<p>First we need to discuss what wealth is. Is it just the amassment of valubles? In the 16th-18th century, rulers thought so. This notion is called <a href="https://en.wikipedia.org/wiki/Mercantilism" rel="noreferrer">mercantilism</a>. This idea was rejected by Adam Smith in book IV of <a href="http://www.econlib.org/library/Smith/smWN.html" rel="noreferrer">The Wealth of Nations</a>.</p>

<p>The current meaning of wealth is not the amount you own, but rather how much you can consume (sustainably). Formally, the <a href="http://www.businessdictionary.com/definition/wealth.html" rel="noreferrer">definition</a> is <em>Total of all assets of an economic unit that generate current income or have the potential to generate future income.</em> This is of course the same amount as the amount that you can sustainably consume. This means that we can measure wealth either as production or as consumption.</p>

<p>Thus, there is not just how much riches you own, but also how much you can create. Also, remember that you cannot consume money. You can only consume goods and services. Amassing riches has little value in itself. It is mainly a way (for an individual or group) to postpone consumption to some point in the future.</p>

<p>Thus, wealth is measured not just by the current riches you own, but also by the ability to create more riches in the future. A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year. </p>

<blockquote>
  <p>These things [...] don't generate new wealth. </p>
</blockquote>

<p>But they do. </p>

<p><strong>Labor</strong></p>

<p>Let's look at how labor increases wealth by looking at a couple of examples:</p>

<p>Example 1. I work at a farm. The result of my work is some farm produce worth X. For that I am paid Y. The farmer that hired me will receive X-Y.
The net wealth gain for the society is Y + (X-Y), or X.</p>

<p>Example 2. I work as a barber. I charge X for a haircut. The customer gets a haircut worth X. Net wealth gain for the society is X + (X-X), or X. Since the haircut is consumed immediately, the amassed riches don't increase. Note that the customer didn't lose out - to him a haircut was worth at least X or he wouldn't have gotten one. In macroeconomic terms the GDP increases by X and net savings is unaffected.</p>

<p><strong>Trade</strong></p>

<p>Trade increases wealth by transferring a good or a service to someone that values it higher. </p>

<p>Example 1: I buy a used car from a neighbour for X amount of money. I get a car that is worth Y to me (Y>=X, or I wouldn't have bought it). My neighbour gets X for a car that was worth Z to him (Z&lt;=X, or he would have kept the car). The wealth produced is (Y-X) + (X-Z), or Y-Z, which is >= 0 because Z&lt;=X&lt;=Y. In GDP terms the wealth produced is X - X, or 0, because GDP only measures how much is paid. </p>

<p>Example 2: An electronics company imports batteries from China for 10 cents each. They sell the batteries to customers for \$3 each. The wealth increase in GDP terms is \$2:90 per battery. The wealth produced is shared by the electronics company, the shipping company, the store salesman and any others that provide services to the electronics company.</p>

<p><strong>Innovation</strong></p>

<p>Innovation is both the invention of new and the improvement of the existing. Actually, most innovation is small improvements in existing technology or design.</p>

<p>Example: I improve a machine that makes nails so that it can make twice the number of nails in the same time. This means that more nails can be produced (and thus consumed) using less labor.</p>

CC BY-SA 3.0
2017-08-18T10:45:34.353Z
"A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year." This is definitely not true as a general statement.
Giskard
CC BY-SA 3.0
2017-08-18T10:47:13.777Z
"The current meaning of wealth is not the amount you own, but rather how much you can consume " also seems weird, do you have a source for this?
Giskard
CC BY-SA 3.0
2017-08-18T11:08:52.483Z
@denesp Clarified the definition of wealth and added a source. That 100,000 is poorer (=less wealthy) than 50,000 a year follows directly from the definition (provided the man expects to live longer than 2 more years). This also corresponds to how rich is used in (swedish) newspapers - it sommonly refers to people with high income.
Klas Lindbäck
CC BY-SA 3.0
2017-08-18T15:17:02.247Z
Out of curiosity, who is richer: Man with 100 in the bank but no work income or man with 0 in the bank but 2/year income? They will both go on to live for 80 more years. (Should the interest rate not factor in?)
Giskard
CC BY-SA 3.0
2017-08-21T08:01:53.597Z
@denesp It does depend on the interest rate. I chose to simplify my example by choosing numbers that would need ridiculous interest rates to be false. Do you think the answer really needs clarification on that point?
Klas Lindbäck
CC BY-SA 3.0
2017-08-21T08:03:54.330Z
I understand what you are saying but I find that the general statement "A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year." is inaccurate and unfortunate.
Giskard
CC BY-SA 4.0
2018-11-13T20:56:06.450Z
@KlasLindbäck I'm trying to better understand where the wealth itself comes from– as in how new dollars are actually made that go into this system. If I go get a $10 haircut, didn't the $10 already exist? Isn't it just flowing into someone else's hands? Where does the new money itself come from?
aroooo
CC BY-SA 4.0
2018-11-15T01:06:47.160Z
@arooo You are confusing money and wealth. The haircut doesn't add any new money. It does add wealth (in the form of GDP) as the barber creates the haircut from nothing simply by using his skill and time. Some money is created by printing new bills and coins, but most money is created by loans. Taking a loan adds/creates money, repaying a loan removes/destroys money.
Klas Lindbäck
CC BY-SA 3.0
2017-08-18T10:38:48.330Z
2017-08-18T11:17:50.307Z
2017-08-18T11:17:50.307Z
Klas Lindbäck
<p>The production of 'goods and services' and 'innovation' is the usual answer. I feel that doesn't really answer the question. 
These things can be traded for wealth but they don't generate new wealth. They essentially take wealth from others and depend on there being wealth already. At least that is how I understand it.</p>

<p>My question is, how is the world so much more well off than it was a century ago? (Please don't mention the industrial revolution) </p>

<p>How did China raise a million people out of poverty without plunging another million into poverty?</p>

<p>How does trade create wealth?</p>

CC BY-SA 3.0
2017-08-17T20:19:21.887Z
Goods are used by humans to produce goods which are used by humans to produce goods which are used by humans to produce goods.... as long as the rate at which production happens is faster than the rate at which production is destroyed (which depends on innovation, education, consumption, etc), wealth is accumulated.
luchonacho
CC BY-SA 3.0
2017-08-17T23:29:13.220Z
How are apples created? I get that I can I take an apple from the grocer but if I do that he loses one, so the total amount of apples is the same. And then some are eaten. How are there still apples? Is there some magical bush that creates them out of nothing?
Giskard
<economic-growth><wealth><international-trade>
How is wealth created?
Gold Nile
# How is wealth created?

(Asked by: username_0 on 2017-08-17)

The production of 'goods and services' and 'innovation' is the usual answer. I feel that doesn't really answer the question.
These things can be traded for wealth but they don't generate new wealth. They essentially take wealth from others and depend on there being wealth already. At least that is how I understand it.

My question is, how is the world so much more well off than it was a century ago? (Please don't mention the industrial revolution)

How did China raise a million people out of poverty without plunging another million into poverty?

How does trade create wealth?

**Tags:** economic-growth, wealth, international-trade

> **Comments:**
> **username_1**: Goods are used by humans to produce goods which are used by humans to produce goods which are used by humans to produce goods.... as long as the rate at which production happens is faster than the rate at which production is destroyed (which depends on innovation, education, consumption, etc), wealth is accumulated.  
> **username_2**: How are apples created? I get that I can I take an apple from the grocer but if I do that he loses one, so the total amount of apples is the same. And then some are eaten. How are there still apples? Is there some magical bush that creates them out of nothing?  

---

## 1 answers

### Answer by username_3 on 2017-08-18. Score: 6 | Accepted answer

First we need to discuss what wealth is. Is it just the amassment of valubles? In the 16th-18th century, rulers thought so. This notion is called [mercantilism](https://en.wikipedia.org/wiki/Mercantilism). This idea was rejected by Adam Smith in book IV of [The Wealth of Nations](http://www.econlib.org/library/Smith/smWN.html).

The current meaning of wealth is not the amount you own, but rather how much you can consume (sustainably). Formally, the [definition](http://www.businessdictionary.com/definition/wealth.html) is *Total of all assets of an economic unit that generate current income or have the potential to generate future income.* This is of course the same amount as the amount that you can sustainably consume. This means that we can measure wealth either as production or as consumption.

Thus, there is not just how much riches you own, but also how much you can create. Also, remember that you cannot consume money. You can only consume goods and services. Amassing riches has little value in itself. It is mainly a way (for an individual or group) to postpone consumption to some point in the future.

Thus, wealth is measured not just by the current riches you own, but also by the ability to create more riches in the future. A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year.

> These things [...] don't generate new wealth.

But they do.

**Labor**

Let's look at how labor increases wealth by looking at a couple of examples:

Example 1. I work at a farm. The result of my work is some farm produce worth X. For that I am paid Y. The farmer that hired me will receive X-Y.
The net wealth gain for the society is Y + (X-Y), or X.

Example 2. I work as a barber. I charge X for a haircut. The customer gets a haircut worth X. Net wealth gain for the society is X + (X-X), or X. Since the haircut is consumed immediately, the amassed riches don't increase. Note that the customer didn't lose out - to him a haircut was worth at least X or he wouldn't have gotten one. In macroeconomic terms the GDP increases by X and net savings is unaffected.

**Trade**

Trade increases wealth by transferring a good or a service to someone that values it higher.

Example 1: I buy a used car from a neighbour for X amount of money. I get a car that is worth Y to me (Y>=X, or I wouldn't have bought it). My neighbour gets X for a car that was worth Z to him (Z<=X, or he would have kept the car). The wealth produced is (Y-X) + (X-Z), or Y-Z, which is >= 0 because Z<=X<=Y. In GDP terms the wealth produced is X - X, or 0, because GDP only measures how much is paid.

Example 2: An electronics company imports batteries from China for 10 cents each. They sell the batteries to customers for \$3 each. The wealth increase in GDP terms is \$2:90 per battery. The wealth produced is shared by the electronics company, the shipping company, the store salesman and any others that provide services to the electronics company.

**Innovation**

Innovation is both the invention of new and the improvement of the existing. Actually, most innovation is small improvements in existing technology or design.

Example: I improve a machine that makes nails so that it can make twice the number of nails in the same time. This means that more nails can be produced (and thus consumed) using less labor.

> **Comments:**
> **username_2**: "A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year." This is definitely not true as a general statement.  
> **username_2**: "The current meaning of wealth is not the amount you own, but rather how much you can consume " also seems weird, do you have a source for this?  
> **username_3**: @denesp Clarified the definition of wealth and added a source. That 100,000 is poorer (=less wealthy) than 50,000 a year follows directly from the definition (provided the man expects to live longer than 2 more years). This also corresponds to how rich is used in (swedish) newspapers - it sommonly refers to people with high income.  
> **username_2**: Out of curiosity, who is richer: Man with 100 in the bank but no work income or man with 0 in the bank but 2/year income? They will both go on to live for 80 more years. (Should the interest rate not factor in?)  
> **username_3**: @denesp It does depend on the interest rate. I chose to simplify my example by choosing numbers that would need ridiculous interest rates to be false. Do you think the answer really needs clarification on that point?  
> **username_2**: I understand what you are saying but I find that the general statement "A man with 100,000 and no income is poorer than a man with no money but with an income of 50,000 a year." is inaccurate and unfortunate.  
> **username_4**: @username_3 I'm trying to better understand where the wealth itself comes from– as in how new dollars are actually made that go into this system. If I go get a $10 haircut, didn't the $10 already exist? Isn't it just flowing into someone else's hands? Where does the new money itself come from?  
> **username_3**: @arooo You are confusing money and wealth. The haircut doesn't add any new money. It does add wealth (in the form of GDP) as the barber creates the haircut from nothing simply by using his skill and time. Some money is created by printing new bills and coins, but most money is created by loans. Taking a loan adds/creates money, repaying a loan removes/destroys money.  

---

