Wealth

I

Introduction

Wealth, in economics, an accumulation of goods having economic value. Economic value has several characteristics. First, an object must have utility. It must have, or be suspected of having, the capacity to satisfy some human want. Wealth can be increased by discovering uses for things previously not regarded as useful. Thus, the discovery of uses for petroleum in the 19th century added enormously to wealth. Second, economic goods must be in scarce supply. Air does not normally have economic value because it is freely available. Air that is artificially conditioned is economically valuable, however, because it is relatively scarce. Third, economic goods must be transferable; that is, it must be possible to buy and sell them at definite market prices. Finally, an object must have measurable economic value. Because the only common unit of value today is money, the worth of goods must be expressible in monetary terms. Some economists also regard a definite skill in performing a job as human wealth, as such skill has a determinable market value.

II

Components of Wealth

In classifying wealth it is useful to distinguish between producers' goods and consumers' goods and, in each of these categories, between durable and nondurable goods. Among producers' durable goods are plants, machinery, and other fixed installations. Inventories of goods to be sold or in process of production make up producers' nondurable goods. Together, producers' durable and nondurable goods constitute capital, as generally understood. Food, clothing, and similar items of consumption are consumer nondurables; consumer durables are homes, furniture, and the like. Services are not included in estimated wealth as they cannot be stored. Services do, however, have economic value, whether as services to producers (for example, business accounting and legal services) or as services to consumers (for example, hairdressing, education, and health-related services).

III

Wealth and Income

Wealth must be distinguished from income. Both involve utility, scarcity, transferability, and measurability. Whereas wealth is an accumulation, a stock existing at a certain instant of time, income is a flow of goods and services during a certain period of time. Wealth may be regarded as a lake, and income as a stream flowing into and out of it. Thus an area of farmland is wealth, whereas the crop in any given year is income. By the same token an accumulation of grain in storage is wealth. The difference between income received and income consumed, wasted, or depreciated, as when grain deteriorates, is the measure of wealth accumulation.

IV

Personal Wealth

A person's holdings of currency, bank balances, and other financial instruments constitute personal wealth as distinct from national wealth. These holdings, moreover, are not items of social wealth, but only claims on that wealth against the actual material objects that compose social wealth, such as a house or a car. Economists estimate wealth by measuring the actual physical stock of assets.

In a period of inflation, private wealth may rise while its social value falls; the monetary value of a house, for instance, may rise in relation to other prices, although the house is actually deteriorating physically. To reach a valid measurement of wealth, monetary valuations must be deflated to real values, discounting the effects of changes in the purchasing power of money.