Misunderstanding of How Wealth is Created

Wealth is created essentially by executing transactions in order to create profits for the seller and value for the buyer. There are four types of transactions that people perform as I will discuss briefly.

Win-Win Transactions.

These are the transactions that occur where the buyer and the seller both take away an advantageous benefit from the transaction. For example; if someone was looking for a piece of equipment for their business that would increase productivity so they could make more money and the seller of that equipment could sell it to him/her at a profit, you could say that both parties won in the transaction. This is the fundamental basis of capitalism, a law of supply and demand with both parties able to extract wealth from the situation.

Win-Lose Transactions.

Here is where a consumer is forced to buy a product or service where there is only one party to the transaction that actually comes away with a benefit. Quite often this occurs in socialistic countries where the government forces a worker to work for a very low wage so that the government or a specific group will benefit. However overall this is not benefiting society overall.

Win-Constant Transactions.

This transaction is when one party to the transaction benefits and the other remains in the same place as where he/she started without any loss or benefit. So this would be like a seller selling a product or service for no profit and the buyer receiving a good value for the product they are buying.
Lose-Lose Transactions.

Here is where both parties lose, usually both parties are forced into the transaction by some outside force and neither will benefit.

But how is wealth created?

Wealth is created by someone creating value! Two and half million years ago someone carved a rock into a circle and created a wheel which changed the way humans lived their lives, a real value was created. When Alexander Graham Bell created the telephone he did so with the intention of helping the people with hearing loss how to improve their hearing. He didn't realize that his invention would change mankind and how he communicates.

Wealth is created most times by creating order out of chaos thus improving the life of the user. Therefore the user is willing to pay for the product or service that is valuable his/her life. In today's world entrepreneurs are the best equipped to do this and they are the biggest supporters of our economy, which is held up by the Free Market or the law of supply and demand.

When the government steps in to support the company that is not providing value to the public then a false economy will result and the government will eventually collapse. We saw this with the fall of socialistic countries like Russia and North Korea. Unfortunately we are seeing that currently that there is no company that is too big to fail like the big 3 automakers.

History has shown that democracies fail because of loose fiscal policy and that eventually leads to socialism and the policies of those like Karl Marx, who wanted one individual to control the markets.

I believe along with my successful clients that Free Markets Work and that the market will factor all knowable information into the price and it is impossible to foresee future events that will affect the price however over the long term the short term chaos in the market will eventually provide wealth to those properly diversified with their investments and are focused on the long term.

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