Creating Wealth

There is a widespread notion that there’s only a fixed amount of wealth in the world — that one can only gain wealth at the expense of others. This belief goes hand in hand with a variety of common viewpoints: the conviction that one man’s fortune is unfair to the rest of us; the guilt many Americans feel on account of our relative wealth in the world; and the fear that immigrants who send money back home have reduced our overall wealth. But what exactly is wealth? And if the fixed-wealth view is wrong, how is wealth created?

Wealth is anything that helps a person or group meet their needs and desires. People use wealth to meet needs on their own (e.g., a house is a form of wealth that provides shelter) and by interacting with others who are in a position to help (e.g., money is wealth that can be used to buy food from a vendor). To better understand the nature of wealth, let’s consider whether a simple transaction between two people adds wealth to their community, and whether wealth has been taken from others in the process.

Let’s say that Grace needs a jacket and pays James $50 to make one for her. For simplicity we’ll assume that James already has the materials and machinery necessary for the job.

After the exchange, the community has gained one jacket at the expense of the materials required to make it. Since the jacket is able to meet needs such as warmth and comfort that the raw materials alone could not, wealth has been added to the community.

In addition, James has likely learned something by making the jacket. Perhaps he’s discovered a way to speed up the process or to improve the quality of his product. James is now better able to meet the needs of others; his newfound knowledge is a form of wealth added to the community.

The 50 dollars themselves still exist, but are they worth as much as they were before? Do transactions like this reduce the value of currency or raise it? Well an increase in the supply of a product tends to reduce its price because the additional competition among suppliers forces them to slash prices to compete for customers. And lower prices mean more bang for the buck. So this transaction is representative of the type of production that increases the value of currency, which adds wealth to communities throughout the world.

On the other hand, the machinery used to make the jacket has undergone wear and tear that will eventually take it out of service, leaving it unable to meet needs any longer. Over time, different forms of wealth are inevitably lost: products age and lose their value, and people leave the work force taking their expertise with them. But if beneficial transactions happen efficiently and often enough, overall wealth creation will outpace these natural losses.

In the end, Grace and James have added wealth to their community without taking it from anyone! Wealth has been created.

Sadly, the fixed-wealth misconception is self-fulfilling: antipathy toward achievers leads to tax-raising schemes that stifle people’s ability and incentive to create wealth. In this time of need, we should allow and encourage talented and motivated people to do what they do best.

Freedom and Happiness

I had a great day at work the other day. After hours of trying to figure out why the software I'd written wasn't working, I finally found the error in my code that was causing the problem. As a software engineer, one of the most rewarding parts of my job is successfully debugging code — finding and fixing my own mistakes. It's strange that part of my happiness requires that I make mistakes, because those same mistakes can cause frustration and delay! It's sometimes hard to understand what makes us happy.

This got me thinking about a friend of mine who moved from beautiful Palo Alto, California to blustery Chicago. I remember asking him why he'd want to leave such a great climate for cold and windy weather, and he told me that he'd become bored of the perfect weather and that he missed the rain and the cold. It struck me as odd that even though my friend would probably prefer nice weather on any given day, he was happiest when he experienced subpar weather some of the time.

The recipe for happiness can be puzzling, and it changes from person to person and from time to time. The inconsistent and unpredictable nature of happiness underscores the importance of giving individuals the freedom to find and bring about their own happiness, and makes me wary of any mandatory government program that is claimed to make life better for all people.

Take Social Security, the social insurance program that is funded by mandatory payroll taxes. Before Social Security was signed into law, President Franklin D. Roosevelt said, "There is no reason why everyone in the United States should not be covered. I see no reason why every child, from the day he is born, shouldn't be a member of the social security system." So FDR couldn't see any reason why people shouldn't have Social Security? Well what about if they don't want to? What if they want to spend their hard-earned money on something else? And who is anyone to say what should or shouldn't be a part of everyone else's life?

I think it's arrogant for anyone, even the President, to presume that any one thing will make life better for everybody. And while financial security can greatly improve a person's quality of life, government-imposed financial security undermines our freedom. As Benjamin Franklin put it, "They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety."