Economic Outlook: The Basis of Real Wealth

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R.E. McMaster pointed out in 1981 that real wealth — all wealth — is based on land and labor. 

Every so
often we “open up” this space, and
use it to provide a forum from which to present the views
of various economic writers and thinkers. In the past
few  years we’ve so featured the work of Walter Prescott Webb,
C. Vernon Myers, and others. Well, the following essay–reprinted with permission from Mr. R.E.
McMaster’s economic newsletter, The Reaper–struck us
as just the sort of common sense analysis that MOTHER EARTH NEWS’
readers would appreciate and profit from. R.E. has, in
relatively few words, cut through much of the mumbo-jumbo
that characterizes the public statements of the economic
“establishment,” and revealed the simple, beautiful
truth that any nation’s real wealth is based solely upon
the richness of its natural resources and the productivity
of its people. 

Bread Is Basic

When we talk about economics these days, the words and
phrases which quickly fill the air are: “supply side
economics,” “marginal utility,” “Chicago vs Keynesian
economics,” “monetary and fiscal policy,” “inflation,”
“petrodollar recycling,” and so forth. All these buzz words
are evidence of the frame of reference from which they
spring, that of urban intellectuals. They are products of a
culturally sophisticated age, marked by mathematical
complexity and computer technology. Collectively,
economists focus on money as an absolute in the
financial/economic system. Money is king, and calls all the
shots. Money is the measure of wealth and worth, both net
and personal. We are dealing here with a mind set that
saturates our society.

In a few moments of fleeting fantasy, let’s assume that we
are the remnant of a boatload of people. We are shipwrecked
and marooned upon an island in the Pacific. All we have are
the clothes on our backs and the resources of the island,
in terms of economic goods. With no hope of rescue, we
start to build an economy. We begin with the basis of
economic production:. land and labor. These two must
work in harmony for there to be economic progress and
production. (Notice that there has to be production before
there can be consumption. Our economic order today often
gets the cart before the horse.)

Assuming that our island is located in a moderate climate,
receives ample rainfall and sunshine, is blessed with lush
vegetation, trees, fertile valleys, streams, and an
abundance of animals, we have the foundation necessary for
producing economic wealth. Certainly, we should be thankful
that we aren’t marooned on a desert island. The resources
available on an arid island wasteland make the production
of economic wealth far more difficult, if not impossible.

Next, let us assume that the men and women who were
shipwrecked with us are of strong, hard-working stock. So,
our labor resource is the best possible, too. If we were
marooned with a group of elderly people, or young children,
or sick or lazy individuals, we would quickly learn that
our labor force was marginally productive. So, it becomes
readily apparent that high quality land and labor are the
raw materials of maximum economic productivity, and that
both somewhat depend upon the “luck of the draw.” Climate,
natural flora and fauna, water, and minerals are real
environmental assets. Good physical condition, moderate
age, and a positive mental attitude toward work are also
the “luck of the draw” in the case of our shipwrecked
passengers: (This is also true when a new government comes
to power in a nation.)

With favorable land and labor, we begin to produce capital
… houses, fishing gear, canoes, bows and arrows,
cooking and eating utensils, etc. Notice that land and
labor are the raw materials for the production of capital,
and subsequently, goods and services. What goods will be
produced? The goods most desired. Only if a good or service
is desired, will it have value. It is questionable,
particularly initially, on the island, if gold will be
viewed as being very valuable. Fish, fruits, a horse, a
milk cow, shelter, boats, and bows and arrows will probably
be in the greatest demand initially. These items have
value. Only after our new culture is established will we
then view gold as having value. Then, and only then, will
gold serve, as it has always served, as a medium of
exchange, which holds its value as a store of wealth and is
easily divisible, recognized, and nondestructible. Gold
only becomes valuable after the basic biological needs of
our group are met.

We are lucky enough to establish a gold mine on our island
after the first three years of civilization. Some members
of our work force mine the yellow metal and produce gold
coins. The gold coins have value, because they represent
actual productivity… toil and sweat. Our rice farmer is
willing to trade “x” number of bushels of rice for “x”
number of gold coins, because he recognizes that he
is receiving value for value. Both rice and gold are the
result of productivity. All productivity on our island, all
good and services, stem from the earth. They are made
possible by labor. THIS IS ALSO TRUE TODAY IN OUR

All goods and services, as well as real money, gold and
silver, are the result of work, the expenditure of energy.
Recall the first and second laws of thermodynamics. Energy
is neither created nor destroyed. It is only transferred,
and something is always lost in the transfer. Economics
operates in harmony with these laws. This is just plain,
good old country economics. It is a far cry from
city-centered, fictional, debt-created wealth.

On our island (in the rural country, too) goods, services,
and money are produced into being. The Federal
Reserve, on the other hand, simply creates money out of
thin air. The Fed spend money into circulation. This is
what inflation is all about, the creation of something
(money) out of nothing.

Why did we go to all the trouble of creating this fantasy?
Primarily, to reprogram our thinking. We no longer think in
terms of who and what creates true economic prosperity. The
land is the ultimate source of all wealth. The labor of men
produces the wealth which is latent in the land. From this
observation, we should see that when the land is
unfruitful, such as during times of drought, the net result
for the economy at large will be decreasing economic
prosperity, less wealth. This is why drought and
depressions go hand in hand. The land is less productive,
so less wealth is produced, and hard times hit.

Since all new wealth comes from the land, it is critical
that we note that farm income is approximately 70% of ail
new raw material income–new wealth. In a very real
sense, then, agricultural production is a governing factor
in our economy. The $20 billion agricultural loss in 1980,
due to drought, will be devastating for the economy,

Carl H. Wilken, an American farm economist, proved that a
definite link exists between the value of farm products and
national income. Wilken’s evidence suggested that the new
wealth created in the economy multiplied itself seven
times, as it worked its way through the economy. Put
simply, $1.00 of farm income generates $7.00 of other
income. Also, a 1% increase in unemployment results from a
1% drop in farm income, according to Wilken’s studies.
Wilken stated that the only factor that remains consistent
with the earned profits and savings of a nation as a whole
is the total price paid for all our raw material production
Agriculture, while the largest source of new wealth, is
joined by oil production, ore recovery, timber harvested,
etc. These resources, most of which are renewable, produce
new wealth.

It’s also important to note that what we are dealing with
here is the multiplier effect. When the price of raw
materials drops, there is an exact ratio decline in terms
of national income. And an increase in debt expansion and
unemployment, according to Wilken. Economic good times are,
by contrast, multiplied by abundant production of new
wealth. Economic bad times are magnified by declining raw
material production. Again, Wilken purported that the total
national income is five to seven times the annual price
paid for all raw material production. This “parity,” if you
will, ties real money in directly with the production of
other goods and services.

Tractors have to be produced. Gold has to be produced.
Wheat has to be produced. Thus, equipment, money, and food
are all produced by the sweat of men’s brows. Wheat and
tractors can not be created out of nothing. Neither should
money. When money is earned into circulation rather than
created out of thin air and spent into circulation, not
only does inflation not exist, but, with the concomitant
elimination of the fractional reserve banking system, the
boom/bust cycle is eliminated, too. Remember that a cycle
is, by its very nature, unstable. Men desire stability, for
with it comes a sense of security, well-being, and a
long-term view. Eliminating the interest earned by the
banks which own the Federal Reserve on money which is
created out of thin air, plus outlawing the fractional
reserve banking system, would go a long way toward
providing us with a sound, stable, and secure economy.
True, our economy would not grow as fast, but growth would
come in real terms, not in terms of illusionary,
debt-created wealth that is liquidated in the bust which
follows the inflationary boom.

With all this in mind, let’s look at a study entitled, “The
Implications of an International Gold Based Economic System
to Raw Materials Prices,” prepared by Peter L. Brandt and
Daniel Markey at the Chicago Board of Trade (9/7/79). They
looked at the relationship between gold and other raw
materials (commodities). (By the way, what we have been
discussing above in terms of real economic exchange is
nothing more or less than “barter.”)

Brandt and Markey stated, “While all raw material prices
will continue to be traded in currency terms, the currency
expression of that raw material’s value will be in
relationship to gold and silver over the long term.” Brandt
and Markey were relating to economic reality (barter) in a
society that thinks in terms of computerized banking

Based upon $350 gold, it was these gentlemen’s conclusion
that the price of corn should be $4.65 a bushel, wheat
$7.00, soybeans $11.65, oats $2.48, cotton $1.03 per pound,
hogs $0.65, pork bellies $0.81, cattle $1.13, broilers $0.67,
cocoa $1.94, sugar $.16, and copper $1.52, production
shortfalls aside.

Let’s assume, just for the sake of argument, that Brandt
and Markey’s analysis is roughly accurate. What conclusions
can we draw with relative confidence? First of all, with
gold having doubled their $350 price, other commodities
should be much higher priced, too. Yet, with gold now at
roughly twice the price discussed in this study, we still
find that these basic commodities, taken collectively, have
not moved up substantially, at all. In fact, these basic
commodities are, for the most part, still selling for less
than they should have when gold was at $350 an ounce!

What’s wrong? There is a political/fear/anxiety
factor built into the price of gold, which distorts its
relationship to other commodities. Gold is real money, and
the stampede to gold and the distortion of the ratios is,
in fact, evidence of an invisible depression. During a
depression, people seek money, real money, which is,
historically, gold. Commodities are cheap in a depression,
and we have been through an inflationary depression in
terms of gold versus commodities.

This warped gold/commodity relationship also suggests that
eventually the price of commodities may have, long-term, a
lot higher to go, particularly if the price of gold
maintains its present lofty levels.

But, there is yet another more insidious conclusion that we
can draw. In terms of real money, gold, the prices of raw
materials have deflated drastically. If they stay low in
terms of gold, or if the price of gold declines and these
raw material prices hold steady or decline further, the
implications should be obvious for the economy at large. We
will have a tremendous shakeout. Recall Wilken’s

The wide difference now between the annual price paid for
raw material production and national income is due to the
use of credit/debt: $1.00 of farm income generates $7.00 of
national income. In terms of economic expansion and
contraction, this means that the economy at large has some
massive adjusting to do on the downside if commodity prices
stay put, or fall.

If commodity prices rise sharply, and realign with gold,
the cost of basics for the American consumer will send the
Misery Index through the roof. As we discussed in the
earlier paragraphs of this article, commodities are the
real anchor, the reality to which all economic activity
ultimately returns. Bread is basic.