What is Wealth?

There has been much discussion about "wealth creation" especially when comparing the US to the EU. One of the things that makes such discussions questionable is the question of what is meant by wealth.

Both trading areas have seen large run ups in the value of publicly traded securities. This has made the paper wealth of those holding stocks rise, but has it really done anything for real wealth? The same is true of real estate (especially housing) prices. If a home rises in cost at a much faster rate than inflation it appears to make the owner wealthier, but from a utility point of view what has really changed?

It would be interesting to see how much real wealth has changed over time. I would define real wealth as new investment in society. This means that government spending on tangible things like roads, bridges and schools would be a sign of growing real wealth. So would private investment by firms in new manufacturing capacity or offices.

Things with no further developmental use like weaponry would be excluded. I have mixed feelings about the space program, but that could be considered a form of R&D and thus adding to real wealth.

Things get trickier when discussing human capital. If a society invests in education that seems like it should be included. But how do we measure education which is financed by the students taking on debt, as is the case for much higher education in the US?

Do we also include operating expenses like improved health care? A healthier population is "worth" more than a less healthy one so this seems like an investment that is adding to real wealth. The raw numbers spent on health services are not a good measure, what is needed is a measure of the effect. So a decrease in, say, the cancer rate would translate into more capital (since these people are now in better shape) regardless of the cost involved. Places like the US which have high overhead may be spending more per capita, but only a portion of this adds to wealth.

Without any statistics my hunch is that the highly touted growth in the "wealth" in the US is mostly do to price inflation in securities and real estate and that the country has probably been getting poorer by the measure I'm suggesting. I'm also guessing that the EU is doing better.


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Copyright © 2007 Robert D Feinman
Feel free to use the ideas, but the words are mine.