On Wealth

2010 August 14

A few months ago, our friend Jego asked a few of us to define where we thought wealth came from and how it was defined and built.  These are our answers…starting with Wes.

On Wealth

by Wesley M. Brown

I have not read Smith or Keynes or Galbraith for many years. And, I still believe that asking three economists a question will result in at least four opinions, perhaps more. But, questions on the nature of wealth, how it’s created, and how best to ensure prosperity remain intriguing.

In earliest times, wealth, meaning “an abundance of valuable resources or material possessions.”(www.wikipedia.org) had little abstract meaning. Material possessions were few, had little value beyond their utility, and most were possessed, but not really “owned” in the modern sense, communally. Even living “possessions” such as women or children were only useful to the extent that they could be defended or excluded from others.

But, as civilizations developed, so too did economic specialization. Herding and cultivation finally were sufficient to move beyond mere sustenance to surplus.

At that point, those blessed by petitions to the heavens, good husbandry, or sheer dumb luck were able to accumulate a sufficient surplus to begin exchanging their goods and labor for an equivalent value of another’s goods or labor. Yet, while all civilizations went though this period, the problem of the exchange rate was never really solved, and was much too fluid beyond narrow territorial limits. For example, how many goats equaled a specified amount of something else proved to be an issue that remained problematic in any given area.

However, at that point in history, wealth became essentially predicated upon human agreement. While parties in a goat herding culture could easily agree that goats were valuable, and thus some measure of wealth (i.e. the guy who only needed 5 goats to sustain his family but owned 10 goats was thus more wealthy than the guy with 4 goats who was running a goat deficit and needed a goat bailout, much like AIG, but I digress), the problem remained of exchanging the prominent medium of goats for something else.

In other words, the early wealth formula breaks down once two parties from areas with different measures of wealth (i.e. valuable resources) want to exchange their surpluses. The goat herder places a high value on goats while the fig grower equally places a high value on figs. Each may need some measure of the others surplus, but there is no easy way to sort out a transfer of wealth without much haggling and the distinct possibility of an overcompensated goat herder or an overcompensated fig grower.

This imbalance was only partially solved by the invention of money. While the medium of money was far more convenient than carrying around a wallet full of goats or figs, the chief advantage was the consumer now had the economic choice to purchase various goods and services at any time when he had money available rather than having to wait for someone with goods and services that also needed an exchange.

But even though money began to solve the problem of storage of wealth, money only has the amount of value as is agreed upon by those involved in a given market. Both sides of a transaction must agree that the good or service being sold has a value equal to the agreed upon value of the currency. And, even when a governmental unit steps in and assigns a particular value to currency, such value is worthless if a seller cannot afford to sell his or her goods for the governmental value of currency.

But wealth always had a relative component. Did the seller set the price of his goods based upon currency or was currency based upon the price or value of goods sold? And, this equation was further compounded when two people came to the table with two different currencies. Private or regional agreement set the value of exchange, but it was still too fluid to ensure stability.

Following private or regional agreement as to the value of currency, and thus wealth, parties began to look to public trading markets and secondary indexes of valuation to determine value. Granted, the value of goods, services, and currency remained in flux, but such fluctuations could be tracked and sometimes predicted, giving market players some measure of confidence as to value.

This leads us to the issue of creating or ensuring prosperity. On this question I am admittedly torn. The libertarian side of me argues that prosperity cannot be ensured no matter what we do. Wealth ebbs and flows naturally, and those skilled in the creation of wealth will be wealthy. Those who have little or no skills will be poor, and both distinctions of wealthy and poor will be relative. And, every now and again, some technological invention or natural calamity will occur and either propel wealth forward exponentially or wipe out all or most of the wealth in a given area. The more pragmatic side of me, however, argues that wealth can only be created in a stable economy. In other words, if enough people do not have enough wealth or sustenance to survive, they will eventually turn on those who have wealth and take or destroy it.

History is filled with hundreds of examples where the mob of have-nots, either because of generalized suffering or the realization that they have numbers far superior to those of the wealthy, decide to begin some kind of rampage against the haves. These rampages either result in the destruction of wealth or the complete overhaul of an economic or political system. So long as they perceive that there are persons with some means who are not sharing in the suffering it is only a matter of time before some form of destruction or societal overhaul will ensue.

In light of the above, I can only think of a few items which typically minimize the possibility of grave destruction or transfers of wealth owing to economic upheaval:

1.Disclosure – In the simplest of terms, the good or service I am selling should be the thing it purports to be. Our legal system should give a purchaser redress for a sellers false or misleading claims as to the product or service. Caveat Emptor is only really effective when the purchaser is something of an expert as to the good or service being purchased.
2.Competence of Collateral Indexes – Although this may be difficult, I think it’s important that indexes of value should be standardized, equally available to the purchaser and seller, and regulated as to the basis for their opinions or conclusions. For example, I can readily secure a copy of the NADA yellow book from a bookstore when researching the purchase of a used car. However, I have been told by persons in the used car industry that the NADA books at car dealers are not the same as those sold to consumers. While I speculate that if there are differences between the two that the dealer NADA might lower the value of a car for trade-in purposes, thus giving a slight advantage and additional profit to a dealer when he takes in a trade, this discrepancy, assuming it to be true, is exactly the type of thing that our beloved government should be addressing. Of course, this scenario applies to many different industries, but the principle is the same.

We can all point to things that we think should be accorded high value, but in my view it is the agreement of at least two people that a given thing has value that forms the predicate of wealth. But no matter how you define it, wealth will always remain a relative concept.

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