The Mystery of Wealth Creation

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"Wealth is the tool of freedom, but the pursuit of wealth is the way to slavery" - Frank Herbert

A friend, a successful entrepreneur and long-range thinker, laments that in recent years the best brains have been gravitating toward the financial sector. How, he and I were wondering the other day, had these bright minds become so obsessed with wealth creation?

Too many people now concentrate on investments - in real estate, equities and bonds and derivative assets - rather than earning a good living by delivering innovative products and services that improve quality of life in the world. The distinction, in our minds, is between generating income based on one's own creativity and labor rather than creating wealth off other people's labor and Dame Luck.

In the good old days, people earned a living doing something useful. They saved up some of their earnings to invest in productive assets - facilities and equipment - that would enhance their income. They would invest in real estate or financial assets, expecting to collect rent or interest. They would then use that supplemental income to secure their future. The value of these investments was in line with the returns.

Over time, real estate and financial assets took on a life of their own. Bright people started entering this arena, instead of becoming doctors or musicians or engineers or managers. They invented logic to convince themselves and others that these assets were worth more than what the yield would justify.

For instance, agricultural land in Kuthmangalam village (that I talked about last week) is Rs. 10 million per acre. The value of the crop produced would be about Rs. 60,000 per annum, leading to a rental value (after deducting input and labor costs) of just Rs. 10,000 per acre - a return of 0.1% p.a. The high prices are justified purely on future capital appreciation - a bubble. Stocks, similarly, are valued on capital appreciation rather than dividend yield. This spiral goes on until the bust.

Instead of deploying capital assets to generate income, in recent decades the focus has shifted to making money purely on speculation. If I make a killing on real estate or my friend's driver makes a killing on stock options, these are pure windfalls - they cannot be construed as sustainable wealth creation.

We know a great algebra teacher who is into day trading; he is talking about quitting teaching to trade full-time. If he does, his students and his school and the community will suffer. When that happens on a larger scale, when the best brains in the world are diverted to unproductive but remunerative professions, the whole world suffers and we get a global financial meltdown.

Britain's top regulator, Adair Turner, regards a lot of what is done in Wall Street or the City as 'socially useless.' He suggests a turnover tax on all speculative activities - a move that, according to Nobel economics laureate Paul Krugman, is gathering widespread support from many people outside the financial industry.

I see better sense prevailing in the New Age. Youngsters of today are wary of the stresses of unbridled speculation and waiting for blue birds or black swans to happen. Nor do they want to sell their souls to ensure success. They will gravitate towards more meaningful and productive activities in the real world.

Asset pricing and valuations will trend more toward intrinsic worth based on cash flows rather than self-fulfilling and self-defeating prophecies. People will pursue overall well-being for themselves, their families and the society at large, rather than just personal wealth. Let us use this opportunity to dialog and debate how to make this shift happen - for ourselves and for the generations to come.

Sudhakar Ram is Chairman and Co-Founder of Mastek, a leading IT solutions company specializing in providing IT platforms and applications for large and complex transformation programs like the London Congestion Charging Scheme, and the National Health Service in the UK.

He believes that we have the potential to create a sustainable world and live in harmony with our environment. However, this would require a fundamental shift in our mindsets - the "constructs" that drive our attitudes and actions. The New Constructs is his initiative to leverage Connected Intelligence in realizing the Connected Age. Use it as a platform to dialog and debate how to make this shift happen - for ourselves and for the generations to come. Please share. Stay active, stay engaged.

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