Welcome to part 2 of this series on creating wealth. I know it has been a while since I attempted to write the second part of this essay series. But nevertheless, I acquired the courage to get behind my computer and get it done. 

So what am I gonna discuss with you in the second part? Well, let’s start with some 101 stuff. Exploring the meaning of the concept ‘wealth’. A bit of history: we, humans, invented wealth at the dawn of civilization; money comparatively is a recent invention. 

Wealth is fundamental. It’s the stuff we want: a house, food, clothes,  travel, material possessions, and so on. Paradoxically: a wealthy person is not necessarily a person with a lot of money. Strange, to be rich is to be wealthy, right? And vice versa? Time for a thought experiment. 

Imagine you got a magic machine that could, on your request, produce whatever you want. Be it a car, a home, or any meal you can dream of. If you got access to such a device, would you still need money?

Now let’s imagine you wake up in the middle of Antarctica, without any means of communication and with no living soul in any close proximity and freezing temperatures. But lucky you: there is a big plane with a couple of billion dollars. You are absolutely loaded, but I wouldn’t call you wealthy (nor do I want to be on Antarctica). 

I think you get the point here: wealth is what you want; thus, it’s not money (because money is just a product of human imagination). I can imagine that at this point, you might be thinking: yes, well, creative thought experiments and all. But listen up, Thijs, everybody is talking about making money. So shut up with your wealth creation. Well, I have some good news for you: money is a way of moving wealth. So in practice, money and wealth are usually interchangeable. However, they are not synonyms, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money. 

The first thing to understand

Specialization. That’s the magic word. Money is a side effect of specialization. We live in a highly specialized society, but what does that mean? Like fundamentally? In our society, most of the things you need, you can’t make for yourself. So if I want a tomato, an iPhone or maybe a house, I have to get it from somebody. 

But how do I get the person who grows tomatoes to hand me one? Simple: I give him something he wants in return. Naturally, you cannot get very far if you only trade things directly with people who need them. Imagine you make fantastic guitars, but none of your local farmers like guitars. How will you get food? 

As they get more specialized, the answer societies find is to make the trade into a two-step process. Instead of trading guitars directly for tomatoes, you trade guitars for, say, gold, which you can then trade again for anything else. The stuff that we used in between is something called: the medium of exchange. Which can be anything rare and transferable. Metals have been the most prevalent, but lately, we’ve been using a relatively new medium of exchange, called the dollar, that we basically invented. Why does it work as a medium of exchange? Well, because its rarity is backed by our beloved Uncle Sam.

A medium of exchange has one significant benefit: it fixes trade. But there also is a slight disadvantage: the medium of exchange obscures what trade really is. Most people believe a business makes money. But that’s not true; money is just the intermediate stage– a shorthand– for whatever people need or want. So, what businesses really do is make wealth. They make something people want. 

There is no pie

Surprisingly, many people retain from childhood the idea that the amount of wealth in the world is fixed. What you have to understand here is that there is a fixed amount of money in a typical family at any moment, but the amount of wealth in the world is definitely not fixed.

In this context, wealth is often described as a pie. Politicians will tell you that “you can’t make the pie bigger.” They are correct if you’re talking about the amount of money in a family’s bank account or the money that a government receives from one year’s tax revenue. If one human gets more money, someone else has to pay.

As a child, I thought that if a couple of rich people had all the money, it meant that everyone else had less. Apparently, a lot of people continue to believe something similar far into adulthood. It’s a fallacy usually present in the background when you hear someone speaking about how x percent of the population have y percent of the wealth. But if you plan to begin a startup, then whether you apprehend it or not, you’re planning to show that there is no pie. 

The root cause of this abstraction is the abstraction of money. So, here I am, telling you again: money is not wealth. We just use the money to move wealth around. Sure, 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 no set amount of wealth in the world. You can create more wealth. Humans have been making and destroying wealth for all human history (but on balance, created). 

I’ll be back soon with part 3 in this essay series, we’ll continue to explore different aspects of wealth creation!