How is Wealth Created?

There is a fallacy that being wealthy is predominantly a function of choosing one’s parents wisely.  The vast majority of the wealthy people I know started out with nothing, and most of them are small business owners.  By starting small businesses, they created jobs and goods and services that created wealth, not only for themselves, but for others in their community. Small business owners, by definition, create something out of nothing, and that something is GDP.

The number one driver of economic prosperity is small business.  Large businesses, like General Motors, get a lot of press and everyone knows their name, but most people work for small businesses.  Most small businesses create enough income to feed the family that owns it and perhaps a few more people.  But some small companies grow up to be Microsoft.  In both cases, the consumer benefits from the product or service that the entrepreneur provides and our society is better off as a result. 

My Uncle Jim (who is part of my investment policy committee) suggested a raw test of capitalism to gauge how easy it would be in a particular location to start a business and thus create wealth:  What if an aspiring entrepreneur wanted to buy a pack of hotdogs at Costco and sell them out of a cart on a street corner.  How hard would that be to accomplish? 

In Mexico City, it would take over a year of red tape, permits and costly bribes to get the required licenses.  In California, I speculate it wouldn’t be a simple task either (and we would probably need an environmental impact study).   In the town where I live, Cumming, GA it would take approximately two months, which is why our county (Forsyth) is one of the fastest growing in the country.  I’ll bet that the country with the highest immigration rate is probably the one that it’s easiest to start a small business in.

For families that are not entrepreneurial, which are most of us, the next best way to grow wealth is to spend less than we earn and invest in the stock market.  A good way to get exposure to small companies, mimicking the effect that entrepreneurs experience is to buy the Russell 2000 index.  Owning larger company stocks like those that comprise the S&P 500 is also a key strategy in designing a properly diversified portfolio.

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Filed under + Economics, Politics and Financial Planning

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