The Two Views of Wealth

Saturday, November 08, 2008
Wealth is a slippery and difficult concept. Even money, the most visible manifestation of wealth, is hard for most of us to really grasp. What is it? Where does it come from? Why do some have so much more than others? Why don't we just make more of it?

It was as late as a college economics class that I learned that banks create money when they issue loans. Then I knew we were in deep doo-doo.

As for wealth, the views and understandings are myriad and nuanced, running the gamut of sophistication and erudition. But to simplify greatly there are two common views. The static view is that there is a fixed amount of wealth and the economy is simply the process of moving it around from person to person. Like the "spot" in The Cat and the Hat. If I have $5 I can keep it, in which case I have it and you don't, or I can give it to you and now you have it and I don't.

There are two ways I might give you the money. You could make me something I want, and I could give you the $5 in order to have that thing—we trade. Alternatively I could just give it to you. Either way, the money has moved from me to you, the spot has moved from the wall to the towel.

Dig deeper and there's a world of difference between these two scenarios. If you make something for me to get my $5, then afterward you do indeed have the $5 but I have something I didn't have before. In the dynamic view wealth is not just money, it is something created by the efforts of human beings. It is not like matter. Our exchange has created wealth that didn't exist before. It follows that economic policies can and should be formulated so as to increase wealth as much as possible. The dynamic view has prevailed since Reagan and Thatcher.

I like Obama's temperament. My greatest fear is that, having never held an "ordinary" job in his entire life, his understanding has never matured from the static view of wealth to the dynamic. I fear that he will seek to "spread the wealth around", killing the wealth-creating economic goose in the process. Let us all hope not.