Economics — Here’s My Take by Martin Kienitz

9 – WEALTH

Think of Robinson Crusoe washed ashore alone on a deserted island. He had no money or any need of it. At the outset he had no wealth but soon created some. He sharpened sticks and used them to spear fish. He wove leaves into a hat and built a hut to keep dry. He made animal skins into shoes, clothing, and an umbrella to keep off the tropical sun. Each of these items, made with Crusoe’s own labor from the island’s natural resources, certainly qualified as wealth if you think of wealth as being useful possessions. They were useful to him and would certainly be useful to others – they would have value in a society of castaways on deserted islands. He made them, but ‘found’ objects could be useful too.

But now consider if Crusoe were to spend some of his time weaving coconut fibers into a Union Jack. It could be among his prized possessions. He could count it as part of his wealth but it might be of no value to others. If he could trade with others he might increase his wealth. He would realize that wealth consists not just in useful and prized possessions but in tradable ones, too. Thus wealth, in a single-person society, could be anything that is valuable in any way to that person. It could be life supporting, helpful, beautiful, pleasing, comforting, or practical: no restrictions, because there’s no accounting for individual tastes. However, wealth in a multi-person society would also include things that are wanted by other members of society. Items could become wealth if they were desired by and tradable to someone else. It’s from this that the economic aphorism comes, “Value arises from Exchange.”

Because of all this, wealth has no definite measure or steady amount. It has no clear definition. It is evanescent; it depends on people’s whims and wants as well as their needs. It depends on their willingness and ability to trade with each other.

Economists like to start small and ponder wealth, money and economic growth in a group of just two persons and then try to generalize up to more complicated societies. On this basis a barter economy in a multi-person society can be erected. People can trade goods and services with each other without using money. But this doesn’t eliminate the evils of a money economy because persons can trade in goods they have no use for. They could work to accumulate stocks of stuff of no value to themselves except for exchange, as modern retailers do. Or they could make loans of goods for trade using other goods as collateral.

Some items can clearly be possessed by only one person at a time and thus could be “owned,” and might be traded between owners. Other items, such as river water, are more communal. Their ownership, if any, would have to be agreed upon with social or legal arrangements. Unclaimed ore deposits are wealth when appropriated, not before. In society, ownership is the key to wealth, the necessary concept. Wealth has no meaning without the agreements and customs that create ownership of things. To own something is to have exclusive possession and authority over its use, including the ability to deny its use to others. Our everyday meaning of wealth is founded on ownership: wealth is everything owned, less everything owed, at a given time.

Wealth has had a checkered career, as an idea. There has always been confusion about it. It seems clear enough in people’s minds yet they have very differing opinions about it. Rich people think of wealth in one way, poor folks in another. At one time land was once the only true wealth but then gold was included. Herdsmen counted their wealth in cattle.

Land, as wealth, with its farms and forests, was once class-based because it belonged to the gentry. The 18^th century mercantilists of England thought their nation’s wealth was the gold stored in the Bank of England’s vaults. Not so, said Adam Smith in his Wealth of Nations. A nation’s wealth was not in gold or money, which are dead and unproductive, but “the annual produce of the lands and labour of society.” That was a step forward. It marked a beginning in the understanding and spread of capitalism. But notice – neither the mercantilists nor Adam Smith included money as part of wealth. After them, society changed yet again. The industrial revolution created great factories, and money had to be counted as wealth. When an industrialist bought land from a country gentleman for its coal deposits, the gentleman received money and the industrialist got raw material for his factories. The gentlemen’s wealth was now in money instead of land. When the all coal was burned up, where did the land’s value go? There was nothing left but the factory’s output of goods, a hole in the ground, and money, i.e., the industrialist’s profit and the gentleman’s proceeds from his sale. This period marked a momentous change – money was now conceived of as wealth. Adam Smith must have turned over in his grave.

Time marched on and there were many more changes. Today ‘wealth’ seems to mean whatever the moment calls for. Sometimes it is everything one owns, borrowed money counting as negative wealth. Sometimes wealth is only what’s tradable. Pundits, politicians and the man in the street all forge ahead with their own ideas. This isn’t new. Economists have fiddled with the definitions of wealth to suit themselves, each starting over rather than building upon the work of their predecessors. Adam Smith, Karl Marx, J. M. Keynes, Milton Friedman all did so. It often depended on their politics. Still another variation was proposed by Carl Menger in 1892. [1] According to him, wealth is:

. . . the entire sum of goods at an economizing individual’s command, the quantities of which are smaller than (his) requirements for them.

That’s pretty abstruse. I don’t know of any economists that eagerly pursued this breakthrough.

Ordinarily we use two slightly different ideas of wealth. The simplest is net worth: assets minus liabilities, that is, personal property, real estate, investments, money in the bank, cash in hand or under the mattress, minus mortgages, unpaid bills, taxes due, personal IOUs, etc. Then there is a larger view, which adds in saleable intangible assets like patents and copyrights. But I have found even wider, alternative ideas of ‘wealth’ that sprout like weeds and might be wealth too, but it’s hard to be sure. They can be possessed but not owned in a legal fashion; they cannot be sold, traded or given away. People may have clear title to them, so to speak, but they’re not transferable. When we speak of a “wealth of knowledge” or “wealth of experience” we have this meaning in mind. Workers in our economy, from burger flippers to doctors, must have such intangible ‘wealth’ in order to make a living but it’s not easy to give it a monetary value. For example, an electrician’s license has value. It is like a bond that yields an income over time. Another example, “goodwill,” is a monetary asset listed on a corporation’s balance sheet. It’s the estimated dollar value of good relations with customers and the community. If these went away the company would truly be poorer but no one is sure by how much. The money-value of goodwill is just a guess.

One can point to further intangible assets which might be wealth but are impossible to quantify. Intelligence, talent and good looks are also possessed but non-transferable. They are unearned and undeserved but everyone knows how vital they are. They open the doors to opportunity and fortune. They are valuable but not value-able. It might be done by figuring out how much poorer one would be if they were missing. Such definitions are nearly useless to economists, so they use a narrower definition called economic wealth, which does away with such problems:

The economic wealth of an entity at a given point in time, consists of the ascertainable money-values of those things, material or immaterial, that are owned by the entity less those things that are owed, which can be legally transferred to another entity through sale, trade, exchange, gift, inheritance, or other means.

Under this definition, economic wealth includes:

And it excludes:

Economic wealth can be bought and sold. It is a stock of assets, not a flow of them. Its value is measured at a particular point in time because the values of assets change with time. It is owned by some entity. It is not vague but is somehow countable, and it can be measured with money. A dollar value can be assigned to or estimated for it. This definition of wealth leaves out free goods. For example, underground water is not owned but the right to pump it from a specific property is an intangible economic asset which can be bought and sold.

Some don’t like the concept of economic wealth because it’s too narrow. Why must everything be reduced to money? It’s a valid objection. One reason to measure wealth with money is to let different kinds of wealth to be compared and combined, and to change hands smoothly and easily. Purists think that only those things with a market value are really wealth and rule out touchy-feely intangible kinds. Others realize that the economy depends vitally on more than money but can’t pin it down precisely.

It’s important to distinguish economic wealth from the wider kinds of intangible wealth. Human skills and knowledge must be kinds of wealth because society would be poverty-stricken without them. If they are lumped in together with ‘real’ economic wealth the result is a ‘fuzzy’ kind of wealth. Intangibles like patents are economic wealth since they can be bought and sold, but skills lying between their owner’s ears, like computer programming, are not. It’s impossible to draw a line between economically important and unimportant skills, and they come and go with the times. We are reduced to hand-waving since this fuzzy wealth category is so open-ended. So why do we use it? Because it matters. As yet we have no proper words for “intangible non-transferable assets that are useful or valuable in some way.” The best we’ve come up with is “human capital.”

The United Nations has published balance sheets for twenty nations [2] grouping their assets under three headings: ‘manufactured’ or physical assets, ‘human capital’ or people’s education and skills, and ‘natural capital’ such as land, oil and minerals. If these categories were really comparable and substitutable then policy-making would become asset management programs. The UN does not include money and other financial assets as part of wealth in their reports, nor does it include unpriced assets like clean air and water.