LeoGlossary: Wealth

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Any financial or physical asset that can be converted into a form that can be used in transactions. This is applicable to those held by individuals, companies, or countries.

It is a measure of all assets owned.

This is an important concept in economics. Wealth is both a driver of the economy which is also created through economic productivity. One of the key aspects to this is business. This can also be termed commerce or trade.

Net worth is another term that is associated with wealth, which is determined by taking the market value of all physical and intangible assets and subtracting all debts. This term is most commonly applied to individuals as opposed to company.

From this perspective, wealth is stock whereas income is flow.

Wealth Versus Currency

Currency is not wealth. This is why countries simply cannot "print" their way into wealth. Expanding the money supply does not solve the problem. The reason is more money does not equate to the ability to increase economic output.

When a central bank expands the money supply (for those not under fractional reserve banking), the inflation usually results in higher prices. The reason is due to the inability to expand economic output, i.e. grow GDP.

This is a situation commonly referred to as "too much money chasing too few goods and services".

It is easy to see how the wealth of a nation does not increase simply because more banknotes or currency is put into circulation. Unless there is an increase in economic activity, the results will only be more money.

Wealth is expanded when the additional money is transformed into business and commercial applications. A company might use the additional capital to finance a new plant, which then creates more products that are sold into the market. Here is where we see wealth being generated.

Wealth Generation

Historically, wealth generation were tied to land and labor. Demographics play a big part in this. Agriculture and early industrial societies were built around this.

Technology is also another major component. The innovation and application of human knowledge by a country leads to the creation of wealth.

The basis of wealth generation was written extensively by the likes of John Stuart Mill, Karl Marx, and Adam Smith. All put forth theories about this topic.

Over the last couple decades, global wealth exploded. This Industrial Revolution was a large driver of this. The last half century saw the digital world emerge. The Internet is likely the greatest wealth generation tool in human history.

Due to advancements such as Moore's Law, we saw the friction tied to business reduced. Global communications was sped up with computing power increasing at every level. Databases provided greater access to information by larger numbers of people.

Marc Andreeson stated that software is going to eat the world. This means that everything is being digitized. Cloud computing, open source software, and advanced networks means we will see a wealth generation orders of magnitude higher than we saw the last 50 years.


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