New Ideas About  Building Wealth, Lesson 1

We were touring an old castle, a stone fortress built by the Crusaders from the ruins of a Roman temple built 1000 years earlier. The fortress was built with limestone and marble blocks, half a ton apiece, transported dozens and even hundreds of miles over land and sea.

I had the same two thoughts I have every time I see a monumental structure like this: “What an immense human achievement!” And… “Boy, the person that funded this was really, really rich!”

I voiced this second thought to Osama, our archeologist/guide. He said, “Don’t forget. They had free labor. They had slaves.”

I’ve heard this said as a rationale for slavery more times than I can count. But it’s not true. Slave labor may be cheap, but it’s hardly free. A slave owner has to provide food and clothing and shelter to his slaves. And teach them the skills they need. And treat them when they get sick.

I kept thinking about this during the rest of the tour. And my thinking was that in purely economic terms – from the point of view of the guy who’s paying for it – there’s not much difference between slave labor and wage labor.

For centuries, most laborers were paid little more than what they needed for the basics: food, clothing, shelter. In other words, a worker received subsistence wages – a salary that was roughly equivalent to what it cost to employee him.

All this began to change – a bit – during the Industrial Revolution. There was suddenly such a huge demand for labor, skilled and unskilled, that some wages began to rise above the subsistence level. Especially for those with technical skills.

Today, in the industrialized West, unskilled laborers are usually paid a salary that leaves little or nothing for saving. But what constitutes subsistence is much more than it used to be. The real improvement has been in the wages of skilled and even some semi-skilled workers. They can make enough to cover the basics and buy some modest luxuries and even save a little, if they try.

This increase in worker compensation was the result of widespread industrialization. It was partly a matter of scientific development, but also a matter of an expansion of capital in the private sector. Growing industries created growing profits. And that led to the growth of banking and other forms of capital investment.

I thought some more about that and then I had this thought:

At base, there are only three ways to participate in an economy: as a laborer, as a merchant, or as a capitalist.

 That was true 2000 years ago. And it’s true today.

* You can make money as a laborer: i.e., a worker.

* You can make money as a merchant: i.e., a businessperson.

* You can make money as a capitalist: i.e., a banker.

There are grades and variations of each one, but these are the core three.

(Well, you can also make money through robbery, bribery, and extortion – but we are not talking about government jobs here.)

Workers make money by working. This seems redundant, but it needs to be understood. As a worker, you are essentially trading your time or dollars. You can make extra money in two ways: by working more hours (if you are paid by the hour) or by doing more work per hour (if you are paid piecemeal).

Businesspeople make money by trading things. Working more hours and/or doing more work per hour can have a positive effect on how much money they make. But the real determinant is profit.

A businessperson makes a profit by selling things at a higher price than it cost him to make or acquire them. If he fails to do this, he will lose money. Thus, the businessperson’s primary ability to make money depends on his ability to buy and sell. Buying and selling prices are partly determined by supply and demand. But the businessperson that buys cheap and sells dear can make money even when the economy is difficult.

The primary difference between a worker and a businessperson is that the worker earns his money as salary, which is a legal contract, and the businessperson’s income is determined by profit, for which there are no guarantees.

The third way to make money is to act as a banker. A banker is someone that comes to the economic table with capital – i.e., a store of money that he is willing, under the right circumstances, to lend or to invest.

Like the worker and the businessperson, a banker has the potential to make more money by spending more time banking. And like the worker, the amount of money he makes is backed up by a legal contract. But unlike the businessperson, the primary factor in how much the banker makes depends on supply and demand.

Generally speaking, banking is easier than working and simpler than running a business. If you have money to lend, there will always be someone that wants to borrow it. If you lend conservatively (with sufficient collateral) to someone that really wants to borrow it, you can charge a high-interest rate. You can also have the borrower sign a legally binding document guaranteeing you a fixed return. Like a worker, you have the advantage of earning your money by contract. And like a merchant, there is no limit to the profit you can make when supply is limited and demand is strong.

Usually, when we talk about the economics of making money, we talk about all sorts of factors that complicate our thinking. Of these complications, thinking that there are dozens, if not hundreds, of jobs available is the most confounding.

Consider only the types of jobs you can have: You can be a farmer or a scientist or a doctor or a lawyer. You can be a plumber or a sheet metal worker or a retail salesperson. You can be skilled, unskilled, or semi-skilled. You can be experienced or inexperienced. You can be an entry-level worker or a manager or a senior VP. But at base, you are a worker. And if you understand that, you can understand why most workers never make enough money to acquire wealth. It’s because they spend their lives trying to make more money as a worker, instead of thinking about how they can take on other jobs.

That’s what we’ll talk about in Lesson 2.