A new year always brings with it resolutions that run the gamut from developing better health habits to better financial habits. Many people want to improve their financial health, whether through better money management or earning more money. Understanding how wealth is created could help people with their financial resolutions.
In his book “The Wealth of Nations,” the Scottish economist and moral philosopher Adam Smith wrote wealth wasn’t the accumulation of commodities or resource reserves a nation possesses. Rather, wealth exists in the productive knowledge of its people. According to Smith, the ability to efficiently transform resources into desired goods and services represents the true source of a nation’s wealth. Physical and human capital represents the true embodiment of wealth.
The observations Smith made about nations can be applied to individuals as well. As individuals, we vote with our dollars. People are financially rewarded based on the value others place on their productive outputs. This applies to hourly workers, salaried workers and manufacturers of products.
Contrary to popular belief, the economy isn’t stagnant. One individual making more money than someone else doesn’t take money out of anyone else’s pocket.
The economy continues to grow when individuals and businesses succeed with ideas, products and services and accept the risks in taking advantage of these opportunities in the hope of earning profits. Individuals who live in a nation with a growing economy have more money in their pockets and more access to goods and services to make their lives better.
Several key elements must exist for people individually or a nation as a whole to create wealth. Private property rights protected by the rule of law and the freedom to make decisions about products, services and trade creates more income for individuals and nations.
One of the most important New Year’s resolutions might well be to ensure these freedoms are protected because through them is the only known way to increase overall prosperity.
Phyllis Hunsinger is founder of the Freedom & Responsibility Education Enterprise Foundation in Grand Junction. The foundation provides resources to students and teachers in Western Colorado to promote the understanding of economics, financial literacy and free enterprise.
For more information, visit www.free-dom.us.com. A former teacher, principal and superintendent, Hunsinger also wrote “Down and Dirty: A ‘How To’ Math Book” Contact Hunsinger at firstname.lastname@example.org.