“If you believe that the money exists for building amazing futuristic cities in India, you must be certifiably insane.” That is the standard reaction to my scheme for building 600 cities for the 700 million Indians currently trapped in 600,000 villages. Where will the money come from? My answer is simple: out of thin air. That’s when they suddenly remember that they have an urgent appointment with their hair dresser or chiropractor.
Wait, wait, I say. That’s how all wealth is created: out of thin air. Let me explain, I say, as I force them to listen. Cities create wealth. And that wealth is what creates cities. Isn’t that the old chicken and egg problem? It looks like that but there is a way out of this seemingly impossible situation. But first we need to get a couple of building blocks for constructing the argument.
Let’s first distinguish between an expense and an investment. When you buy a productive asset or what is called capital asset, it is not an expense, it is an investment. You may have to borrow money to buy the asset but if you have chosen wisely, your asset will produce enough wealth for you to repay the loan in due course and you end up with the capital asset. What you need is the smarts to use the asset to increase your productivity. The capital asset may be as trivial as a cell phone that a vegetable seller uses to increase his sales. Or it could be as massive as “buying” a city to increase the productivity of millions of people.
The money spent in human capacity building – also known as education – is an excellent example for distinguishing between an expense and investment. The raw material is the basic human brain. The money spent transforms the raw brain into a trained brain. If the lifetime earnings of the trained brain exceeds that of the raw brain by at least the cost of the education, then you would say that the return on that investment (ROI) is positive. It is an empirically verifiable fact that the ROI for education is positive because investment on education has persisted for centuries. If the returns were non-positive, the market would have selected education out for extinction.
Modern factories are another example of a capital investment which create new wealth. Simply put, factories increase the productivity of the people. Which means that more stuff gets produced using the same or lesser effort. The increased production is more than what it took to create the factory in the first place. That is why factories persist.
A city, I submit, is capital equipment just like a machine or a factory. Only difference is that it is large. And while the cost of a city is large, so is the wealth that it creates. Therefore, theoretically at least, it is possible to “buy” a city on borrowed money and then pay back the loan from the increased income that comes from the working of the city. That is the secret of creating wealth out of thin air.