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Weekend Investor: This Is The One Key To Wealth

September 16th, 2012 Leave a comment Go to comments

A librarian from New Jersey wrote this opinion piece about income inequality. The author makes the case of the existence of a caste system, whereby lower income workers can never become wealthy simply because they will never earn enough money as a CEO or professional athlete. Since the lower income worker needs all of his money to live whereas the CEO doesn’t need all of his money to live, he advocates public policy for high tax rates to level the incomes.

This position is hard for me to understand. After all, as a librarian, doesn’t he read books (financial books) to get other ideas of how finances and the economy actually work?

The mistake that this author makes that unfortunately millions of people make is that they don’t understand what wealth is. They equate wealth with income meaning that only if you earn enough money will you get rich. The fact is, it’s really hard to get rich simply on income alone due to high tax rates. It’s possible, just a lot harder.

What Makes An Advanced Economy

In a simple economy, people produce products that they would barter with other people. For example, a farmer might barter corn for fire wood from a lumber jack. In this economy, people would prosper by how productive they are individually. In the librarians view, this is what an economy looks like.

But, like most things, economies advance over time. One technology that isn’t new but nonetheless an important concept is that of an entity called a business. If a group of farmers got together to sell corn in aggregate, they can sell much more corn at once to groups or businesses instead of individuals.

In this more advanced economy, the business itself has a value separate from the value of its assets (land, equipment, etc). The Forbes list of the richest people in the world doesn’t contain a single person who got there by individual earnings. It isn’t possible because no one person can be as productive by themselves to hold earn that much wealth. They need to own other assets such as businesses.

Key Takeaway

If want to get wealthy, you need you acquire assets that have value and make money. Don’t simply depend on earnings from your own sweat because it is unlikely you will ever earn enough money by yourself to become financially independent. If you listen to the librarian, it’s already a lost cause because from his simplistic point of view wealthy people make it by earning more.

Fortunately, we have an economic system that enables you to improve your economic well being in many ways. One way is to invest in the most successful people around, those that create and run the best businesses available in the public markets. You may never become a CEO but that doesn’t mean that you can’t benefit when the CEOs company succeeds.

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