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Bill Greiner Contributor


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The Wealth Of Nations -- Why Individual Productivity Is Key To A Successful Free-Market Economy


When many folks hear the phrase “Wealth of Nations,” they immediately think of Adam Smith’s legendary socioeconomic work published in 1776 under the full title of An Inquiry into the Nature and Causes of the Wealth of Nations. The work was one of the first serious thought pieces regarding how wealth is created and the role of a market-based economy in that process. The book covers a number of broad-based economic concepts, such as the division of labor, productivity and the usefulness of free markets.


At times, the world’s leaders have attacked the usefulness of free-market economic systems, declaring market-based systems uncaring and inhumane. While some would argue the truth of these sentiments, free-market economies have lifted up the vast majority of Western societies to levels of prosperity that were only dreams as little as 150 years ago.  However, simply claiming an economic system to be market-based, rather than command-based, isn’t enough to promote high levels of growth. A focus on productivity is needed for strong, sustainable growth to occur and for society, as a whole, to prosper.


The purpose of this piece isn’t to wave the free-market flag, but to simply address the question: “Why do some societies prosper, while others languish over long periods of time?” Additionally, the usefulness of this analysis goes beyond the simple philosophical argument of market-based vs. command-based economic systems. My goal is to apply this learned knowledge for investment purposes.



Why Productivity?


For the general purpose of this piece, I equate social “prospering” with economic productivity. Why not include the softer social goals in our analysis, such as the issue of income distribution, which is a current focus of some? Simply put, without raw economic growth, nobody prospers and income distribution becomes moot.


It is broadly believed, as a general economic tenet, that nominal GDP growth (total economic production) can be attributed to three factors:


1. The size of a country’s labor force

2. The productivity of that labor force

3. Inflation


The larger the country’s labor force, the larger the productive capacity of that country. Additionally, the more productive a labor force, the higher the macroeconomic growth of a society. Finally, inflation adds to growth by driving revenue higher for goods and services. The two factors that generate “real” (after-inflation) growth are labor force size and productivity.


The growth of a country’s labor force, alone, over long periods does not raise the standard of living, as personal disposable income levels are not tied directly to the size of the labor force. Instead, the standard of living is directly tied to the productivity of each individual within that labor force.


Bluntly stated, the true wealth of a nation is tied to that nation’s after-inflation, per-capita productivity level.


This is the measure I will examine: the rate of change of global and national after-inflation, per-capita productivity levels. I will outline why, over various periods of time, productivity trends accelerate in some countries, resulting in true wealth creation, and do not accelerate in others, with no resulting wealth creation.


From an economic standpoint, disposable income can be consumed or saved. If saved, investments occur. As investments occur, productivity over a period of time rises – assuming the investments are sound. As productivity rises, disposable income rises… you get the picture. A “circle of prosperity” occurs due to a rise in productivity.

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