Is Wealth Created?
by J. Jason Mott

A common belief in most of today's economic theories is that wealth is created. Economic growth, the theory goes, results from that creation. It is an especially popular belief among trickle-down economic “free” market advocates. But is it true? Does the marketplace give us a vehicle to actually create wealth out of thin air, only requiring a good idea? If I start a business, with say only $10,000 in capital, and the business eventually becomes worth $1,000,000, it might seem logical at first that I've created wealth. After all, a piece of capital, my new business, didn't exist before, and now it exists and is worth 100 times what I invested.

But critical common sense will reveal that wealth is never created. The marketplace is set up in a way that allows us to manipulate the value of resources, but it never creates wealth – it only transfers it around. So if my $1,000,000 business isn't new wealth, where did the $990,000 in new value come from?

My fictitious business manufactures and sells WonderWidgets. The are made of clay and copper. Let's say I bought a piece of land that has clay and I buy the copper. To start, I'm getting some of my new wealth by mining my land of its clay – so I'm transferring value from my land to my business. The business who is selling me my copper is also transferring their land's value to sell the copper. Next, I need laborers to build my WonderWidgets. Those laborers are selling off their time with community, family, and/or self improvement for liquid capital, another transfer of wealth. The biggest thing that gives my new business its value is those who are willing to purchase a WonderWidget. To do so, they must either take money from their savings (transferring value from the bank), stop buying something else (transferring value from another business), or work extra hours (transferring value from their time with family, community, or self improvement). A journey through this line of thought will lead any objective person to conclude that wealth isn't created, it's just transferred around. To make my new business worth something, other things like land, banks, other businesses, and community had to decrease in value.

So, if wealth is never created, how on Earth does an economy grow? Simple, it grows by having additional resources added to it. The biggest resource that fuels western economic growth is oil. Every last ounce extracted is a new piece of wealth being added to the economy at the expense of the land from which it was extracted (and the air we breathe!). But oil isn't the only thing – this also goes for gold discovered, diamonds, etc. And don't forget, every net new person born is a new resource for the economy. So if there is a net population growth, there will be a net economic growth to go with it (assuming no other dynamic causes a bigger loss than population growth adds).

This message has been edited. Last edited by: Common_Man_Jason,

Where to start? We use our labor, both physical and intellectual to create value, as your example of clay and copper illustrated. The value of your widget wasn't inherent in the clay on your land, your personal capital created that value. That value creates wealth when people exchange the value they created and exchange it for the value you create.

Wealth is created by individuals expending their personal capital and creating something of value to others. What resource does a psychologist transfer when he councils someone in need of help? He is using is personal capital, in the form of his education, and exchanging it for money owned by someone in need of help. No resource, other than time was transferred.

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Wealth is created by individuals expending their personal capital

That's my point. If you expend value to "create" value, you're really just transferring it.

Keep in mind, I'm not judging it or saying it's wrong, I'm just pointing out that we don't actually create any wealth, we just transfer value from one resource to another.

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No resource, other than time was transferred.

Time, in fact, is the most valuable resource in the marketplace.

I wonder if we are drifting into symantics here. Are we using creating and transfering interchangably? It seem to me that your point may have been that the earth has limited resorces and individuals were transfering wealth from the land to themselves as individuals. Each individual owns their time and I believe what they do with it depends on whether they create wealth for themselves.

So what if the means of production are not at the optimal level or full capacity? Is it possible to increase wealth then?

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Put simply, The law of conservation of energy states that energy wealth can not be created (made from nothing), or destroyed (made to disappear to no-where) and that energy wealth can be changed from one form to another (such as electrical energy in to heat energy).

????? Maybe

It's important to keep in mind, there is no hidden right/wrong lesson here. I'm not judging anything.

I'm merely challenging the notion that wealth is created, rather than transfered around. It may, in the end, be a semantics debate. From what you've said, I think you understand it as I do, but you still would rather use the word "create." At best, it's a reconfiguration and and transfer of wealth. We still only have what we started with. We don't create wealth, we play the game and get wealth transfered to us through that game. But that wealth came from somewhere, not thin air.

Even in your therapist example. First, the therapist transfers the value of some of his time (and perhaps the time of his parents) to educate himself.

To really understand what I'm getting at, one must accept that time is valuable, even when not exchanged for cash. If you don't accept that premise, then one could easily and falsely believe that wealth is created out of nothing.

Log,

I think that's a good analogy.

Wealth can certainly be destroyed. Ask any crack dealer.

Yes, wealth can be destroyed. resources get used up, and populations don't always grow (ask Europe!).

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Wealth can certainly be destroyed. Ask any crack dealer.

Really? I would think wealth is just transfered. wealth accumulated by the crack dealer is either trasnfered into make more crack or lawyers or the IRS or the Dorito Chip company

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Yes, wealth can be destroyed. resources get used up, and populations don't always grow (ask Europe!).

Again merely tranfers of wealth. As in the case of American wealth transfering to China.

I may be wrong, Coal is not a wealth it is a mineral. It's extraction and use is wealth.

LOG,

To a certain extent I would agree with you. But some wealth transfers into a way that isn't of value to humans. And when humans ultimately start to decline in population, that is wealth lost for humans (but gained for Earth).

And that goes the other way around too. Gold that's still buried is wealth, but until it's extracted it is not of value to humans.

Wealth from the old English word "weal", which means "well-being" or "welfare". The term was originally an adjective to describe the possession of such qualities.

"Wealth" has come to mean an abundance of items of economic value, or the state of controlling or possessing such items, and encompasses money, real estate and personal property. In many countries wealth is also measured by reference to access to essential services such as health care, or the possession of crops and livestock. An individual who is wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their society or reference group.

Wealth relates more to the flow of resources while richness relates more to the static absolute value. A wealthy individual, company or community, thus has more resources than it needs and spends, it enjoys a positive flow of resources, including art, beauty, spiritual well being. A rich person, company or community can or cannot be wealthy, the adjective identifying a quantity of richness, a static point, not a dynamic flow. Thus we can have rich individuals who are not wealthy and rich nations that are not wealthy.

The opposite of wealth is scarcity, the opposite of richness is poverty.

The term implies a social contract on establishing and maintaining ownership in relation to such items which can be invoked with little or no effort and expense on the part of the owner (see means of protection).

So can everyone's wellbeing or welfare go up?

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So, if wealth is never created, how on Earth does an economy grow? Simple, it grows by having additional resources added to it. The biggest resource that fuels western economic growth is oil.

This goes a long way to explain why wars are fought over resources, especially in our case. The US has a 9 trillion dollar debt and nothing in the way of resources or assets to make up for it. the rich people in this country have it, but they been accumulating more for themselves buy increasing the debt, so we sure as hell can't expect them to foot the bill.

This also brings up the idea of how important tapping into the sun as an unlimited source of power can be. We already have the technology to place an array of solar powered satalite in orbit to collect enough energy to supply all of the planet's needs.

Starting this massive project would also provice a super-stimulus to the economy for decades to come.

Its so frustrating to me that people we have elected choose to kill other people for what they have rather than use what I just descibed as a vision and the road ahead for our nation.

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Time, in fact, is the most valuable resource in the marketplace.

I agree totally. Although when this becomes accepted by the general populace, then the marketplace itself will change.

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Although when this becomes accepted by the general populace, then the marketplace itself will change.

When people start to realize they've given up family, friends, and community value in order to chase an elusive chance to be Bill Gates, they will transfer their wealth back into community, family, and friendships.

Bill,

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This goes a long way to explain why wars are fought over resources, especially in our case.

Could you tell me when the next fish fingers war is going to happen between the US and Canada?
And explain how many wars over resources have been fought between Canada, Mexico and USA? We get most of our resources from these three countries.

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Could you tell me when the next fish fingers war is going to happen between the US and Canada?
And explain how many wars over resources have been fought between Canada, Mexico and USA? We get most of our resources from these three countries.

Well Ron,

In case you haven't noticed, the Middle East, has pretty much begged us to attack them. When you consider how addicted to oil we are, then factor in our hegemony on the world's military might and top it off with a multitude of terrorist attacks and threats, you have a "perfect storm" of circumstances that lead to war.

We all know it is Saudi Arabia behind 911, being that 19 of the 20 hijackers were from there and that Saudi Arabia has been providing the funding for insurgents in Iraq, but are we going to invade there? Hell no, we are good buddies with them, we are setting our sights on Iran, and like a deer in the headlights, they are acting big and talking smart.

It's only a matter of time before we invade and take what they have too.

By the way, when we withdraw from Iraq someday it isn't going to be from their oil-fields, just from the urban hornet's nests. The same will be true of Iran. Meanwhile, Israel will continue to play patty-cake with Palastine and grin as the Arab nations around them are pounded back to the sone-age.

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It's only a matter of time before we invade [Iran] and take what they have too.

For some reason, I don't think this is so. Instead, I think they are salivating for another Cold War. Direct war causes a loss in political capital, as they've noticed. So now they just want to create a perceived boogie man to regain political capital with the American populous.

Let's be honest, when Americans get scared, the Republicans start winning elections. That certainly isn't lost on them!

If they truly intend to go to war, then they will have to first allow another 911 to justify it.

But this is quite the tangent, isn't is!?

Wealth is, in fact, created. It is created in one of two forms.

There is one, and only one place in our economy where new money is created, that's money that didn't exist before. That is when somebody takes out a bank loan. The magic takes place in the transaction between the private bank and the Federal Reserve.

The other kind of wealth is "perceived value", and exists on paper only. It can disappear just as quickly as it was created. The best example would be the trading of shares of equity in the financial markets, particularly in growth stocks.

artlo,

This idea that money is wealth created out of thin air is simply false. The value of money represents the actual resources available in the marketplace.

That's what inflation and deflation are all about -- the money correcting itself to reconcile with actual resources. If too much money is printed, you have deflation, if not enough is printed, you have inflation. (fluctuation in actual resources available will also have an effect).

To increase their value (and reconcile their reported value), banks require mortgage holders to go out into the world and compete for resources so they can pay back more money than they borrowed. Their reported value is, therefore, based on the amount of warm bodies they have competing for resources on their behalf. People are resources!

Perceived value is the mechanism through which value is transfered between resources. If WonderWidgets suddenly seem valuable to me, the capital to buy one doesn't come from thin air, I must expend my resources to get one (that's how wealth is transfered from one resource to the next, not created). That's what these sentences are getting at:

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The biggest thing that gives my new business its value is those who are willing to purchase a WonderWidget. To do so, they must either take money from their savings (transferring value from the bank), stop buying something else (transferring value from another business), or work extra hours (transferring value from their time with family, community, or self improvement).