I’ve been mulling this around in my head for some time, and haven’t really written down to paper yet. People have been asking me to write it down, so, I’m going to give it a go… its still a bit raw, so please comment…
I think any discussion on wealth has to start with why do we want wealth? Why do we want to be wealthy? One of my key assumptions is that we want to be wealthy because we want to increase our standard of living.
Question: How do we define wealth?
On an individual basis, I’d say we define wealth by how much we own, so our assets – liabilities = equity. We might also judge it on our incomes and the ability to produce income. But, I think most of us would easily understand by a blanket statement such as, “that guy is wealthy”
On a macro basis we might assess a nation’s wealth or the wealth of the globe. We might look at things like a stockmarket index or the GDP of a nation. Let’s talk about the stock market first. When the stock market crashed a couple of years back, did we all of a sudden lose a whole bunch of physical assets? Or did we lose the perceived value that we place on a lot of these companies?
In the case of GDP, the GDP of a nation is not bad as a gross measure of prosperity, especially when comparing one nation to another. But, GDP is kind of a tricky animal. I remember after Japan had their devastating quake/tsunami, a lot of analysts were saying that there is a silver lining, because their GDP will increase due to all this rebuilding going on. It sounds a bit silly. Example: If I clean your house, and you clean mine, and we each pay one another $50, then GDP increases by $100 ($50 x 2). But if we each clean our own houses, then GDP increases by $0. In both cases, we end up with clean houses and no net gain on our incomes. But in the first case, GDP increases by $100. GDP is not a bad measure when it comes to measuring gross income or things like that, but it is not necessarily a measure of wealth.
So, here we go… Unified Theory of Wealth
1) Wealth only exists as stored energy or matter (though they are one and the same). It either exists as solar radiation, agricultural products, minerals, or whatever else is useful. So just like matter or energy, wealth can only be extracted from the Earth. This exists in the form of oil, gold, copper, wheat, soy, etc. For example, if we deemed a car necessary for our standard of living, we cannot create one without using quantities of iron, oil, aluminum, copper, silica, and whatever else goes into producing a vehicle.
2) Technology increases wealth as it reduces the amount of energy or matter needed to achieve our standard of living. To use our car example further, if a car is necessary for our standard of living, then building a car with less material is making better use of resources and thus increases our wealth. The invention of the steam engine, greatly improved the efficiency of burning coal, and in turn much more work could be done from one lump of coal then previously. Much of the industrial revolution has been through increases in efficiency in the use of energy. So, technology matters. Additionally, the discovery/invention of solar panels has allowed us to capture more of the sun’s energy that can be put to work that we deem important.
3) This one is a bit of a tricky one. On a personal level, you can increase your wealth by maintaining your standard of living while using less energy. For example, if dry clothes are important to you, then simply hanging your clothes out to dry, rather than using your dryer uses less energy. Dry clothes for less energy used = increase in wealth! Similarly, if transportation from point a to b is important, rather than having your own car, then using public transportation increases your wealth, as your standard of living doesn’t change while your individual energy use drops. In these cases economics and energy are aligned, since it is cheaper to take public transportation vs owning a vehicle, and it is cheaper to hang your clothes out to dry then it is to purchase and operate a dryer. The biggest impediment to #3, I believe, is convenience. We, especially in the west, have chosen convenience over reductions in energy usage.
Some things I’m still trying to work out in my head. My brother used to fix helicopters, and my father was a repairman. It got me to thinking how their work fits into this theory, and I have it narrowed down to something like this…
Repairmen increase wealth…A helicopter that doesn’t work for lack of a broken wire is about as useful as a helicopter that doesn’t exist. Yes, all the parts in it have intrinsic value, but it loses all its technological gains if our standard of living requires a helicopter. We can either build a new helicopter (use of resources, tying up of assets) or fix the broken wire (use of less resources). In both cases, we end up with a functioning helicopter.
One could argue that the gain is simply the difference required in recycling the helicopter and rebuilding it, vs building a brand new helicopter, but I think its pretty obvious that repairing the broken wire uses the least resources. In this case economics and energy use drive the same behavior.
So there you go, Unified Theory of Wealth
I’ve been discussing this with a friend of mine and he mentioned the I=PAT formula. Have a look… Wiki IPAT