Thursday, February 24, 2011

How Wealth is Created

How is wealth created?  Well, I guess I would say it's when a person or business produces a good or service.  The more goods we create, the wealthier we all are as a nation.  If wealth is important to you then it should be our goal to maximize wealth creation and minimize wealth destruction.  Fortunately, it's not really that hard.  History shows us that 90% of the job is done for you by the "invisible hand".

Adam Smith described the necessary components of wealth creation as: "materials, labour, land, and technology in such a way as to capture a profit."  Economists later called these things the "Factors of Production" and they haven't really added much to the composition left.  It's still land(natural resources), labor, capital(materials and technology), and most add in the all important entrepreneur who brings it all together.  Doing a quick google search this doesn't appear to be in contention (see hereherehere, and here).

So that's how wealth is created, an entrepreneur gets access to capital, buys the materials he needs, hires people to do the work and then they start making stuff.  They make more stuff than they need and they sell it to people who need it.  Cars, boats, cell phones, it all comes down to bringing these things together and wealth is made.

It's not really magical when you look at it like this, but it certainly seems that way when looking at all of it put together.  In terms of history, capitalism has been the most efficient way to create wealth.  It's obviously better than serfdom where the lord and lady tell you what to make.   Communism proved to be only slightly better than feudalism, but I think it's only because they still used money and gave the Czar's wealth to the rest of the people.  I don't think capitalism is perfect or infallible, but in terms of wealth creation, it's yet to be beat.
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