Throughout recorded history, money has been considered virtually synonymous with wealth. Even Webster's Dictionary begins its definition of wealth as follows; 1."a great quantity or store of money or property of value." But the fundamental distinction between money and wealth is obvious. Wealth satisfies desire directly whereas money satisfies desire only indirectly.
Whether copper, silver, gold, paper, or anything else used as money; their basic function or purpose is to circulate or exchange goods and services more efficiently. Of course, money is a purchasing medium, a standard or measure of value and a social institution. Thus, copper, silver, gold, or paper are wealth when intended for immediate consumption but are money when intended for circulation or exchange.
Financial assets are not wealth. Stocks, bonds, mortgages, promissory notes, bank cd's, and land, may with relative ease or difficulty be converted to money. Again, they are not wealth since they do not directly satisfy desire. Additionally, these financial assets may either appreciate or depreciate while real wealth invariably deteriorates or depreciates. A rather insignificant exception to the rule would be the collectible market such as rare paintings, antiques, books, coins or stamps where demand meets a limited supply.
A common fallacy in the economic literature is the confusion of wealth with value. As will be demonstrated by a precise, functional definition of wealth; every item of wealth has value but everything which has value is not necessarily wealth. As indicated above, money as well as financial assets (including land) have value but are no part of the wealth of individuals or nations.
Adam Smith, in his classic AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS, 1776, captured the essence of wealth in the oft repeated phrase "the real wealth, the annual produce of the land and labor of the society." He also fell into confusion when including land as well as individual skill as wealth. References to wealth as the annual produce of the land and labor can be found particularly in Book I, Chapter XI, Section entitled A Digression on Silver and Book II, Chapters III & V. Incidentally, his conclusion of the Digression on Silver is worth quoting in full as it is highly significant.
I shall conclude this very long chapter with observing that every improvement in the circumstances of the society tends either directly or indirectly to raise the real rent of land, to increase the real wealth of the landlord, his power of purchasing the labour, or the produce of the labour of other people.
Produce implies production and land and labor are necessary factors for production. Moreover, production within the context can only mean the production of wealth despite dictionary definitions which also include services as part of production. But services are provided or rendered not produced. For example, the advice of lawyers or doctors, the assistance of cleaners or household help, etc., could hardly be considered production. Goods and merchandise are part of wealth as are roads, bridges, and all improvements on the land.
In order for anything to be considered wealth, it should be 1) material, tangible, corporeal; it can be felt and touched. 2) It is produced by human effort (labor). 3) It satisfies desire directly. 4) It has exchange value.
Henry George (PROGRESS AND POVERTY An Inquiry Into the Cause of Industrial Depression and of Increase of Want with Increase of Wealth, 1879) recognized the importance of establishing a precise meaning for wealth. In Book I, Chapter II, the Meaning of the Terms, he said:
As commonly used the word "wealth" is applied to anything having an exchange value. But when used as a term of political economy it must be limited to a much more definite meaning, because many things are commonly spoken of as wealth which in taking account of collective or general wealth cannot be considered as wealth at all......Increase in the amount of bonds, mortgages, notes, or bank bills cannot increase the wealth of the community that includes as well those who promise to pay as those who are entitled to receive....Increase in land values does not represent increase in the common waalth, for what land owners gain by higher prices, the tenants or purchasers who must pay them will lose.
All things which have an exchange value are, therefore, not wealth, in the only sense in which the term can be used in political economy. Only such things can be wealth the production of which increases and the destruction of which decreases the aggregate of wealth. If we consider what these things are, and what their nature is, we shall have no difficulty in defining wealth.
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