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Economics Forum 2: Wealth

Posted by on February 17, 2009

[This post was originally written for my employer’s blog, Show-Me Daily.]

This entry is about wealth. I highly recommend this article (which covers similar topics to this entry, perhaps better).

The term “wealth” gets thrown around a lot. Like “public good,” however, economists mean something specific when they talk about wealth. It is not just money; it is anything that people want. When a person has more of what they want than they did a year ago, we can say that they are wealthier. If they have more of what someone else wants, we can also say that they are wealthier if they are then able to trade with the person who desires their things and thus get more of what they want.
The question of what people want is somewhat normative (econ jargon meaning “opinion-based”), but some examples will help here. Fishing, farming, and hunting are all ways of obtaining very simple forms of wealth: food, or the stuffs to make it. Besides food, people want clothing and shelter almost universally. Thus, making or trading those things can create wealth.

This point requires some explanation. The term “create wealth” is by no means a misnomer. Any time a person exerts effort to make some materials a little bit more useful or desirable to others, they are creating wealth. As an example, oranges on a tree in Florida aren’t of much use to us in Missouri. When someone makes the effort of picking, packing and trucking them here, they have created wealth.

Trade is another way to create wealth. Any time a person trades something they have for something else, economists tend to assume that they gave up one thing for another thing that they valued more. Because trade usually happens between two people (or two families, businesses, etc.) we can assume that they each feel like they got more out of the trade than they put in, or else they wouldn’t have traded.

Adam Smith more or less invented the modern study of economics when he published “The Wealth of Nations” in 1776. It’s safe to say that no economist today disagrees with his fundamental assertions that societies are made wealthier through specialization and trade (I thought about linking to eBay and Craigslist here, but the fact is that most people do their trading face to face, at the store, etc.).

Today, and for many years now, human civilization has been able to support a standard of living well above subsistence for many people. Specialization and trade, coupled with the concomitant improvements in technology made possible through the application of science to business, have made our current level of total wealth possible. It is also possible to destroy wealth, however. When willing traders are forbidden to trade by force or by law, wealth is destroyed. Property destruction is by far the most obvious form of wealth destruction (not counting campfires or other destructive acts where the destruction itself has value).

I have tried to explicitly avoid mentioning money so far. Though it is essential to our current degree of specialization, money is not truly necessary for specialization and trade — it’s just very convenient, and uneclipsed in efficiency as a medium of exchange.

Try thinking about wealth in the terms I’ve laid out here. Imagine the wealth you create for yourself, your friends and family, your employer. See whether you can think of any forms of wealth destruction that I didn’t mention. I look forward to any and all comments pertaining to this important free-market concept: wealth.

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