Roads and Wealth Creation

For years I have been interested in travel to some of the more remote areas of Australia. Recently I bought an old (but tough) 4WD, and with my children Amy and William we set out for the Flinders Ranges, about 500km north of our home in Adelaide, to spend a few days camping and doing a little off road driving.

One day we visited Arkaba Station, a private property where for $35 we could spend a few hours on a self guided 4WD tour through the station. There was a mixture of terrains; creeks, some very steep (at least for me) and very rough roads. I was really an ideal trip for me, just right for my (very basic) 4WD skill level. We were the only ones on the track for the entire time, and the scenery was very nice, although I was focused mostly on the road. The kids really liked the steep bits and being shaken to pieces on some of the rough roads. They also spotted lots of wild life (Emus and Kangaroos, as well as sheep that are run on the station).

One section was covered with large rocks sticking out at all angles. Our speed was limited to about 5km/hr, and inside the car we were shaking and bouncing all over the place. We could have got out and walked faster. It occurred to me that this was probably a typical road for 99% of history, and that travel at walking pace (and being shaken to pieces if in a vehicle) was probably the norm. This must have made communications very difficult, expensive and therefore very rare.

Driving off road made me appreciate that a simple flat ribbon of bitumen that enables us to travel at highway speeds really is a miracle. The distances we can cover in a few hours on a modern road must have taken days 100 years ago using the poor roads and horse and carts of the time.

Roads as a creater of wealth

One question I have been thinking about lately is “where does wealth come from”. I mean, we all talk about economic growth, which to me means more money in a country/region as a whole, but if an economy grows, we all get richer, so where does the wealth come from? Who is pumping the money in? If we are getting richer, is some one else getting poorer?

Thinking about roads gave me a good example of wealth creation.

Roads allow us to move more efficiently, less effort is required than without them. The government took our taxes and invested them in this infrastructure, now it costs much less to get from A to B. The cost of travel has been reduced.

Lets look at an example. In 1850 Farmer Joe needs to travel a round trip of 100km. He uses his horse and cart and spends two days to travel. In those two days he cannot be doing any other work. Now in 2006 Farmer Joe jumps in his car and travels the 100km in 1 hour. He returns to the farm and can work for 2 full days (minus the 1 hour). That 2 days of extra work that Joe earns income from. This is additional wealth that has been created by the road.

The interesting thing is that no one else had lost anything to make Joe richer. It is a win-win situation. Communications infrastructure (the road) has created wealth, and no one loses.

What about the cost of the road? Well I am assuming that the government paid for this out of the same taxes Joe would have paid anyway. They just decided to spend the taxes on a road rather than a warship or new town hall or something. I am also guessing that the cost of the road is far less than it’s economic benefit to those who use it over the years.

Wealth Creation

Looking around at the people around me I notice that most of are much better off in a material sense that we were say 20 years ago. Much of the stuff we buy (especially consumer goods) is also much cheaper than it was 20 years ago. For example in 1989 I bought a VCR for $1100, I just bought a combined VCR/DVD player in 2006 for $150. Adjusting for inflation thats a cost reduction of about 15 times! Fifteen VCRs for the price on one.

Somehow, wealth has been created. We all have a lot more money. My mother tells my stories about “stretching” the food money to last until pay day in the early 70’s. Now our biggest problem is when are we going to get a flat screen LCD TV?

The only exception to this rule seems to be real estate. My theory here is that real estate prices have been pushed up by demand as people have enough discretionary money now to cover huge interest repayments. Real estate has soaked up excess wealth through the laws of supply and demand.

But I digress. The question I was looking into is “how is wealth created”?

The best answer I have worked out so far (worked out in discussions with several friends) is that: we all get richer as the cost of producing stuff is reduced.

So I think it works like this:

  • Technology is developed that allows something to be produced cheaper than before. For example fertilisers make food production more efficient. Silicon chips lower the cost of electronics.
  • This makes some product or service cheaper to deliver.
  • So we spend less to obtain a given product or service, and have more money free for other things. Like flat screen TVs, or huge interest payments on your mortgage. Or sending our kids to expensive private schools.

Advancing technology is not good for everybody. Some industries get displaced. The development or roads and cars probably put a lot of the horse and cart industry out of business. This must have caused a small group of people a lot of distress, despite the huge benefit to a large number of other people. And yet the world is clearly a better place for having efficient transport.

It is also interesting to see what we do with our increased material wealth. Somehow soaking it up in big interest payments or mobile phone bills doesn’t seem right when there are 10,000 children dying each day from preventable disease. But thats another story. I am currently reading a couple of books on these subjects, and recommend them to you:

Communications Technology for Wealth Creation

I see a lot of parallels in physical communications assets like roads and communications technologies like VOIP and the Internet. They all let us communicate faster and better.

They are engines for wealth creation.

So reducing the cost of communications is a good thing. It lets us communicate faster and cheaper. Reduce the cost enough and maybe some kid in a disadvantaged country can make his first telephone call or obtain an education over the web.

Summary

So on balance I think “decreasing the cost of stuff” is a good thing. It is a mechanism for creating wealth. Like the example of roads, it can be win-win – wealth can be created like magic without disadvantaging a large group of others.

I must admit I find this pretty cool. It suggests that we can actually increase wealth (and the material well being of everyone on the planet) in a win-win situation. For us fortunate people in the 1st world this means more gadgets or a nicer house. For the less fortunate it means hope that one day they will be able to eat 3 meals a day and not die of Malaria.
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6 thoughts on “Roads and Wealth Creation”

  1. I agree with what you have to say, and you have put your case quite cogently. There are other wealth creation methods than the, for lack of a better term, “passive” model you describe (viz, Farmer Joe can now work more productive days at what she is best at, farming, instead of carting). Another way for her to increase wealth is by her own innovations in crop and stock management; she might, for instance, begin using GPS, satellite imaging, and RF cattle collars to rotate stock through virtual paddocks to prevent over grazing (and keep her beasts from damaging the banks of fragile streams). These would fall under “active” wealth creation.

    One big caveat, though, specifically with respect to road building: you are implicitly assuming first world conditions where Farmer Joe can afford to buy a truck to use the road. In developing nations this has usually not been the case. Wealth creation is very unevenly distributed in the third world, with an urban elite having access to more of everything than the rural poor. A paved road built in such a situation often has had a vastly disproportionatley negative impact on rural economies because the road tends to be used by heavy trucks owned by the urban elite. What happens then?

    Farmer Jian in a poor rural village can’t put a donkey cart on the modern road without risking fatal consequences–donkey carts and road trains do not mix–and too often the modern road even renders the old road unusable, either cutting it up into isolated segments or appropriating its right of way. This has dire consequences for the whole community, not just for the farmers, because the traditional local market is destroyed, and everyone–except the distant urban elite–becomes poorer and dependant on foreign aid just to get by. Often the only rational route to survival is migrating to the urban centers.

    Once a rural family migrates to the city, their lot improves only marginally. Sure, when there was drought and famine in Bihar province in India in the 1970s, for example, there was work for them in places like Bombay, but there was no housing. They became “Pavement Dwellers” who eked out a living doing piecework for, say, garment manufacturers exporting to 1st world countries. A Pavement Dweller got a few rupees for a blouse that ultimately retailed for more money in the USA than a typical Pavement Dweller could earn in a year. And this is not just a limited dislocation as happened when the west industrialized; these conditons have now gone on for generations. The grandchildren of most of those farmers displaced from Bihar in the ’70s are *still* pavement dwellers in Bombay today.

    You are on the right track, though, when you talk about communications. Cellular phones have probably been a greater economic boon to the third world rural poor than just about any other technology, with very few of the deleterious side effects I mention above in that a cellphone coexists quite happily with donkey carts.

  2. Hi Bobby,

    Thank you for your thoughtful comments. I didn’t know that paved roads could actually be a problem in some parts of the world.

    When I dreamt up that metaphor I was actually visualising rural Australia in the 19th century. In Australia we have have been fortunate – economic growth has been reasonably uniform across the population.

    Yes, these days the engines of economic growth like ITC and education are getting easier and cheaper to provide to all. The problem is now one of distribution, not of wealth but of enabling technologies. If we can get an education, email, and a cell phone to that pavement dweller he will act to bootstrap himself and his family out of poverty.

    Thanks,

    David

  3. funny, i only had the time to read this today.

    we have a large share of “pavement dwellers” here in the philippines, we call
    them squatters. they (some professionals) put up makeshift shanties along
    creeks, rivers, train tracks or any vacant piece of land (private or not). most if not all don’t have jobs but believe it or not, some of them live a more lavish life than most of the city population. they have illegal electricity/water lines, televisions, washing machines, some even have aircondition units! i own a $45 nokia phone i use for business, some of these guys have $280 cell phones they use for nothing! here in this country, the reason why rich people keeps getting richer and poor people keeps getting poorer is because of one thing, education and knowledge. in a struggling squatter family, you would not see one or two children like well-off families, you would see 10! if these people keeps up the “good” work, the whole country will soon be filled up with under-skilled/poorly-educated workers, if not petty criminals. Later on then will be shipped as migrant workers to first world countries which is happening now, everybody wants out.

    i believe in “REAL” education as the real way to achieve economic prosperity, not by technology or roads alone. i have seen some friends rise up from poverty with education. an education which does not only teach calculus to engineering students, but teach them how to use knowledge to reach their dreams. in a country where education is most needed, tuition fees keep increasing annually, profit-oriented schools (some illegal) keep sprouting up like mushrooms and the government’s education budget allotment keeps getting smaller. my siblings already migrated to australia, i’m still keeping myself busy here trying to spread the vision of open-source and now open-hardware in this country (as david’s wealth theory goes, to “decrease the cost of stuff”), it’s been a nice journey.

  4. Hi Kelchy,

    You know I think I agree with you – education is really strongly correlated with many other ways of measuring well-being, for example lifespan in women. I think technology might be able to help spread eduction more evenly, for example thru the web, and low cost VOIP and IT.

    I am also leaning to highly practical 1 year courses, e.g. how to set up a wireless VOIP network, or village medicine.

    Just last night I found another way wealth is created: banks create it!. I have a horrible feeling that this video explains the mechanism responsible for the creation of most “wealth”, far more than my amateur economics. Unfortunately it’s not real wealth, like I think “making stuff cheaper” is.

    Kelchy – can u pls tell me about your open source hardware? feel free to email me direct.

    Thanks,

    David

  5. Education is the foundation of wealth creation – there is no doubt of that but it has to be delivered. Governments need to place the infrastructure and price it in a way that the average citizen can afford – early internet was so expensive the poor had no access and we started to see a divide between the haves and have nots broaden. However, the WWW has moved on since then and now the hardware is reducing so fast in price that their is less of barrier today than ever there was.
    Road building is still a priority but with a good link to the net anyone with the right guidance can hook into the web and use its awesome power without leaving home! I think the changes in the Indian economy show s this very clearly. THe roads are still disgusting in most of the country -but this does not have to stop the involvement of the poor in the economy!

    Interesting discussion – I hope that maybe the Australian government might learn the importance of roads and the net in supporting the booming economy we have here right now!

    Woody

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