Tuesday, June 10, 2014

Econ 101: Money and Wealth

     This morning I heard a report that wealth has increased round the world, and that China will soon become the single most wealthy country. Apparently, wealth now stands at 186 trillion dollars, and by 2018 or thereabouts China will be the richest country in the world with over 50 trillion dollars. The confusion between wealth and money continues apace.
     Wealth is not money. Wealth is stuff. Wealth the capacity to make stuff. Wealth is the capacity to provide services. If you want any of this wealth, you can trade some of your wealth for it, or you can use money.
But money isn’t wealth. You can’t eat it. It won’t keep the rain off. It won’t make your bed or cook your meals. It can’t catch fish, nor make the nets for catching fish. Only people can make umbrellas, do the chores, make nets, and catch fish.
     What the news really means is that since the last time someone looked at how money is spent, at least 186 trillion  dollars worth of wealth has been created and consumed. That’s all. And since an enormous amount of wealth is created and provided without money changing hands, and an enormous amount of wealth is created and consumed without being traded at all, the figure of 186 trillion dollars is certainly too low. Just how much too low is a real issue. Some time ago (sorry, I don’t have a reference) some economists tried to estimate the value of non-monetary transactions. They did some surveys, and concluded that about 30% of the “real economy” was not recorded in GDP figures. Personally, I think that’s a low-ball estimate.
     For example, composing and revising this screed is a service. It’s a service to me personally because it makes me think and clarify my thoughts. It’s a service to whoever reads it because it does the same for them. What is it worth? If I had a marketable presence in the marketplace of ideas, I would get some money for it, and that would be its value at the time. How much money? That depends on my reputation, on the likelihood that other people would pay for e-book or paper copies of it. Right now, its value can’t be estimated with any kind of accuracy because I offer it free, gratis, without expecting money in return.
     Most of what I do these days are services for myself and my family, friends, and community. If we had to pay for these services, we couldn’t afford them. And that is the case with most of what we do to keep life comfortable and pleasant. It’s true for most of us. Only the people with pots of money can afford to pay for services that rest of us provide for ourselves and for each other.
     The fact that we can’t afford to pay for these services means that the value of these services exceeds the value of our disposable incomes, at least. For half or more of us, it exceeds the value of our incomes, period. That, I think, is a clue to how to calculate the value of the non-monetised economy.

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