Human ingenuity and the creation of wealth

The size of a country’s “economic pie” is most easily thought of as the total dollar value of all goods and services produced during some period of time. This economic pie is the total amount of wealth (or value) created in the economy. It is not some fixed total waiting to be divided up among people. It is simply a statistic-a grand total, calculated by adding up the wealth created by each of the individuals in the economy. Many errors in economic reasoning stem from the incorrect notion that the size of the economic pie is fixed.
On the contrary, the size of the economic pie reflects the physical effort and ingenuity of human beings. It is not an endowment from nature. Economic output expands as we discover better ways of doing things. So over time, it is human knowledge and ingenuity-perhaps more than anything else-that limits our economic progress. If Jim, a local farmer who normally produces $30,000 worth of corn each year, finds a better growing method enabling him to produce $40,000 of corn each year, he has created additional wealth. But Jim has actually created more than the $10,000 in extra wealth. The $10,000 is only his share of the gains from the additional trades made possible by the extra corn he grew. Exchange makes both buyer and seller better off, so the total wealth created by Jim includes not only his $10,000 but also the gains of all of the buyers who purchased corn from him as well. This highlights an important point: in a market economy, a larger income for one person does not mean a smaller income for another. In fact, it is just the opposite. When a person earns income, he or she expands the economic pie by more than the amount of the slice that he or she gets, making it possible for the rest of us to have a bigger slice, too. When a wealthy entrepreneur, such as Bill Gates or Henry Ford, has an income of, say, $1 billion per year earned through voluntary exchanges in the marketplace, he has enlarged the economic pie for everyone by an even larger amount. Here’s how:
Suppose that Linda, a freelance graphic artist, pays $175 for a new software program developed by Bill Gates. As a result, she can do twice as much work in the same amount of time. Because she’s more productive, Linda can earn more than enough additional income with the software to justify her purchase. In addition, the businesses she serves are also likely to be better off because the software makes it possible for her to give them more and better service and a lower price for her services. Thus, while Bill Gates gained, so, too, did Linda and her customers.
Similarly, although Henry Ford certainly became rich, he also greatly increased our ability to transport goods, services, and people. In the process, he made it possible for many others to achieve higher living standards than would have been possible in his absence. Had Stephen King never written a novel, not only would he not be as rich, but we would all be poorer for never having had the opportunity to read his novels. When income is acquired through voluntary exchange, people who earn income also help others earn more income and live better, too.