Ludwig von Mises Institute

Wealth

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Wealth is a concept generally agreed to be the abundance of valuable resources or material possessions, or the control of such assets. While "wealth" is considered to be an ambiguous and nebulous term, it is a concept that nonetheless has an important place in economics.

More specifically wealth can be defined as a claim on, or command of, resources (commodities, capital equipment, time, physical labor, et cetera) that have the potential to make the individual's existence easier, more comfortable or more enjoyable (i.e. "better") than it would be in the absence of such things. Because value is subjective, wealth cannot be measured cardinally, but it is possible to measure ordinally.[1]

In short, wealth can be said to be the ability to have desires fulfilled.

The antonym to wealth is poverty.

Production of wealth[edit]

More concisely, wealth is the ability to fulfil human desire. This means that all steps in production, including the transportation and advertising of products, can generate wealth, because they move the product steps closer toward fulfilling human desire. Raw materials start out as land, a good of the nth order; and as soon as any productive labor is performed upon them, become capital; the value of n diminishing as the resource progresses through each stage of the production process, until finally the producer's good has been completely transformed into a good of the first order (consumer's good) ready for immediate consumption.[2] The wealth represented by that material increases throughout this process.

Advertising and marketing can count as a form of wealth creation if it puts the consumer in a better position to know where he can obtain at the cheapest price what he is looking for or what kind of commodity or service is suitable to remove most efficaciously the particular uneasiness he wants to remove. Thinking can also create wealth.[3] The mind proceeds step by step from the less satisfactory state of insufficient cognition to the more satisfactory state of better insight.[4] The mind is then closer to being able to guide the person's actions toward successfully eliminating the causes of uneasiness.

An action that, by itself, immediately and directly generates only very small physical changes in the world can still have a great impact on satisfaction in the long run. A teacher who delivers a lecture that equips a student's mind to take effective action for liberty may, in doing so, make a very important investment in the future wealth of society. As with other investments in capital, this acquisition of knowledge makes labor more efficiently productive. Likewise, the making of a beneficial edit to a wiki modifies the data stored on the wiki server in a way that advances the equipment toward a state of being better able to fulfil human desires for knowledge and the benefits that knowledge will allow them to attain. The editor's labor, combined with the capital already established by the site creators and previous editors, transforms the wiki, or at least part of it, into a more satisfactory product, thereby increasing the total store of wealth.

Creative destruction can also generate new wealth; for example, demolishing an obsolete building is a necessary step in the process of moving the building site closer to the desired state of having a new, more satisfactory building in its place. Even violence in self-defense or defense of others can be useful to society if it increases the future store of wealth over what it would have been otherwise. For example, the arrest or killing of a criminal who is about to commit mass murder of the innocent and destruction of their property helps preserve the labor and capital resources needed to prevent society's productive capacity from being diminished. The removal of a threat to the life, liberty and property of the innocent renders society wealthier because its resources are then better able to satisfy wants without interference.

Destruction of wealth[edit]

It is also possible for war to destroy wealth by transforming resources that were closer to being ready to satisfy human desires into goods that are less ready to satisfy human desires. For example, war can destroy a building that was capable of immediately providing shelter, and make it necessary to recycle the remnants as scrap, melt them down, shape them into girders, transport the girders to the building site, and use them to erect a new building, before it can again provide shelter. It will take time to return the economy to its former productivity. An injection of resources from abroad (e.g. through foreign direct investment or immigration of laborers) can speed this process, however.

If a politician takes money away from a productive entrepreneur and allocates it to wasteful projects, that too can destroy wealth. In that situation, the resources that were once under the control of a person with the ability and willingness to devote them to efficiently want-satisfying uses are now under the control of people who will devote them to uses with less want-satisfying power. Hence, proposals by leftists such as Barack Obama to force the rich to share or "spread the wealth" through welfare programs[5] are also proposals to destroy wealth or prevent it from ever coming into being. Ludwig von Mises cited labor regulation, compulsory social insurance, compulsory trade unionism, compulsory unemployment Insurance, taxation, and inflation as methods of socialist and interventionist "destructionism".[6] Although the failure to maintain and create more capital allows more resources to be immediately devoted to satisfying wants, in the long run, capital consumption leaves a society less wealthy.

Henry Hazlitt writes that real wealth "consists in what is produced and consumed: the food we eat, the clothes we wear, the houses we live in. It is railways and roads and motor cars; ships and planes and factories; schools and churches and theaters; pianos, paintings and hooks. Yet so powerful is the verbal ambiguity that confuses money with wealth, that even those who at times recognize the confusion will slide back into it in the course of their reasoning."[7] Since money is a commodity that helps fulfill the human need to engage in indirect exchange, it could be regarded as a form of wealth. That does not mean that printing additional paper money will add an amount of wealth to the economy equal to its face value. It could, instead, diminish the purchasing power of each monetary unit, making economic transactions more cumbersome (e.g. through the need to carry around bulky stacks of cash), therefore diminishing the ability of money to efficiently satisfy the desire to engage in useful indirect exchange.

Recent development[edit]

For all its problems, the first 10 years of the 21st century were in fact humanity's finest, a time when more people lived better, longer, more peaceful, and more prosperous lives than ever before:

  • In 1990, roughly half the global population lived on less than $1 a day; by 2007, the proportion had shrunk to 28 percent -- and it will be lower still by the close of 2010.
  • Average worldwide incomes are at their highest levels ever, at roughly $10,600 a year -- and have risen by as much as a quarter since 2000.
  • Some 1.3 billion people now live on more than $10 a day, suggesting the continued expansion of the global middle class. Even better news is that growth has been faster in poor places like sub-Saharan Africa than across the world as a whole.
  • There are still 1 billion people who go to bed each night desperately hungry, but cereal prices are now a fraction of what they were in the 1960s and 1970s. That, alongside continued income growth, is why the proportion of the developing world's population classified as "undernourished" fell from 34 percent in 1970 to 17 percent in 2008, even at the height of a global spike in food prices.
  • Agricultural productivity, too, continues to climb: From 2000 to 2008, cereal yields increased at nearly twice the rate of population growth in the developing world. And though famine continues to threaten places such as Zimbabwe, hundreds of millions of people are eating more -- and better -- each day.
  • Between 1999 and 2005, thanks to the spread of vaccinations, the number of children who died annually from measles dropped 60 percent. The proportion of the world's infants vaccinated against diphtheria, whooping cough, and tetanus has climbed from less than half to 82 percent between 1985 and 2008.
  • There are dark spots still, not least the continuing tragedy of the HIV/AIDS epidemic. But though the 15 countries with the highest HIV prevalence still see life expectancies more than three years lower than their 1990 peak, at least the trend has started ticking back up in the last decade.
  • From 2000 to 2008, child mortality dropped more than 17 percent, and the average person added another two years to his or her life expectancy, now just one year shy of 70.
  • More than four-fifths of the world's population can now read and write -- including more than two-thirds of Africans.
  • The proportion of the world's young people who go on to university climbed from below one-fifth to above a quarter from 2000 to 2007 alone.
  • Progress in education has been particularly rapid for women, one sign of growing gender equity. The worldwide proportion of women parliamentarians increased from 11 percent in 1997 to 19 percent in 2009.
  • The number of armed conflicts -- and their death toll -- has continued to fall since the end of the Cold War. Worldwide, combat casualties fell 40 percent from 2000 to 2008. In sub-Saharan Africa, some 46,000 people died in battle in 2000. By 2008, that number had dropped to 6,000.
  • Today, there are more than 4 billion mobile-phone subscribers, compared with only 750 million at the decade's start. Cell phones are being used to provide financial services in the Philippines, monitor real-time commodity futures prices in Vietnam, and teach literacy in Niger.[8]
  • Between 2005 and 2008, from sub-Saharan Africa to Latin America and from Asia to Eastern Europe, the proportion of people living in extreme poverty (those with incomes under $1.25 a day) plunged. The world is expected to reach the Millennium Development Goals on poverty set in 2000 by the United Nations much earlier than originally anticipated. One of the most audacious goals back then was to cut the world’s extreme poverty in half by 2015; that impressive feat was achieved five years early, in 2010.
  • Despite the global financial crisis, the economies of poorer countries continued to expand and create jobs. That trend began three decades ago; 660 million Chinese have escaped poverty since 1981, for example. The share of Asians living in extreme poverty dropped from 77 percent in the 1980s to 14 percent in 1998.
  • The economists Maxim Pinkovskiy of MIT and Xavier Sala-i-Martin of Columbia University have shown that between 1970 and 2006 poverty in Africa declined much faster than generally recognized. "All classes of countries, including those with disadvantageous geography and history, experienced reductions in poverty," they write in a 2010 paper for the National Bureau of Economic Research. "In particular, poverty fell for both landlocked as well as coastal countries; for mineral-rich as well as mineral-poor countries; for countries with favorable or with unfavorable agriculture; for countries regardless of colonial origin; and for countries with below- or above-median slave exports per capita during the African slave trade."
  • Since 2000 child mortality has decreased by more than 17 percent worldwide.
  • The World Bank reckons that since 2006, 28 formerly “low-income countries” have joined the ranks of “middle-income” ones. These new middle classes may not be as prosperous as their counterparts in developed countries, but their members now enjoy an unprecedented standard of living.
  • The size of the global middle class has doubled from about 1 billion in 1980 to 2 billion in 2012. This segment of society is still growing very fast and could reach 3 billion by 2020.
  • Immigrants send billions of dollars in remittances to their home countries every year. Worldwide, they wired, mailed, or carried home $449 billion in 2010. (In 1980 remittances totaled less than one-fourth of that in inflation-adjusted dollars.) The remittances are more than five times larger than the world’s total foreign aid and larger than the annual total flow of foreign investment to poor countries. In short, workers who live outside their home country, who are often very poor themselves, send more money to their country than foreign investors and more than rich countries send as financial aid. For many countries, remittances have become the biggest source of hard currency and, in effect, the largest sector of the economy.
  • More people have moved, and continue to move, from farms to cities than ever before, particularly in Asia. In 2007, for the first time in history, more people lived in cities than in rural areas. The U.S. National Intelligence Council reckons that “every year 65 million people are added to the world’s urban population, equivalent to adding seven cities the size of Chicago or five the size of London annually.”
  • The trade in goods was barely slowed by the recession that started in 2008. In 1990 the world’s total exports and imports amounted to 39 percent of the global economy; by 2010 they had risen to 56 percent. And between 2000 and 2009, the total value of merchandise traded across borders nearly doubled, from $6.5 trillion to $12.5 trillion (in current dollars), according to the United Nations. Total exports of goods and services in that period jumped from $7.9 trillion to $18.7 trillion, according to the International Monetary Fund.
  • The stock of foreign direct investment measured as a percentage of the world’s economy jumped from 6.5 percent in 1980 to a whopping 30 percent in 2010, while the volume of currency that moved internationally every day grew sevenfold between 1995 and 2010. In the latter year, more than $4 trillion changed hands across international borders each day.
  • In 1990 across the globe, the number of mobile cellular subscriptions per 100 people was 0.2. By 2010 it had exploded to more than 78. The International Telecommunications Union reports that in 2012 subscriptions to mobile telephony exceeded 6 billion—equivalent to an astonishing 87 percent of the world’s population.
  • In 1990 the number of Internet users was insignificant—a mere 0.1 percent of the world’s population. That number rose to 30 percent by 2010 (and to more than 73 percent in developed countries). By 2013 nine-year-old Facebook had nearly 1 billion users, more than half of whom access the social network via mobile phones and tablets.
  • The costs of moving goods, money, people, and information are also dropping. Airline tickets that used to cost thousands of dollars 20 or 30 years ago can be had at a fraction of the cost. Transporting a ton of cargo in 2013 costs one-tenth what it did in the 1950s. Wiring money from California to Mexico in the late 1990s cost about 15 percent of the transferred sum; in 2013 the charge is less than 6 percent.[9]

Notes[edit]

  1. Rothbard, Murray N. (1997), "Toward a Reconstruction of Utility and Welfare Economics", The Logic of Action 1, http://mises.org/resources/290 
  2. Rothbard, Murray. "Further Implications: The Means". Man, Economy and State. http://mises.org/rothbard/mes/chap1a.asp. 
  3. von Mises, Ludwig. "Action within the World". Human Action. "Only the human mind that directs action and production is creative. The mind too appertains to the universe and to nature; it is a part of the given and existing world. To call the mind creative is not to indulge in any metaphysical speculations. We call it creative because we are at a loss to trace the changes brought about by human action farther back than to the point at which we are faced with the intervention of reason directing human activities. Production is not something physical, natural, and external; it is a spiritual and intellectual phenomenon." 
  4. von Mises, Ludwig. "The Temporal Character of Praxeology". Human Action. http://mises.org/humanaction/chap5sec1.asp. 
  5. Rector, Robert and Sheffield, Rachel (9 November 2011). "Obama’s New Poverty Measure ‘Spreads the Wealth’". National Review Online. 
  6. von Mises, Ludwig. "The Methods of Destructionism". Socialism. http://mises.org/books/socialism/part5_ch34.aspx. 
  7. Hazlitt, Henry. "The Mirage of Inflation". Economics in One Lesson. http://www.fee.org/library/books/economics-in-one-lesson/. 
  8. Charles Kenny. "Best. Decade. Ever.", Foreign Policy, Sept. / Oct. 2010. Referenced 2013-05-21.
  9. Moisés Naím. "The End of Power", Reason Magazine, May 2013 issue. Reprinted from The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn't What It Used to Be. Referenced 2013-05-21.

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