Wealth Creation Means What?

When we hear about wealth creation it is usually presented as gaining money and other valuable assets. Make money, then invest it to grow your net worth - a common formula. Those who look a little deeper see that assets alone don't necessarily pay the bills, stress making your money and assets work for you to produce streams of income. In any case the basic idea as understood by most people is that wealth creation is a matter of accumulation.

There is a difference between creation and transference, though. And simply "getting" money can be mistakenly called "making money." Let's look at the difference.

If you make a bet with a friend on a football game and win, no new value is created (except the minor pleasure of gambling). Money is simply moved from the hands of your friend to yours. The same is true on a larger scale when, for example, credit default swaps are used by financial institutions not as insurance, but merely as a bet. Using financial instruments like these, large banks and funds became gamblers in the years leading up to the real estate slump that started in 2006. Many of them were no longer creating any real value, instead just moving wealth around.

What Is Wealth Creation?

If you buy a couch there is real value created and exchanged. The manufacturer creates a comfortable piece of furniture that people want to sit or lay on. To do so they buy materials ranging from wood to cloth and nails. These things are real values created by others. Meanwhile you have to create and trade something of value (your labor and skills if you're an employee) to get the money needed to buy the couch. There is wealth creation at every step of the process.

Even speculation can create value in the right context. For example, those who trade futures contracts create a way for farmers to guarantee a price for their crops months in advance so they don't go bankrupt if the market price is down at harvest time. On the other end, a tortilla chip maker can know ahead of time what his corn will cost, and so plan effectively. Speculators take on the risk, creating a valuable system that allows more consistent planning and production.

In other words, honest wealth creation serves the needs of people. To trick a man out of money is to profit in a financial sense, but not to create. To make something of value and sell it is creation. This is not difficult to understand, but it is often forgotten.

For example, when most people think of how to make money they think of a job or business. But they think of it in a mechanical way, meaning they think of the steps to go through to have money handed over to them. Go to work, do as you're told and collect a paycheck. Start a business, follow what others have done and make a profit.

There isn't anything necessarily wrong with this, but it is a very uncreative and limited approach. Someone else has to create the job to be done or the business model to be followed. This also is not likely to lead to much wealth creation on the part of the person who thinks this way.

The alternative? Look at what value you actually can create and add to the world. Starting at the simplest level, forget about the paycheck for a moment and ask if you are providing much value to your employer, and what you could do to create even more. In business, consider what customers want and need and if there are better ways to provide that. See if there are other needs not being met.

The true wealth creators are not just following what others do. They are looking for new ways to create value. It is a much more satisfying way to make money than to simply look for the quickest way to move dollars from other pockets to yours. Of course you want to "get paid," and there are always ways to do that. But wealth creation comes first. Only then is there something to pay the employee or business owner.