Economic Wealth: A Three-Step Process | Federal Reserve Bank of Minneapolis (2024)

Mohamed Al-Bushehr lives in Iran on less than two dollars a day. He works for the government and has one of the few jobs available at the local oil platform. When he goes home at night, he spends the evening searching for clean water and food for his young family of four.Al-Bushehr has little economic freedom and lives by the rules and standards set forth by the Ayatollah.

In contrast, Michael Theis lives in the United Kingdom on more than 40,000 pounds a year. He has nearly unlimited economic freedom and a stable job. When he goes home at night, he has clean running water and a refrigerator full of food. The average gross domestic product per capita in the United Kingdom is nearly 10 times that of Iran, according to the Central Intelligence Agency (2004). These two countries illustrate what separates wealth. Three factors create wealth in countries. These factors are the ability to own personal property, a market-driven economy and an infrastructure that provides the basic necessities of life.

Private property rights for individuals are key because they provide a reason for individuals to seek economic wealth. The ability to accumulate wealth helps drive an economy, in which both the consumer and the producer are striving to achieve as much as possible for themselves. This in turn adds wealth to a country. According to Benjamin Powell (2002, p. 2),

The freedom to exchange allows individuals to make trades that both parties believe will make them better off. Private property provides the incentives for individuals to economize on resources because the user bears the costs of the actions.

Thus, when individuals have the right to own property and have the ability to use it as they wish, they will attempt to make economic decisions that will better their economic standing. The power of property rights can be seen in an Index of Economic Freedom report by Marc A. Miles (2004). The profile ranks nations based upon economic freedom. Countries that are associated with the top of the list include Japan, Iceland, Australia, Germany and the United States. They all allow individual property rights. Countries at the bottom of the list, such as Iran, Cuba and Libya, have no individual property rights. U.S. Federal Reserve Chairman Alan Greenspan cites the significance of allowing individual property rights to help developing countries create wealth. In a 2003 speech to the Financial Markets Conference, Greenspan says, "A society without state protection of individual rights, especially the right to own property, will not build private long term assets, a key ingredient of a growing modern economy" (paragraph 1). Property rights for the individual must be established in order for a country to develop into a wealthy nation.

The next step in clarifying why some nations are wealthier than others can be discerned from the type of economy supported by the nation. The Index of Economic Freedom rankings show that property rights are only one component that is common to the top countries; the second key ingredient is a market economy. Michael Watts (1998) cites in a U.S. Department of State paper the importance of market economies:

Market economies are not without their inequities and abuses—many of them serious—but it is also undeniable that modern private enterprise and entrepreneurial spirit, coupled with political democracy, offers the best prospect for preserving freedom and providing the widest avenues for economic growth and prosperity for all (paragraph 7).

See Also

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Market economies are essential to developing national wealth because they allow for trade and entrepreneurship. Trade and entrepreneurship create higher national gross domestic product and promote economic creativity to obtain wealth. Finally, economic freedom leads to competition and development of an efficient and practical system yielding high returns and in turn leads to greater national and individual wealth.

The final step for a nation to achieve economic prosperity is to establish an efficient infrastructure that provides for the basic necessities of its citizens. In a 2002 interview on the Public Broadcasting Service Web site Commanding Heights, Peruvian economist Hernando de Soto states, "Health is also extremely important. Information is important. Roads, infrastructure, cleanwater—all of that is crucial" (p. 2). Countries can spend less on eradicating disease and infestations wiping out the population when they provide clean water and sufficient food for their population. In turn, they spend their time and resources on developing their economy. Secondly, countries whose citizens do not have to worry about the necessities of life are able to spend more time developing methods that more effectively utilize the country's resources. Spending time on problem-solving activities is a luxury that poor nations do not have. To foster economic wealth, countries must have a basic infrastructure that provides access to food, clean water and healthcare.

Countries that are wealthier, are wealthier because they have these three common characteristics: a market economy, individual property rights and provision for life's basic necessities. These qualities foster economic growth, which in turn leads to economic wealth for a nation. Robert Solow, recipient of the 1987 Nobel Prize for economics, comments on economic growth in a Region (2002) interview for the Federal Reserve Bank of Minneapolis:

The essence here is a poor country learning and becoming able to do (it's more than just learning) what rich countries already do. There, I think the case is clear. The notion that the poor countries of the world can in any reasonable interval achieve rich-country incomes without trade and capital flows is utterly implausible
(paragraph 29).

Creating an economically wealthy country is an intricate process; however, if a government fosters property rights, utilizes a market economy and develops a basic infrastructure, it can eventually develop into an economically wealthy nation and escape the grasp of poverty.

References

Central Intelligence Agency. (2004). The World FactBook
(Dec. 3, 2004).

de Soto, Hernando. 2000. Interview on Commanding Heights,
Public Broadcasting Service. (Nov. 29, 2004).

Greenspan, Alan. 2003. Remarks at the Financial Markets Conference of the Federal Reserve Bank of Atlanta, Sea Island, Ga. (Apr. 4).

Miles, Marc A. (ed.) 2004. Index of Economic Freedom. Heritage Foundation and The Wall Street Journal. .

Powell, Benjamin. 2002. "Private Property Rights, Economic Freedom, and Well Being." Economic Education Bulletin 42 (Nov.).
(Nov. 30, 2004).

Solow, Robert. 2002. Interview by Douglas Clement in The Region 16 (Sept.), Federal Reserve Bank of Minneapolis. (Dec. 9, 2004)

Watts, Michael. 1998. "What is a Market Economy?—Introduction".
U.S. Department of State. (Dec. 7, 2004).