Wealth

I INTRODUCTION

Wealth, in economics, an accumulation of goods having economic value. Economic value has several characteristics. First, an object must have utility. It must have, or be suspected of having, the capacity to satisfy some human want. Wealth can be increased by discovering uses for things previously not regarded as useful. Thus, the discovery of uses for petroleum in the 19th century added enormously to wealth. Second, economic goods must be in scarce supply. Air does not normally have economic value because it is freely available. Air that is artificially conditioned is economically valuable, however, because it is relatively scarce. Third, economic goods must be transferable; that is, it must be possible to buy and sell them at definite market prices. Finally, an object must have measurable economic value. Because the only common unit of value today is money, the worth of goods must be expressible in monetary terms. Some economists also regard a definite skill in performing a job as human wealth, as such skill has a determinable market value.

II COMPONENTS OF WEALTH

In classifying wealth it is useful to distinguish between producers’ goods and consumers’ goods and, in each of these categories, between durable and nondurable goods. Among producers’ durable goods are plants, machinery, and other fixed installations. Inventories of goods to be sold or in process of production make up producers’ nondurable goods. Together, producers’ durable and nondurable goods constitute capital, as generally understood. Food, clothing, and similar items of consumption are consumer nondurables; consumer durables are homes, furniture, and the like. Services are not included in estimated wealth as they cannot be stored. Services do, however, have economic value, whether as services to producers (for example, business accounting and legal services) or as services to consumers (for example, hairdressing, education, and health-related services).

III WEALTH AND INCOME

Wealth must be distinguished from income. Both involve utility, scarcity, transferability, and measurability. Whereas wealth is an accumulation, a stock existing at a certain instant of time, income is a flow of goods and services during a certain period of time. Wealth may be regarded as a lake, and income as a stream flowing into and out of it. Thus an area of farmland is wealth, whereas the crop in any given year is income. By the same token an accumulation of grain in storage is wealth. The difference between income received and income consumed, wasted, or depreciated, as when grain deteriorates, is the measure of wealth accumulation.

IV PERSONAL WEALTH

A person’s holdings of currency, bank balances, and other financial instruments constitute personal wealth as distinct from national wealth. These holdings, moreover, are not items of social wealth, but only claims on that wealth against the actual material objects that compose social wealth, such as a house or a car. Economists estimate wealth by measuring the actual physical stock of assets.

In a period of inflation, private wealth may rise while its social value falls; the monetary value of a house, for instance, may rise in relation to other prices, although the house is actually deteriorating physically. To reach a valid measurement of wealth, monetary valuations must be deflated to real values, discounting the effects of changes in the purchasing power of money.

V THEORY OF NATIONAL WEALTH

National wealth is the sum total of economic goods in the possession of the national, state, and local governments; business and non-profit institutions; and the individual inhabitants of a country. Systematic study of what constitutes a nation’s wealth was begun in the 16th century by proponents of mercantilism. They advanced the thesis that a nation’s stock of precious metals forms the most important part of its wealth. This view was generally accepted until the 18th century, when a reaction against the narrowness of mercantilist doctrine set in. It became evident that precious metals, particularly in the form of currency, were claims on wealth rather than wealth itself. Mercantilist doctrine was gradually replaced by the view of the physiocrats, a group of French economists of the 18th century, that only agriculture, mining, fishing, and other extractive industries could contribute to the real wealth of nations. Adam Smith broadened the physiocratic concept by stressing that wealth not only can be extracted but also can be created by manufacturing. This view was systematically formulated in the 19th century by John Stuart Mill. His formulation, with certain relatively minor modifications, is the one generally accepted today.

According to the modern version of Mill’s concept, a nation’s wealth comprises only its measurable physical assets—that is, its land and other natural resources; the structures, roads, and other improvements on the land; the machinery and other durable goods used in production and distribution; inventories of goods in the possession of enterprises; and the goods accumulated at any one time in the hands of consumers. Paper money and securities are not included in estimates of a nation’s wealth, because such assets are only claims against the physical assets that actually constitute wealth. Holdings of money and securities are counted, however, when these holdings represent claims against governments or nationals of foreign countries. If a nation’s aggregate claims against foreigners exceed the claims of foreigners against the nation and its inhabitants, the difference is a net addition to national wealth. If claims by foreigners exceed claims against foreigners, the difference is a net decrease of national wealth.

In the determination of national wealth, definite skills have a calculable market value. Currently, economists tend to give consideration to such items in socio-economic accounting. Examples of factors that contribute to wealth but are not considered wealth are the goodwill and similar intangible assets of a firm, the institutions and traditions of a nation, and such attributes of a people’s character as the pride they possess in their skills.

VI ASSESSING VALUE

In addition to problems of deciding what categories of wealth to include in estimates of national wealth, serious difficulties develop in assessing values. These difficulties arise because only a small part of a nation’s wealth is traded on the market in any given year, and the market values of shares, real estate, and other assets may fluctuate considerably from year to year. In evaluating national wealth economists have used two approaches: subjective evaluation and objective evaluation.

A Subjective Evaluation

In the subjective approach, a nation’s wealth is measured by summing up individual estimates of the worth of individual possessions, as reported on tax returns and other required reports. The subjective approach depends a great deal on personal honesty and on the completeness with which the various forms of wealth are covered by official documents.

B Objective Evaluation

The objective approach requires that disinterested and qualified outsiders estimate the aggregate value of particular possessions. Values at market prices are difficult to obtain for the reasons given above. Values shown in companies’ books are invalid because prices may fluctuate substantially after the asset is acquired and entered in the books. Even when prices remain the same, allowances made by a company for depreciation and obsolescence may be, for internal financial reasons, either higher or lower than those that objectively should have been allowed. The best method open to statisticians is to estimate, in prices of the present day or of some fixed base date, the values of all existing assets and then to reduce these values by applying appropriate rates of depreciation and obsolescence. Sometimes the subjective and objective bases of evaluation can be used concurrently and the results checked against each other. Such figures are approximate and must be used with caution.

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