2013-08-30

The Reality Of Wealth

Austrian capital theory (at least in the Misesian tradition, which is the one with which I am most familiar) posits - among other things - that more highly advanced technologies are only possible when we invest time in their creation, and that doing so requires savings. To understand this on an elementary level, consider Homer, a man whose only means of survival is subsistence fishing.

Every day, Homer wades out into the waters and attempts to catch fish with his bare hands. This is extremely difficult, of course, so he manages to catch just one fish or two per day; barely enough to survive. Then, one day, he lucks out and manages to catch four fish! Thinking quickly, Homer sets two of his fish out in the sun to dry; he then eats his daily ration of two fish. He wakes up the next morning and finds that he has a savings of fish. Because he does not have to catch any fish today, Homer decides to spend the day building a fishing net. He eats his two saved fish over the course of the day, and on the following day, Homer uses his new fishing net to catch many more fish. His life improves and he lives happily ever after.

Some important features of this story are: (1) Homer required time to build a fishing net, and (2) Homer was only able to acquire that time because he had accumulated some savings.

Unless you inherited all of your wealth, personal wealth works in a similar way for you. Most of us spend some part of our young adulthood seeking education, credentials, trade experience, or apprenticeships while drawing only a modest salary or wage. It is only after we've acquired those credentials that we end up at a higher level of income. 

MBA degrees, CFA and PMI Certifications, etc. are more glorified examples of the same phenomenon. To earn those, we often have to invest a substantial amount of after-hours time pursuing them, or taking time off work, or a sabbatical, etc. In any case the extra time we invest is a form of savings consumption that results in our achieving a larger income stream.

Even artists must invest time and savings into honing their craft. Many artists, as they develop and build their portfolios, work side-jobs (or primary jobs) until they have built up a fan/customer base large enough to sustain their artistic operations on a career basis.

So, the common thread here is that expanding your personal income stream involves spending extra time, or part of your savings, on developing a new quantity of output that can be utilized in the market. If you're the kind of person who likes to put in a solid 40 hours and go home, that's perfectly alright. But it's important to realize that no such person is ever likely to greatly increase his or her income. For that, one has to spend one's off-hours producing something. That might be sometime common, like researching stocks and investments, or putting in overtime for the boss; or it might be something unusual, like developing a product to sell on Ebay, or writing and recording an album of music, or painting, or sculpting, or getting a postgraduate degree...