How is Wealth Created from Nothing?

Part of the fun of writing a blog is seeing what search engine terms bring people to your blog.  The title of this blog came from a search engine result.  Since the question was asked, I thought I would put forth my theory.  Understanding how wealth is created is fundamental to understanding how to become wealthy.

To gain wealth is to accumulate things of value.  Things of value are things for which other people would be willing to trade labor, materials, or other things of value.  This can be money, land, art, materials, houses, cars, or even a system to produce something.  Note that the amount of wealth contained inside a thing of value fluctuates depending on the desirability of the thing at the given time.  For example, the value of a Babe Ruth baseball card increased for a few cents when it was issued to several thousand dollars today.  In 100 years when no one remembers who Babe Ruth was, it will likely be worthless.

The amount of wealth is not fixed, but instead can increase or decrease over time.  Wealth can be created by using labor to add value to something.  Wealth can also be found (for example, finding a desirable rock that can be traded for labor or other things).  Finally, wealth can be gained by something becoming more desirable and lost by something becoming less desirable.  Very few things hold their value over periods of centuries.

Wealth is not always created by labor, even if the thing produced by the labor is desired.  For example, if someone gives a massage to another person and is paid for the service, no wealth is created.  Instead, wealth has merely traded hands from the person getting the massage to the person giving it.  The value of the massage is destroyed almost as fast as it is given.  Labor that creates something that spoils or is used like food also creates no lasting value.  Labor that creates wealth provides something that holds its value for a period of time.  For example, building a house, painting a desirable picture, or building a useful tool.

One of the most amazing things about wealth is that it can generate additional wealth.  This does not occur if wealth is simply stored – for example a gold brick is purchased and placed inside a vault.  Wealth can generate additional wealth when the owner allows others to use it in exchange for some form of payment.  For example, money can be lent to another in exchange for some level of interest for use of the funds.  Another example is if money is given to someone to buy tools and other necessities for a business in exchange for a share of the profit.  Wealth can also be used to buy tools, supplies, provide wages, and develop a location that allows for the provision of a service or goods, which in turn can create more wealth.

To create wealth, one must do the following:

1.  Create or provide something that is valuable to other people, which in turn will cause them to trade labor or something of value for it.  In general this means providing something to fulfill a need.  The greater the need met, the greater the wealth created.

2.  To increase income, increase the number of people served.  Paint a house, receive a few thousand dollars.  Open a multi-state painting business that serves thousands, receive millions.

3.  Create more value than you use.  This creates excess wealth that can then be used to create more wealth.

4.  Prevent the destruction of existing wealth by keeping it in forms that hold their value or grow in value.

5.  Allow others to use your wealth to cause it to grow.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

One comment

  1. This is a great article, you should show it to Obama and Bernanke. I don’t think they understand how wealth is created.

    Raise the debt ceiling because America always pays it’s bills???

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