Real wealth is anything that makes our lives easier or more comfortable or more enjoyable in any way.
Creating new wealth can be as simple as things like combining the ingredients and making soup. Or doing the work to turn lumber and nails into a fence. The finished soup or fence has more usefulness than the raw ingredients or materials that created them and the work to create the finished product adds to the your personal and indeed the world’s stock of real wealth.
Some forms of wealth including our soup example are quickly consumed and need to be constantly replenished. Other forms of wealth can last for decades or even a century or more (buildings, bridges, rail lines and much more). Most forms of wealth get used up or deteriorate over time and eventually need to be replenished.
Some forms of wealth are natural and don’t need to be created by humans. This includes clean water, raw land, forests and all forms of minerals and “fossil” fuels in the ground.
Wealth measured in dollars versus Real Wealth
Of necessity, wealth is measured in dollars. Dollars are the best way to value and compare various components of wealth but dollars are not a perfect measure of real value.
Over time, inflation erodes the real value of dollars and therefore on average the dollar value of many items of natural and human-made wealth increase over the year while there is no increase in the quantity of real wealth. The dollar value of all the existing house in a community can double in a decade due to higher demand or lower interest rates while the real value and real wealth and usefulness of the houses is unchanged.
Lower interest rates can push up the dollar value of all real assets (real wealth) while the stock of real wealth assets and real wealth remains unchanged. And of course higher interest rates can do the opposite.
When the share price of a company on the stock exchange soars its usually not because the current real assets or real production of the company has increased but because the market has increased its expectation of the value and volume of the production that the company will face in the future.
BitCoin is an interesting example…
Financial wealth is measured in dollars but the actual wealth of a person or country exists somewhat independently of its value in dollars.
The actual underlying wealth consists of both tangible and intangible things of value.
Real tangible wealth includes a vast list of things. Examples include raw land and all natural resources, farmland, houses, apartments, retail stores, office space, furniture, electric generating plants, electricity and natural gas distribution networks.
Real wealth also includes intangibles. A popular song may exist only in an electronic format. But it can be listened to by an unlimited number of people an unlimited number of times per person and over an unlimited time span. Each time it can provide enjoyment to the listener(s). A song is not a necessity of life. But after our necessities are taken care of humans greatly value entertainment and various intangible forms of mental stimulation. If you don’t agree with this try thinking about doing without your smart phone for a month. Everything about it is digital and intangible and yet most of us now find these devices absolutely essential for communication and entertainment.
The Role of Government