Sunday, February 01, 2015

Understanding the Economic Concept of "Wealth"

"Wealth" or being "wealthy" is well understood by most people in society.  We know "wealth" when we see it.  We all know we want to be "wealthy."  But when it comes to having a thorough and fundamental economic understanding of wealth, most people (even economists) fail.  The reasons are many, but most people just don't have the time or intellectual desire to fully think through "wealth."  However, if you take the time to do, not only do you drastically improve your understanding of economics, but you also dramatically increase your chances of being happy.  And that, ultimately, is the point and purpose of economics and life.

The first "stage" or level of understanding of wealth people have is money.  I remember a friend of mine and I in college walking across campus on a blustery fall day.  The wind was blowing and somewhere upwind somebody must have dropped some cash because soon $1 and $5 bills were blowing right across our feet.

For a nanosecond we were stunned because, well..."there's money blowing across our feet."  But soon our innate, human instincts kicked in and we were scrambling to grab as much cash as we can, pushing each  other out of the way in a spirited friendly competition of enrichment.  After grabbing all we could see we were each about $15 "wealthier," but what I remember most about it was the IMMEDIATE and RAPID genetic response we both had to chase and push each other over bits of green colored paper.

The question is why were we so excited about paper?

Obviously it wasn't the paper as much as it was the stuff the paper could buy.  And if we could grab that money it would allow us to buy stuff that would directly help support and enhance our lives.  And this is the second "stage" of people's understanding of wealth.  It's not about the money.  It's about the stuff.

This is a key epiphany to have because what you realize is that economics is not about the "money" a nation prints.  It's about how much stuff it can produce.  This is why, again, Adam Smith wrote "The Wealth of Nations" not the "Money of Nations."

However, what precisely is stuff?  Yes it is goods and services that can be used to help extend, maintain, and enhance your life, but does just having more "stuff" necessarily make you wealthy?

Well, yes and no.

Everybody needs a certain amount of "stuff" to survive.  We all need a certain amount of food.  We all need a certain amount and quality of shelter.  And we all need a certain amount of clothing.  But for the vast majority of mankind's 2 million year existence on this planet just scrounging up this basic level of "stuff" was incredibly challenging.  Again, it was no more than 300 years ago that hunger was the number on thing humans were battling against for survival.  Thus it is very much hard-wired into our brains to scrounge and consume as much stuff as possible for survival (which is why dogs will not stop eating just as humans won't either and we have an obesity problem despite the "food" problem being solved).  Ergo, human's drive to be wealthy is not so much about the stuff itself but to have the peace of mind, sense of security, and psychological benefit that comes with being wealthy.  i.e. - you never have to worry about starvation, survival, shelter, or work again (notice how immediate and happy people are when they win the lottery).

Now, in a literally sense to be wealthy, this would mean you would have to store up all the food you're going to eat, have a house you will live in forever, and have all the other material items and "stuffs" collected at some massive depot.  Then, slowly, but surely, you'd eat through these resources, dying fat and happy. 

But "stuff" doesn't work that way.  Food rots.  Milk spoils.  Even houses deteriorate and collapse without maintenance.  So how does one get wealthy without owning that actual stuff?

Well, welcome to the third stage.  Time.

At first you'd be tempted to say, "well I would just store all my wealth in the form of money to purchase future stuff!"  And this is true.  You could store your wealth in the form of money in a bank account, silver or gold in a vault, or some other form of economic medium that stores your wealth.

But (bar winning the lottery) how did you get so wealthy in the first place?  Where does this "wealth," the ability to buy future stuff (and so much of it you don't have to worry about it anymore) come from?

Well, the answer is time.

Again, barring winning the lottery or inheriting wealth, you have to understand what wealth really is and what its origins truly are. For while wealth is just "a lot of stuff" stuff at its "economic-atomic level" is created with human time.

I've mentioned this before in several of my books because the concept is so important, but everything you see around you ONLY exists in its current form because human time went into it.  The computer you are reading this on right now was sand, metals, and minerals in the ground.  And that sand, metal and minerals would remain there had it not been for humans to dig them up out of the ground, refine them, and then assemble them into this computer.  The walls and sheet rock in the room you are currently in would still be timber and rock somewhere had it not been for humans who cut, hauled, and built the building around you.

In other words, yes, stuff is the true source of wealth, but stuff does not exist unless humans exchange their time turning raw materials into usable, consumable stuffs.

Thus, when we look at this or any other economy, it is no so much various tradesmen and specialists exchanging their wares, products and services as much as it is an exchange of time.  I will give up my time producing a car in exchange for money.  This money will allow me NOT to buy groceries, but rather to pay for the time of the thousands of people involved in producing groceries.

This then puts the onus and origins of wealth in the only place it can be - your time.  Specifically, how valuable is your time relative to other people whose time you are going to exchange yours for.

If you are going to become an "English major" or an "aspiring rap artist" or a "professional activist" let us be very clear what you are saying.  You are saying,

"My time is worthless.  One minute of my time has little to no value because nobody will exchange one minute of their time executing their profession for me executing mine." 

HOwever, if you were to become a doctor, an engineer, a pharmacist, or a tradesman you are saying,

"My time has value.  One minute of my time will command MULTIPLE minutes of other peoples' because my trade, my skill is that much more difficult, specialized, and in demand."

And it is this disparity, this difference, this deficit between how many minutes of other people's time you can command with a mere minute of yours that builds wealth. 

This is why the "Masters in Pansexual Horned Frog 19th Century Literature Studies" makes $9 an hour serving fries to an electrician who makes $50 hour wiring the house of a surgeon who charges $90,000 for 5 hours of open heart surgery.  However, don't think of it in terms of "dollars per hour" think of it in terms of "minutes of a skilled person per minutes of an unskilled person."

If I do the math right, just ONE MINUTE of the surgeon above can command 2,000 minutes of the Pansexual Horned Frog Literature major.  And since it is human time that ultimately makes all stuff, you can see with such an huge ratio how skilled people can accumulate and command such wealth.

This, technically explains to the atomic level what wealth really is and where it comes from.  However, this is only on an economics level.  There is one final stage to truly understand wealth, and this also involves time.

Understand there is a law of diminishing returns to wealth.  That once you get enough of it, you derive less and less benefit from it.  So when Bill Gates made his first billion, no doubt he was very happy.  But what about the next billion?  And the next billion?  And that one after that?  For all practical purposes the "first" billion took care of most of his material needs, desires, and wants.  But as fun and awesome it is to have lots of "stuff," stuff is not the most important or sought after item in the world.

It's other people. Specifically their time.

Yes, you can command people through money and the labor market to give you 4 minutes of their time in exchange for 1 of yours.  But they are working for you and in the end are giving you the finished product of "stuff."  But what humans truly value is the time and company of other people who do not give them a "product" or a thing in the end, but companionship, love, friendship, and intellectual stimulation.  It is (again) why playing video games is fun, but playing against your friends online is even better.  Going to a movie is great, but watching it with friends is better.

In other words the ultimate form of wealth is other people WILLINGLY deciding to spend a percentage of their finite and dwindling lives hanging out with you.  Not in the expectation there will be "stuff" at the end, but simply because they want to.

This then changes the focus of wealth from "skilling up" or "leveling up" so your time is more precious than other people's time in the labor market, to that of being a good and enjoyable person.  A good and enjoyable person that people willingly spend their time on.

Are you honorable?
Are you honest?
Do you speak the truth?
Are you interesting?
Are you funny?
Are you selfless?
Are you altruistic?
Do you have standards?
Do you have ethics?
Are you charming?
Are you entertaining?
Are you interesting?
And are you humble?

In other words, to be truly wealthy you need to command other people's time in two different ways.  One, economically so you can accumulate enough wealth all your material needs are taken care of.  But, two, socially so other humans willingly spend time with you and you have good social, familial and romantic lives. 

This final "stage" or epiphany is arguably the most important economic lesson humans need to learn.  Because once realized not only does it makes people happier, but it has a drastic and amazing effect on your personal finances.  For once you realize that true wealth comes from friends, family, and loved ones, your need to make a ton of money for material wealth disappears, or at least is severely lessened to a minimalist level.  And if all 315 million Americans realized this, imagine what would happen to our finances.

Nobody would be borrowing money to buy a fancy car they can't afford to impress people.
Nobody would be buying designer jeans or bags to impress people they hate.
Nobody would be slaving away to pay for a mortgage on a McMansion next to the Joneses. 

Nearly all consumer and personal debt would be wiped out (or severely lessened), people would adequately save for retirement, and a level of sanity and economic knowledge would pervade the entire population that no doubt would lead to a much more stable, brighter, and happier economic future.

But something tells me more people will tune into Kim Kardashian's derriere than read this article.

Oh well, enjoy the decline! 


Torgo said...

Great work, Cappy. Immortal words.

Black Poison Soul said...

Off-topic, Aaron. This is the latest news:

Obama Proposes 14% tax on companies untaxed foreign earnings

I'm curious what your thoughts are re this, as an economist.

grey enlightenment said...

You mention the part about money being useful not for its negligible intrinsic value (the paper or metal) but its extrinsic value (what it can buy). That seems to douse cold water on the argument about how it's bad that the dollar is being debased by printing money, because it doesn't matter how many dollars there are out there; what matters is the utility of a dollar and how this utility creates happiness. 100 years ago there were no personal computers, no refrigeration, no uber, no central air conditioning. Money today can purchase a much higher standard of living than 100 years ago, even if fewer dollars can buy an ounce of gold.

Mib said...

Great post up until the end where you go all happy-go-lucky. While social wealth is valuable, and I would argue the difference between being rich and wealthy. You want a fuckton of material wealth.

You can live a minimalist lifestyle and have designer jeans. So much of debt is blue pill vision about getting laid ca nice home ect. Its not insecurity so much as a specific type of insecurity about going against the cultural order (university, American style relationships.)

The more I work and sell my time away for a comp sci career I realize wealth is trading for the sands of time.

Anonymous said...

OK. Arron. I am giving up blogging.
This post is really excellent mate.

This is how the other bands must have felt when they heard Sgt. Peppers for the first time.

Joe said...

Super post again Cappy! I was a bit surprised at the second part, "He who has friends, has real wealth." I couldn't agree more. Probably need to modify my own post where I say work and family are important, or even more important, than wealth.


Big Joe said...

Great blog as always Cap!

William Hughes said...

Thank you.

Anonymous said...

Thumbs up!

j blog said...

Wealth is owning means of production.

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