On the Creation of Wealth | Wealth, money, and redistribution

The origins of wealth are often misunderstood. Many people believe that there is a limited supply of what we call ‘wealth’, and therefore, the only way to become wealthy is to exploit or take that wealth from somebody else.

Yet this premise is deeply flawed: flawed because there is no set amount of ‘wealth’ in the world.

Firstly, it is important to know what we are referring to when we write about wealth in an economic sense. Although often conflated, wealth is not money. In the same way that a giraffe is an example of an animal but is not the definition of an animal, money is considered to be a form of wealth (only because other people accept it as a means of exchange and trust it will continue to serve that purpose; money stops being wealth when that trust breaks down, as in Weimar Germany) but is not the definition of wealth itself. Wealth is not money, but rather the assets underlying money: the factories, houses, farms, and most importantly the ideas and knowledge of how to produce the things we find useful and desirable.

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In the words of a certain Francisco d’Anconia, responding to the notion that ‘money is the root of all evil,’ — “When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor — your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money. Is this what you consider evil?”

Wealth is created by taking existing resources and re-organising them into a more useful form. The knowledge and ideas required to take resources and transform them into another form is the most important element here. The physical resources that went into building the computer on which you are reading this have always existed, but it is the knowledge and innovation process that led the individual elements: silicon, cobalt, aluminium, etc. to become the computer you are using at present. It is the same for everything: whenever one takes wood, concrete, and bricks and builds a home from them, they are creating wealth, the same principle applying to factories, schools, televisions, and everything else.

This can be extended further: certain assets like shares, bonds, and indeed money represent tangible assets because they are backed by trust. It is the underlying trust that makes these become a form of wealth in itself.

Increasing the supply of money therefore does nothing to increase wealth, as Venezuela is currently being reminded. The only thing that can increase wealth is to incentivise its creation by creating optimal regulatory environments and ensuring taxes are at an appropriate level so that entrepreneurs, guided by prices that reflect the individual desires of billions of people, can focus on unleashing their creativity. Government agencies can try to replicate this, but unless guided by the same profit motive that informs private entrepreneurs what people find valuable, the amount of wealth created will be very limited. History provides plenty of examples, but it’s telling that both Venezuela and Cuba are now re-introducing private enterprise after having prohibited it for ideological reasons.

Profit is not the enemy: it reflects that entrepreneurs are delivering goods and services that are valuable to people; that they are delivering wealth. Losses are equally important: they signal that individuals do not value the goods or services being produced and so scarce resources should be shifted elsewhere. Without profit and loss, there is no way to coordinate economic activity. The equation is not one-sided. In a free society, people only acquire money by delivering something in exchange, something that someone, somewhere valued more than the money they handed over, whether it is a smartphone, a book, or a holiday. Trade is beneficial to both parties or it wouldn’t occur.

Since no single person can manufacture millions of iPhones or build thousands of automobiles themselves, it is very common for businesses to hire employees. Whilst some love to denounce millionaires for ‘exploiting’ labour, a theory now debunked by the Marginal Revolution, it is absurd to suggest that voluntary exchange is a form of ‘exploitation’. Furthermore, the ‘solutions’ proposed to solve this ‘exploitation’ are often what causes exploitation to occur: by establishing barriers to entry in the form of minimum wages, excess regulation, licensing requirements, etc, it makes it reduces labour mobility and makes it harder to switch to a better working environment. Working conditions and salaries will naturally rise as a result of competition as companies will outbid one another to attract labour. Writing this article from the US, I can see this in action everywhere. Many companies have ‘Now Hiring’ signs in their windows listing wages far higher than the minimum wage and offering a multitude of other benefits to attract workers.

My theory as to why many continue to blame billionaires for society’s ills is that it is simply a lot more convenient to do so than to take responsibility for one’s own situation. Just as immigrants and Jews were (and continue to be) blamed for everything and anything, ‘billionaires’ and ‘the rich’ have become the latest target.

This gets everything the wrong way round. Billionaires should be applauded, both for their own achievement, and for creating immense levels of wealth for everyone else.

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Adam Louis Sebastian Lehodey

I write about economics, literature, philosophy, sociology, urbanism, and anything that interests me at the time.