Wealth and Money
Economic wealth consists of what others value enough to acquire through trade; money is a medium of exchange that makes trading easier.
Money and wealth are closely related, but they are not the same thing.
Economic wealth depends upon human judgments of value. Something does not become economically valuable merely because its owner values it personally, nor because great effort was required to produce it.
Imagine that you keep a jar filled with dirt from the place where your grandfather stood on Omaha Beach during World War II. That dirt might be priceless to you because of its personal meaning. But if nobody else values it enough to give you anything in exchange for it, possessing the jar does not make you economically wealthy.
Economic wealth concerns what other people value.
Value Depends Upon Human Judgment
The same principle applies to labor.
Working very hard does not necessarily create wealth. You might spend three years carving an enormous marble statue that nobody wants. The labor was real. The effort was enormous. But if nobody values the finished statue, all that labor has not necessarily created much economic wealth.
Someone else might spend three hours writing a computer program that solves a problem for thousands of people. If many people value the program enough to pay for it, those few hours of work may create considerable wealth.
Labor can help create wealth, but labor by itself does not determine value. What matters economically is whether what you possess or produce is valuable to other people.
Creating Wealth by Serving Others
This principle produces an important and sometimes surprising result.
If you want to create greater wealth for yourself, one of the best things you can do is stop thinking exclusively about what you want and begin paying close attention to what other people want, need, and value.
Consider a skilled heart surgeon.
Much of the surgeon’s productive wealth consists not in piles of cash but in knowledge, training, experience, judgment, dexterity, and reputation. The surgeon effectively says to others: “Here is what I can offer: the ability to perform life-saving heart surgery reliably, effectively, and safely.”
People suffering from serious heart disease may value that combination of knowledge and skill enormously. They—or hospitals, insurers, or others acting on their behalf—are therefore willing to exchange significant resources for the surgeon’s services.
The surgeon’s economic success depends upon being useful to other people.
The same principle applies to farmers, mechanics, carpenters, restaurant owners, engineers, software developers, teachers, inventors, and entrepreneurs.
Simply wanting to become wealthier does not make anyone wealthier. In voluntary exchange, you generally must offer other people something they value.
The questions that produce wealth therefore become:
- What do other people need?
- What problems can I solve?
- What can I produce that people want?
- How can I provide greater quality, convenience, safety, reliability, or usefulness?
This reveals something important about economic self-interest. Self-interest and concern for others are not necessarily opposites. Under conditions of voluntary exchange and competition, self-interest creates powerful incentives to become highly attentive to the interests of others.
To create wealth for yourself, create value for others.
This does not mean every way of becoming rich creates wealth. Theft, fraud, coercion, political favoritism, and similar activities can enrich one person at the expense of others. The principle operates most clearly where exchanges are voluntary and people are free to accept, reject, or seek alternatives to what someone offers.
What Is Money?
Money makes exchange easier.
Without money, people can barter—trading one good or service directly for another. But barter requires a difficult coincidence: you must find someone who possesses something you want and who also happens to want what you possess.
Money solves much of that problem because people agree to accept a common medium of exchange.
Many things have served as money throughout history, including precious metals, shells, salt, coins, paper currency, and other widely accepted stores of purchasing power. Money is valuable principally because other people will accept it in exchange.
You cannot eat a dollar bill. You cannot drink it, live inside it, heat your house with it, or use the paper itself to cure an illness. What makes money useful is what it allows you to acquire.
A person who says, “I want a million dollars,” ordinarily does not desire the physical currency merely for its own sake. He wants what that money would allow him to obtain: food, housing, travel, education, medical care, security, leisure, investments, or simply the freedom to decide later what he wishes to purchase.
Money is therefore usually a means rather than an end. It represents generalized purchasing power.
Money Is Not the Same as Wealth
This distinction explains why creating more money does not necessarily create more wealth.
Imagine an economy containing a certain number of homes, automobiles, loaves of bread, computers, medicines, machines, barrels of oil, and hours of skilled labor.
Now imagine that government prints more money and the number of dollars in circulation suddenly doubles—but the quantity and quality of those goods and services remain exactly the same.
The society has twice as many monetary units. It does not suddenly have twice as many houses, twice as much food, twice as many doctors, or twice as much productive capacity.
Creating more units of money is not the same thing as creating more things people value.
When the amount of money grows much faster than the goods and services available for purchase, prices can rise substantially and each unit of money can lose purchasing power. This is what economists call inflation.
Extreme cases make the distinction especially vivid. Governments have sometimes issued currency in denominations of millions, billions, or even trillions during periods of hyperinflation. A person can therefore possess bags filled with money while remaining desperately poor if that money will purchase very little.
The number printed on the currency does not determine wealth. What matters is what others are willing to exchange for it.
Wealth Can Be Created
One of the most hopeful ideas human beings have discovered about economic life is that wealth can be created.
Human beings create wealth when they transform knowledge, labor, capital, natural resources, technology, and imagination into things other people value more highly than the resources previously available.
A farmer creates food. An engineer designs a safer bridge. A manufacturer transforms raw materials into useful tools. A physician restores health. An entrepreneur discovers a more efficient way to help teachers, students, and learners explore historic primary sources.
This means economic life is not necessarily a zero-sum contest in which one person’s gain must be another person’s loss. Voluntary exchange can make both sides better off because each person receives something he values more than what he gives up.
Why the Difference Matters
Confusing money with wealth can lead to serious economic mistakes. Money helps people measure, store, and exchange purchasing power, but money does not substitute for production.
Prosperity ultimately depends upon creating things human beings value: food, shelter, medicine, knowledge, tools, transportation, energy, services, technologies, skills, and countless other forms of useful human achievement.
The most important economic question is therefore not simply: How can I get more money?
A deeper question is: What can I create, learn, produce, or do that others will value?
In a system of voluntary exchange, the road to creating greater wealth for yourself usually runs through creating greater value for somebody else.
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