The previous article, Wealth is Created, leads us perfectly to this post. Some of the ideas in this article are from chapter two of Organic Wealth fittingly entitled, Equal Transactions. I’m not going to give away all the gold here; there’s much more that’s left out of this article. But please keep reading for enough nuggets for some mind blowing revelation.
Free market capitalism produces new wealth. To put it another way, the so-called wealth pie just gets bigger. The reason the wealth pie grows is because our economic system is based on equal transactions.
Just the idea that wealth is created out of thin air is eye-opening. First of all, wealth in the book’s context is from saving a portion of one’s income. When we save some of our income, it’s new wealth made from thin air.
Let’s say someone saves $100 per week from their paycheck. After one year, they would have a total of $5,200 saved. If their plan was to invest this money and not spend it, then it is brand new wealth that never existed before.
The reason it’s brand new is because it was the result of receiving an income in exchange for their labor. The employer providing the wage isn’t doing so from some kind of wealth transfer but rather, in an equal transaction. The employer gets production and the employee receives an equal value of money for that production.
The person’s $5,200 in wealth, therefore, was created directly from their production and not from the employer’s wealth. Because the employee’s production had a monetary value, any amount that’s saved is new wealth that never existed before.
At this point we can define wealth as the saved monetary value of one’s labor.
New wealth isn’t just from labor, however. It’s actually created by earning an income by meeting demand. So it doesn’t matter if you’re an employee who meets demand with your labor or a business who meets demand with a product. Any time demand is met in exchange for money and any portion of that money is saved, it’s new wealth that never existed before. The wealth pie goes boom.
We can therefore define wealth as the saved monetary value from meeting demand.
Businesses Too Meet Demand
We’ve briefly looked at employees. Now let’s consider a business that meets demand. A business will take their employees’ production and use it to produce a product or service to sell that they hope will meet demand.
Going back to our example, if our employee who saves $100 per week receives a wage of $1,000, the company then is obviously out $1,000 in money. Over the course of the year, the employee has created $5,200 in new wealth from an income of $52,000. But does that mean the employer has lost $52,000 of its wealth?
The employer has not lost $52,000 of its capital or wealth because it uses an equal value of production from the employee to create and sell products to its customers. The customers pay for something they want in an equal transaction so they haven’t lost anything. The company, however, receives revenue that effectively replaces what it paid out to its employees.
If the company is good at meeting demand, then they’ll replace what they paid out in wages and their other expenses to earn a profit for the owners. Profit making is the ultimate goal of any business. If the owner saves a portion of that profit, it’s new wealth just like if an employee saves a portion of their income.
What’s great about free market capitalism is that earning an income by either an employee or a business doesn’t prevent others from earning an income as well. The reason is because the crux of the matter is meeting the demand of the marketplace and not by slicing up a pie.
This crux moves us to the next article taken from chapter three, Unlimited Wealth.