Is Wealth worth Money? The problem with theory of Wealth, Value and Money

By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group

 

Before getting through my argument, let me set a line of enquiry for this essay, a question that I was asked a couple of days ago:

“One quests a new or an alternative wealth theory which could explain the value of intangible wealth; such as skill and happiness; since the one reads flaws and shortcomings in the existing theory of wealth which formulated in economics.” 

What is wealth in economic jargon? How can one value the wealth? Is wealth an absolute term or relative? Is wealth identified with its value (I mean if one cannot measure values of wealth by scientific ways, the wealth is not worth!!)?

Introduction

The early theory of wealth emerged in order to answer this question: “What is the source of incomes? How are capital surplus of goods formed? It was not a question about “value”. It was an enquiry to find an absolute and continuous source of income not measuring it. For the sake of saving your precious time, please let me explain this part in brief and in the form of bullets as follows

• In France, Francoise Quesney argued that the source of income and surplus is the sun. He developed the first analytical model about wealth (Tableau Economique). He saw farmers as the transformers of wealth and producers of surplus 
• Adam Smith who went to France to study out there, disagreed with his teachers. He came from industrialized England where labor and capital generated incomes even far above the farmers. Smith proposed that surplus arose from the division of labors, which large-scale manufacturers (capital) allowed. In nutshell, Smith talked about productivity and the role of capital in generating it and how this process led to wealth accumulation
• Marx refined Smith focus on labor to say that labor alone was the source of surplus. However Marx’s initial – not his final – argument was that surplus came from labor and there was a gap between the cost of labor and its productivity. This led to what became known as the "transformation problem”, which locked a century of Marxists into an attempt to reconcile Marx’s arguments with linear algebra. 
• The dominant neoclassical theory argued that was impossible to favor one input over the other: both labor and capital contributed to output, and could be smoothly substituted for each other in what they called a "production function”. The problem for neoclassical model (developed by Robert Solow)was that changes in the amount of labor and capital in Solow’s model accounted for less than 50 per cent of recorded growth: the gap, which became known as "Solow’s Residual”, was attributed to technological change – for which neoclassical economics had no theory.

The above historical event explanation reveals how the main issue, searching for source of wealth, disappeared in modern neoclassical economics as the word 'value' was reduced simply to a question of relative prices. But the new problem arises “how relative prices are set” or “How values measure for different types of wealth which differ in their natures”.

Economists define the term of value as functionality of wealth, and scarcity and durability of wealth; by these two definitions they brush away the question on diversity of wealth and reduce the value of wealth to a measureable scale, price / money. Further, they put market mechanism as the medium for determining relative prices where demand and supply face each other.  

From an economic point of view, the value of intangible wealth; skills, knowledge, happiness; can be measured by; the balance between demand-supply of skills, functionality and applicability of knowledge in the markets, and the price of insurance policies for managing risks and consequently remain happy!!

In this sense, wealth maximization is achievable when goods and resources (they assume unlimited resources!!!) are in the hands of those who value them the most; it means someone values a good more, ONLY if he is both WILLING and ABLE to pay more MONEY (or in the equivalent of money) to have it [Dworkin, R. M.; Is Wealth a Value?].

If you disgust with this viewpoint, you are right. One expects theories answer questions not changing questions to fit answers.

 What Heart-Brain may say

To be blunt, my human nature has not been convinced with the existing economic theory for scaling wealth. The theory is far weak to become an ideal model to describe wealth and consequently lead to a robust value assessment method.

Years back, I tried to build a theory upon the theory had proposed earlier by Robert Ayres. The core of my idea was to put energy as an independent factor of production in the neoclassical production function (in addition to capital, labor and technology) in order to enter the limitations which imposed by the second law of thermodynamics in the production model. My intention was to measure a real value for all the production factors (labor, capital, technology).

Although my idea was not welcomed and received with cold shoulders in the course of reviewing my working paper, I learnt that the real value of wealth could not simply be measured by relative prices. There were a few limitations imposed by the law of nature and social behavior of humans.

My point is that the functionality of wealth may vary in its definition in different societies and over the course of time, though the absolute value of wealth can be measured only based on the limitations that the nature puts forward.

The notion of relative price in economics fails to see the whole picture and misleading. 

Conclusions

Our understanding about “social interactions” has locked into perspectives which proposed by the economic theories. Without a multidisciplinary and holistic approach, we cannot expect to find a better theory to explain some truths about the role of wealth in socio-economic-environmental interactions.

Unfortunately, the main stream economists are reluctant to accept non-economic factors entered in to their models. Perhaps they are afraid of complexity or they love status of quo in markets for the sake of easy short anticipations.       

Governments with Visions in Conflict

By Shahab Sabahi – Energy and Environment for Development – Research Group

One of the principal roles of government is to ensure that long term public goods are not undermined by short term private interests. Governments also desire to protect social justice, and sometimes at least rhetorically ecosystem. Further, governments are bound to the pursuit of economic growth.

To drive the latter task, governments ought to, as the conventional macroeconomic wisdom urges, be so active in championing the pursuit of unbounded consumer freedom, often elevating consumer sovereignty above social goals and actively encouraging the expansion of the market even if it is necessary, in private areas of individuals. Contrary, the first two roles require governments intervene, either implicitly or explicitly, to protect common goods from spread of the market and guarantee the redistribution of wealth.

There is a real sense of policy-goals competition. Under prevailing political economic logic, it is clear that for stabilizing the macroeconomics, economic growth is indispensable. Governments, therefore, are bound to prioritize economic growth, even with compromising other goals.

It means, since the consumption expansion, spending extension, and depleting natural resources assure the social stability, governments never take serious measures to encourage society-wide savings, support small community-based businesses, and never intervene to stop exploitation of natural resources (by the way,  governments love to fund researches on sustainable development).  They simply say “people can spend more, so they would be happy, won’t they?”  

Are you happy?

Labor Productivity: Fear of social instability and the dream of economic growth

By: Shahab Sabahi, Energy and Environment for Development – Research Group

The conventional macroeconomic model implies when demand for goods and services falls, revenues to firms are reduced, leading to job losses and reduced investment. Reduced investment leads to a lower capital stock which, together with a lower labor input, in turn reduces the productive capability of an economy. Public revenues also fall, debt increases and the economic system has a tendency to become unstable. This logic supports the fundamental idea of rising and continuing consumption growth for long term economic stability.  

The model argues that a lasting consumption growth is feasible. It provides a formulation the key relationship between supply and demand. In a simple way, it says, income is calculated as labor input multiplies by the productivity of labor. In this simple formulation the dependency on capital, technological progress, efficiency and resources is all rolled into the factor of labor productivity. Thus labor productivity can be thought of as the average amount of income generated by an hour of labor input. In effect, if the labor input remains constant then growth is determined merely by the increase in the labor productivity. In capitalism, labor productivity is expected to grow over time, as technologies advance. It benefits the supply-side by increasing output and eliminating the need for additional expensive labor input. Furthermore, this increase in income, the model advocator believes, promises society-wide prosperity.  Though in the real world, the evidence tells different story

If labor productivity grows in a larger pace than labor input growth rate (e.g. aging population or purposefully reducing the share of expensive labor input in production), the only way to stabiles economic output, in long term, is by reducing further the labor input that means accepting some underemployment. Not only unemployment leads to low consumption demand which in return undermines the economic system, but it destabilizes the society.  

By persisting only in the idea of improving labor productivity and continuing consumption growth, we just try to mend the economy. Particularly it is the case for developed countries. Mending economy may work for a while but soon or later it will stall. There is no doubt that continuing labor productivity improvement is essential. But the question is about its pace. Its growth rate should be in harmony with labor input growth rate. It is not easy sailing, but few strategies have been adopted by governments; such as work-time sharing which, look promising toward a long term social stability. We should discuss more about this subject before getting fooled by another version of this complex macroeconomic model.

Institutions and society's growth

Shahab Sabahi
Energy and Environment for Development – Policy Analysis Research Group

How and why do societies grow? What are the consequences of growth? Does growth follow deterministic patterns? Can growth path be imitated in another location with similar results? If so why then some countries are able to achieve economic growth and better standards of living for their populations while others are not. Most of my time has been spent in last two years to do research on this topic with particular focus on role of natural resources, capitals, environment, social institutions, individuals and states and the rule of law. 

These issues concern social scientists Old and  the current economics frameworks has been well identifying sources of economic growth in terms of educational achievements, technology, market organization but hasn’t really dug deeper into why markets are organized differently. Why is it that in some places there is investment into education, or adoption and embracing of new technologies, and in other places there is not? That is the point that economics alone fails to help for searching answers. It requires bringing political economy and institutions in the picture. The major theme that has been keeping me busy right now is to understand the roles of institutions, how institutions emerge, and why dysfunctional institutions arise in different places.

In terms of statistical institution structure and its sources of creation and survival are rather complicated. Social scientists acknowledge elements such as geographic limitations, ecology, weather, natural resources, security problems, etc. which contribute to economic development and growth in much of the world. These scholars are essentially talking about elements that are outside of human control. But history tells us events that humans intentionally changed the course of growth or even initiated it even in the ground of environmental limitation.

So it sounds that to achieve a clear understanding we should examine the roles of institutions and how these social structures can provide leverage and influence in a way that mitigate the impact of various inherent environmental limitations. .