Wealth

National wealth is the sum total of economic goods in the possession of the national, state, and local governments; business and non-profit institutions; and the individual inhabitants of a country. Systematic study of what constitutes a nation's wealth was begun in the 16th century by proponents of mercantilism. They advanced the thesis that a nation's stock of precious metals forms the most important part of its wealth. This view was generally accepted until the 18th century, when a reaction against the narrowness of mercantilist doctrine set in. It became evident that precious metals, particularly in the form of currency, were claims on wealth rather than wealth itself. Mercantilist doctrine was gradually replaced by the view of the physiocrats, a group of French economists of the 18th century, that only agriculture, mining, fishing, and other extractive industries could contribute to the real wealth of nations. Adam Smith broadened the physiocratic concept by stressing that wealth not only can be extracted but also can be created by manufacturing. This view was systematically formulated in the 19th century by John Stuart Mill. His formulation, with certain relatively minor modifications, is the one generally accepted today.

According to the modern version of Mill's concept, a nation's wealth comprises only its measurable physical assets—that is, its land and other natural resources; the structures, roads, and other improvements on the land; the machinery and other durable goods used in production and distribution; inventories of goods in the possession of enterprises; and the goods accumulated at any one time in the hands of consumers. Paper money and securities are not included in estimates of a nation's wealth, because such assets are only claims against the physical assets that actually constitute wealth. Holdings of money and securities are counted, however, when these holdings represent claims against governments or nationals of foreign countries. If a nation's aggregate claims against foreigners exceed the claims of foreigners against the nation and its inhabitants, the difference is a net addition to national wealth. If claims by foreigners exceed claims against foreigners, the difference is a net decrease of national wealth.

In the determination of national wealth, definite skills have a calculable market value. Currently, economists tend to give consideration to such items in socio-economic accounting. Examples of factors that contribute to wealth but are not considered wealth are the goodwill and similar intangible assets of a firm, the institutions and traditions of a nation, and such attributes of a people's character as the pride they possess in their skills.

In addition to problems of deciding what categories of wealth to include in estimates of national wealth, serious difficulties develop in assessing values. These difficulties arise because only a small part of a nation's wealth is traded on the market in any given year, and the market values of shares, real estate, and other assets may fluctuate considerably from year to year. In evaluating national wealth economists have used two approaches: subjective evaluation and objective evaluation.

In the subjective approach, a nation's wealth is measured by summing up individual estimates of the worth of individual possessions, as reported on tax returns and other required reports. The subjective approach depends a great deal on personal honesty and on the completeness with which the various forms of wealth are covered by official documents.

The objective approach requires that disinterested and qualified outsiders estimate the aggregate value of particular possessions. Values at market prices are difficult to obtain for the reasons given above. Values shown in companies' books are invalid because prices may fluctuate substantially after the asset is acquired and entered in the books. Even when prices remain the same, allowances made by a company for depreciation and obsolescence may be, for internal financial reasons, either higher or lower than those that objectively should have been allowed. The best method open to statisticians is to estimate, in prices of the present day or of some fixed base date, the values of all existing assets and then to reduce these values by applying appropriate rates of depreciation and obsolescence. Sometimes the subjective and objective bases of evaluation can be used concurrently and the results checked against each other. Such figures are approximate and must be used with caution.