The True Purpose of Economic Activity
Throughout my life, I've often heard people say that the purpose of working a job or running a business is to earn money.
When we closely examine the phrase "earning money," it doesn’t quite make sense.
Firstly, money is an abstract concept. Without something concrete to tie it to, the idea of "money" can seem elusive. For instance, consider:
"I give up 20 dollars to get myself a sandwich."
Needs and Wants Are Primary; Markets Are Mere Machinery
There are two parts to the above transaction:
- I want: A sandwich
- I give: 20 USD
The Role of the Economic Machine
The global economy is a vast and intricate system, encompassing nations, cultures, technologies, and countless other facets.
But why does humanity maintain such a complex mechanism, continually running and "growing" year after year?
The purpose of this "economic machine" is to serve and fulfill the needs and wants of the population it supports. If there were no desires or wants, the market itself would cease to exist.
As Adam Smith famously wrote in The Wealth of Nations:
"Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer."
Fulfilling a Need or Want Produces Transactions and Money
Two critical words arise from the discussion above:
- Serve
- Fulfill
Both terms represent the same fundamental idea:
"Fulfilling a want in the economy is represented by money."
The more fulfillment a person or group delivers to address the needs and wants of the populace, the more "money" that person or group earns. In essence, every unit of gain represents a token of gratitude from others for providing a valuable good or service to society.
Wealth Is the Power to Fulfill Needs and Wants
The wealth of a group of people is fundamentally about their power to satisfy needs and wants.
Wealth represents the ability to serve oneself and others in meaningful and productive ways.
As Adam Smith noted:
"Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life."
Capital: A Specific Type of Wealth
Capital is a form of wealth optimized to generate even more wealth.
For example, a well-trained engineer is not wealth in and of themselves. However, through ingenuity and hard work, they can produce solutions that fulfill the needs and wants of others, thereby creating wealth.
Defining Goods and Services
Goods
Tangible objects that satisfy human wants and needs, capable of being stored, transferred, and accumulated.
Services
Intangible actions or activities performed to meet human wants and needs, typically consumed at the moment they are produced.
As Adam Smith observed in The Wealth of Nations:
"The labour of some of the most respectable orders in society is, like that of menial servants, unproductive of any value, and does not fix or realize itself in any permanent subject, or vendible commodity, which endures after that labour is past, and for which an equal quantity of labour could afterwards be procured."
Smith's distinction between productive and unproductive labor highlights his emphasis on tangible outcomes, such as goods, as the foundation of lasting wealth. Services, while valuable and necessary, were seen as temporary contributions that did not generate enduring assets for future economic activity.
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