Wealth

March 22, 2025

Wealth is an overloaded word. It means different things to different people. I have a framework for understanding wealth. I would have picked it up from multiple sources but the main credit should go to all the podcasts Naval Ravikant appeared on.

Imagine a primitive tribe with 10 people: A, B, C, ..., I, J. A hunts. B cooks. C does something. Everyone creates something/ provides something that the tribe wants. When A hunts and brings meat home, everyone wants that. When B cooks and makes food, everyone wants that. This process of creating/ providing something that someone else in the tribe wants is the process of creating wealth. In David Deutsch's words, wealth is the set of physical transformations. When A hunts and brings back a dead deer, {tribe with x food} turns into {tribe with x food + dead deer}. That's wealth.

Now consider a scenario. Sure, A is creating wealth through his skillsets. J is creating wealth through her skillsets. A provides whatever he can to J and J provides whatever she can to A. But this is inefficient. What if A wants B's services and B doesn't want A's services? How will the trade happen?

To make it easy for evreyone, money comes into picture. Collectively if everyone in the tribe creates a X amount of wealth today, the tribe prints a Y amount of money to point to X amount of wealth. And this money is distributed among all based on the perceived value of wealth each individual created(/perceived value of the product/ service each individual is providing).

So, money is just a pointer pointing to the wealth someone created(for the tribe). As long as collective wealth is being created and money is being printed based on that, there is no problem. If the tribe prints more money but doesn't create as much wealth as the printed money points to, the money loses value because it's not backed by wealth anymore. This is called as inflation. The reverse is deflation.

To summarize, wealth is a set of physical transformations that you can make and money is just a pointer to it. Money by itself has no value.