How Is Wealth Created?


What is wealth?

Wealth is often misunderstood.

When the word “wealth” is spoken, people often bring to mind images of opulence. For me, it used to conjure up images of a cartoon I enjoyed as child, Duck Tales, in which Scrooge McDuck would swim through gold coins in his money vault. So, if these are the images that come to our minds then it might be natural that when we speak of increasing wealth, one might assume that we are speaking of adding a few more coins to the vaults of those wealthy like Scrooge McDuck.

This isn’t the case. Merriam-Webster gives one definition of wealth as “abundance of valuable material possessions or resources, abundant supply, all property that has a money value or an exchange value, all material objects that have economic utility; especially: the stock of useful goods having economic value in existence at any one time.”

This definition is more appropriate. We are not only talking about the rich getting richer, but also, much more importantly, about the poor getting richer. It is true that under certain circumstances the rich and poor may improve their positions at different rates.  This can cause contention, but let’s save that important discussion for another time. First let’s discuss how wealth originates.

But before we move on, note that money is not wealth and wealth is not necessarily money. Money, however, can be a measure of wealth.

So how is wealth created?

Wealth is not like energy or matter, which cannot be created or destroyed (although, many in our culture do believe this fallacy). Fortunately for us human beings, the world was created so that wealth can grow constantly (and this is a different phenomenon than what happens when money is printed constantly).

Unfortunately, it can also be destroyed.

Although many seem to resist this, it isn’t difficult to demonstrate. World GDP (Gross Domestic Product) has increased exponentially in just last the last 200 years. A quick Google search readily provides multiple sources on this.  A couple are pasted below:

Source: Statista

There are two ways one can obtain more wealth. It can be taken from someone else, or it can be created. The former has been too common in world history. Members of one village or country would march over to pillage another village or country. This explains how village A might get wealthier at the expense of village B as shown below.

But this doesn’t explain what has been happening to net wealth in history. Net wealth has increased throughout history, especially in the last two hundred years despite the population of the world increasing dramatically.

Image.

If wealth were fixed then we would have the same resources constantly redistributed among more and more people. Thus, each person would receive fewer things as the population increased, and we would all become poorer and poorer. However, in terms of our village graph above, we have seen net wealth increase (Village A plus Village B) that couldn't be explained by pillaging. Something more like what is shown below.