Sunday, April 26, 2009

The Distribution Of Income II: Opportunities

Income is derived from six major economic factors:
(a) Labour - Brawn
(b) Capital - Technology emnbodied in Machines
(c) Entrepreneurship - Mobilisation and Market Information
(d) Technical Skills - Technology embodied in People
(e) Property - Physical Assets
(f) Financial Assets.

They can be reduced to something very simple:
(i) Labour
(ii) Skills - Entrepreneurship, Technical Skills
(iii) Capital - Machines, Physical Assets, Finance Assets.

If you have a good physique but is not prepared to study or observe how money is made, then you are going to end up as a labourer or worker - and what you are going to get paid is a wage.

The wage rate is probably the lowest rate of return to any effort by human beings - because this is the residual of the human race - those who do not go to school or do not spend the standard number of years in school.

There is a disadvantage in not having sufficient Knowledge to participate in the mainstream of the economy - understanding of the rules of the market, ability to communicate with other participants in the market, the ability to handle finance without getting one's fingers burnt.

There is an optimal number of years in school that is required in order to be in the mainstream of the economy. Nowadays, it is found that getting the first degree is necessary - but not sufficient - there may just be too many competitors. Getting a second degree is desirable - because it provides added skill and puts you above the first degree holders. Getting a PhD may give you diminishing returns - for you have become too specialised and perceived to be too narrow in your interest.

But, apart from the above academic qualifications, there is another segment that is vital for industrial growth - and that is the vocational schools - the technical skills training centres.

People are taught to be skilled workers as wielders or precision-tool operators - people who know how to make machines work. These are prized workers in an industrial expansion. In some countries, these skilled workers are considered more important than the academic graduates of the universities.

As you can see, skilled workers are required to operate expensive and sophisticated machinery and therefore are paid better than the labour of illiterate unknowledgeable workers.

Entrepreneurship is a skill that is not easily taught in schools - the most successful entrepreneurs are apprenticed in a dynamic environment where several social qualities are inculcated - alertness (of what is going on by one's own observation), dexterity (the ability to do almost everything by oneself), integrity (the ability to carry out the words one has spoken), honesty (the ability to handle other people's money without running away from it), mobilisation (the ability to bring all the different factors together to work as a team), etc.

Ordinary hardworking people have become successful entrepreneurs because other people can trust them with their scarce resources in order to generate some positive return from the enterprise.

The return to entrepreneurship is called profit - which is subject to the vagaries of the economy, if it is dynamic.

The underlying factor for growth of the modern economy is capital - that part of income that is saved and transformed through research and innovation into means of production of better goods and services which will advance the welfare of the people.

By saving and accumulating capital, it is possible for a person to have many sources of income - in addition to his salary.

If he has saved enough to buy property or financial assets, he may have enough capital to get returns which would be sufficient for him to feed his family, without him having to work for a wage.

Access to economic opportunities must be one of the intrinic human rights of all citizens of a nation.

Economic opportunities encourage its citizens to be frugal and innovative.

The distribution of income reflects the effort that each of its citizens put into the economic process.


pywong said...

Good article. Looks a lot like the Rat Race.

walla said...

walla said...