolvency?  Is Germany just more fortunate or lucky?  Do they have a better piece of land or more natural resources?

Really what makes a country rich are the same things that make a family rich.  It is a matter of how much the citizens of the country are producing, because wealth comes from production.  Countries that are rich have policies and economic systems that promote production.  They also have a population willing to produce and effective tools to make production efficient.  Countries that make it easy to create those tools will be wealthier.  (Note, yes, some countries are rich because of natural resources such as sitting on a lake of oil, but even in those countries the leadership often keeps all of the wealth from selling the resources and leaves the population in general desperately poor.)

And this makes sense.  If you have each family in a country producing a house during a given year, at the end of the year everyone will have a house.  If everyone is growing crops, there will be plenty of food to eat.  If many people are producing tools, there will be a lot of tools available to make work more efficient.  And if a country has a lot of backhoes, cranes, and other equipment, they can build skyscrapers, canals, and other things to make life a lot more comfortable.  You first need people producing enough food, clothing, and shelter to meet their basic needs, then people producing tools to make parts, and then people producing the cranes and the backhoes.

Countries that are poor have few people producing.  In almost every case there are things that discourage production such as war or a corrupt government that steal production.  Some are torn by war, so people are just trying to survive.  Things of value get destroyed or stolen quickly, leaving little incentive to produce anything that you don’t need immediately.  Other countries have never gotten production methods to the point where they have enough time to make the tools that make it possible to become more productive.  Everyone is scraping for food and shelter, leaving little time to build quality hammers, saw, shovels, and other implements, let alone tractors.  Often such societies are victims of constant war as well, or have leaders who take whatever excess is produced, leaving little incentive to produce more.  There are also a few primitive societies remaining who have established lifestyles that follow the game herds, making development of things like windmills and substantial shelters impractical.

Then there are some countries like Greece that could be very rich, and were in the past, but have developed a culture and a companion government that discourages work and production.  Leisure time is seen as a right and highly valued, while hard work is seen as a waste of time.  High amounts bureaucracy, coupled with high amounts of corruption, make it very difficult to produce things, so people give up trying.  Those who do little are just about as well off as those who do a lot since people who work hard are highly taxed to pay for those who do not, so there is little incentive to work and produce.  Greece also has been enabled by a series of different countries over the last fifty years or more, allowing them to live a lifestyle beyond what they were producing.  Each time they exhausted their supporter, they moved onto another country like a tape worm that kills its host then finds another.  It is somewhat comical, somewhat frustrating to see the citizens of Greece upset with the citizens of Germany whenever the least stipulation is called for when a loan is made.  This is like a spoiled adult child unhappy when his parents say he needs to hold a job before they’ll pay his rent.

So what can a government, and more importantly, the people of a country do to make their country wealthy?  It’s simple:

1.  Create a safe area free from crime and seizure of goods and property by outside countries.  Without a safe zoneand security for the producers, no country can prosper.

2.  Create an economic system that rewards production.  The more you create, the more you get.  This encourages people to leave their homes and produce things, rather than engaging in leisure activities and doing the bare minimum needed to get by.

3.  Keep bureaucracy to the absolute minimum.  A small amount of regulation is needed, but make the barriers to starting and running a business as low as possible.  The more competition there is, the more everyone’s production increases, the cheaper the prices of goods become, and the higher wages get.

4.  Do not tolerate any form of public corruption.  Put people who demand bribes or use their office for personal gain under the jail.

5.  Make government as small a burden on people as possible.   Keep taxes low and use them only to provide defense and necessary functions of government to keep things running smoothly.  Resist the urge to tax and take from one party and give to another.

6.  Provide for strong property rights.  People will not produce if their property can be seized at any time.

7.  Before any sort of assistance is given, expect people to do all that they can to provide for themselves, then let private charities do what they can.  Give out temporary public jobs to help those between jobs rather than providing money and goods directly.  Always make sure there is an advantage to work.

In many ways, the United States is heading down the path that Greece took about a hundred years ago.  One look at where they are should make anyone want to stop heading down that path and take another.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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