What is.. Wealth creation?
The problems of the developing world, global poverty and a fundamental part of economics and business is all about wealth creation. How is wealth created?
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Wealth is a stock of assets or resources or income owned by an individual or a country at a point in time. |
Example:
If you add up the value of all the personal possessions that you currently own at this moment in time, that will be your current wealth.
Wealth is created when we are able to produce a surplus over and above what we need to survive. With that surplus we are able to acquire further resources that enable us to become more productive and so produce more of a surplus and so on.
This Flash animation tries to explain things in a different way! NB If you don't have Flash, the story is outlined below.
Phase 1:
Two people own some land and farm it. They have no tools but do have some seed. They do not manage to produce enough to feed them for the year. They go hungry and risk starvation.
Phase 2:
Assume that one of the two manages to invent a simple tool to dig the land. They are able to generate a greater output as a result of having this tool. They now have just enough to feed them for the year.
Phase 3:
The innovative streak continues and the pair invent a simple plough share. They pull it between them and it increases productivity. They produce enough to feed themselves and a small surplus.
Phase 4:
They use some of the surplus to trade for a horse. In the next year the horse pulls the plough share, they are able to cultivate more of the land and produce enough to feed themselves and the horse and have enough left over to trade for some better quality seed.
In the next year the combination of horse, ploughshare and better quality feed sees their productivity rise even further.
Phase 5:
They use the surplus to trade for a tractor. They decide to retire the horse. The tractor means that they can cultivate the land and sow the seed in a fraction of the time that it took the horse. They use some of the spare time they have generated to relax and ride the horse!
Output increases even further as a result of the efficiency of the tractor. They use the surplus to buy some adjoining land. The tractor allows them to be able to farm their existing land and the new land in less time than it originally took them to dig a fraction of the land when they first started. The surplus they produce is used to buy some fertilizer for the land...
And so on. That is how wealth is created and how countries like the UK, Germany and the US prospered so much during and after the industrial revolution and become so rich. Many less developed countries are in the position of our farmers in phase two of our model!