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Who Creates Wealth

June 8, 2011

In mainstream political discussion it is assumed that “investors” create wealth.  I challenge this assumption.  Wealth is created when something is created that has greater value than that of its non labor inputs.  The creation of goods from raw materials or the creation of creative works are examples of wealth creation.  Directly it is those who directly create these objects rather than those that invest that create wealth.  Instead of a blatantly false direct statement the assumption generally means that the activities of “investors” lead to an increase in GDP.

To understand this issue one needs to understand what GDP is.  The GDP is the value of production that occurs in a society.  It is important to note that consumption only occurs when the investor thinks that the production will be consumed.  The consumption drives production which is how wealth is created to fund consumption.  In normal settings more wealth is created in the production process then is consumed in society leading to a massing of wealth within a society.

It is important to note that with the necessary presence of investment decisions, it is consumption that drives production and not investment itself.  The availability of credit means that the funds for investment need not be present at the time of production for production to occur as long as credit is available.  In modern economies governments set themselves up to provide credit through central banks usually accepting some measure of inflation for the availability of credit to fund production.

If credit markets are operating responsibly, production will be driven if and only if there is the anticipation of consumption.  Thus while workers are directly responsible for wealth creation, it is consumers who indirectly drive wealth creation.  How much spending power different segments of a population have has a direct impact on the production that occurs in that society.

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From → Economics

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