Essay - The True Nature of Wealth

Value, Ownership, and Trade

Wealth. The very word is enough to make some people go ballistic, So before we go any further, I want to introduce a definition that should help to dissipate the emotional fog.

Wealth, is the Ownership of Anything of Value.

Now that's simple, isn't it? If you own something, and if you or anyone else in the world either wants it or needs it, that's wealth. It may not be a lot of wealth, but it's wealth nonetheless. We'll discuss accumulations of wealth a little later.

Value is Relative.

Oh hell, now I've made it complicated again. Well, maybe not too complicated. If I paint a picture and love it, I might be unwilling to part with it for anything less than $10,000. For me, it has tremendous value. You on the other hand, may take one look at it, decide that you hate it, and be unwilling to purchase it at any price. For you, it has zero value. Now wait a minute, you may be thinking, what is the true value of that painting? We can't both be right, can we? The answer is, yes we can! There can be no objective measure of value, because value only exists as a result of want or need. Let's look at a few more examples:

A man builds a shopping center 10 miles from the nearest road. To anyone not on drugs, the value of the shopping center is zero. To the man who built it, it's worth at least as much as he spent building it. (For a while, anyway.)

Some jerk runs a traffic light and totals your car. His insurance company sends you a check, but it's for the wholesale value of the car. That is, the average price a car dealer would have been willing to pay you for the car, before it was destroyed. You will soon find that the retail value of your old car was a lot higher than the wholesale value. Retail reflects the average price consumers are willing to pay when they want to own an equivalent car. Wholesale is the average price owners are willing to accept when they decide they no longer want to own the car they have.

You have a garbage disposal under your kitchen sink. You have no desire to buy garbage disposals, but if this one breaks you'll get a new one right away, because your spouse knows where you sleep. Thus the existing unit has a replacement value above and beyond the convenience of it's use, because it's continued operation allows you to avoid the expense of buying a new unit.

Ownership is Absolute.

With value, we can see that there is room for virtually an infinite number of opinions. When it come to ownership though, there is generally only room for one opinion. Disagreements can be deadly. In the prehistoric past, ownership was controlled by force. Today we train our children to accept the social contract which says "taking by force is wrong", and "Violators of this rule will be punished". Our social contract also establishes the criteria by which we recognize legitimate ownership. Ownership in it's simplest form can be defined as : The authority to control the location, use, or destruction of an item of value.

While on the subject of ownership, I want to bring up an important point that I'll return to later: You own yourself. It doesn't matter if you believe that this is God's law, or man's law. It is a vital part of the social contract that most people agree to. You own yourself, but you cannot sell yourself. You can sell your labor, and you can sell your time, but in the end you still own yourself.

Trade is Always Fair.

Trade occurs anytime people agree to exchange items of value. Agreement is the key concept here. Without agreement, the exchange doesn't take place. Exchange without agreement is theft. In most cases both parties are convinced that they have increased their wealth, at the expense of the other party. This is to be expected, in light of the knowledge that value is relative.

Cash is Finite, Wealth is Not

The population of the United States on April 1, 2000 was 281,421,906. The total amount of U.S. currency in circulation that year was $500 billion, but two thirds of that was/is held overseas, so that left $167 billion available in the United States. A little division tells us that there's 593 dollars and 42 cents for every man, woman, and child in the country.

I have heard people argue that if some people are poor, it can only be that they were cheated out of their money by some nasty rich person. Well, if cash and wealth were one and the same, we'd be a pretty poor nation, wouldn't we? Cash is just another commodity, like cows, or batteries. We use it as a medium of exchange only because it was designed for that purpose, and is therefore extremely convenient in that role. Cash is the grease that keeps the wheels of the economy turning. Not enough, and things slow down. Too much, and the economy runs "too fast". Here's an even stronger example:

The Federal Government collected $1,825 billion in taxes for fiscal year 2000. That means Uncle Sam collected every single dollar in the country eleven times over, in just one year! How is it then, that we're not all broke?

The answer of course, is that we create NEW wealth, and we do it all the time! The government even keeps track of this for us: You hear it on the news from time to time. It's the Gross Domestic Product. (GDP) The GDP is defined as "The total market value of all final goods and services produced in a country in a given year." For the U.S. in 2000 The GDP was 42,756 billion. Now we're talking real money! That's $152,157 each. To be honest, that figure does include services, which don't result in tangible assets. I think the point is clear though: an awful lot of people are out there creating new wealth. If someone doesn't have as much as they'd like, they should be out there creating more themselves, not whining that they deserve a share of someone else's.

The Source of Wealth

If You Don't Own It, Make It!

We previously defined wealth as the ownership of anything of value. I also pointed out that you own yourself and more to the point, you own your labor. When you sell your labor, the person buying it is happy to do so, because s/he can use that labor to increase the value of raw materials that s/he already owns.

In a nutshell: The Labor expended to manufacture a product is an integral component of that product. No less important than the steel or plastic or computer chips.

If you own some raw materials yourself and you apply your labor to them, you increase your wealth. For example, suppose you own the wood from a tree. You could sell it as firewood for a modest sum, but you could also apply your labor and build a dining table and chairs. The wood is still wood, but your labor has reshaped it into something that others are willing to trade a great deal of money for. It's not something from nothing, through the medium of wood (in our example) it's the conversion of an intangible asset (labor) into a tangible product (furniture.)

To Kill a Red Herring

At this point, you may be feeling a bit confused. Many people have been taught that economics is a zero-sum game. When pressed, the zero-sum people will eventually pull out the second law of thermodynamics and claim it as "proof", so I'm going to attack that argument directly.

Stated simply, the Second Law of Thermodynamics says that: In a closed system, entropy always increases. Entropy unfortunately, was usually defined as disorder, so even though the second law really only deals with heat transfer between areas of high and low concentration, excessive abstraction has led people to restate the second law as "order always degrades into disorder."

The observant reader will notice that I emphasized the first four words in the classic definition and that those words are missing in the "abstraction." The zero-sum crowd points to the abstraction, and shouts "See, everything wears out over time and loses value, so wealth can never increase!" Oh, but those four simple words. The Earth you see, is not a closed system. The Sun provides our planet with a constant supply of energy, most of it at high energy wavelengths. The earth maintains a temperature balance by radiating most of that energy back out into space as heat. Entropy increases for the universe as a whole, but not necessarily for out planet in particular.

So What Does This Have To Do With Wealth?

It has everything to do with the labor, that essential commodity that you own. Where does it come from after all? You're not born with a lifetime supply...

Labor requires energy, and our bodies receive energy in the form of food. Our food consists of plants, or animals that eat plants for their energy. Plants receive their energy from the Sun, and the Sun quite frankly, provides more energy than we will ever be capable of using.

Connecting The Dots

The Sun provides a virtually limitless supply of energy, causing plants to grow.

The plants provide people with energy they need to perform labor.

Labor when properly applied to raw materials, results in the creation of wealth.

Is it easy? No, of course not. Raw materials are finite, so buyers must compete to purchase them. Customers are also finite, so sellers must compete to provide them with the best value. My best advice? Do what you enjoy. It may not generate the greatest amount of wealth, but life is far too short to spend half of it feeling miserable.

-= The End =-