3.2.1        Wealth Creation   

(This is an archived extract from the book Patterns of Power: Edition 2)

Wealth is created when the amount paid by customers for goods and services exceeds the costs of the supplies consumed in producing them.  Using this definition, anyone who is paid is creating wealth – including politicians and public servants, who are paid by the population to provide a service.  The total wealth created in a country is usually referred to as its ‘Gross Domestic Product’ (GDP).[1]

The process of wealth creation is multi-layered, with some companies supplying other companies, but ultimately it converts work and raw materials into products and services that people want to buy and use.  A manufacturing business, for example, might purchase a range of goods and work upon them before selling them at a profit.  Other companies might provide essential services for the distribution, retail and after-sales support of the goods produced.  All these activities add to the cost of the output and the consumer (or the taxpayer) pays.  Value is added at every level.  All employ labour, which is paid for: the wealth earned by employees. 

In a capitalist economy, the wealth produced is shared between the owners (or shareholders), the workers, taxes paid to the government and an amount that might be retained for re-investment.  The negotiation of what proportion each receives is discussed later (3.5.6.1).  Everyone involved must judge that the reward justifies the effort: the owners want a return on their investment (3.2.7) and the employees want money to spend as consumers (3.2.2).  Without such incentives, less effort would be expended, less innovation would be brought to bear, and less wealth would be produced.  This is a powerful practical argument for establishing and maintaining property rights so that people can keep most of the wealth they have created.[2]

This process of wealth creation is stimulated by the demand for goods and services.  Wealth cannot be created unless a customer is prepared to pay for what is being provided: a consumer, the government, or another business that requires the supply of goods and services.  The wealth which people create enables them to buy goods and services, thereby providing opportunities for other people to create more wealth in a virtuous circle of economic growth, governed mainly by market forces (3.3.2).  As noted later, government attempts to direct the creation of wealth are less successful (3.3.6).

In practice there is a limit to economic growth.  An economy’s maximum capacity to produce wealth is determined by the resources available to it: labour, natural resources, finance, and the facilities and infrastructure it requires.  An economy is said to be ‘efficient’ if it is fully utilising the available capacity.[3]  Governments can affect the capacity of the economy, for example by investment in infrastructure and the training of labour; they can also affect its efficiency, by regulation (3.3.1); but private enterprise produces most of the world’s wealth – in response to market forces rather than to instructions from governments.

© PatternsofPower.org, 2014