What is Wealth?

Cryptocurrency is not wealth

“The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.” — Frank H. Knight

Conflating the words money and wealth is an easy mistake to make because in most everyday parlance we use the two interchangeably — if you are wealthy, you have a lot of money, and if you have a lot of money, you are wealthy — without loss of comprehension.

But money is a measure of wealth, not wealth itself, just like kilogram is a measure of mass but is not itself mass. They are not the same. They have to be distinguished if we are to reason cogently about the nature and causes of wealth of people (and progress in our “inquiry into the nature and causes of the wealth of nations.”)

I have written a fair bit about wealth and money over the years. Time for a TL;DR version.

Money refers to wealth, the referent. Money comes into existence through conventions. Like language, it’s a social construct. Agreement among people engaged in economic exchange is the irreducible foundation that supports the use of some thing as money. It could be cowrie shells, or salt, or gold, etc. (commodity money) or pieces of paper (promissory bank notes, IOUs), or even just pieces of paper with no commodity backing (fiat money), or entries in a ledger (perhaps cryptographically maintained on the internet), or whatever the next technological advance becomes the next convention.

If wealth, the referent, did not exist, there’d be no need for money. Stranded on a deserted island, all your money is no good if there’s nothing on the island you could exchange the money for. Money is worthless without wealth, but there can be wealth without money.

What is wealth? Anything that is of value. Value is subjective. Therefore there has to be a subject to do the evaluating. The existence of people (sentient, evaluating beings such as us) is prior to the existence of wealth.

Before the arrival of Robinson Crusoe, there’s no wealth on the island. After he arrives, he “creates” the wealth by valuing the coconuts, the freshwater streams, the fish. Certainly, he did not “manufacture” the stuff provided by nature. But that stuff became wealth only because he found it to be of some value.

Imagine that Crusoe had found a rich deposit of U-235 (the stuff that goes boom! beyond a critical mass) on the island. That’s not wealth because it’s of no use to him. That stuff would became wealth only after the arrival on the island of the Canadian-American physicist Arthur Jeffrey Dempster in 1935. (It’s labeled “235” because it was discovered in 1935. Just kidding.)

Does wealth exist on Mars? In theory yes, because some (not all) of the people of earth today (none in the distant past) value some (not all) of the existing stuff on Mars; but in practice no, because we don’t yet have the ability to grab the stuff we value. But soon enough, Martian stuff will become wealth when humans get there and start using it.

Understanding what wealth is is not rocket science. Wealth is one of the core concepts of economics. Even I — admittedly not the brightest mind on earth — have been able to understand what wealth is with a bit of pondering the matter for about 25 years, and this is my modest attempt to convey that understanding to those who care to learn.

~*~*~*~*

In a recent post (Inequality – Part 2) I made the claim that “that wealth does not exist in nature. Wealth is created by people.” In a comment to that post, Raghuram wrote,

… the vast bulk of the wealth is given for free by nature.

To which Prabhudesai replied in a comment:

The notion of wealth is 100% human creation.

Gasoline was in earth for millions of years yet it was not considered wealth until some humans figured out how to use it in a way that other people would pay for it. At that point it became wealth.

To which Raghuram replied with a thought experiment:

Suppose there is a river, passing through a village, carrying clean drinkable water. Let’s say one day, a group of bandits get the bright idea that if they block access to the only road leading to the river and charge a rent from the villagers to get water, they can make a lot of money.

What you are saying is that, until the bandits’ got their bright idea, the clean water was not considered wealth, but then all of a sudden it became wealth after the bandits “figured out how to use it in a way that other people would pay for it“.

Like Knight, I fail to see any utility in attempting to teach in the face of an insistent refusal to learn. But we economists are a masochistically stubborn lot. Having embarked on this futile venture to explain what wealth is, let me give it one parting shot before conceding defeat.

Raghuram’s conclusion suffers from an inability to distinguish between what I call “an economic good” and wealth. Everything we humans value for some purpose is wealth. What we value may be nature provided (clean water, air, fertile land, etc.) — in which case it is “free.” Next to a huge source of clean water, we have wealth. It’s not an economic good. Simple test: Can I sell it to you? No. You too can grab as much as you need. An economic good is something to acquire which you have to give up some other economic good. The operative principle is scarcity. Only if something of value is scarce, does it become an economic good.

Clean water available in unlimited quantities (meaning, the supply far exceeds the demand) is wealth but it is not an economic good. If the supply is constrained to be less than the demand, the clean water (wealth) becomes an economic good, and therefore it has a positive price. The higher the price, the greater is the demand relative to supply.

Here’s a paradoxical idea. An increase of wealth (an increase in the supply of stuff that we value) can lead to a decrease in economic goods. Imagine that the village gets its fresh water from a stream. That water is wealth (people cannot do without it and therefore they value it) and is an economic good (because the demand exceeds the supply.) One day, the villagers drill a well that taps into an immense aquifer. This increases the supply of water far beyond any conceivable use the village has. Water continues to be valuable (and therefore wealth) but it stops being an economic good because it’s no longer scarce. I can no longer sell you a gallon of water from the well because you can get as much as you want without paying me anything.

The river water in Raghuram’s story was wealth before the bandits showed up, and continues to be wealth after they captured the only road to the river. What changed was that the water became an economic good because the bandits restricted the supply — and people were forced to pay a price for something they had had for free.

~*~*~*~*~*

So if that’s the TL;DR version, you may wonder what the longer version is. They’re here:

  1. What’s Wealth and Where Does it Come From?
  2. Competition and the Creation of Wealth.
  3. Nature of Wealth.
  4. The Cost of Things.

Concrete minds (all mixed up and permanently set) are impossible to change. Why bother? Because many minds retain their plasticity even after they’ve been subjected to mindless schooling. It’s meant for those alone.

In a future post, I will explore the paradox of wealth: With superabundance, there will be an increase of wealth and a decrease of economic goods.

14 thoughts on “What is Wealth?

  1. Mango Monday November 8, 2021 / 8:53 pm

    With regard to your statement- “Agreement among people engaged in economic exchange is the irreducible foundation that supports the use of some thing as money”

    “History shows it is not possible to insulate yourself from the consequences of others holding money that is harder than yours.” -Saifedean Ammous

    Holding fiat or toilet papers as money as one’s cash savings ( though there is a market consensus for it being good for transactions ) has consequences. Therefore I feel the “agreement” is an emergent property primarily from the scarcity of the “good” being used as money.

    Like

  2. Raghuram Tuesday November 9, 2021 / 4:16 am

    It was you who claimed:

    The bare, basic, simple, inarguable, undeniable, incontrovertible, inescapable fact of the matter is that wealth does not exist in nature. Wealth is created by people. Nature provides the raw materials but without humans, there is no wealth because there’s no wealth creation. Only small children and stupid adults think that wealth exists in nature. Santa Claus is not a fact of nature. It’s pure fantasy.

    If you had substituted economic goods for wealth, that statement would have been more accurate.

    So, a better title would have been: Errata: The difference between wealth and economic goods.

    The higher the price, the greater is the demand relative to supply.

    That is the essence of the problem for anyone who wants to make a lot of money. How to maximize the price, by:
    1. manufacturing demand
    2. restricting supply

    One gets rich to the extent that one can successfully manage 1 and 2. Notice, that it does not matter whether you create or destroy wealth in the process. More often than not, destroying wealth is how 2 is accomplished, which is why it is said:

    Behind every great fortune there is a crime, and it is the economist’s task to whitewash these crimes.

    In https://deeshaa.org/2021/04/20/the-cost-of-things/, you wrote:

    Here’s a surprising claim. The cost of any economic good is the cost of the energy that went into its production. We can go into why this is so later. If this is true, then it follows that the cost would fall if the cost of energy falls. And if the cost of energy tends to go close to zero, then the cost of everything would tend toward zero. In other words, super abundance.

    Super-abundance is the greatest nightmare of every businessman: “How is one supposed to get (money)rich if everything is super abundant. Can’t let that happen”.

    For everyone else, it would be a great blessing.

    Like

  3. Prabhudesai Tuesday November 9, 2021 / 12:48 pm

    If you had substituted economic goods for wealth, that statement would have been more accurate.

    I had not come across the phrase “economic good” before this post but in my mind I thought of this concept as just a special case of wealth. All wealth (things humans desire/need) and be expressed on a scale of price people are willing to pay for it. On cheaper end we might have Oxygen in air or drinkable water etc. in some circumstances. It is so cheap and abundant that there is no point trading it but it is wealth none the less. Everything else on the scale is an economic good.

    So I think economic good is just a subset of wealth. (Both of which are subjective).

    That is the essence of the problem for anyone who wants to make a lot of money. How to > maximize the price, by:
    1. manufacturing demand
    2. restricting supply

    Yes, there is an optimal price point which is a function of supply and demand but most corporations have very limited control on either variables due to competition. Of course the best way to kill competition is with siding with the government and using government to kill your competition. Great examples of this are Banks, Insurance companies and health care in USA. Nearly every sector in India is a good example of using government to steal people’s money.

    But many others achieve this without involvement of government. Amazon has increased demand for everything my making it extremely simple to search and but products from world over. Amazon could not restrict the supply but still made profits by sheer scale of demand.

    Ferrari, makes fixed number of cars each year thus restricting supply and increasing prices but analysis shows that they are not optimally priced.

    Behind every great fortune there is a crime, and it is the economist’s task to whitewash these crimes.

    It is a meaningless phrase. Probably invented by some politician or loser academician.

    Super-abundance is the greatest nightmare of every businessman: “How is one supposed to get (money)rich if everything is super abundant. Can’t let that happen”.

    All historical evidence points in exactly opposite direction. Rockfeller made oil extremely abundant in USA. He reduced the price of oil by 1/50th by just making it abundant. Private companies like Airtel, Jio etc. made cellphone coverage/data prices negligible by making it abundant.

    In the post 90s India nearly everything including food is abundant thanks to private businesses and businessman like Ambanis or Mittals. In fact senior Ambani’s rise was achieved purely by making clothes and petroleum products abundant in India.

    Is there any product today that is less abundant than in past due to some businessman trying to makes it less abundant and make money in process ? (Only condition is government not heavily regulating it).

    If there is anything I can bet on with my eyes closed is the fact that everything that people desire will get more abundant over time unless government gets involved.

    Liked by 1 person

  4. Raghuram Wednesday November 10, 2021 / 7:52 am

    Prabu Desai wrote:

    Rockfeller made oil extremely abundant in USA. He reduced the price of oil by 1/50th by just making it abundant. Private companies like Airtel, Jio etc. made cellphone coverage/data prices negligible by making it abundant.

    In the post 90s India nearly everything including food is abundant thanks to private businesses and businessman like Ambanis or Mittals. In fact senior Ambani’s rise was achieved purely by making clothes and petroleum products abundant in India.

    You seem to be a worshiper of winner-take-all businessmen and are misattributing the abundance of goods to them. Businessmen are not in the business of creating abundance, but of making money, by whatever means possible.

    It was not Rockefeller or Ambani who made oil abundant, but nature. Relative to human usage, nature provides enormously abundant amounts of oil. In the early days, you didn’t have to frack rock and pump it out, just drill into it and the pressure of built up gas gushed it out. The extreme abundance of the resource and its great advantages as a source of energy, favoured the business strategy of tiny margins on large volumes (that can be achieved by exploiting economies of scale), over large margins on small volumes, and therefore a winner-take-all business.

    Is there any product today that is less abundant than in past due to some businessman trying to makes it less abundant and make money in process ? (Only condition is government not heavily regulating it).

    Your businessman worship is blinding you to basic facts all around you.

    To answer your question, all you have to ask is: what is the greatest expense for the average household? It is either rent or a home mortgage payment. Businessmen are the primary reason why housing, which can potentially be abundant and cheap, hangs like a grindstone on every household. Here are some of the strategies they use to restrict supply:

    lobby for zoning laws that limit the number of storeys. The Indian version is for the local mafia to prevent conversion of slums to anything else. They charge the daily wage labourers who live in these slums insanely high rents.
    lobby to prevent metros from serving city centers or better yet not build them at all.
    lobby to oppose new multi-storeyed construction to keep rents high.

    leading to unfortunate situations like this:

    If there is anything I can bet on with my eyes closed is the fact that everything that people desire will get more abundant over time unless government gets involved.

    I’m not so sure. Everyone desires more leisure time, but the current system provides less and less of it by putting chokeholds on essentials like housing, and making them take a lifetime to obtain. Indeed a good heuristic when making policy decisions is to ask: Will this give people more leisure time to spend with their family, to create and enjoy art, science, life?

    Like

    • Prabhudesai Saturday November 13, 2021 / 8:34 pm

      “What can men do against such reckless hate? ” King Theoden in Lord of the Rings – Two Towers overlooking the massive army of Orcs.

      “What can ordinary person like me do against such extreme level of retarded-ness ?” me looking at your comment.

      Businessmen are not in the business of creating abundance, but of making money, by whatever means possible.

      Yes true. Most times creating abundance is the best way to make money.

      Relative to human usage, nature provides enormously abundant amounts of oil.

      Nature does not provide oil to us. Oil has to be extracted efficiently, refined and shipped across the globe in a form that is usable. There might be infiinite oil on a distant planet in distant galaxy but it is not “abundant” because it is not usable. My grandfather never saw a gallon of crude oil in his life. I can buy as much as I need. I live in times of abundant Oil unlike my grandfather. This is just a simple observation. Nature does not have anything to do it.

      Oil is more abundant today in 2021, than in 1890s. All credit to humans.

      It is either rent or a home mortgage payment. Businessmen are the primary reason why housing, which can potentially be abundant and cheap, hangs like a grindstone on every household. Here are some of the strategies they use to restrict supply:

      If that was true then countries, states, villages who do not have “businessmen” should have abundant, cheap and better housing no ? Most communist countries/states have absolute shit housing (look at Kolkata) most capitalist countries have far superior housing.

      Overall houses per capita have gone up in last 100 years. The quality of homes itself has gone significantly up. All thanks to mostly private entrepreneurs.

      Everyone desires more leisure time, but the current system provides less and less of it by putting chokeholds on essentials like housing, and making them take a lifetime to obtain.

      Data suggests exactly the opposite. We are living in times of such abundance that we do not have to worry about minor things like food and clothing. Housing might be expensive but it has always been expensive throughout history, but houses we want now are far superior than homes 100 years ago.

      lobby for zoning laws that limit the number of storeys. The Indian version is for the local mafia to prevent conversion of slums to anything else. They charge the daily wage labourers who live in these slums insanely high rents.

      Liked by 1 person

      • Prabhudesai Saturday November 13, 2021 / 8:35 pm

        lobby for zoning laws that limit the number of storeys. The Indian version is for the local mafia to prevent conversion of slums to anything else. They charge the daily wage labourers who live in these slums insanely high rents.

        Well, this clearly is a corrupt government colluding with its friends to make more money. Clearly a government problem and not that of entrepreneur problem.

        Liked by 1 person

        • Prabhudesai Saturday November 13, 2021 / 8:38 pm

          BTW

          According to the U.S. Census Bureau, the median sales price of a house in the U.S. in 1980 was $64,600. Given that the mortgage loan rate at that time was 13.74%, a 30-year loan for $64,600 required a monthly payment of $752.15. The average size of an American home was 1,595 square feet, indicating a monthly payment rate of $0.47 per square foot of housing.

          By 2020, the median sales price of a house rose to $336,900. The mortgage loan interest rate, however, declined to 3.11%. A 30-year loan, then, required a monthly payment of $1,440.45. The average U.S. home size also increased to 2,261 square feet, indicating a monthly payment rate of $0.64 per square foot of housing.

          In 2020, the average blue-collar worker’s hourly compensation rate stood at $32.54. Therefore, a $1,440.45 loan payment required 44.27 hours of work per month, which is equal to a monthly payment rate of 1.17 minutes of work per square foot of housing.

          That means that the time price of a loan payment decreased from 82.47 hours of work per month in 1980 to 44.27 hours of work per month in 2020, or by 46.3%. Over the same period, the time price of a monthly loan payment per square foot of housing decreased from 3.1 minutes of work to 1.17 minutes of work, or by 62.1%.

          Between 1980 and 2020, the nominal price of a square foot of housing increased by 268%. Over the same period, the average nominal blue-collar hourly compensation rate rose by 257%. As such, the time price of a square foot of housing rose from 4.44 hours of work in 1980 to 4.58 hours of work in 2020, or 3.1%.

          For that tiny statistically insignificant rise you get a far better house.

          Liked by 1 person

      • Raghuram Sunday November 14, 2021 / 9:41 am

        “What can ordinary person like me do against such extreme level of retarded-ness ?” me looking at your comment.

        But for this, I wouldn’t have guessed I was speaking to a 6-year-old.

        Like

  5. rcwpacct2019 Wednesday November 10, 2021 / 10:42 am

    @raghuram apparently thinks that there is this tribe of humans called “businessmen” (perhaps they have horns 🙂 )
    Those anti-business arguments are straight up communism. I hate to break it u, they tried it … it doesnt work lol

    Liked by 1 person

  6. keshavbedi Monday November 15, 2021 / 4:45 am

    “What is wealth? Anything that is of value. Value is subjective. Therefore there has to be a subject to do the evaluating. The existence of people (sentient, evaluating beings such as us) is prior to the existence of wealth.”

    This alone is enough to show that cryptocurrency is wealth. People subjectively value it as such. If gold can be both wealth and money why can’t cryptocurrency be both?

    Like

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