The Wealth of the People:
Your Neighbor's Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
By
Fernando Urias
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SMASHWORDS EDITION
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PUBLISHED BY:
Fernando Urias on Smashwords
The Wealth of the People:
Your Neighbor's Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
Copyright © 2011 by Fernando Urias
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The Wealth of the People:
Your Neighbor's Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
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Summary
This is the second book of the "Wealth of the People" book series. The series is an inquiry about the requirements for the production of wealth in a society.
The first book looked at the economics of Robinson Crusoe alone in an island and concluded that to produce wealth you have to work using your capital structure. The amount of investment in your capital structure determines the income that you can make with your work. Your capital structure is composed of tools that make your physical capital and the knowledge to make them and use them, which is called your human capital.
The second book looks at the requirements for the wealth production process to continue when you find a neighbor in the island. An agreement to respect life and property emerges as a requirement for the wealth production process to continue and becomes a factor of production. This agreement and other agreements that will be discussed later can be grouped under the concept of "Social Capital", defined as the existence of agreements between two or more individuals that are needed for the wealth production process to continue. Social capital becomes a requisite for the capital structure to function and in this way becomes a factor of production and a determinant of the income that you and your neighbor can make.
The rest of the titles of the "Wealth of the People" series are listed at the end of this book.
Introduction
The second book of the series "The Wealth of the People" is about the relationship that you need to have with a neighbor in the island if you want to preserve and increase your income. You have to make an agreement with your neighbor of mutual respect for life and property. This agreement preserves the status quo so that each of you can continue working in your respective wealth production activities. Once this agreement is in place, you will find out that you can increase your income through trade. By trading products, your advantage in a wealth production process can be passed to your neighbor in a voluntary agreement that occurs because there is profit for both parties. A simple example shows that both of you can increase your income through trade. It is an economic conclusion of the book that it is to the advantage of both parties to respect each other’s life and property and to engage in free trade.
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The Wealth of the People:
Your Neighbor's Wealth
An Inquiry into the Relationship between
Wealth, Freedom, and Life
* * * * *
Your Neighbor
In book one you were alone in an island working hard to survive and building up your capital structure and one day you find out that there is another person living in the island. How would you approach this person? The first question in your mind would be whether this person will be friendly or hostile. Hostility is a real possibility. Remember that the first people that Robinson Crusoe encountered in his island were cannibals. You would want to know if your neighbor is a threat to your life or a potential friend.
Maybe your neighbor is not a cannibal, but he might be tempted to steal your food and tools. As a result of your work and your investment, you should possess some perishable products, some durable goods and some tools. Your neighbor might be tempted to take them all away. Would he be strong enough to try it? Does he have a superior weapon like Robinson's musket that he might be tempted to steal your possessions with impunity? Maybe he is part of a tribe that might enslave you?
It could also be that your neighbor discovers that you exist in the island and he thinks that you are the threat. Maybe he will be afraid of you and maybe you are the one that is capable of stealing his possessions.
The Cost of Not Knowing Your Neighbor
Since you do not know your neighbor, you would have to incur costs to protect your life and property. You will have to spend some time in surveillance to make sure that he is not a threat. You will have to think about investing in a weapon that you might need to defend yourself. You might have to incur the cost of moving your shelter to a hidden or more protected area. These costs will reduce your income because instead of producing other products that you want, some of your time will be spent in surveillance and weapon construction.
The Poverty Resulting from Violent Behavior
The worst situation that you could have would be to find out that indeed, your neighbor is part of a cannibal tribe, just like it happened to Robinson Crusoe in his story. In this situation, your neighbor is definitely a threat to your life. Your wealth production capacity would be restricted because you would have to produce in hiding being careful of not being detected. The appreciation for human capital is so low in a cannibal and some other cultures of violence that a person life is not valued for the productive work that can be performed in a lifetime. The life of any person becomes expendable. In a productive society, the wealth production capability of a person is very valuable and it is a great productive loss upon death in addition to the personal loss to family and friends.
The next worst situation that you could encounter with your neighbor would be that he wants the temporary income that he can get by stealing your food and tools at the expense of your life if necessary. This would be a very short sighted view of your neighbor because the value of the assets is be very low as compared to the value that you can give as a productive person in free trade throughout a lifetime. Nonetheless, this case is still very common today since there are still many societies where people are killed for money, land, and power.
Another less common but still existing relationship is if your neighbor wanted to enslave you. If your neighbor has superior strength or a superior weapon he could be tempted to force you to work for him. This would be a relationship with a great drop in income for both parties, because instead of having two people working hard and building their individual capital structures, one individual would be working with very low productivity and motivation under the gun and the other would have very low productivity holding a gun that does not produce wealth. Slavery is a situation of low productivity for all parties.
The next bad case and a more common situation could be that your neighbor wants the benefit of your assets but he does not necessarily want to kill you. He would like to enjoy the temporary benefits of stealing your food and your tools. He might not have a great use of your tools because a person of this mentality would probably not know how to use them or would use them without maintenance until they will break down. In this unfortunate case, he would take the physical things that you have and leave you with nothing. Your neighbor would improve his income momentarily with the stolen food and tools but he will drop to a level of poverty as soon as the food runs out and the tools break down. Your income would drop immediately after the moment of the crime. You would have to build your capital structure again and you would probably not do so until you can ensure that they will not be stolen again. The first tool that you would probably build after this experience would have to be a weapon that you would use to defend yourself in case he comes again to repeat his crime. You would have to invest time in the protection of your wealth production process.
The most common situation of violent behavior or implied violence would be if you neighbor wants the benefit of the wealth production capacity of your tools but does not want to enslave you or kill you. If he has a superior weapon, he might decide to come to you periodically to collect part of the wealth that you are producing, probably in the form of food or finished goods. He would not be interested in taking your tools because he would not know how to use them or have no interest in working. Under the threat of violence, he would let you know that he expects to have a certain amount of food ready for payment when he comes to collect. The effect of this fee on your wealth producing ability will be that it will overcrowd your investment budget and eliminate your willingness to invest. The burden that your neighbor might require under this relationship might be so great that you will not be able to improve your capital structure.
The Effect of Violence on Investment
A situation of violence or lack of protection of property is critical for the existence of tools. Since tools are physical items that can be stolen, they are very valuable for the service they provide, and they are costly because of the time it takes to build them, they will not be built in a society that does not protect them. A society that does not protect life and property and the tools of production is condemning itself to poverty.
If your tools were stolen in the island, your income would drop to the level that you had before you had your tools. You would be thrown into a poverty level where all you could do is to produce the minimum amount of perishable goods that you could produce without tools. You would try to produce with the minimal possible investment until you felt confident that any new tool that you would build would not be taken away from you. You would not be able to produce the income that you would have been accustomed to until you can recreate all the physical capital goods that you were using in your production process.
Violence Makes Weapons a Tool of Production
If you would experience violence in the island, you would have to invest time in a weapon to defend yourself and your tools before you could go back into a wealth production activity. Your weapon would be a necessary tool in your wealth production process. If your weapon is a spear or bow and arrows, it could also serve as a hunting tool.
Violence Increases Costs
If you are in an environment with violence, you would have to spend considerable portions of your time in surveillance or in escape, instead of using the time to produce goods that will satisfy your needs or investing in tools for better methods of production that will increase your income.
Violence Reduces Human Capital
In the case of violent behavior, even your human capital would be adversely affected. Although nobody can take away your mind and what you think, the threat of a violent attack would distract you from productive enterprises and direct your mind to find ways of self-defense.
The stealing of your goods or tools will make you fear that your neighbor will not respect your life. A violent experience would instill fear in your find .Your creativity to invent new and better wealth production processes would not be restored until you would know that you are no longer under the threat of violence.
Although your neighbor would not be able to take away your human capital, what you have learned, and you would not start from zero to recover, you would have to invest the time again to produce the physical tools.
The Violence Principle of Wealth Production
Violence is devastating for the process of wealth production. Violence stops or slows down the production of wealth. It is not possible or very difficult to produce wealth under violent conditions. Violence or the threat of violence makes the investment in tools stop because there is no motivation to invest large amounts of time on tools that will be taken away by violence.
The Low Cost Solution
If you could find a way to trust your neighbor and make your neighbor trust you, at least to the point where both of you can be assured that you are both going to respect each other's life and property, then you could maintain the wealth producing levels that each of you had achieved with your respective capital structures.
Trust is much easier to achieve if you and your neighbor speak the same language, if you are from the same culture, or if you profess the same religion but these are not necessary and neither are they sufficient conditions. The condition that is necessary and sufficient is for both of you to want to become wealthy and to know that to do this you have to have a mutual respect for life and property.
If you and your neighbor find a way to trust each other, your wealth producing capability will not be deteriorate when you share the island. You could live away from each other and go on with your respective enterprises and live as is if the other did not exist. You would avoid the cost of surveillance and weaponry.
Ideally, you would look for trust by a coincidence of values. You would want to know that your neighbor appreciates life and has learned to respect property to the same level that you would so that you do in order to avoid the costs of surveillance and self-defense. You might have differences in other values, but if you have coincidence in respecting each other’s life and property and in wanting to become wealthy, then you can have a wealth production process that is less costly.
The Agreement to Respect Life and Property
To continue your wealth production activities, you need to approach your neighbor and reach an agreement of respect of life and property. You want your neighbor to respect your life and property and you would offer in return to respect his. This agreement would allow both of you to continue your lives in the island producing wealth according to each other's capital structure. The agreement would be based on the advantage that this agreement brings to both parties. The agreement to coexist in peace is better for both of you than the violent alternatives. The agreement is advantageous to both because both want to preserve your lives and engage in wealth producing activities.
The agreement to respect life and property has to include the respect of property. An agreement to respect life without the respect for property would result in a fight that could risk your lives and would cause the same surveillance and weaponry costs in the wealth production process as if there was no agreement.
The Respect of Life and Property Principle of Wealth Production
To preserve and continue to increase your wealth production capability in the presence of a neighbor, you have to make an agreement of mutual respect for life and property.
The Foundation for Law
If you make an agreement for respect of life and property, you would have the basis of the first law between you and your neighbor. Laws are enforceable agreements between people that live together on the expected behavior in society. Laws are enforceable by the state but since there is no state and no police between you and your neighbor, the agreement is not yet a law but a voluntary agreement base on the common advantage and common trust. There is no state to guarantee that it will be carried on. You and your neighbor are the guarantee. The main ingredient of the agreement is that the agreement is advantageous to both of you.
The agreement to respect life and property, based on the knowledge that it is advantageous for both parties is the foundation of the law that can be written when a state is in operation. The lack of an agreement due to the lack of knowledge of the citizens of a country would make the law very difficult to enforce. Education and knowledge is the basis for the law and the state can be tasked by its citizens to handle violations of the agreement as exceptional conditions.
Social Capital
Before the appearance of your neighbor, your freedom was bounded by nature, your knowledge, and your capital tools. With the appearance of your neighbor, you have to make an agreement that will preserve the freedom and wealth that you might have achieved with your capital structure. This agreement is necessary for the wealth production process to continue and it is in this sense one of the means of production. For this reason, it can be called "Social Capital". It is here defined as the existence of agreements made between individuals in a society that are necessary for the production of wealth.
In the island, this agreement is necessary to keep the status quo of your independent wealth production efforts. It does not improve your wealth production capability but it is necessary to preserve it. A state of war is a state of absent social capital. An agreement and behavior to respect life and property is the beginning of the establishment of social capital in a society.
The Property of the Natural Resources
When you were the only person in the island, you could have thought that the whole island belonged to you. With the discovery of your neighbor, you would need another agreement regarding the property of the natural resources, including the land, the water in the creeks, and other resources in the island. You could get together and draw an imaginary line that would divide the island into two. At the end, such an agreement would be arbitrary and would be only enforceable by fighting. Due to the economies of your time and your capital structure, you should probably be possessive only about your respective shelters, tools, capital goods, and any piece of land in which you invested some time. It would be more practical to consider the rest of the island as not having an owner and available for the hunting and fishing of both.
You would delimit the smaller areas where you have set your respective shelters. Robinson Crusoe was very clear on building a tall fence that required the use of a ladder to go over it. This wall gave him peace of mind over any beast that might approach in the night because he would remove the ladder once he was inside.
Adding Social Capital to your Capital Structure
The agreement to respect life and property is a necessary condition for the wealth production process and becomes in this way a part of your capital structure. Your capital structure requires social capital when you have a neighbor living close by. Rather than being a third pillar in the capital structure, social capital can be more properly thought about as the foundation of your capital structure because physical and human capital are not formed if social capital is not existing. You will not invest in a tool that you will not be allowed to keep. Social capital is a prerequisite for the formation of physical capital and its associated human capital.
The Possibility for Trade
If you and your neighbor reach an agreement to respect life and property, then you could entertain the possibility of trading the products that each of you produce. Such trade can occur if there is an advantage in the trade transaction.
The Advantage of Trade
If you and your neighbor had exactly the same skills, the same preferences, the same physical capability, the same experience in producing products, and had invested in the same tools, there would be a possibility that you would both produce at the same cost and then there would be no advantage to trade. But if just one of these factors is different, making one of you more efficient in any product, than there is an advantage in trading.
If each of you was taking two hours to hunt a turkey with a spear and one hour to gather a pound of vegetables, then each of you would be spending three hours to collect the ingredients for a dinner of roasted turkey and vegetables. If you invent the bow and arrow and invest in making a set, you might be able to hunt a turkey in half hour instead of two hours. Assuming that your neighbor does not copy your invention, it would be advantageous for you to hunt an extra turkey and trade it with your neighbor. In the trade transaction you can transfer the efficiency of the bow and arrow process to your neighbor and be paid for it. You could hunt a second turkey in half an hour and offer it to your neighbor in exchange for one pound of vegetables. By doing this, you would reduce your labor of obtaining a pound of vegetables from one hour to half an hour. Your total dinner expense would drop from one and one half hours to one hour by hunting two turkeys and exchanging the second turkey for one pound of vegetables. Your neighbor will be delighted to trade one pound of vegetables for one turkey since it would drop the cost of his dinner from three hours to two hours by him collecting two pounds of vegetables and exchanging one for the turkey that you would offer in exchange.
The result would be that the cost of dinner, that used to be one and a half hours you, can drop to one hour with the trade of one turkey. For your neighbor, his meal cost can decrease from three hours to two hours thanks to your offer of the sale of one turkey for one pound of vegetables. This means that there is synergy in the trade transaction. Synergy means that the total is more than the sum of its parts. You and your neighbor are more valuable together than the sum of both of you working independently in your respective capital structures.
The Price of a Product
When you were alone, you would measure the cost of a product in terms of the time that it would take you to make it. When there are different production costs between individuals for the same product, it is advantageous to trade. When you trade, the exchange rate is called the price of the product. If the price of a product is lower than your cost, you will want to trade and save some time. Since a pound of vegetables will cost you one hour and a turkey only half an hour you would want to do the trade and save half an hour. Your neighbor would be looking at the same transaction but from the opposite side. For him, the cost of a turkey is two hours and the cost of one pound of vegetables is one hour. At the price of one pound of vegetables for one turkey, he can save one hour.
The Profit of the Sales Transaction
The trade transaction is a sales transaction. By bartering with your neighbor, you are in the business of hunting and selling turkeys. A simple definition of a business enterprise would be that it is a process of wealth production that results in a sale to a second party.
The difference between the price at which you sold a product and your cost is your profit. The sale of one turkey that cost you half an hour for the price of a pound of vegetables that would cost you one hour yields a net profit of half an hour. In addition of earning an income for the work of hunting a second turkey in half an hour, now you are also earning an income in the profit of the sales transaction.
Your neighbor is also making a profit. Your neighbor sold one pound of vegetables for a two hour turkey and it only cost him one hour to gather the vegetables. He made a profit of one hour. He has increased his income by one hour.
You had already realized a gain of one hour and a half in the hunting of the first turkey by investing in the bow and arrows. The sales transaction provides a vehicle by which you can save another hour and a half by hunting a second turkey for your neighbor. You can save another half hour by trading and pass to your neighbor the savings of one hour. Through trade, you are benefiting further from your investment by making a profit as you pass part of the advantage of your investment to your neighbor.
A simpler way of looking at it is to say that there is a gain of one and a half hour by you doing the hunting of the second turkey and you are splitting the profit by you taking half an hour and your neighbor taking the remaining hour.
The overall result of the trade is that there is an efficiency gained by working together through the sales transaction. After the discovery of the bow and arrow, your dinner was costing one and one half hours and your neighbor's dinner was costing three hours for a total of four and a half hours for both dinners. After the trade, your dinner would cost you one hour and your neighbor's would cost only two hours. The total cost of both dinners would be a total of three hours. One hour for you to hunt two turkeys and two hours for your neighbor to gather two pounds of vegetables. This is a thirty three percent reduction in cost just for a simple trade.
The Trade Principle of Wealth Production
The wealth production capability of two individuals is increased if each individual produces wealth with the process in which each is more efficient and pass the benefit of the efficiency to the other party through a sales transaction in which both parties gain a profit.
Adding Trade to Social Capital
The agreement to trade is an addition to the social capital of you and your neighbor. You can have an agreement to respect each other’s life and property but decide not to trade. When you decide to trade, you have a vehicle to transfer your respective efficiencies. The existence of an agreement to trade at a certain place is a higher level of social capital than not trading. Impediments to free trade, such as tariffs, regulations, taxes, duties, restrictions, or product qualifications reduce the social capital of a nation.
The Negotiation Window
The cost of a turkey to your neighbor is two hours with a spear hunting process. The price of one turkey for one pound of vegetables, which cost one hour of his labor, is a fifty percent bargain for him. This price did not have to be such a good bargain since the price can be subject to negotiation. If you know that his cost is two hours, instead of offering the turkey for one pound of vegetables, you could have offered it for one and a half pounds of vegetables. This price would still be advantageous to your neighbor by half an hour instead of one hour. Your profit would then be one hour for you and half an hour for him instead of the opposite situation.
The price of a turkey has to be somewhere in between half pound of vegetables, which is your cost and two pounds of vegetables, which is your neighbor's cost. The price has to be somewhere in the middle and away from the extremes for the sales transaction to occur. Each extreme is very advantageous to one of you but not advantageous at all to the other. The probability of a deal is much greater in the middle.
The exact price does not affect the efficiency of the operation as long as the most efficient supplier keeps on making all the supply. The negotiation determines the relative shares of the profit. In a later book we will see that when a market exists with competing business enterprises, the price gets closer to the production cost.
The Customer Relationship
Once you have agreed to trade, your neighbor will become your customer and you will become his customer. In a customer relationship, either party has the option to reject the product. As a supplier of a product, you have to produce with the quality level that your customer expects when making a purchase. If you customer does not want your product, the sales transaction will not happen. If you hunt two turkeys and one is damaged during the hunting process, you might have to offer the good one for the trade transaction to occur. In the same token, your customer could gather two pounds of vegetables and offer you the one pound that is more wilted. If it is in bad shape, you might not agree to trade the wilted vegetables for the good turkey.
When you were producing for your own consumption, the quality of the product was determined by you. With a customer, the quality of the product is a shared responsibility. The customer has an expectation of the quality of the product but what you offer might be the best that you can produce with the current process. Your neighbor also has to produce at an acceptable level of quality for you to accept his produce in exchange. When competition enters into the picture, the quality of the product will be defined by the supplier that takes the leadership in the quality and value yielded by the wealth production process.
The Cost of the Trade
The trade has to happen at a certain place and a certain time and both of you have to walk to that place to make the trade. This is the cost associated with the trade transaction. If the cost of trade is too high because you live in opposite sides of the island, you might be better off producing your own products than to trade. The cost of the trade is distinguishable from the cost of production. In modern economies, one of the major components of the cost of trade will be the transportation cost. The trade between two people requires the time and the place where they will meet and this means that there is a cost associated to get to the place and the time to evaluate the transaction and make the purchasing decision.
The Specialization of Labor
Once you and your neighbor are engaged in trade, there will be a natural tendency for each one of you to specialize in your own activity. One of you can become the hunter and the other can become the vegetable gatherer. By specializing in each activity, the learning curve of each of you works in a way that both become better and faster at their specific activity. This will further increase your productivity as a team. If you average half an hour of hunting time during your turkey hunts, you might find out that when you get used to hunting two turkeys every day, instead of taking one hour to hunt two turkeys, you might become more efficient and bring the time down to forty minutes.
Even if you initially had the same production costs, the specialization of labor makes it more advantageous for one person to perform one activity and the other person to perform the other activity. This will make the team being more efficient as a team and increases the dependency on each other. This dependency is voluntary and it will last as long as the trade is advantageous. The trade can be stopped at any time if one of the parties is not fulfilling his obligations to the satisfaction of the other. When trade stops, there will be the loss of income associated with the advantage of the trade relationship.
The specialization of labor occurs because you do the activity more often. You would be improving in your skill. The specialization of labor is an increase in your human capital.
You become more productive further in your specialization when you invest in tools to improve your specific specialization. You can develop tools that are specific for your activity. Instead of diluting your investment budget in the production processes of several products, you can concentrate your investment in the production of one product while your neighbor can concentrate his investment budget in the production of another product improving the efficiencies of both wealth production processes.
The Wealth of Social Capital
The wealth brought by the improvement of the physical tools has to be preserved with an agreement to respect life and property. The wealth of social capital starts with the preservation of the wealth created by the physical tools. In the first book it was concluded that the best way to accumulate wealth is by having tools that are part of the wealth production process. The first wealth contributing factor of social capital is that it allows the possibility of this occurring. Without social capital, the wealth of the tools disappears by loot and loss.
In addition to preserving the wealth of the tools, social capital adds trade as a possibility. If there is respect for life and property, trade can occur and it becomes a vehicle by which the efficiencies of the tools can be passed to a neighbor. Although the profit in a trade transaction is due to the efficiency of the tools, the existence of social capital in the form of trade makes it possible to pass the advantage. This benefit cannot happen in the absence of social capital.
The peaceful association with a neighbor would bring another kind of wealth to your life. Wealth is defined as the abundance of goods to fill your needs. Your neighbor fills a need that it is not easy to trade. This is the need of companionship. Many of the paragraphs of Robinson Crusoe’s novel are about his extreme loneliness and the psychological state that this causes in a human being. The existence of a neighbor would bring the wealth of companionship to a sole survivor in an island just like Robinson Crusoe was able to get with the person that he saved from the cannibals.
The Freedom Given by Social Capital
With the tool improvements in the wealth production processes, you gained more capability and therefore more freedom. The existence of social capital preserves this freedom as it preserves also the wealth given by the capital tools.
In addition to preserving the freedom attributable to the tools, social capital is the actual definition of freedom in society. The agreement to respect each other’s life and property is the first item in an agenda to define freedom upon the existence of a neighbor or as being part of a society. Natural freedom permits any beast to attack you and destroy your site and your tools. By defining an agreement of respect of life and property you would have gained a social freedom that is much greater than the natural freedom that you lose with the restriction of respecting your neighbor’s life and property. Being part of a society brings many advantages to an individual, including great increases in the freedom that can be exerted while being part of a society. The social capital of a nation becomes the definition of the freedom that is enjoyed in that nation.
There are more gains in freedom achieved with the existence of free trade. The agreement to trade brings an infinite variety of possibilities for the availability of products that can be acquired as compared to the small number that you would be able to produce alone. The freedom to choose different products from different suppliers is a great increase in freedom that is performed by a shopper in a market every day. This freedom is not possible without the existence of social capital.
There is another freedom gained from the peaceful association with your neighbor not discussed before. Your neighbor and you together you can accomplish many tasks that each alone cannot do. For example, you might want to move a large rock that it will take both of you to move. The projects that can be undertaken by enterprises with many individuals are examples of the freedom that social capital can bring to a society.
The Life Given by Social Capital
Social capital implies that each other are going to respect each other's life and property. You had your life before you met your neighbor but it can be put in peril very fast by nature or the lack of an agreement. Any beast in the island can attack you and kill you right away. With the agreement with your neighbor, you know that at least from him you will get respect for your life.
Another part of life given by social capital is the resulting savings from the efficiencies that are passed in free trade. These efficiencies increase the time you have available for other activities and therefore increases your life.
There is also added life from social capital in the sense that a life with companionship is richer than a life in loneliness. If you read Robinson Crusoe's story you will see that being alone for long periods of time is not a happy experience. A life with company is richer than a life alone. We did not cover here if your neighbor was of the opposite sex because it was not the first consideration of the discussion of social capital but the implications of the family in the context of social capital and the economy are quite important and will be discussed later in another book of this series.
Products and Services
The same way that products can be made and traded under the existence of social capital, services can be provided. You could cut each other’s hair in an even exchange. In a situation in which you are the only two people in the island, lending a service would almost have to be in even exchanges. An example of a service that would be very critical would be the help needed if you get sick.
What is more interesting from the trade relationship is that it is to your advantage to be of service to your neighbor and vice versa. It is to your advantage to reach trust in your neighbor, to trade with him, and to find out that the he is doing well in his wealth production activities because the success that he can achieve, he can share with you in a trade transaction.
The Need for Honesty
Since you have a great advantage on trading with your neighbor, you should not risk the relationship by being dishonest. The short term gain of a dishonest transaction would be small compared to the loss of trading partner. To establish trust, a continuity of honest transactions has to occur. If one of you is not honest, the last transaction might damage the relationship and may end it. The lack of honesty will bring jitters to the whole relationship. If you are dishonest with one transaction, your neighbor might think that you will not honor the agreement of respect for life and property and both of you might have to incur the costs of surveillance and self-defense.
The Priority between You and Your Customer
Who should be served first? Who has a higher priority? You are in the wealth production to maintain yourself but you found out that you can maintain yourself better by trading with your customer. In the island, the customer, your neighbor, is part of your survival equation. In society, where the specialization of labor is at a high degree, the service to your customers is synonymous with your well-being. You are pursuing your well-being by being of service to your customer.
You have to keep yourself and your customers happy. If you pay attention to yourself and neglect your customers, you will be hurting yourself because you will lose your customers. If you service your customers without taking care of yourself, then you are losing the purpose of your being. You need to service your customer the best way you can without damaging yourself. This means that by being part of the equation of your survival, your customers are almost part of your family.
The Combined Capital Structure
The combined capital structure of you and your neighbor determines, upon the application of the work of both of you with your respective capital structure, the income that you both can produce. This capital structure includes the components of physical capital, as your bow and arrows, the components of human capital, such as your knowledge and ability to hunt, and your neighbor’s ability to gather vegetables and eventually his ability to farm, and the components of social capital, such as the agreement to respect life and property and the voluntary participation of both of you in trading. The addition of social capital to your capital structure means that the definition of your capital structure includes the social elements of the capital structure.
The Capital Structure Principle of Wealth Production with the addition of Social Capital
To increase your wealth and your income, you have to invest in the physical, mental, and social assets of your capital structure in a way that would exceed its maintenance requirements so that you have net increases in its size and function. You have to make agreements with your neighbor to respect of life and property so that the investments that you make in physical and human capital are preserved. This is a component of your capital structure that has been defined as social capital. You can increase further your social capital by trade and the specialization of labor. Social capital is the foundation where physical capital property rights are preserved and human capital is used as it maximum potential.
Conclusion
In book one it was shown that you have to abide by two principles to produce wealth. The first one is that you have to work. Work is applying your mind, your physical effort, and your time to produce wealth. The second one is that the income that you produce when you work is determined by your capital structure. To increase your income, you have to improve your capital structure.
When you consider the existence of a neighbor in the island, you would come to the realization that you have to make an agreement with your neighbor to respect life and property to preserve the gains that you have achieved with your physical and human capital. This agreement is the beginning of the concept of social capital that makes your neighbor part of your capital structure. Furthermore, you can increase your social capital and your income by engaging in trade. Trade has a mutual advantage because you can pass the competitive advantages of each other through a trade transaction with both parties making a profit. The conclusion is that social capital is the foundation for your capital structure which in turn, with its elements of physical and human capital is the determinant of your income.
End of Book Two
Final Notes on Book Two
Dear Reader,
If you have any comments, suggestions, or corrections regarding this book, please send them in an email to uriasf@aol.com and I will review them before the next edition.
If you have read this book, liked what you have read, and would like to contribute to this author, please go to smashwords.com and purchase a copy of my book titled "The Automatic Time Management System". The author will get a good percentage of the proceeds according to Smashwords policies and you will get a time management book that will help you improve your business life as well as your personal life.
While you are doing this, download a free copy of my e-book titled: “My Low Carbohydrate Story, Diet Book, Cookbook and Shopping List". It will tell you what I have learned about nutrition. You might find something here that will change your eating habits.
Fernando Urias
The “Wealth of the People” Book Series
The task of explaining the causes of the wealth of the people in a society is a long and complex subject for a single e-book. To facilitate the explanation and the delivery of the material, an e-book will be published in each logic set of topics.
The following are the planned titles of the book series:
Your Wealth
The first book looks at the time savings gained by a single person increasing his physical and mind assets in an island.
The Wealth of Your Neighbor
The second book is about the agreements that two people have to make to be in a path of increasing their respective wealth.
The Wealth of the Market
The third book explains the opportunities offered by a free market to produce wealth for the people that participate in it. This book explains the wealth production results when there is a market that brings the competitive advantage of every individual to the table.
The Wealth of the Business Enterprise
The fourth book is about the function of the business enterprise to produce wealth for its customers, its owners, and its employees.
The Wealth of the State
The fifth book discusses what happens when we remove the assumption that everybody is going to behave correctly. The book explores the historical formation of the state and the implications for the production of wealth.
The Wealth of Social Capital
The sixth book is the core of the series. Social Capital is defined as the ability of a society to learn and agree on the rules that are necessary for the production of wealth. This is the key for the wealth of the people in society. This is the ingredient that is a prerequisite for physical and human capital formation and is the ingredient missing in many countries that are not able to achieve wealth.
The Wealth of Physical Capital
The seventh book is about the wealth of the physical capital that humanity has today. It should make you grateful that you live in this age and not five hundred or five thousand years ago.
The Wealth of Human Capital
The eighth book is about the wealth of the human capital that humanity has today. A great deal of the human capital available is taken for granted and it is wasted so it will be good to review it.
The Wealth of a Nation
The ninth book takes us to Adam Smith's Wealth of Nations. A nation is an entity that comprises a geographical area with a legal setting. It is governed by a state that is the keeper of the social contract. The state maintains the rules of a nation’s Social Capital and thus determines the capital structure of the nation and its citizens and in this way the state determines the income of its citizens.
The Wealth of the Planet Earth
The tenth book is about our planet. It introduces the concept of Natural Capital. What we think of natural resources is actually the capitalization of life that has been happening for millions of years. Unfortunately, many of the actions that we do in the pursuit of wealth production reduce the planet’s natural capital. If the planet was treated as a capital asset, it would be maintained correctly and it would not be consumed risking a drop of the whole world to a lower income level.
The Wealth of the Human Spirit
The eleventh book will be an inquiry about what of all these economic principles might mean in the spiritual world.