07 June 2012

What is Wealth?

Wealth, simply put, is the accumulation of valued outcomes.

Robert Heilbroner explains that:
Wealth is a fundamental concept in economics – indeed, perhaps the conceptual starting point for the discipline. Despite its centrality, however, the concept of wealth has never been a matter of general consensus.
As it turns out wealth is also central to the study of politics – defined as bargaining, negotiation and compromise in pursuit of valued outcomes (a definition from The Honest Broker). In the study of wealth boundaries between the disciplines of economics and politics merge into shades of grey.

This post seeks to make three points related to wealth. First, wealth is more than money. Second, wealth can refer to outcomes in terms of both ends and means, and ultimately is a subjective concept. And third, it is important to distinguish the redistribution of wealth from the aggregate accumulation of wealth, though both are important, valued outcomes to policy making.

If wealth refers to “valued outcomes,” then what are “valued outcomes”?

The first thing most of us think of as wealth is money. Money is important because it can readily be exchanged for other things. We often use measures of income or economic activity as a descriptor of wealth, and such measures often work quite well, but they don’t tell us everything about what we value. Efforts to measure “happiness” as wealth have become a sort of cottage industry, but have not gained much traction in displacing monetary-based measures of wealth.

In his 1958 classic, Politics: Who Gets What, When, How, political scientist Harold Lasswell suggested eight different categories of valued outcomes: power, income, respect, well being, rectitude, skill, enlightenment and affection. (Lasswell actually used “wealth” but defined it as “income” – I use the latter here to avoid confusion.) While Lasswell’s work has been much discussed for over half a century, including whether the eight value categories are comprehensive or not, the essential point here is that the outcomes that we value in society have many dimensions that go beyond money or that which can be expressed in money. (There are of course philosophers, political scientists and economists who would argue that everything has its price. I am not one of them.)

The presence of different (and often inconsistent) conceptions of what constitutes a valued outcome is of course where politics come in. Because people value different means and ends, we reconcile those different values through various forms of democratic political systems. Take energy as an example. Everyone agrees that the lights should stay on, but people disagree about what means should be used to provide energy – Fossil fuels? Nuclear? Renewables? – and how much they would prefer to pay for energy services. Such differences in perspective cross many of Lasswell’s value categories (maybe all of them). We reconcile those differences via politics, which is how we get done the business of society.

Money helps to illustrate another important aspect of wealth – a distinction between ends and means. Money is a means of achieving valued outcomes, because it is readily exchangeable. The lights come on in my house because I send the power company money every month. Even in that case, the electricity that comes out of my wall is but a means to some other end – in the case of producing this blog post using electricity, enlightenment. Of course, for some – Gordon Gekko comes to mind -- the accumulation of money is an end in itself. One person’s means might be another person’s ends.

Heilbroner explains that economists have debated whether wealth is an objective or subjective metric. Examples of objective measures of wealth cited by economists over many centuries include money (of course), gold (and other forms of capital) and human labor. The idea of an objective metric of wealth is one of the underlying bases for benefit-cost analysis, which is a prominent tool in the policy analyst’s toolbox.

While it would certainly make the tasks of policy analysis (and indeed politics) much easier if there were an objective metric of wealth, the position that I take, simply based on observation, is that wealth is a subjective concept. The fact is that people value different outcomes differently. That said, in an extremely wide range of situations, money does an admirable job serving s a proxy for wealth. A challenge for the analyst is to always remember that money does not measure everything that matters to people.

A final point to make in this post is that wealth can change in both relative and absolute ways. For instance, if you give me all the money in your bank account, I will have become more wealthy, and you less so, but the absolute wealth of society will not have changed. The distribution of wealth is also a valued outcome (and might also be considered in terms of power and rectitude) that different people view differently, and thus from a political perspective should be a part of any discussion of the absolute wealth of society. So while my interests and focus will be on the accumulation of wealth (as valued outcomes) across society, to address this subject properly necessarily requires considering issues of distribution in addition to aggregate accumulation.

With a working definition of "wealth" in hand, in a number of subsequent posts I will take up one of the central questions of both economics and the study of politics, drawing on insights from each field, to explore the following question: How do we as a global society become more wealthy?

25 comments:

  1. Of your three points, only the second seems to be debatable; the first and third seems fairly obvious. And even the debatability of the second depends on how it is phrased. If wealth is about (personally) valued outcomes, then its subjectivity is tautological. To make the point more interesting, one needs to be careful about how value is defined.

    My own take is that wealth is mostly (though not entirely) objective and that means cannot be considered valid outcomes except to the extent that they have necessary ends. To put it another way, if two means lead to exactly the same ends, it is not valid to favor one over the other.

    With regard to values themselves, at the very least they must be subjected to a consistency check. It may be possible for people to value things that are mutually exclusive, such as reducing CO2 levels in a short amount of time while maintaining economic growth. Such "valued outcomes" should not be associated with wealth because the values are not logically consistent and therefore lack validity.

    It is my expectation that when (personal) values are not just taken for granted but are subjected to rigorous analysis, most of the subjectivity disappears. I also expect that you will disagree, but at least this gives you specific ground to defend.

    ReplyDelete
  2. You have overly complicated something fairly simple.

    Wealth is whatever we need and want. Each of us decides specifically what that means for ourselves.
    Establishing the relative values of different forms of wealth is performed by the marketplace.

    Essentially everything is wealth, but some forms have more value than others.

    Nearly every aspect of Wealth has sufficient complexity that politics could not possibly manage it. At best politics serves as the means for special interests to distort market outcomes.

    Money is purely a mechanism to exchange the wealth we produce for the wealth we desire.

    As people get richer they slowly cease accumulating wealth, and switch to accumulating money - because it becomes difficult to consume the amount of wealth ones money can buy. As the shift from accumulating wealth to accumulating money progresses, the benefits shift from the rich to everyone else - because unspent money represents wealth someone else is consuming.

    ReplyDelete
  3. Strange that freedom and liberty do not seem to get much attention in this discussion of valued outcomes.

    ReplyDelete
  4. -3- Stan - I agree. I don't see freedom in the list anywhere, and I think it should be.

    ReplyDelete
  5. wealth and or money could also be defined as energy which you either possess or control

    ReplyDelete
  6. dhlii,

    I'm pretty sure that wealth is NOT simply "whatever we need and want." Suppose I value something and spend resources to accumulate it. Clearly by your definition I will consider myself as being wealthier. But what if no one else in society values it? Then from the societal perspective, the same definition implies that NO wealth has been accumulated. Is it possible for something to be wealth and not wealth at the same time?

    Moreover, if I have used valued resources (from society's perspective) to accumulate this non-wealth, society will conclude that it is in fact poorer, not wealthier, due to my activities. Your definition seems inconsistent when applied across multiple scales and therefore is logically flawed.

    In a case like this, the value that I place on the outcome is real, but the wealth is not. This is hardly different from a situation where a child is afraid of monsters in the closet. The fear is real but the monsters are not.

    ReplyDelete
  7. Wealth has a timeline. Take the past 100 years. In 1912 if you contracted a communicable disease such as TB you might well die from it. This no matter how much money you have. There are many things like this. In this sense the average person today is wealthier than the millionaire of 1912. Technology moves at a rapid pass today.

    ReplyDelete
  8. Brian;

    What is wealth for you and for someone else not only are allowed to be different but are with absolute certainty.

    Except that I have simplified things even further - to make clear some of Roger's problems in later analysis, there is no consequential difference between my definition and his more cumbersome one.

    Nor is "accumulate" important. Wealth includes watching sunsets, and going on vacations.
    It is anything that I value enough to produce in order to aquire or experience.

    You are correct that "society" or expressed differently "the free market" will not have exactly the same values - duh. Again we are all different.

    Your "societal wealth" is just a gigantic summation of each individuals values as expressed in the market place. There is no universal definition of wealth, though there might be some consensus on some values.

    Certainly as measured by one specific person or groups set of values, the net wealth of society could be optimized differently. But alter whose values you use and you get different results.
    Demonstrating that the sum of each persons individual values might be lower than the sum of a specific single set of values means nothing.

    Regardless, the summing of each individuals wealth preferences will inevitably result each individuals preferences being weighed differently by others - but that problem exists no matter what. Establishing some imposed scheme, implicitly forces me to work to achieve someone elses values. The free market does the same - you choose to produce what you conclude others value, in order to get what you value, but there is no compulsion from the free market. The free market not only maximizes your ability to get what you want, but others ability to get what they want, because you have to produce what they want to get what you want.


    As to your monsters analogy. my personal wealth is both real to me and real, it is also real to you, it is just not wealth to you. There are no monsters in the closet. And in order to get what I value, I must either create that myself, or produce something else that you value and exchange for it.

    ReplyDelete
  9. stan, mike pedex,

    While Rogers definition is overly complex, if you value freedom, liberty, or energy, then those are wealth to you.

    Further they are essential ingredients as it is difficult if not impossible to create wealth with out them.

    ReplyDelete
  10. Brian;

    Wealth is entirely subjective.

    We go to a great deal of trouble to create objective edifices for it, but even the crass visa commercials are about the use of a pseudo objective system of values to achieve something that is "priceless".

    Value and price are real. Ultimately we are forced to put a price on everything, but being real does not make them objective.

    What you are willing to produce and exchange for say dinner out with your family is not the same as what I would. The price of a happy meal is very real, but alterations ranging from chicken flu, to shifts in our tastes or our perceptions of the future could alter that price substantially. There is no objectively correct price. There is just the price you are willing to pay right now.

    ReplyDelete
  11. Brian;

    Some of us like chocolate ice cream.
    Some like vanilla.

    For some the preference is sufficient they will not buy or eat the other.

    The value some place on chocolate - according to your scheme undermines the value the rest of us place on vanilla. By your argument we are essentially all poorer because less vanilla is produced.

    We need not chose ice cream. There is almost nothing where preferences are universal.
    Why is a Gucci shoe more expensive than one from PayLess ? Because some people desire it sufficiently to pay more. While there are purportedly objective elements such as raw materials costs (which are themselves just another layer of subjective values), scarcity, usefulness, ultimately the prime factor in all prices is need or desire.





    Wealth, whether called desired outcomes, or needs and wants, is inherently individual and subjective. When we measure the wealth of a nation we are measuring the sum of the extent to which each individual has had their personal needs and wants met.

    Fortunately we do not have to attempt such a complex summation. With little exception we produce what others need and want in order to get what we need and want. And we almost universally use money to exchange one for the other.
    The measured value in money of everything we produce must very nearly match the value of what we want and need.

    The total value of what we produce is then fairly accurately measures the extent to which we have met our needs and wants - how wealthy we are.

    Further though needs and wants are not precisely the same as happiness - we might actually want things that do not make us happy, they are about as close an "objective" measure of our happiness as we can get.

    ReplyDelete
  12. Brian,

    It is precisely the fact that we value goods and services differently that creates the exchanges that make us better off. Every free exchange makes both parties to the exchange better off. If you value my vintage baseball card more than your collectible book and I value your book more than my card, we exchange and both are better for it.

    BTW -- this is why free exchanges, by definition, produce greater wealth than government spending and regulation which are not voluntary.

    ReplyDelete
  13. .

    In economic terms wealth is goods and services. Money is merely a transfer mechanism. Try this thought experiment, assume you have a warehouse as big as Kansas that contains all the money in the world, but you are the only person alive in the universe. That money is worthless other than for trivial tasks like lighting cigars.


    BTW, all economic enterprises consume wealth (labor and goods) and produce wealth (goods and services). If the value of the wealth produced is more than the value of the wealth consumed, we call this difference "profit." If less, we call it "loss."

    In order to have a wealthier society it is vitally important that the economic enterprises are net wealth producers (profitable) rather than net wealth destroyers.

    .

    ReplyDelete
  14. "Wealth is a fundamental concept in economics – indeed, perhaps the conceptual starting point for the discipline. Despite its centrality, however, the concept of wealth has never been a matter of general consensus."

    That is universal.

    "With a working definition of "wealth" in hand, in a number of subsequent posts I will take up one of the central questions of both economics and the study of politics, drawing on insights from each field, to explore the following question: How do we as a global society become more wealthy?"

    I fail to see your working definition of wealth.

    The comments above each illustrate points that should be considered. The detail required cannot be summarized in a single blog post or comment.

    My mega-yacht, castle, mansion, vacation home, 3rd-5th home, etc... are not wealth but cost centers unless they are income generating or maintain investment potential beyond my initial investment and recurring costs.

    It seems to me that once economists look past the accepted definition of poverty they are blinded by 'bling' and feel compelled to apply per capita and multiple gradients in class distinction. While I see some value in that I do not see how in a global sense this is valuable in measuring global societal wealth growth with targeted outcomes in mind.

    As with poverty, attention must be given to fluctuations & weighting factors with regards to region, housing, nutrition, health/nutrition/mortality, energy costs, education, disposable income and savings(safety net). After that various outcome levels need to be identified and applied both retroactively and towards future projections. This must be done per-person and not per-capita. Frankly I am more interested in the fluctuations of the various components than the establishment of a single threat level color, average phone number or average global temperature of the earth.

    On a long holiday weekend, a retired bus driver with home paid off, full pension and with a full picnic basket surrounded by grandchildren and family in a public camp ground seems just as wealthy to me as a man that has vast luxury homes around the world, running major airlines who is entertaining(working his crowd) work associates while discussing how the less 'wealthy' should all live more moderately to save the planet.

    You have your work cut out for you Roger, it does not seem like rocket science but I think it has the potential to open a lot of eyes. Good luck.

    ReplyDelete
  15. Stan (#12),

    I don't disagree with a thing you said. We all value things differently, and that difference in valuation is part of what drives the free-market exchange that allows a more efficient allocation of resources.

    So which of my statements disagrees with your point of view? I'm not clear on the point of your response.

    ReplyDelete
  16. dhlii,

    I find your responses curious, as a few brief comments should illustrate.

    1. You say of Roger that "You have overly complicated something fairly simple" and then go on and on in multiple posts. If wealth is simple and, as you claim, your definition is a simpler version of Roger's, then why does it take you so long to say it?

    2. You also say "Nearly every aspect of Wealth has sufficient complexity that politics could not possibly manage it." But I thought you said it was "fairly simple." Contradict yourself much?

    3. You say "There is no universal definition of wealth," and yet in your first post you appear to offer one: "Wealth is whatever we need and want."

    4. You claim that "Wealth is entirely subjective" but then offer that "there might be some consensus on some values." In fact, if wealth is related to what we value, then any shared values at all imply that wealth is not "entirely" subjective.


    Let me see if I can state things more simply.

    No "entirely subjective" concept is meaningful, because it is incapable of being expressed beyond you, the subject.

    Wealth certainly has some subjective aspects to it; it also has some objective aspects. The only question is the proportion of the two. I am asserting that based on universal and commonly-held values, wealth ends up being "mostly" objective. Differing values end up acting like random noise on the overall amount of wealth.

    Let me offer a possible definition: wealth is something you possess or produce that OTHER people value.

    To apply this to the ice cream case, if you spend your resources to produce lot's of vanilla ice cream that you can't use (because it's too much) and no one else wants (because they prefer chocolate), you have in fact made yourself and society less wealthy.


    Now, if you still think your perspective makes sense and is workable, you can apply it to the following scenario.

    In town lives someone who loves to break windows. We'll call him W.B. for window breaker. W.B. loves everything about breaking windows. He loves the shattering sound and values hearing it. He values seeing the shiny shards of glass on the ground, and the big, jagged, gaping holes left behind. And he values the memory of experiencing all these things. He values it all so much that he uses his resources of time and energy to walk through town breaking all the windows.

    So here's the question: By engaging in this (subjectively) highly valued activity, is W.B. producing wealth?

    ReplyDelete
  17. The problem I have when I look at the "war on poverty" are three fold. First is definitional -- the poor are defined as the lowest quintile, how does one fight to make the lowest 20% richer than, well, the lowest 20%. Half the population is always below median... and theres nothing to be done about it. (by definition). Second, the standard of living among the poor is high enough in this country that people enter the country illegally so that they may join that group. Third, poverty (living in a poor living condition by whatever definition) can't be solved by money, it can only be solved by *wisdom*, by better choices...


    According to the Brooking Institute: http://www.brookings.edu/research/testimony/2012/06/05-poverty-families-haskins

    If you want to avoid poverty and join the middle class in the United States, you need to do three things: Complete high school (at a minimum), work full time and marry before you have children.
    If you do all three, your chances of being poor fall from 12 percent to 2 percent, and your chances of joining the middle class or above rise from 56 to 74 percent.
    Brookings defines middle class as having an income of at least $50,000 a year for a family of three.

    ReplyDelete
  18. Brain;

    Wealth is simple - what each of us need and want.

    Explaining what is wrong with your or Roger's definition is less simple.

    That something is simple does not mean its behavior can not be extremely complex.
    Though atomic structure has increased in complexity since Bohr, The Bohr atomic model was incredibly simple and the current one is not vastly more complex. But atomic behavior is incredibly complex.

    How does the fact that some values are shared by a majority of the members of some group transform them from being subjective to objective ?
    The opinion of some majority of some group does not transform something from subjective to objective. Any value that humans are free to individually weigh differently is subjective by definition. There are very few (if any) values so sacred that we universally and precisely agree on them to an extent that we prohibit others from valuing them differently.

    Your attacking semantics.
    There is no universal agreement on a definition of what wealth is, in the sense that you and I need not agree that an Audi TT is wealth or even if we agree that it is, we need not agree on its value.

    Of course subjective concepts can be meaningful.
    the fact that we do not hold precisely the same values, does not prevent us from respecting others right to value a few things radically differently and most things only a little differently.

    We can play games with subjective and objective. But so long as we are free to chose values on our own, value is subjective. A large body of amorphous common ground, does not make something subjective objective.

    As to your definition - it is backwards.
    We produce things OTHER's value in order to get things WE value. It is what WE value that is wealth. Further though production is a near universal facet of wealth. Production is not intrinsic to wealth. The only attributes required for something to be wealth to someone is that that person needs or wants that thing.
    It is not even essential that wealth be an object. Sex, a sunset, time with your kids, ... all kinds of intangibles are wealth.

    I do not understand how re-arranging my ice cream analogy changes it. If you do not want something it is not wealth for you. If there is more of what you want, only the portion you want is wealth to you. Beyond that you are just reiterating the laws of supply and demand.
    But I would note that demand is the some of the specific demands of all individuals. There is no aggregate demand that can exist independent of individual demand.

    W.B. Is producing wealth for himself. Presuming that others value windows, he is also destroying someone else's wealth.

    I do not know if you are deliberately alluding to Bastiat's broken windows fallacy or not, but the fallacy is not that no wealth is created, but that you can not ignore the fact that wealth is also destroyed.

    Regardless, your are diverging from wealth to freedom and rights. Your needs and values do not create rights and freedoms.

    ReplyDelete
  19. "Strange that freedom and liberty do not seem to get much attention in this discussion of valued outcomes. "

    http://www.ted.com/talks/barry_schwartz_on_the_paradox_of_choice.html

    ReplyDelete
  20. @Brian,


    So here's the question: By engaging in this (subjectively) highly valued activity, is W.B. producing wealth?


    The question is beside the point. The relevant question is "Is the value of the wealth created greater or lesser than the wealth consumed?"

    If W.B. is compensating the window owners to their satisfaction for their troubles the answer is probably yes.

    .

    ReplyDelete
  21. dhilli (#18),

    "Your needs and values do not create rights and freedoms."

    I never said they did. They don't create wealth either. By themselves values don't create anything. But they can provide the impetus to create all those things.

    And are you sure that W.B. has produced wealth for himself? Doesn't it depend on how the story ends? More importantly, to address Roger's interest, has W.B.'s action helped us "as a global society become more wealthy?"

    ReplyDelete
  22. Abdul (#20),

    "The question is beside the point." Well, it's not beside MY point, and I'm the way making my post, after all.

    Now, you are more interested in asking "Is the value of the wealth created greater or lesser than the wealth consumed?" That's fine. It's a subset of mine, and could be rephrased "Did W.B. produce a net amount of wealth for society as a whole?"

    Your answer "probably yes" is not a valid answer to the question, since you asked whether the wealth is "greater or lesser."

    But if you meant to say probably greater, then I say absolutely not.

    Let's say that W.B. pays to fix the windows and clean up the mess. The townspeople are back to the exact same physical state as before, but lost some trust and peace of mind. Depending on how one defines wealth, they are either no wealthier or have even lost wealth.

    As for W.B., he has not only lost the broken windows he values (and retains only their memory), but has also lost a large amount of resources that could have been used to obtain other things he cherishes. W.B. would likely agree that he is demonstrably less wealthy, as would everyone else in town.

    ReplyDelete
  23. Brian,

    W.B. paying for broken windows plus inconvenience is not really any different that paying to have me sing Melancholy Baby.

    If W.B. feels the best use of his entertainment dollars is breaking my windows at $10,000 each plus replacement, then he and I are both happily better of (wealthier) than before.



    .

    ReplyDelete
  24. Brian (#21)

    As a result of our needs and wants we create wealth - just a restatement of your remarks.

    Unless somehow the wealth we create is neither needed nor wanted by anyone,
    then the we have created what we need and want, and what we created is wealth.

    As to W.B. your back to trying to invert the ice cream and hoping for something besides ice cream to fall out.

    IF W.B. met a need or want, then that was wealth for him at that moment. IF he changed his mind, or the transitory value proved less than the cost, the results are net negative - but that is just accounting. It does not change whether acheiving a need or want is wealth.

    You can only measure the global wealth of society by summing each individuals independent personal measures of their wealth. There is no such think as societal wealth as an independent construct. That presumes an objective definition of wealth, which will ultimately leave you in a world with only chocolate cream.

    ReplyDelete
  25. dhlii,

    "That presumes an objective definition of wealth, which will ultimately leave you in a world with only chocolate cream."

    Nonsense. Objective does not mean universal. It only means existing externally to or independently of the mind. Everyone can agree that chocolate has value as a flavoring for ice cream because it gives everyone the same chemical boost. That doesn't preclude some from preferring another flavor nor even all from sometimes preferring another flavor depending on their mood.

    " There is no such think as societal wealth as an independent construct."

    Pure poppycock. You have defined wealth as satisfying needs and wants. Don't societies as a whole have identifiable needs and wants? Isn't that what makes them different from each other? Then by your definition, the satisfying of society's needs and wants leads directly to societal wealth--an independent construct. What I am arguing is that your summation of individual wealth better equal the total societal wealth (calculated macroscopically), otherwise your definition is not self-consistent. In other words, your definition is logically invalid if it does not hold over all scales. An analogy from physics might be that the momenta of all the atoms that make up an object have to sum to the total momentum of that object, which is found from macroscopic characteristics (i.e., not from the individual atoms).

    By the way, Adam Smith disagrees with your notion that wealth is purely subjective. He says wealth is exactly equivalent to the total labour of others one can command or purchase. Translating this into Roger's language would give a definition like this:

    Wealth is the accumulation of tradeable outcomes.

    This definition has the advantage of not explicitly involving the notion of value, and therefore avoids a lot of unnecessary disagreement. :)

    ReplyDelete