How is wealth created?

Question

I am curious as to how everyone views the following:

How do you define wealth?

Where do you feel that wealth comes from?

Do you think wealth is finite or infinite?

With all do respect, some of the answers seem pretty limited. Work = Wealth? Maybe, but there are countless other means. The question was how to create wealth, not how one amasses wealth.

If you are defining wealth (individually and globally) as as some variation of net worth, or better yet stored value that can be converted into monetary/barter value, then you have to consider that merely building individual wealth doesn't mean wealth is being created. If I make a fortune in small business by selling products, then essentially I am taking a little bit of wealth from all my customers. If I labor all day long and get paid for my work, someone gave some of their wealth in exchange for the work, so wealth was merely transfered.

In effect, these are only examples of transferring wealth from one entity to another other.

Wealth is CREATED with ideas.

For example, if I show a company how to operate more efficiently and save them $10 million merely by adjusting their system of operation (not affecting incoming and outgoing costs/sales) then in effect I have created $10 million in new wealth. This happens all the time in business. They may pay me $1 million as a resulting consulting fee and therefore I have created $1 million in wealth for myself without taking any from anyone else.

Consider the original use of the assembly line. This made the prices of developing products far more efficiently, and added value to society with cheaper prices, more job opportunities, and many more products available. ideas that create efficiency create wealth, and ideas are unlimited. Thus, wealth is unlimited in that there is no shortage of ideas. Evolution historically is society becoming more and more efficient, which is evidence that with time, there is no end to how much wealth will be created.

The division of labor might be the greatest wealth creator in history. If you consider the impact of the division of labor, and how much more efficient life is around the world on average as a result of the division of labor, you cannot dismiss how powerful that change has been.

When I go to the grocery store and can instantly buy all the ingredients I want for pretty well any meal I can conceive of, I am always amazed at the thought of all the work this would take prior to the division of labor to accomplish this same task.

Consider just producing eggs and bacon...it would take the average person (not farmer I suppose) all week just to figure out how to even get the ingredients, when it takes the equivalent of about 30 minutes of minimum pay work to merely drum up the cost for the same ingredients. That is powerful, and whether you are rich or poor, everyone all benefits immensely from this.

As for those that view wealth as just a giant piece of cake divided among the people, I think those people overlook the fact that that cake can be grown in size as well. If no one ever st rived to make thins more efficient, then indeed, wealth would be finite, but human nature is to find better ways to do just about everything (which is the beauty of free markets) that there is no way that giant cake will ever remain one size. The example describing India's issue with population illustrates that very well; essentially that they need to focus more on increasing the size of their total cake so to speak, as oppose to worrying about their massive population splitting up the wealth. Well put...even if it was merely a cut and paste of someone else's work : )

Answer 1

depends on your view of wealth. personally i would rather be wealthy spiritually speaking than of material wealth.

Answer 2

There are at least two definitions of wealth, (1) assets (the value of what you own), and (2) net worth (what you own less what you owe). Which one is "correct"? Depends on your perspective. If you only look at a single person, assets are probably a better measure (you get to live in a house or drive a car regardless of how much money you owe on them, as long as you stay current on the payments). If you want to adopt an intergenerational perspective, net worth is probably a better measure, because when a person dies, the heirs can only receve inheritance after paying off the creditors.

If you are looking at a nation, the two measures are almost identical (when Peter borrows money from Paul, Peter's liability is Paul's asset), except for a relatively small "international investment position" (assets and liabilities arising from international investrment).

Where does wealth come from? It's either earned (you invest a part of your income) or inherited. The research I've seen suggests that the primary channel of wealth accumulation is, in fact, inheritance; saving and investing play a realtively minor role.

Wealth appears by and large infinite. Most of things we own (with very few exceptions such as land) are products of labor. Since there is no theoretical limit on the amount of labor, there is no theoretical limit on wealth...

Answer 3

On an individual level, wealth can be measured in the amount of cash, stocks, bonds, gold, etc. that you have. This however is different from the wealth of the nation or general population. The collective wealth of a group of people is based on their ability to produce goods and services needed by that group of people - for example, the number of manufacturing plants, access to raw materials, equipment, expertise, etc.

Imagine if group A has a lot of gold and paper money, but little producing power. Group B has little gold and paper money, but many factories, mines, oil wells etc. Group B may rely on group A to get paid, but all group B has to do is declare that they will no longer accept gold or the existing paper money as a medium of exchange anymore - once group B establishes a new medium of exchange (for example, by printing new paper money), group A will no longer be able to buy anything. Group A will suddenly become very poor, because they have little else to trade. Group B on the other hand will become richer, because they no longer have to produce anything for group A - they will only be producing for themselves.

Wealth at anytime is finite, but there's no limit to how much can be created in the future if you have access to enough resources.

Answer 4

Wealth is the liquidity of the useful future resources of an economy. It represents the useful work that people have done to create more resources than they use up. It is finite in the sense that in order for it to keep it's value, the people must remain viable so that they will have a need for it. All species require physical resources to remain viable, and physical resources are finite (though they may seem infinite). Increasing populations or increasing desire may seem to increase wealth, but it only subtracts from the length of term for future viability. The limit to long term wealth is the amount of energy which can be input to the system to meet the physical needs sustainably. Unrestrained growth will eventually cause the wealth system to collapse.

Answer 5

I explained this on my blog one day. click on the "economics" link.

Heres the short to the point answer.

WEALTH and WORK
The fact of the matter is that wealth comes from work. example: cutting a tree into planks at the sawmill. I could sell somebody a tree, but i could get more money by working at cutting the tree into USEFUL(see above) planks. I have done WORK. the WORK i did made the resouce more useful. The sword again: the swordsmith added to the value of an unworked block of steel by working on it until its a useful shape. The American Dollar is backed by work. All Wealth comes from work. However, there are ways to gain wealth from other people's work

Answer 6

There are several different questions here.

First, I define wealth on an individual basis as the ability to obtain what it is that you want, or an increase in utility/"happiness". If I want a loaf of bread, do I have the ability to get it? If I do, I have enough wealth to cover that. The common perception of wealthiness is "riches," but I believe these are two different things. Rich to me is the ability to preserve and/or increase your quality of life without "working" for it. For instance, suppose I have $1,000,000 invested at 10% annually - then I have a $100,000 income that I don't have to "work" for by going to a job; if my annual expenses are at or less than $100,000, I would consider myself rich because I don't need to "work" for what I want. I would also be rich if I had $500,000 invested at 8% and had $40,000 of annual expenses. It's not so much a number, it's whether you have enough to cover your costs, and possibly some left over to in effect allow your costs to go up, or increase your quality of life.

Wealth, or buying power, can come from any number of sources, but it basically comes from helping other people. Suppose I am a master bread maker, and I know that thousands of people aren't getting enough bread. I make thousands of loaves of bread and supply it to them, and they pay me for it - we are all better off, and hence more wealthy. Since I value their money more than my time and effort to make the bread, I am happier; the people who voluntarily purchase the bread from me are happier because they clearly value my bread over their money, and in effect over everything else they could have purchased with the money. But I can make people happier in other ways, so long as the government doesn't stop me from doing it. For a real-world example, take gasoline. Suppose there are two gas stations - one selling gasoline for $2.50, one selling it for $5.00. What does this tell you? It tells me that the station at $2.50 has way more gas than it needs, while the $5.00 station is hurting for supply. So what could I do? Buy 100 gallons from the $2.50 station and sell it to the $5.00 station. How does this make people better off? It moves a valuable resource from where it isn't needed as much to a place where it is needed much more. I haven't added any work into the system, other than transportation, and yet I've made everyone better off - the $2.50 is happy to have made a profit from the sale, the $5.00 is happy to have more supply of gasoline, and hence it can lower its prices (if I've sold it for less, which I would have to do) and therefore it can lower its prices and its customers will be happy too. And of course I'm happy because I have been able to make a profit from the deal.

Finally, wealth can come from providing a service - a maid, for example, or a repairman. Again, these people make others happy by providing something others need and are paid for it.

In all of these cases - producing a desired good, working to reduce inefficiencies, and providing services - I am looking for what people need and fixing it. While any one person can't do it all, a complex society is brilliant at coming up with solutions to fix others' problems, and this makes everyone happier in the long run. This leads into your third question; suppose I have two people, A and B. A is a bread-maker, B is a butler. A produces a loaf of bread and sells it to B - they are both happier now because A valued B's money more than the time and energy to produce the bread, so A is wealthier; B is also wealthier because he valued the bread more than his money. Now when A needs his house managed, he can trade for A's services, again making them both better off. So we've started with two people who both had a utility level of, say, 1.00. After these trades, they have both benefitted, so now they have a utility of, say, 1.20. This is because each valued the other's product more than their own, and so they are both better off; so since the total utility of the system went up without any external influence, I believe wealth is infinite.

Answer 7

Wealth is created by hard work ,saving ,and then investing.All wealth is finite.

Answer 8

HOW WEALTH IS CREATED

Savings – Savings can be in the form of such things as cash, savings accounts, CD’s, money market funds and bonds. While some liquid savings should always be set aside for unforeseen events, savings types of investments are poor wealth builders because they generally pay a low interest rate and the income is taxed with every interest payment you receive. These types of investments are also very poor at keeping up with inflation.
Stocks -With the exception of the past few years, stocks have been very good investments over the past 20 years and have produced unusually good rates of return, primarily due to price appreciation. In late Spring of 2000, prices had reached levels where stocks were highly overvalued by historic standards. Since that time, prices have receded tremendously (especially in the technology sector). Periods of substantial gains, such as the past decade, are usually followed by stagnating or depreciating markets. We are only now at the point where we are starting to see some growth in the stock market again. Historically, however, the stock market has returned a 10% rate of return on average.
Small Business – This is the way many people who have wealth created it. A successful small business built up over the years can produce substantial wealth upon the owner’s retirement and the sale of the business. However, relatively few Americans overall own small businesses because they require significant capital to start up, and only a few survive the risky start-up phase. These complications makes this avenue of creating wealth work for only a few.
Leveraged Real Estate – Leverage is defined by The Dictionary of Real Estate Appraisal, 2nd Edition as "The effect of borrowed funds upon the rate of return on the equity investment."

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HOW WEALTH IS CREATED

By ARVIND BANAVALIKER

In his excellent book "The Competitive Advantage of Nations", Michael Porter says : "Firms, not nations, compete in international markets."

Similarly, we need to understand that governments don’t create wealth, only industries do.

In our country, it is customary to say that India is poor because of its large population. It is so very easy to say this that it has become almost like a reflex. No thought is given to centuries and centuries of grinding poverty, to why India became (or remained) a poor country in the first place or whether its continuing poverty itself could have anything to do with its burgeoning population.


To say that India is poor because it has a large population is also to effectively stop all thinking and all discussion. The problem may exist but the answer has been found. There is a certain size of cake and if there are a large number of people to share it, it follows that everyone’s portion must be small.

But what happens if smaller nations, much smaller nations, produce a much larger cake? How are they able to do this regularly, year after year after year? With many locational disadvantages at that! The Netherlands has only l6 million people but its gross domestic product (GDP), US$ 396 million, is much larger than ours. With a population of one billion, our GDP is only US$ 250 billion. Australia has only 19 million people but again its GDP, US$ 349 billion, is larger than ours. Canada has 30 million people and its GDP is US$ 569 billion. The Netherlands has a land area which has been won back from the sea. It has cloudy weather for nearly 8 months of the year. Australia is a large continent but geographically is placed well away from world markets. Canada has a large land area but, at least in the more industrialized eastern part, has summer only for about 5 months of the year.

Further, what if some of these nations, the Netherlands and Australia for example, were actually behind us in GDP only 7 to 10 years ago but have now not only overtaken us but have pulled well away from us?


Would you say then that there was something seriously wrong with our country? There is. There is a sickness, a malaise affecting this country and, therefore, its people. And the sooner we recognize it and acknowledge it and admit to it, the better. It is no longer enough to merely mouth platitudes stating that India is poor because it has a large population.

Of course, it breaks one’s heart to have to admit that there is an illness. But the good news is that, believe it or not, the illness is really not all that difficult to put right. What is more, the remedy is a sure-fire one, meaning, you administer the remedy and begin to see results.

Something dramatic happened in history about 300 to 400 years ago. This was the birth of modern science and technology . This was the birth of modern science and technology. As a result, certain nations in Europe shot forward and others like India and all other developing countries got left behind. Sciences such as astronomy, physics, chemistry, geology, biology, botany, zoology, metallurgy etc truly got started. Technology, the child of science, developed innumerable products from these sciences to make life better and more comfortable for man.

If you look around you, you will see all these products of science. These as the realization or fruition of one or more of the sciences which we have mentioned. The needs of man are considerable. Self-denial and self-abstinence are laudable goals in themselves but we need to reflect how far these national traits in India got in the way of not merely the discovery of modern science and technology in our country but also its willing or unstinted adoption by us after its discovery elsewhere.

The scene we are presented with in India today is that large masses of people have got to make do without even the basic necessities of life. Just think of the enormous possibilities that lie ahead. Think of the food that needs to be produced, the clothing that has to be manufactured, the houses that have to be built, the education that needs to be provided, the roads, transport and communication facilities that have to be organized, the medical care and hygiene that has to be arranged and so on. All this means jobs, jobs and more jobs — for men as well as women!

It can only become possible with the help of modern science and technology and not by anything else. This is what wealth creation is. Governments don’t create wealth, politicians don’t, bureaucrats don’t, only industries do. Religions don’t create wealth, journalism doesn’t, law doesn’t, literature doesn’t, even mathematics (it is only a medium of expression) doesn’t, only science and technology does.

What is even more important, technology changes man. Think of yourself in these two ways : say, before you learned to drive a scooter or a motor car and after you had begun to drive. You were now a different person altogether. Privately, you thought to yourself that you now could do this as well as anybody else. Later, a thought crept into your mind that if could master this, you could attempt almost anything else you chose. You began to feel that you were as good as anybody else in the whole world. But this glowing feeling came with a rider attached to it. If you were as good as anybody else in the entire world, then surely everyone else was as good as you were. See where technology leads you?

It leads you to an unquenchable sense of self-esteem and it also leads you, wonder of wonders, to a healthy respect for the rights and the abilities of others. All technology does this : whether it be a telephone, a bicycle, a camera or an airplane. We all agree that television and jet travel has annihilated distance and made the world a much smaller place. In the process, it has changed our very manner of thinking. This is another way in which, as the saying goes, technology determines culture.

Technology, therefore, changes intimately the life of every man, woman and child in a country and it these people that then take that country forward. Technology liberates the mind and these liberated minds then help to create more wealth and propel the country forward.

But technology is not in charge. Science is. Science is only another name in Latin for truth. Science is and should be the governor attached to the accelerator pedal. Science helps you decide, given the circumstances of your country (or even your circumstances as an individual or those of your family as a unit) what goods you need to have and what not, what kinds of technology to get, how employment-intensive industries can be favoured, how to extract the most from out of the littlest technology (should it come to that) and so on. It even teaches you virtues such as cleanliness, orderliness, punctuality, individuality, integrity etc. This is exactly how it happened in the developed countries.

The essential principles of modern science and technology are simple and easy to absorb. We began by saying that Governments don’t create wealth. Instead, in a non-ideological way, if the government of a country truly understood what does and singlemindedly pursued this path, it could immediately set its people on the road to prosperity. In doing this, it would help to solve its economic, political, social and philosophical problems as well.

It can only become possible with the help of modern science and technology and not by anything else.