What is Wealth?

Economic science often invites us to wish for growth. It is presented as the solution to unemployment, the savior of public finances, and the engine of a better quality of life. But a moment of honest reflection reveals a more complex picture. Pollution, the depletion of natural resources, the psychological distress that often accompanies a consumerist lifestyle, and the frantic production of goods destined for the scrapheap of vanity—all these effects suggest something deeply flawed in the blind idolatry of growth.

Yet, the defense of "degrowth" seems equally senseless. We must produce wealth to live, to thrive, to heal the sick, and to educate the young. To be against all growth is to be against life itself.

The real choice, then, is not between growth and degrowth. It is a foolish dichotomy. What we truly want is the growth of the good and the degrowth of the bad. We want more of what genuinely enhances human well-being and less of what diminishes it. But this raises the most fundamental question of all: What is good? And what is bad? What, in its essence, is really wealth?

This chapter seeks to answer that question by moving beyond simple definitions and building a comprehensive framework for understanding what wealth truly is.

1.1 What is Wealth? A First Definition

At its most basic level, wealth is the abundance of valuable resources or possessions. But this definition only pushes the question back a step: what makes something "valuable"? In everyday language, we tend to equate wealth with money. However, as we will see, money is merely a representation of wealth, a claim upon it, not the thing itself. True wealth consists of the tangible and intangible things that satisfy human needs and desires.

1.2 Goods and Services

The most concrete forms of wealth are the goods and services that we use every day.

• Goods are physical, tangible objects. A loaf of bread, a house, a smartphone, a tree in a forest, and a machine in a factory are all goods. They can be consumed (like the bread) or used to produce other goods (like the machine).
• Services are intangible activities that provide value. A doctor's consultation, a teacher's lesson, a financial advisor's counsel, and a musician's performance are all services. They do not result in ownership of a physical object, but they fulfill a need or desire.

Both goods and services are forms of wealth because they directly contribute to our well-being. A society with ample food, comfortable housing, excellent healthcare, and a vibrant cultural scene is, by this measure, a wealthy society.

1.3 How is Wealth Created?

Wealth is not a fixed quantity that simply exists; it must be created. The primary engine of wealth creation is human effort applied to the natural world. This process combines the three factors of production introduced in the previous chapter:

1. Land: This provides the raw materials—the minerals, the timber, the soil, the energy.
2. Labor: This provides the human effort, skill, and ingenuity to extract and transform those raw materials.
3. Capital: This provides the tools—from a simple hammer to a complex computer—that make labor more productive.

A farmer (labor) uses a tractor (capital) to cultivate the soil (land) and grow wheat, creating a good (the wheat) that is far more valuable than the seeds and effort that went into it. This is wealth creation in its purest form. Importantly, trade itself is also a form of wealth creation. When two parties voluntarily exchange goods or services, both do so because they value what they receive more than what they give up. The total wealth in the world increases, even though nothing new was physically produced.

1.4 Real Wealth and Market Wealth

This leads to a crucial distinction: the difference between real wealth and market wealth.

• Real wealth consists of the goods and services that directly sustain and enrich human life. It is the nutritious food, the clean water, the sturdy shelter, the life-saving medicine, the inspiring art, and the loving relationships. It is wealth in its most fundamental, use-value form.
• Market wealth is the monetary value assigned to goods, services, and assets in a market economy. It is the price of a stock, the value of a bond, the sale price of a house, or the wages paid for labor.

The relationship between the two is complex. Market wealth is supposed to be a representation of real wealth. We use money as a common yardstick to compare the value of a house to the value of a car. However, the two can diverge dramatically. The market price of a pharmaceutical drug might be astronomical, putting it out of reach for those who need it, while a beautiful sunset or a supportive community—forms of immense real wealth—have a market price of zero. Furthermore, financial markets can create massive amounts of market wealth (a stock market bubble) that is not backed by any corresponding increase in real goods and services, only to see it vanish in a crash. Understanding finance requires us to always keep this distinction in mind: price is not the same as value.

1.5 The Ubiquity of Options

A sophisticated view of wealth must also account for the value of possibilities. This is the concept of an option. An option is not a good or service itself, but the right, but not the obligation, to take a specific future action.

Options are a form of wealth because they provide flexibility and security.

• A family that owns a piece of vacant land has the option to build a home, sell it, or continue to hold it. This optionality has value, even if the land sits empty.
• A company with a strong balance sheet has the option to invest in a new, promising technology when it emerges. A debt-ridden competitor does not have that option.
• Even an individual with a diverse skill set has more options in the job market than someone with a narrow, obsolete specialty.

In finance, options are formalized as complex financial instruments. But in a broader sense, the concept pervades our understanding of wealth. A wealthy person or society is one that has preserved its options for the future, not one that has locked itself into a single, potentially disastrous, path.

1.6 Savings and Investment

How is wealth preserved and increased over time? Through the twin processes of saving and investment.

• Saving is the act of forgoing current consumption to set aside resources for the future. It is the bridge between the flow of income and the stock of wealth.
• Investment is the use of those saved resources to create new wealth. This can take many forms:
•   Physical Investment: A business uses saved profits to buy a new factory, increasing its capacity to produce goods.
•   Human Capital Investment: An individual spends savings on education or training, increasing their future earning potential.
•   Financial Investment: An individual buys shares in a company, providing that company with capital it can use for physical investment.

Saving alone does not create new wealth; it merely preserves value. It is the act of investment—deploying savings productively—that generates economic growth and increases the total stock of wealth.

1.7 What is a Liability?

To fully understand wealth, we must also understand its opposite. If an asset is something you own that has value, a liability is something you owe—a debt or financial obligation.

A mortgage is a liability for a homeowner. A bank loan is a liability for a business. An unpaid bill is a liability for an individual. Liabilities are not inherently "bad." They can be used to acquire assets, like a mortgage used to buy a house. However, they represent a claim on future wealth. They are, in a sense, negative wealth.

Recall the fundamental equation from the introductory chapter:

Wealth (Net Worth) = Total Assets – Total Liabilities

This equation shows that you cannot understand a person's or a company's true financial position without looking at both sides of the balance sheet. A person with a $1 million art collection (asset) but a $1.1 million mortgage (liability) has negative wealth. They are, in a very real sense, poorer than a person with a $100,000 savings account and no debts, whose net worth is a positive $100,000.

1.8 What's the Point of Saving?

If wealth is a stock, and income is a flow, then saving is the tap that regulates the flow into the reservoir. But why engage in this act of deferral? The point of saving is multifaceted.

1. Security: Savings act as a buffer against future uncertainty. A loss of income, a medical emergency, or an unexpected repair are all crises that are far more manageable with a stock of savings to draw upon.
2. Future Consumption: People often save to make large future purchases that they cannot afford with their current income, such as a house, a car, or a vacation.
3. Income Generation: Savings can be invested in assets that generate their own income, such as stocks that pay dividends or bonds that pay interest. This creates a virtuous cycle, where wealth itself becomes a source of new income.
4. Legacy: Many people save to leave an inheritance for their children or to support a charitable cause that is important to them.
5. Freedom and Options: Ultimately, the accumulation of wealth provides freedom. It gives an individual the option to change careers, start a business, take time off to raise a family, or retire early. It is the ultimate expression of the value of options. The point of saving, then, is not merely to hoard money, but to purchase future possibilities.

In conclusion, wealth is far more than a bank balance. It is the stock of tangible and intangible assets—from physical goods to financial securities to personal capabilities and future options—that provides for our present well-being and secures our future freedom. It is created through human ingenuity and effort, and its true measure lies not in market price alone, but in its capacity to sustain a flourishing life.

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 What is Wealth? /E-cyclopedia Resources by Kateule Sydney is licensed under CC BY-SA 4.0