The Wealth of Nations — Part 4: What’s Wealth?

Wealth?   Maybe!

Most people would readily identify a heap of gold ingots as wealth. But a moment’s reflection is enough to conclude that what can be considered wealth depends on the context.

Imagine Robinson Crusoe alone on his otherwise uninhabited island coming across a pile of gold nuggets in a stream. What’s more valuable to him: the gold or the fresh water in the stream? Gold is pretty useless to him because he cannot use it for anything. Gold is a heavy, soft metal. A piece of iron would be more valuable for making a knife or a pickax. Gold is of little value to him.

The important word is value. The value of materials is not intrinsic to them. Without an evaluating human mind, the concept of value is empty of any content. Humans impart value through their knowledge and preferences. Wealth is anything that is of value. I could have written that last sentence as “Wealth is anything that is of value to humans” but it would be redundant since value necessarily implies an evaluating human mind.

Stuff naturally occurs in nature but it does not become wealth until humans value the stuff. Both knowledge and preference is involved in this. Iron ore is naturally occurring stuff but it is worthless until one knows how to extract iron from it. That’s called technology. It is a handy word that means “knowing how to do something.”

Knowing how to transform naturally occurring stuff into stuff that has any value is how humans create more wealth than what they begin with. A pile of radioactive uranium ore before people knew how to enrich uranium and build fission reactors was just a pile of rocks that was useless, and unknown to them also quite lethal.

Now people know better. They have the technology to use uranium ore. They have ideas — good or bad — about what to use uranium for.

Knowledge, ideas, technology, know how — all these are interchangeable concepts in the context of how humans create wealth. Without ideas, stuff is just stuff. With the proper ideas, humans transform stuff to create wealth.

Preference also comes into the matter of value. For example, a vegetarian would be willing to pay not to have to eat non-vegetarian food that a non-vegetarian would pay good money to eat. I know someone who is massively into clothes and has closets full of them. I consider anything more than a few clothes to be useless clutter. Value is subjective.

Subjective. That’s another very important word. It is the subjective evaluation of something that ultimately determines it value. We value goods and services that we consume. We signal our valuation by how much we are willing to pay for them. Our valuation depends, as mentioned before, on our preferences. (Preferences can be manipulated but that should not detain us here.)

Here’s a question. How much is something that is found in nature worth? How is its worth determined? Let’s take iron ore as an example of stuff that occurs in nature. How does iron ore get to be worth what it is worth?

The answer to that is that iron ore derives its worth from the value that humans assign to the things that ultimately gets made out of the ore through a series of transformations. It’s the end product’s valuation that determines the value of the naturally occurring substance. The fact that the end product is valued is the only thing that matters in the valuation of the starting substance.

Note that the production process starts from the naturally occurring stuff — iron ore in our example — to the final consumer product with iron in it but the valuation starts at the consumer product end of the chain and proceeds backward to the iron ore. No one consumes iron ore. People use products made out of iron and that is where iron ore derives its value from.

The valuation of iron ore depends on the subjective valuation of the products that include iron in them. If people did not care for those products that have iron in them, it would be pointless to mine iron ore.

The important thing to appreciate is that natural resources — such as minerals found in and on the surface of the earth — are not wealth in and of themselves although they constitute an important factor that goes in the production of wealth. The transformation of natural resources into final products that have value involves “round about” production processes that require one very valuable thing: time.

Let’s go into the round-about-ness of production and the time factor in a bit.

{This is part of a work in progress called “The Wealth of Nations.”}

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