What Is Wealth?

Or, That Goofy Zero-Sum Game Argument

It’s important to understand that money isn’t the same thing as wealth. Money can be one form of wealth, but when we get down to it, it’s ultimately just a stand-in so we don’t have to trade chickens anymore. Wealth is any stuff, or the ability to get stuff, or do stuff. Thinking that “wealth” just means money and nothing else is like thinking that “TV” just means game shows and nothing else. Jeopardy is great, but if that’s all you think is on, you misunderstand the nature of TV and will have a hard time having any sort of meaningful discussion about it.

Here’s an example of what I mean about misunderstanding the nature of wealth. Liberal economics says that government spending always makes the economy better, because there’s more money moving around, so the GDP is bigger, which is how they define the economy. But GDP just looks at money. Remember- if wealth is all goods and services, then an improved economy would be producing more goods and/or services. Simply moving more money around, without increasing productivity, is meaningless. If I pay you 50 million dollars to sit on your couch for an hour, then you pay me 50 million dollars back to do the same, the GDP gets 100 million dollars bigger. But nothing actually happened. This is the fallacy of government stimulus. You can make the numbers look good without actually changing the real economic situation.

(side note: GDP can be useful. I know. Productivity causes money to move around. GDP, in theory, measures how much of that happens. But it does so indirectly and incompletely, and can be made invalid, as in this example. But it has its proper uses, so please don’t use this against me when I cite GDP as a useful metric a year from now.)

There’s a term that gets tossed around a lot at this point. Game theory involves the concept of the “zero-sum game,” or a circumstance in which one player’s gains are, by design, another player’s losses. To put it a different way, in order for one person or team to win, someone else must lose—that is, in a zero-sum system.

Liberals often argue for higher taxes or restricting businesses based on the idea that our economy is such a system—there is only one pie, and we have to split it up, so if one person has a lot of pie, that means someone else is getting screwed. Poor people are poor because there’s only so much money to go around, and the rich took too much of it. President Obama’s near-daily attack on those rascally millionaires and billionaires and their private jets comes to mind, not to mention his belief that it’s good to “spread the wealth around.” As I’m writing this line, I just heard Ed Schultz on his radio show claim that we need to raise taxes on the wealthy because–paraphrasing–the Bush tax cuts killed job creation and just led to the wealthy taking more money. In other words, the more money rich people got, the less there was for the rest of us. And I regularly get yelled at about the terrible, awful, no-good very bad “income gap,” often in the context of the Reagan years–based on the logic that, since the rich got richer during that time, the poor must have suffered.

But our economy is not a zero-sum system. Think about it: if I have $100 in my pocket, it doesn’t mean there’s someone out there that’s $100 poorer because of me. That $100 is in constant motion, as people make more stuff, and people get richer every time it moves–because, remember, what’s happening isn’t simply money moving from point A to point B, the money is just a convenient way to pay for productivity. If I give you that $100 and you build me a bookshelf that didn’t exist before, we both gain—you make profit on your sale, I get a bookshelf that I couldn’t make myself because I don’t have the tools or experience. This breaks the definition of a zero-sum system, because we both gain, nobody loses.

Look at the example again. We’re not on the couch this time. If I pay you 50 million dollars to build a giant golden statue of Zeus in my backyard, then you pay me 50 million dollars back to buy 300,000 tons of vitamin C, the GDP is the same as if we had been sitting on the couch trading money. But this time, we both have $50mil more worth of stuff. What matters is the productivity.

What this ultimately means is that people acquiring large amounts of money does not mean they are making other people poor. People acquiring large amounts of money is GOOD for the economy–it generally means they are being productive, which is making themselves and others more wealthy.

Let’s separate that one out, because it’s a big deal. As a general rule, people acquiring large amounts of money and wealth is good for the economy, and everybody in the economy benefits from it.

If all this is true, what about that income gap? Did Reaganomics help the rich at the expense of the poor? In fact, according to Census Bureau data, the opposite took place. From 1981-1989, Americans in every quintile saw their real (inflation-adjusted) income rise, and the number of Americans making less than $10,000 a year shrank by 3.4 million–whereas Americans in the lower-earning quintiles did lose ground in the 8 years before and after Reagan.[1] How about the current economic crisis? If the rich are losing, someone else must be gaining, right? And the rich have certainly been hit by the recession. The actual number of American millionaires fell from 9.2 million to 6.7 million between 2007 and 2008.[2] How have the poor fared? Have they picked up all that money?

Of course not. It’s all too easy to score political points by telling people that they are getting screwed and then saying to them, “If you vote for me, I’ll make things right!” But that’s simply not how things work. Punishing the rich doesn’t help the poor. Historically, it hurts the poor as much or more than the rich.

Here’s the thing. People usually (of course there are exceptions, but on the whole) get rich by being extremely productive. When that happens, not only is there more stuff for us all, but productivity doesn’t just create stuff, it creates jobs. No jobs created when we’re on the couch. But when we’re being productive? Someone’s gotta mine all that gold, drive the trucks to get it to my house, melt it down, engineer the statue, feed all those workers, provide the gas for the trucks, power for the tools, and so on, and on, and on. See the difference?

Let’s see where that leaves us:

  1. Money is not the same thing as wealth. Wealth is all kinds of stuff.
  2. Acquiring wealth usually happens through production, which is good for everyone.
  3. The economy is very much NOT a zero-sum system–and therefore, it’s not a contradiction to say that we can all–rich, poor, and middle–get richer together.

Finally, why don’t we take this opportunity to look at one of our common practical goals in light of these ideas? I hope we can all agree that we want to help the poor build better lives. According to this understanding of wealth, productivity, and business, just about the most effective way to help the poor will be to increase the productivity of the economy. This increases total available wealth, makes the wealth more affordable, and creates more jobs so that more people can access the wealth. More employment, cheaper goods, more vertical mobility. Bam!

The question then becomes, how?  What do we do to make this happen?  Should the government stimulate production?  More to the point, can the government stimulate production?

My first of many thoughts on that extremely big issue, coming soon.

[1] Niskanen, William A. and Stephen Moore (1996, October 22). Supply-Side Tax Cuts and the Truth about the Reagan Economic Record. Retrieved September 15, 2011, from The Cato Institute Web site: http://www.cato.org/pub_display.php?pub_id=1120

[2] The Economist (2009, April 2). Easier for a camel. Retrieved September 15, 2001, from The Economist Newspaper Limited website: http://www.economist.com/node/13356686?story_id=13356686

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  1. #1 by Tincup on September 15, 2011 - 11:12 pm

    Thank you for sharing your point of view. I like your post but I would change the title to from “What is Wealth” to “What is Value”. My contention is that first, the assumed intrinsic value of money is flawed and doesn’t represent true value or true value created. My second contention is that in this modern age huge portions of money flow quickly to sources that may not be equal to value. Large portions of people spend their money on these things of no value such that they have less and the source of their funds, which are not as valuable as perceived, receive more. The result is that value is not achieved and we end up with large income and net worth gaps. Recent statistics say 20% of top earnings generate 84% of the value in America. Approximately 46 million people and 1 in 5 children are below the defined poverty line. The flaw with the assumed intrinsic value of money and our error on “perceived value” is just part of the puzzel.

    The other piece, which I plan to write about next, is the population explosion. In the case of the human kind, quantity doesn’t outdue quality. If our immense population was highly educated and skilled, the population issue may not be a problem. But when you combine vast amounts of under-educated and underskilled people with the errors assumed about money you have a catastrophe on your hands…which is what is coming or so I fear.

    • #2 by basicconservative on September 17, 2011 - 6:17 pm

      Thanks for commenting! I see your point, but I can see a couple of potential hazards in your logic. You’re right that the assumed value of money doesn’t actually represent anything intrinsic to the money itself, and there can be things with high value for low cost and things with low value but high cost in such a system. However, you say that people spend money on things of no value. I contend that, in a free market, the value of money is whatever the people in each individual transaction determine it to be. So I might say painting A is crap, and I wouldn’t buy it for a dollar. But you might see amazing beauty and value in it, and be willing to pay $1000. I can look at that and say you are spending money on something of no value, but you would disagree. If millions of people are willing to spend five bucks on a Big Mac, and Hardee’s and Wendy’s and Jack In The Box and Arby’s are all offering competitive alternative products and prices, then I’d say that Big Mac has been demonstrated to have a value of five bucks. You might disagree, but again, who is any individual to make those determinations for another? If Nissan says my car is valued at $20,000, but I think it’s only got a value of $18,000, I can ask them to give it to me for 18. And if they refuse, I don’t have to buy it. The arbitrary value of money is what gives it the ability to flex according to these market forces.

      What alternative to this sort of system would you suggest? Nothing in human history has ever produced better results so far.

  2. #3 by Sean Estey on January 31, 2012 - 10:24 pm

    Great article! You have a way of explaining things in clear, concise language which makes reading your articles a pleasure. I have subscribed to you and look forward to your new posts, good sir!

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