What is wealth? I already touched on this in my first blog post, but I want to present a more formal definition here. There are many people already touching on this issue, and I will borrow from them. But I will also attempt to formalize it and present it in a straightforward, coherent manner. I will do this in two stages.
This blog post concerns the first stage: Definitions:
Purchasing Power: Often what we mean when we say “wealth” is simply just purchasing power. Purchasing power will be an important concept in this blog. Purchasing power is not wealth. Money is not wealth; It is purchasing power. Purchasing power is a claim on existing wealth, but in itself does not constitute real wealth. Depending on how it is used, purchasing power can promote the creation or the destruction of wealth. The distinction between wealth and purchasing power is important as it allows us to translate economic speak. “Investment of wealth” (i.e. in new business ventures, etc.) easily becomes “Use of purchasing power to control access to real wealth”. “Wealth” becomes purchasing power and “invest” becomes “control”. Keep in mind this a bit tongue in cheek, but I’m also partly serious.
Wealth: Wealth is simply that which sustains an individual, group, or society. It has many facets, but it is most certainly not purchasing power. Wealth is not something you can measure directly. It exists in the strength of our social fabric, in the strength of our democracy, in the fertility of our soils, and in the extent of our natural resources. It does not appear in GNP and is usually only missed once it’s gone. At the point where any particular aspect of wealth dissappears, the economic costs to the society usually increase dramatically. Some aspects are more important than others and a society can survive some lapses or losses. But all societies have a breaking point at which point they will fail. This is another primary concern for this blog.
Value: Value is simply how much purchasing power a group or individual is willing to trade for any good or service. Value does not correlate with wealth. A Babe Ruth 1914 Rookie Card may not represent much real wealth, but it carries tremendous value. It is ok that wealth and value do not correlate. They do not need to, nor should they. The danger I see is when speculation becomes disruptive to the economy, such as with speculation on financial derivatives, or the way commodity markets can be disruptive to farmers. In these cases we need to ask what is driving the speculation, why, and whether it leading to the long term health of our society (i.e. is it promoting the creation or the destruction of wealth).