Most people asking that question actually want to know where wealth comes from.

What they really want to know is how wealth is obtained.  Ok, I will answer all three questions.

Wealth comes from retained earnings. That is, the source of wealth is the creation and retention of value.  Fields of grain, viens of ore, ziff (a term that means “stuff” or “things” and that includes crafted goods and works of art).  That definition of wealth doesn’t answer much, the real question is, where does increased wealth come from.

  • leverage improvements
  • exploitation [which may or may not mean what you think it means]
  • comparative advantage
  • specialization and trade

Leverage means using a lever to multiply force or effectiveness.  A plow gives a farmer leverage.  An ox or a horse to pull the plow gives a farmer leverage.  A horse collar (so the horse can pull harder — with his or her shoulders — without choking) gives a farmer leverage.  Baseline progress in wealth and standards of living come from ever improved leverage.  Greater leverage makes labor all the more valuable.  Inventions of all kinds are forms of leverage.

Exploitation means making  use of natural assets.  It can mean learning to fish when no one fished before.  Farming the land when no one knew about farming.  Switching to a better crop (which may also involve leverage) or a better meat animal.  Solar panels, windmills, dams and strip mining are all different examples of exploitation.

Comparative advantage.  If I can make 4 chairs or 4 loaves of bread a day, and you can make 40 chairs or 100 loaves of bread, you are better off making fewer chairs and more bread and having me only make chairs.  We will have more total production by sharing.  It does not take an absolute advantage (you have that over me in this example), just a difference in the percentage effectiveness of what we do to make it possible for both of us to become wealthier by specialization and trade.

Specialization and trade.  If I specialize I can increase my comparative advantage.  Specialization is part of the key to modern wealth.  If someone does everything, they will not do any particular thing anywhere near as well as someone who specializes.  But to make any of that meaningful, we have to have trade.

That is how value is created so there is some left over to create wealth from what is saved.

Wealth ends up in the hands of particular people in the following ways:

  • They create the wealth by manufacture (by use of their levers, exploiting a resource, or specialization).
  • They take a portion of the wealth by facilitating trade in one way or another.  A sales person, a stock broker, a merchant — all of them function as social lubricant that allows trade to occur and as trade creates value, those who reduce the friction in trade increase social value — and that means that they can accumulate a portion of that value for the service they provide.
  • By economic rents.  Owning the right to levers or resources to be exploited and by charging others.  An equipment rental company, a patent holder, an oil and gas lessor, all rents.
  • By kleptocracy.  Straightforward theft of wealth from others who have accumulated it.  Whether by direct force (e.g. a bank robber) or indirect force (e.g. graft or corruption, fraud or similar means) this is an anti-lubricant process.  Any method of gaining wealth someone does not understand looks like theft.

The prior economic lesson and this one kind of help focus on how utopias are built and how the tend to fail from economic forces (and how some have survived many generations), though that takes one more discussion. Once I’ve covered the third set of principles (which will be a discussion, in part, of libertarian marxism), then it is a bit of social discussion (since even an economically sound utopia will fail if it is a parent’s dream and a child’s nightmare) and I’ll be ready to go onto something that I’ve thought a fair amount about over the years.

But what economic concepts do you think are important?  Did this help you understand what wealth is and how people make it?

Oh, as for money, the Greeks invented standardized coins.  So, in a way, money comes from the Hellenic world.  More next week.