What Wealth Is

Do you know what wealth is? How do you make wealth? There are many senses of the word, not all material. I'm not trying to make a deep philosophical point about the true kind, there are different kinds. This is about one specific, technical kind of "wealth." What people will give you money for.

I think knowing the difference between money and wealth is important for knowing how to get what you want in life. In fact it's key. People generally do not want money, they want things that cost money; they want wealth. If you think the answer to "How do I get what I want in life?" is "To earn money," then your next puzzle is "OK How do I earn a lot of money," which you'll answer with Job X. But what is Job X? You're left no further along. Strangely, talking about making money actually makes it harder to understand how to do so. Notwithstanding the tactical means, "To earn money," is the wrong answer to the above question. The right answer is to create wealth.

Additionally, I think this applies to getting things that do not cost money. This is an abstract distinction between wealth and money to understand and build your attitude upon for getting anything you may want in life. - Chris

Paul Graham

Money Is Not Wealth

If you want to be wealthy or create wealth, it will help to understand what it is. Wealth is not the same thing as money. Wealth is as old as human history. Far older, in fact. Money is a comparatively recent invention.

Wealth is the fundamental thing. Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on. And don't just think extravagance (like an American); wealth is relative, and a modest man can be wealthy. You can have wealth without having money. If you had a magic machine that could on command make you a car or cook you dinner or do your laundry, or do anything else you wanted, you wouldn't need money. Whereas if you were in the middle of Antarctica, where there is nothing to buy, it wouldn't matter how much money you had.

Wealth is what you want, not money. But if wealth is the important thing, why does everyone talk about making money? It is a kind of shorthand: money is a way of moving wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.

Money is a side effect of specialization. In a specialized society, most of the things you need, you can't make for yourself. If you want a potato or a pencil or a place to live, you have to get it from someone else.

How do you get the person who grows the potatoes to give you some? By giving him something he wants in return. But you can't get very far by trading things directly with the farmers. If you make violins, and none of the local farmers wants one, how will you eat?

The solution societies find, as they get more specialized, is to make the trade into a two-step process. Instead of trading violins directly for potatoes, you trade violins for, say, silver, which you can then trade again for anything else you need. The intermediate stuff-- the medium of exchange-- can be anything that's rare and portable. Historically metals have been the most common, but recently we've been using a medium of exchange, called the dollar, which doesn't physically exist (we choose green paper, but it could be anything). It works as a medium of exchange, however, because its rarity is artificially guaranteed by the U.S. Government.

The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money. But money is just the intermediate stage-- just a shorthand-- for whatever people want. What most businesses really do is make wealth. They do something people want.

The Pie Fallacy

A surprising number of people retain from childhood the idea that there is a fixed amount of wealth in the world. There is, in any normal family, a fixed amount of money at any moment. But that's not the same thing.

When wealth is talked about in this context, it is often described as a pie. "You can't make the pie larger," say politicians. When you're talking about the amount of money in one family's bank account, or the amount available to a government from one year's tax revenue, this is true. If one person gets more, someone else has to get less.

I can remember believing, as a child, that if a few rich people had all the money, it left less for everyone else. Many people seem to continue to believe something like this well into adulthood. However if a few rich people had all the wealth, it does not leave less for everyone else. The two concepts are usually conflated, and wealth (the kind under discussion) being worth money, causes this fallacy to typically occupy the background when you hear someone talking about how x percent of the population have y percent of the wealth. If you plan to make wealth, then whether you realize it or not, you're planning to disprove the Pie Fallacy.

What leads people astray here is the abstraction of money. Money is not wealth. It's just something we use to move wealth around. So although there may be, in certain specific moments (like your family, this month) a fixed amount of money available to trade with other people for things you want, there is not a fixed amount of wealth in the world. You can make more wealth. Wealth has been getting created and destroyed (but on balance, created) for all of human history.

Suppose you own a beat-up old car. Instead of sitting on your butt next summer, you could spend the time restoring your car to pristine condition. In doing so you create wealth. The world is-- and you specifically are-- one pristine old car the richer. And not just in some metaphorical way. If you sell your car, you'll get more for it.

In restoring your old car you have made yourself richer. You haven't made anyone else poorer. So there is obviously not a fixed pie. And in fact, when you look at it this way, you wonder why anyone would think there was.

Kids know, without knowing they know, that they can create wealth. If you need to give someone a present and don't have any money, you make one. But kids are so bad at making things that they consider home-made presents to be a distinct, inferior, sort of thing to store-bought ones-- a mere expression of the proverbial thought that counts. And indeed, the lumpy ashtrays we made for our parents did not have much of a resale market.

Creating Wealth

The people most likely to grasp that wealth can be created are the ones who are good at making things, the craftsmen. Their hand-made objects become store-bought ones. But with the rise of industrialization there are fewer and fewer craftsmen.

Craftsmen can create wealth. A good creation is, in itself, a valuable thing. There is no manufacturing to confuse the issue. If someone sat down and created a great product, the world would be that much richer.

Everyone in a company works together to create wealth, in the sense of making more things people want. Many of the employees (e.g. the people in the mailroom or the personnel department) work at one remove from the actual making of stuff. Not the craftsmen. They literally think the product, one step at a time. And so it's clearer to craftsmen that wealth is something that's made, rather than being distributed, like slices of a pie, by some imaginary Daddy.

It's also obvious to craftsmen that there are huge variations in the rate at which wealth is created. At a company there may be a craftsman who is a sort of monster of productivity. You may watch what he does one long day and estimate that he has added several hundred thousand dollars to the market value of the company. A great craftsman, on a roll, can create a million dollars worth of wealth in a couple weeks. A mediocre craftsman over the same period can generate zero or even negative wealth (e.g. by introducing major problems).

This is why so many of the best craftsmen are libertarians. In our world, you sink or swim, and there are no excuses. When those far removed from the creation of wealth-- undergraduates, reporters, politicians-- hear that the richest 5 percent of the people have half the total wealth, they tend to think injustice! A great craftsman would be more likely to think is that all? The top 5 percent of craftsmen probably make 99 percent of the good products.

Wealth can be created without being sold. Scientists, till recently at least, effectively donated the wealth they created. We are all richer for knowing about penicillin, because we're less likely to die from infections. Wealth is whatever people want, and not dying is certainly something we want. Craftsmen often donate their work by making products that anyone can use for free. I am much the richer for many of these products.

What a Job Is

In industrialized countries, people belong to one institution or another at least until their twenties. After all those years you get used to the idea of belonging to a group of people who all get up in the morning, go to some set of buildings, and do things that they do not, ordinarily, enjoy doing. Belonging to such a group becomes part of your identity: name, age, role, institution. If you have to introduce yourself, or someone else describes you, it will be as something like, John Smith, age 10, a student at such and such elementary school, or John Smith, age 20, a student at such and such college.

When John Smith finishes school he is expected to get a job. And what getting a job seems to mean is joining another institution. Superficially it's a lot like college. You pick the companies you want to work for and apply to join them. If one likes you, you become a member of this new group. You get up in the morning and go to a new set of buildings, and do things that you do not, ordinarily, enjoy doing. There are a few differences: life is not as much fun, and you get paid, instead of paying, as you did in college. But the similarities feel greater than the differences. John Smith is now John Smith, 22, an X employee at such and such corporation.

In fact John Smith's life has changed more than he realizes. Socially, a company looks much like college, but the deeper you go into the underlying reality, the more different it gets.

What a company does, and has to do if it wants to continue to exist, is earn money. And the way most companies make money is by creating wealth. Companies can be so specialized that this similarity is concealed, but it is not only manufacturing companies that create wealth. A big component of wealth is location. Remember that magic machine that could make you cars and cook you dinner and so on? It would not be so useful if it delivered your dinner to a random location in central Asia. If wealth means what people want, companies that move things also create wealth. Ditto for many other kinds of companies that don't make anything physical. Nearly all companies exist to do something people want.

And that's what you do, as well, when you go to work for a company. But here there is another layer that tends to obscure the underlying reality. In a company, the work you do is averaged together with a lot of other people's. You may not even be aware you're doing something people want. Your contribution may be indirect. But the company as a whole must be giving people something they want, or they won't make any money. And if they are paying you x dollars a year, then on average you must be contributing at least x dollars a year worth of work, or the company will be spending more than it makes, and will go out of business.

Someone graduating from college thinks, and is told, that he needs to get a job, as if the important thing were becoming a member of an institution. A more direct way to put it would be: you need to start doing something people want. You don't need to join a company to do that. All a company is is a group of people working together to do something people want. It's doing something people want that matters, not joining the group. Creating wealth is a mindset that empowers you to see all the roads available to you.

After college, you need not join an institution, you need to start doing something people want. Do something people want, that's it. You may say, "Great, so what do people want?" and think that this dictum is no more informative than saying "go earn money." Well It's an attitude, first and foremost, and secondly a 'litmus test' for judging the value of your daily attack. It's not supposed to tell you what Job X is, but you need this understanding first in order to figure that out (you'll also need the ambition, independence, and smarts). The difficulty is changing your mindset from what I want to what people want. Doing what you want is not creating wealth, creating wealth is identical to doing what people want. Thus empowered, and knowing the difference between wealth and money and how they work together, puts you in position to approach the world with a rock-solid irrefutable truth to base your actions.

Finally, creating wealth says nothing about the additional need of working hard. It's one piece of the puzzle. But the bright side is-- there's only a few basic fundamental pieces from which everything else follows. Just a few. Now you know one of them.