A catalog of wealth-creation mechanisms (2009)

US economic historian here. The idea that the US government funded the construction of the first Transcontinental Railroad and Panama Canal to trade with China is very, very weird.<p>- 1850-1890 was a period of high protectionism, highest tariffs on imports in the US history.<p>- A good approximation of share of traded goods in the railroads would be the share of imports+exports in the GDP. Together, exports and imports were not more than 15% of GDP. Source: <a href="https:&#x2F;&#x2F;www.nber.org&#x2F;system&#x2F;files&#x2F;working_papers&#x2F;w4710&#x2F;w4710.pdf" rel="nofollow">https:&#x2F;&#x2F;www.nber.org&#x2F;system&#x2F;files&#x2F;working_papers&#x2F;w4710&#x2F;w4710...</a>, Table 3.<p>- railroads transported a lot of agricultural products and also passengers, and were hugely profitable from that. I doubt they would recover any cost by transporting porcelain and whatever other goods China exported at the time.<p>- &quot;But that answer is wrong, as can be shown by examining historical records of the time.&quot; - citation needed.

Great article. I’ve always been fascinated by the question “where does the value of things really come from?” And this article touches on that. Everything ultimately goes back to the fundamental ways we create wealth, and how much time and energy we expend doing it. The article mentions No.3 as containing most services which involve transforming goods. I wonder where do personal services like massage, and prostitution come into that?<p>Or what about friendship or a romantic partner? A husband or wife cannot be converted into money but I’d say having one is to most people a definite kind of wealth.<p>You might call these ‘emotional services’, and group them in with art and entertainment in general. I would say this is at least different enough from manufacturing to warrant their own category. Edit: rewording

For a transaction to create wealth the two parties must collectively be more wealthy than they were before. If they are collectively as wealthy then no wealth has been created. Some criminal activities destroy wealth in aggregate even though money or goods changed hands in a way that superficially resembles a trade.<p>I suspect though that the distribution of money itself between people can increase net wealth, because it shifts how that money will then be used economically in useful ways. The same $1 in the hands of a minimum wage worker might have different economic value than if it was in the hands of a millionaire because how it is likely to be used in the economy is different. I don&#x27;t know which is better though, will the minimum wage worker pay for services that are more beneficial, or will the millionaire invest it in a company that creates jobs and provides services? We need both things to happen though to some degree, so maybe the answer shifts with the economic cycles.<p>If I buy a coffee and drink it have I just decreased net wealth by destroying valuable coffee, or have I increased it by transferring the money to somewhere it can do more useful economic work in downstream transactions?

I think it is missing something foundational. People have preferences over both production and consumption. Perhaps Mr A likes to consume X, but hates the work involved in producing X. Meanwhile Mr B likes to consume Y but hates the work involved in producing Y. Rather that A doing without X and B doing without Y, they could team up, swapping chores. Mr A makes Y for Mr B and Mr B makes X for Mr A. That clearly makes them better off, and needs to be on the list of wealth-creation mechanisms.<p>But it sits awkwardly with the materialistic focus of the catalog. There are two people, producing the same things and consuming the same things, but with two scenarios with different levels of wealth. Ron&#x27;s catalogue aggregates preferences; no difference in what work gets done? No difference in wealth.<p>That raises an awkward question about language. Do we say that wealth comes from diversity of preferences? Or do we say that wealth comes from specialization and trade? Sometimes the two mechanisms operate conjunctively. A diversity of preferences does not, in itself, generate wealth. The wealth only comes if, in addition, one does the trading to exploit the diversity of preferences. But that specific kind of trading only generates wealth if there is a suitable diversity of preferences to exploit.<p>That makes me doubt the value of a catalogue written as linear list. One needs to catalogue the package deals (for example: preference diversity AND trade).

There&#x27;s a followup: <a href="https:&#x2F;&#x2F;blog.rongarret.info&#x2F;2009&#x2F;10&#x2F;wealth-production-mechanisms-followup.html" rel="nofollow">https:&#x2F;&#x2F;blog.rongarret.info&#x2F;2009&#x2F;10&#x2F;wealth-production-mechan...</a> - in reply to the first time this was posted on HN!

The article is a good summary of typical business models! I also learned a lot by trying to answer the <i>(Bonus question: what did the U.S. give to China in exchange for its china?)</i> - fur and opium.<p><a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Old_China_Trade" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Old_China_Trade</a><p>The article lists the following: Move, Store, Transform, Farm, Build, Mine, Health, Research, Information (Supply&#x2F;Demand, Law, Journalism).<p><i>I&#x27;m pretty sure this is a comprehensive list. Can anyone think of anything I&#x27;ve left out?</i><p>Music and art come to mind as not being &quot;useful information&quot; but still appealing, because they reflect and enhance culture, which brings people together.<p>As for wealth storage, I heard another list of investment advice being told on a Sunday morning: stocks, bonds, and property.<p>I winced, because I don&#x27;t trust the stock market (even though I do believe that some companies have great potential. Government bonds require political stability, which I worry about. Property values are destroyed in war or natural disasters, both of which I expect are likely to occur in my lifetime.<p>What could we invest in instead? Philanthropy. We could just give it all away! Building guanxi will endure even huge economic changes. Laptops and phones come and go, but Hacker News karma is forever ;-)<p><a href="https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=28004632" rel="nofollow">https:&#x2F;&#x2F;news.ycombinator.com&#x2F;item?id=28004632</a>

Trade creates value and not just in the way of moving things. The law of comparative advantages is mind blowing once you understand it <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Comparative_advantage#Ricardo&#x27;s_example" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Comparative_advantage#Ricardo&#x27;...</a>.

This is a great catalogue of wealth creation mechanisms at a societal or global level, but it misses the question of wealth acquisition: How does an individual gain personal wealth? There are, in my opinion, three fundamental categories:<p>1. Create value (this encompasses most of the catalog)<p>2. Deplete valuable resources<p>3. Extract value from a transaction stream<p>The idealized engineer creates utility out of chaos. This value creation, however, is limited in its ability to cause them to gain wealth: They typically sell their time during which they perform this activity for a salary. A company that employs an engineer and pays him $100,000&#x2F;year might make many times that amount with the products that he designs.<p>An oil company, coal mine, or non-sustainable farmer owns some land rights and takes out resources. The things they remove are valuable, but the profit does not come from the creation of the resource - they already existed. This category also applies to other activities which might not actually take a resource away but which harm the commons.<p>There are some activities which are useful, but where practitioners make far more money than the actual value they create. Someone who organizes and who employs many workers and sells the sum of their output is in a position to profit from the difference in that transaction. Jeff Bezos might hypothetically be smarter, luckier, stronger, and overall able to pack more boxes than any of his warehouse workers, but he&#x27;s still human - he&#x27;s not gaining wealth to the tune of more than $13,000,000 dollars per hour while his employees are making $18 an hour because he&#x27;s creating about a million times more value. Instead, of the three categories, he (and anyone else who makes more than approximately a standard deviation above the median GDP) is primarily extracting more value.<p>My personal problem is that I take particular satisfaction in creating something valuable. I find resource extraction to be unsatisfying to the point of being demoralizing, and I find leveraging power to extract more value than I think I&#x27;m due to be shameful.

This is a very long-lived, and actively maintained, blog. I&#x27;m impressed. There aren&#x27;t many out there like this.

I sometimes have trouble with the idea of “creating wealth”. I am not sure if people like Bezos or Gates have created wealth but instead have managed to funnel wealth into their pockets. They may even have destroyed wealth by suppressing competition and potentially better ideas.<p>It seems the real wealth creators are inventors and scientists who create new things . From then it’s more if zero sum game between different businesses.

&gt; <i>Wealth</i> is a measure of how much stuff people have that they actually value for its own sake. Food, housing, clothing, shelter, and artwork, are all examples of wealth. <i>Money</i>, by way of contrast, is merely an accounting mechanism that humans have invented in order to facilitate trade.<p>I think this is pretty accurate, except the description of money as &quot;merely&quot; an accounting mechanism. Trade is facilitated through a variety of accounting mechanisms, and money is obviously an item in this list insofar as it is the <i>unit of account</i> for economic entities that maintain accounting books. However, money is also a concrete economic good in and of itself, subject to forces of supply and demand much like any other good.<p>The author correctly states that wealth is derived from subjective valuation, so money could be seen as something like the &quot;limit&quot; (categorically) of wealth, which aggregates the value judgments over all (person x good) combinations.

Fasten, widen and simplify communication space. Entertain communicants for free. Boost individuality and ego of communicants or tweak according to demand. Sell the inflated souls to the highest bidder.

Did anyone catch this in the comments below?<p>&gt; There is one major category of wealth-producing activity that I just thought of that I did leave out. I&#x27;ll leave it as an exercise to see if anyone can figure it out :-) I&#x27;ll post it in a couple of days if no one gets it.<p>That was over ten years ago, I don&#x27;t see a followup.

&gt; But historically, the most reliable and the most socially beneficial way of making money is to create wealth.<p>Is it? It seems almost universally true, historically, that those with the most money are those which create the least value: nobles, landowners, heirs, etc.

&gt;For those of you coming from Hacker News, I&#x27;m on a cruise ship going through Asia at the moment.<p>&gt;posted in 2009<p>I really hope this guy gets out of quarantine soon

I don&#x27;t see anywhere that Automation fits into that list. We can create value by automating many of the other items on the list. Relevant today is the automation of serving information (web developers!), but automating transformation (factories) was a game changer for industry.<p>Also, &gt; Google makes money via 9a, not 9c. I don&#x27;t think that&#x27;s true. Google makes most of its money on ads, not market making. While there is an aspect to ad serving that is market making, I think it&#x27;s fair to characterize their primary revenue stream as money-for-eyeballs, which is very much monetization of Information.

Since this list is so broad it includes pretty much any professional activity, as a counterpoint, compare to Adam Smith, who had a lot more rigorous definition, and for who wealth creation can only happen when labour is applied to the production of useful commodities, or in the market making for such (crudely summarized).<p>e.g. &quot;curing disease&quot; did not create wealth. Instead, he put physicians on the same level as house maids and clowns, in that they are unproductive in the strictest sense (although still necessary of course).

I think the main category the author misses is <i>providing experiences</i>. He lumps &quot;novelist, screenwriter, composer and choreographer&quot; as creating information that is &quot;useful in and of itself&quot;, but I think that&#x27;s a <i>real</i> stretch.<p>Experiences can be directly subjectively enriching to the consumer even if they don&#x27;t provide any &quot;useful information&quot;. By &quot;useful&quot; here, I assume the author means something like &quot;able to be used to produce value later&quot;.<p>If I take you on a boat to watch the sunset, I have given you an experience that has value, so I have created some intangible wealth. But I haven&#x27;t given you anything you could reasonably categorize as &quot;information&quot;. It&#x27;s not like you didn&#x27;t know sunsets were pretty already.<p>I think this category is important because in many ways it is both the most fundamental and also the most unlimited. Ultimately most of the other categories of wealth exist to eventually provide experiences. Why do I want things? So that I can experience having or using them. Very few material objects in our life exist for purely utilitarian reasons.<p>But the real magic of experiences is that they can provide value without using anything up. When I take you to see the sunset, the sunset is still there for others to see too. When I read a book, the book is still able to be read by others.<p>This is important because as we get closer and closer to using up the resources of the Earth, it&#x27;s good for us to focus on intangible experiences that don&#x27;t actually consume anything.

&gt;&gt; It&#x27;s important to keep in mind that there is a distinction between wealth and money...<p>I think this goes astray here. I think the operative distinction is between &quot;wealth&quot; in the abstract &quot;wealth of nations&quot; sense and the aggregate of wealth in the &quot;net worth&quot; sense.<p>The first definition is pretty closely related to value. The second is more closely related to the value of assets. If real estate, shares, bonds and such have a high market value then we have more wealth in the &quot;net worth&quot; sense.<p>The gross market cap of the education sector is not high, but it does generate value, for instance.

A long time ago I tried to categorize wealth mechanisms like this. There are tons of concepts, depending on how high or low you are generalizing.<p>For instance, providing something only the wealthy have to the masses (private drivers, smartphones, etc)<p>I found on the highest level everything could technically be boiled down to &quot;paying money for a product or service to remove uncertainty&quot;. (Buying a hamburger so you don&#x27;t have to make it yourself, insurance, everything)

&gt; Bonus question: what did the U.S. give to China in exchange for its china?)<p>Anyone know?<p>Suggested here are gold&#x2F;silver bullion&#x2F;coinage, unsurprisingly. Furs and sealskins. And probably a lot of opium: <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Old_China_Trade#Finding_mediums_of_exchange" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Old_China_Trade#Finding_medium...</a>

I am surprised education does not figure more prominently in 9. In a sense all wealth is created through education (a newborn child knowns nothing about &quot;wealth&quot;).<p>NB: Education is not just the &quot;provision of information&quot; or &quot;help with figuring out the rules&quot; (although there are aspects of both).

This feels so vauge it might as well be saying that the way to make money is to figure out what people want and find a way to give it to them.

Author here. AMA.

I would add to 9, &quot;Move and store information&quot;. That&#x27;s what most of us here in HN do.

Also capital (aka delayed consumption) creates value, under specific circumstances.

Ron missed an important category. Creating value by entertaining people.

While I agree these are &quot;wealth creation&quot; mechanisms, what the blog describes is market (economy) inefficiencies that enable arbitrage.<p>So by spotting an inefficiency and exploiting it, you profit.<p>tl;dr explore and exploit.

This is such a patriarchal&#x2F;capitalist&#x2F;libertarian&#x2F;white supremacist take.<p>What about the birthing and raising of children? What about the schooling of children? Of course in a man&#x27;s world this is never assigned any value.<p>What about slavery? America was built on chattel slavery, indentured servitude, and lessor degrees of coercion and exploitation that leverages asymmetries in wealth and freedom. While the first two are technically outlawed, the latter thrives as strong as ever. If coercing resources out of the ground (#6) is a wealth creation mechanism, isn&#x27;t coercion of labor out of human bodies to do the actual work of #1-6 another wealth creation mechanism, even if it&#x27;s one we don&#x27;t want to admit, or at least talk about honestly?<p>What about Rentier Capitalism[1]? Is it something we want to avoid talking about?<p>---<p>[1] <a href="https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Rentier_capitalism" rel="nofollow">https:&#x2F;&#x2F;en.wikipedia.org&#x2F;wiki&#x2F;Rentier_capitalism</a>