Tuesday, August 5, 2008

Wealth - Making It Up As We Go

Pie is great stuff! Who doesn't look at a piece of cherry pie, or dream of apple pie a-la-mode, or drool over a fresh, home made berry pie! There's only one problem with pie. The more people who want some, the smaller everyone's slice is! Or the government launches a PSA campaign warning you of the dangers of eating too much pie and encouraging you to eat stale cookies instead, because they are "better for you."

Your normal family budget and government economics works the same way. If Dad wants to buy a monster truck, Mom & the kids have to go without new clothes. Or if the kid gets accepted to a private university, the entire family has to do without to pay for tuition. Or if Mom wants a new dress, Dad can't get the latest electronic gadget. And government programs ultimately bankrupt the nation, because all they can do is raise taxes to fund the new programs, because the only way the government can get money is to take it from YOU, who earn it.

Free markets, on the other hand, actually do something a little magic. They create wealth. Now this is a difficult thing for many people to visualize, because all they know is slices of pie. But what happens in a free market when more people are clamoring for pie? Government would divide the pie into smaller slices. The free market finds a way to make more pies so everyone who wants one can have a piece. And this is the magic of wealth creation. Clever people, with the incentive of doing a little better for themselves and their families, find a way to make more pie. And if the pie is tasty, these clever people become rich! Its as simple as that.

Simple, but not easy. If it were easy, everyone would do it.

What is the trick to creating the magic? Eliminate obstacles, focus only on what is important, and work very, very hard. For a great treatment of how startups work, see How to Make Wealth by Paul Graham.