Almost 20 years ago, I found the following story, as I recall, in one of those kid entertainment booklets at a McDonalds. I have always loved it, but think I have only just begun to understand why.
The Pig and the Bear decided to go into business. “We’ll make lots of money!” they thought.
The Pig baked a bushel of potatoes and the Bear fried a heap of doughnuts.
They went to the market place early in the morning to get the best spots. Nobody was around yet. The morning was clear and chilly. The Bear had a nickel in his coat. After a while, he went over to the Pig’s stand to warm up a little
“How much for a potato?” he asked.
“A nickel for you.”
The Bear was about to say that he’d just wanted to ask, but then he changed his mind. He fished in for the nickel in his fur, took the biggest steaming potato in his paws, and crossed the road back to his stand.
The business is moving, rejoiced the Pig. But there were no more customers for a while and he hadn’t eaten since they started at dawn so he crossed over to the Bear’s stand and bought himself a black raspberry doughnut for the nickel.
The Bear was happy to make his first sale.
He felt he should eat something before the customers started to flock to his stand. So he went over to buy another backed potato. The move brought him luck. He had hardly finished eating when the Pig was over for another doughnut.
Then business slacked off again until the Bear bought a potato. Soon the Pig was over again and the bear went right back with him to his stand to spend the earned nickel. The Pig returned for a doughnut and soon they were going back and forth until they had sold everything.
The counted the money, but, strangely, the Bear had only a nickel and the Pig had nothing at all. They couldn’t believe it!
“We have sold all our merchandise,” they kept saying, “but we have no money.”
In vain they counted and recounted: They had only a nickel between them after the whole day of busy trading.
The moral buried in this story is that the velocity of money does not generate wealth. You cannot spend your way to prosperity. Suppose each of the entrepreneurs began with 10 units of product. Their GDP would have been $1.00 over the course of the day, but neither feels much better off.
Wealth is determined by the extent to which one has capital and resources to produce something more efficiently. The farmer with an ox is wealthier than the farmer without because he can do more with less – grow more food in a season than the farmer without.
The wealth of a nation is not determined by sales, the accumulation of consumer products, or the extent to which money is sloshing around. It is plants, factories and infrastructure that make us wealthy. It is our ability to do more with less. If we can make more widgets at a cheaper price than the next guy, we are wealthier than he.
It may be that the only wealth is in manufacturing, but there is a case for service. In the above story, if the Bear were a bookkeeper and the Pig a plumber, an exchange of services would have been mutually beneficial. The Bear has neither the skills nor the tools necessary to install a toilet and the Pig has little interest in figuring out debits and credits. Each can make more money by working in their skill area and paying someone to do the other things.
We need, therefore, to spend more on education. But many students graduate from university with skills that no one will pay for. They may know who Max Weber was or be able to find the derivative of a polynomial or explain the periodic table, but there are few who would pay for that knowledge.
The “Greatest Generation” did not become so by spending. Tested by the Depression and war, they were great savers. They created the capital that allowed the building of wealth in North America. It is us Boomers who cannot delay gratification and are so willing to go into debt not just for big items like a house and a car (my father never had a car loan), but for a 42” flat panel TV screen, a vacation, whatever.
Ron Turley. January 2009.Tags: merchandise, money, trade