What exactly is "wealth"... how is it defined? Now understand that I am deliberately ignoring the more inclusive concept, which could include such intangibles as love, peace, health, well-being, and so forth. For this discussion I would like to consider "wealth" from the very narrow perspective of possession of desirable goods or services.
I hope by means of this discussion to better understand some of the underlying concepts by which we measure "wealth". As some of you are aware, I am woefully undereducated, having never attended college or university. By the same token, I am not entirely ignorant, either. I have always been impressed by the level of conversation and commentary both here and at FundAlarm, and I hope to be able to continue my self-education by drawing upon the knowledge base which is represented by you other posters. OK, I'm a knowledge vampire, if you please. You folks have done gone and got yo' eddication the hard way, and here I'm hoping to steal some of it. Well hell, stealing is in the best traditions of any economic system- capitalist, socialist, or whatever... nothing unusual there.
To be imperfectly honest, I am attempting to better understand the thought processes of some of you, and to see if I can determine where and why I might either agree or disagree with you. Recent conversations with Maurice have prompted this. He and I frequently disagree on many topics, and yet I can see an element of reasonableness in some of his observations.
So let's start at the beginning, trying for the most simple construct, and see if we can develop this conversation to the point where it applies to today's world. OK, let's imagine a beginning where there was the world, and on that world there were "people". Since we are starting from scratch, let us assume that at the start none of these people had anything of any value- that is, nothing that anyone else didn't already have enough of to keep them happy.
Under this scenario, there certainly is wealth, at least potentially, in that the entire resources of the planet are at this point unrecognized and unclaimed. There's gold, silver, precious metals and crystals, timber, gas, oil... and everything else that at some point in future history will be recognized as "wealth". And in that future, most of this wealth will, through various processes, eventually wind up in the possession of a relatively small percentage of the human race. Also in that future, a thing called "money" will be invented, to stand as a conveniently transportable surrogate for much of this wealth. But not yet.
OK, let's push the "Start" button: one day one of our people is happily walking along, and he notices a bright shiny gold nugget in a nearby stream. He finds this object to be pretty cool (surely there must have been a word for "cool" even then), and upon returning to his village finds that many others there also find this item to be desirable. Realizing that he is in a position of advantage, he declines to share any information as to the source of this new desirable thing. Eventually, of course, others too will find and acquire this new gold stuff, and the ability of gold to make pretty and long-lasting ornaments will be discovered, making gold even more valuable. The exploitation and transformation of the planetary resources begins, and the concept of Wealth is now with us.
So what happens next?
Comments
For example, even with the earliest coinage, some mechanism must have determined what any particular coin could be exchanged for in the way of tangible goods.
Before coinage, or other "artificial" representations of "wealth", bartering was the norm, yes? I suppose that depending upon local conditions of supply/demand, some relatively normal ratio sort of "self-established" if one wanted to trade, say, one goat for some measure of wheat. I imagine that in some parts of the world this type of transaction is still very much in evidence. Now, if one fellow has the goat and the other has the wheat, they are pretty much dealing with a non-representational reality.
And then, after coinage, how was it ever established how many pieces of whatever were worth one goat, or one kilo (or other standard measure) of wheat? What mechanism came to determine this? Now we have one fellow holding a fistful of coins, desiring to trade some number of them for a goat, or maybe the wheat. I want to get at the heart of the basic concept of how exactly the relationship of representational "money" to "real stuff" came to be.
I'm somewhat familiar with the writing of Ludwig von Mises, but frankly I would have to devote way more brainpower than is justified to wade through that, and time is short. What I'm hoping for is a broad-brush overview of how coinage/printage came to be, and how it works.
Thanks for your input, Scott. Regards- OJ
Richard Armour
Very good question. I've actually slept over it instead of jumping to answer it.
Here is the Wikipedia definition:
http://en.wikipedia.org/wiki/Wealth
And you have restricted the subject to possession of desirable goods or services, wealth may be defined as building an abundance of assets. These typically include your bank, brokerage accounts, the real estate, farmland, animals etc. ownership rights in businesses, any valuable art you own, your pension or similar annuitized payments etc. But, I would also include the human capital into that as well. Part of the wealth we accumulate is the process of converting human capital to financial capital. Human capital of the wealthy have better education and better opportunities.
How do you measure such wealth? We normally convert the present value of the accumulated goods and other assets to a dollar amount (for gold bugs, it could be measured in oz. of gold if you like). Forbes makes a list of the wealthy by following this process.
If we go beyond the narrow definition, wealth includes cultural wealth, family and friends, the healthiness, time and joy as well. Those are harder to quantify though.
*** Wealth is a perceived store of value. The "value" that is stored is perceived to be exchangeable for real goods and services now or in the future, or may be exchanged into other perceived stores of value. (That's a mouthful, but I didn't ask this question.)
The fella you cite who found the first gold nugget probably wasn't sure, but likely "perceived" others might be willing to trade him something in exchange for such a beautiful and rare specimen. Apparenty, when he tested his theory in the marketplace, this perception was confirmed, as he continued to amass the metal.
Key to the above definition is "perception". I perceive for example that $4 U.S. dollars can pretty easily be exchanged into a gallon of gasoline today. In the short-run, our perceptions about a dollar's value don't change much. I'll probably still be able to buy a gallon of gas for $4 three days from now. Who sets these perceptions? We all do. The fella who sells the crude and the refiner who buys it. The guy that delivers to the retailer. You do when you pay for gas at the pump or decide what type vehicle to own or how far to drive each day. While cash is perceived as stable in the short term, other stores of value may not be. For example, my stock mutual fund may be worth 20% more or 20% less three days from now, depending of course on market perceptions.
Another crucial aspect of wealth is its ability to be accumulated and "stored" in some fashion, either in paper currency or via more speculative investments. This is where the debate you allude to starts to get messy. Let's say for the sake of argument I was born into a third generation of successful investment bankers and your heritage was of a good working class family - maybe Pa was a dock worker down at the bay - been in news lately. Both fine parents and decent people mind you. Since my Pa has more of this perceived value stored away in stocks, bonds, gold coins and real estate tnan he can possibly spend in his lifetime, he passes all along to me - being an only child. (Yep, paid the inheritance tax, but half of $100 mil still ain't bad.) Unfortunately, your folk expend their meager stash on medical bills as they grow old. Nothing left. Oh, say it ain't so, Joe! Can't afford to attend college, but you're one of the lucky ones to find work in this economy. You take a job flipping burgers down at Burger King - rakin in maybe $15,000 a year with overtime - great life ain't it? Me, I'm busy watching over all them investments (wealth) Pa bequeathed. Oil's up this week. Stocks are down. Thinking of buying some depressed real estate one of these days. OOOPS, call coming in from my broker down at MF Global.
professor hank
Nice topic, Investor. I liked in wiki where it said that the definition is very context dependend and therefore it varies greatly. I also like the broad definition that wealth is 'anthing of value'. That would include human capital things like a law degree. Joe is correct with money and coinage to the degree that it is considered to be 'of value'. That is where you need to be careful with definitions of money v. currency.
That said, 'money' is a yardstick by which to measure various things of value and by default is used as a omni-metric of wealth. [sheesh, I mean, we've got to keep score some how, right?]. It fails miserably when it comes to valuing things like education, good will, community involvement. Yeah, we're counting all 'things of value' and I aver that being actively involved in your community can be counted as an thing of value and therefore wealth under the broad definition.
And I'll wrap for now with my old tired suggestion from the Elder Baron R. that for safety you should keep a third of your wealth each in securities, real estate and rare art. I've taken this further, no doubt with the inflation of a few hundred years and feel that everyone should not only tally their wealth, but should diversify it more religiously than their portfolio. Add up how much of your wealth is in the form of securities; how much in real estate; and, how much in a rare art type of asset. One could use rare guitars, tractors, beanie babies, coins, jewelry, etc.
Call it a winter project.
and so it goes,
peace,
rono
Corporate financial wealth is cash flow greater than cash needs. (ditto for governments and schools.)
Although in your post title you emphasized a wealth discussion, your text clearly commingles the quest for a wealth discussion with a money historical perspective and a targeted objective to secure some insights about the profiles about Mutual Fund Observer (MFO) participants. I certainly recognize and endorse the need to trust individual MFO contributors. All postings are not equal. Satisfying these diverse goals in a single space limited reply is a daunting assignment.
I suspect your high expectation exceed MFO responder’s capabilities. This observation is not a slam on the knowledge and talents of board members. It is simply an acknowledgement that the subject matter is very complex and dependent upon the economic status (his wealth) of the responder. Whole textbooks and multi-semester courses are devoted to it.
You are somewhat naïve to presume that a few replies will reward you with the insights that you seek. Regardless of how well constructed and how well meaning the reply (especially including mine), the posted response will be incomplete and will reflect some bias that will distort your understanding of the matter. A quick review of the published postings verify this remark.
I am perplexed by your search for financial wisdom without a willingness to pay the price. I quoted a line from author Jonah Lehrer in my recent Canadian Cruise posting: “hard problems rarely have easy solutions”. Understanding money history, wealth definitions, and subtleties of individual investor trustworthiness and decision making are hard problems. A comprehensive understanding may never be attained.
I appreciate that you have time constraints. We all are exposed to similar limitations. But if you are truly sincere in your desire to become better informed with respect to the development of money, its impacts on our wellbeing, and on wealth accumulation, I propose that you invest just a little time with economics textbooks.
Every Macroeconomics textbook offers a chapter or two that deals with money issues. For example, in William Baumol’s and Alan Blinder’s book titled “Macroeconomics: Principles and Policy”, the authors provide short chapters on the nature of money, how it is measured, the origins of the money supply, banking, and how banks create effective money. This entire sequence of money presentations is contained in about 35 pages; it would take only about 2 hours of committed reading.
Textbooks like that referenced can be commonly found in used bookstores for the price of merely several dollars. The price in time is not high for a more complete understanding of the issues that you so properly raised.
Old Joe, I admire your perspicacious questioning. It helps get us back to basics. Many famous people have commented sagaciously on money and wealth matters. To end on a somewhat lighter note, permit me to quote some of my favorites.
From Sophocles: “Of evils upon earth, the worst is money. It is money that sacks cities, and drives men forth from hearth and home; warps and seduces native intelligence and breeds a habit of dishonesty.” Wow!
From Benjamin Franklin: “There are only three faithful friends – an old wife, an old dog, and ready money”. Note the insightful exclusion of a young wife.
From Peter's Almanac: “Early to bed and early to rise -- till you get enough money to do otherwise." Amen to that.
A wise old Italian Proverb pontificates that “After the game, the king and the pawn go into the same box.”
From Warren Buffett: “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”
From author Ayn Rand: “So you think that money is the root of all evil. Have you ever asked what is the root of all money?” I sometimes wonder about the roots of Ayn Rand, but I like her writings.
Allow me to close with a politically incorrect observation from Voltaire: “In general, the art of government consists of taking as much money as possible from one class of citizens to give to another.” True in yesteryear; true today.
I fully recognize that this brief submittal does not satisfy the initial request. I really believe that no responsible reply can do that. The issues are too multifaceted; the responses must of necessity travel in diverse directions. Some committed book study would provide at least some closure.
As the advertisements state: “Just do it”.
Best Wishes.
Actually, I have read several of Binder's books, but am still trying to understand the actual transition between barter and monetary exchange. Not simply to repeat, but rather to consolidate the issue, I can't rationally get past that point for some reason. Again, from above:
Even with the earliest coinage, some mechanism must have determined what any particular coin could be exchanged for in the way of tangible goods.
Before coinage, or other "artificial" representations of "wealth", bartering was the norm, yes? I suppose that depending upon local conditions of supply/demand, some relatively normal ratio sort of "self-established" if one wanted to trade, say, one goat for some measure of wheat. I imagine that in some parts of the world this type of transaction is still very much in evidence. Now, if one fellow has the goat and the other has the wheat, they are pretty much dealing with a non-representational reality.
And then, after coinage, how was it ever established how many pieces of whatever were worth one goat, or one kilo (or other standard measure) of wheat? What mechanism came to determine this? Now we have one fellow holding a fistful of coins, desiring to trade some number of them for a goat, or maybe the wheat. I want to get at the heart of the basic concept of how exactly the relationship of representational "money" to "real stuff" came to be.
As I recall, Binder really didn't go there, and yet it seems to me such a fundamental underpinning of our use of currency. Once the use of currency became established, of course it took on a life of it's own, and the average person surely didn't give it much thought. With the use of letters of credit the concepts of "representational" wealth became fairly common, and many of today's financial instruments are quite similar in use. (It's interesting to note that not all of those early letters of credit wound up being worth much, either.. sort of like Greek bonds.)
I wonder if any of our posters can help with the barter/coinage transition? That alone would be quite helpful.
Nice to hear from you. Thanks-
OJ
*** Wealth is a perceived store of value. The "value" that is stored is perceived to be exchangeable for real goods and services now or in the future, or may be exchanged into other perceived stores of value. (That's a mouthful, but I didn't ask this question.)
Key to the above definition is "perception". I perceive for example that $4 U.S. dollars can pretty easily be exchanged into a gallon of gasoline today. In the short-run, our perceptions about a dollar's value don't change much. I'll probably still be able to buy a gallon of gas for $4 three days from now. Who sets these perceptions? We all do. The fella who sells the crude and the refiner who buys it. The guy that delivers to the retailer. You do when you pay for gas at the pump or decide what type vehicle to own or how far to drive each day. While cash is perceived as stable in the short term, other stores of value may not be. For example, my stock mutual fund may be worth 20% more or 20% less three days from now, depending of course on market perceptions.
Yes, that's exactly right with respect to contemporary transactions, and of course money (as you say, a "perceived store of value", equivalent to my "representational wealth") changes hand today without any fundamental examination of the actual storage mechanism. This isn't odd, since all of us have been used to the concept of using money to exchange stored wealth/value for tangible goods or services since we were kids. The only time we even sort of come close to considering this question is when we feel that some particular price is unjustifiably high, or perhaps unusually low.
But how, I wonder, did this concept get started? And from above: "how was it ever established how many pieces of whatever were worth one goat, or one kilo (or other standard measure) of wheat? What mechanism came to determine this?"
Now coins are real things, although most, made of base metals, are actually representational, as opposed to Rono's coins, which are the real McCoy.
If we can, in plain English (without six pages of incomprehensible formulae), clarify how the transition from barter to coinage actually took place, then we can consider the next transition, from coinage to printage. But one thing at a time. It's interesting to note that the exchange of certain objects for more substantial goods has taken place across many, many cultures- for example, some American Indians used certain types of seashells as barter instruments, if I remember correctly. I wonder if the shells were perceived to be valuable in and of themselves, or did they "represent" some other form of stored/exchangeable wealth? (If the former, then whoever was picking them up must have laughed all the way to the beach: "Hey, I just pick up these things and that other moron gives me all of those great flint-tipped arrows!")
Thanks Hank- I appreciate your input!
OJ
Well, I have a large turd pile of words about this thread parked at the "save draft" thingy.
Having read enough books, but not directly at "where coinage came from" and/or the history of such money; I will attempt to trim this write.
At various points in time, the so called "king's money" was issued, 'cause those in control with position and money set the rules, eh? As to the movement of barter to an agreed upon currency that became accepted by the population; my fully untrained and unknowing mind can conjour the following scenario:
Technology lead to a need for a common currency in a given culture. As the wheeled carts pulled by the animals could travel greater distances and as the populations grew larger, barter would still be okay for your local village; but didn't work so well 25 miles away and no one knew your name of your family's name. This continued to expand as old-tech ways and the populations continued to expand.
Ah, hell; this is all that my tired mind can produce tonight. And perhaps that is all I need to say, too; and that the "drift" of the thought is enough to set the idea. I'll be back..........
Take care of yourselves,
Catch
The Power of Gold: The History of an Obsession
http://www.amazon.com/Power-Gold-History-Obsession/dp/0471003786/
(First visit MFO's Amazon.com link to order)
Late Peter Bernstein in this book not only covers gold but also the history of money.
Regards- OJ