How we measure wealth, riches, abundance, and well-being is more important today than ever.
Topics covered include:
- How late 18th century philosophers Adam Smith and the Earl of Lauderdale defined wealth and the role of capital. Why they worried about income inequality and excess profits
- What led to the dramatic increase in life expectancy and wealth in the 20th and 21st centuries
- How a long life expectancy and well-being can be attained at much lower levels of wealth
- Why John Maynard Keynes was right about the expansion of the economy but wrong about how many hours we would work
- How the U.S. expanded its wealth relative to the rest of world, and at what cost
- Why natural capital should be included in measuring wealth
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Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 430. It’s titled “How Should We Measure Personal and National Wealth?”
Adam Smith and the Wealth of Nations
In 1776, Scottish philosopher and economist Adam Smith published a book titled An Inquiry into the Nature and Causes of the Wealth of Nations. It’s a book that is still influential over 200 years later. If you take any type of basic economics class, finance class, invariably, they mention this book. I suspect most people haven’t read it, although I did review a good part of the book this past week.
When the book was published, the consensus at the time was wealth just consisted of gold and silver. And that wealth was something that we kept close to us, paying out gold to purchase something overseas was considered a diminishing of wealth. Smith changed that. He described national wealth as the increase of revenue and stock.
By revenue, he meant income, rent, wages. Stock—he meant land; capital to be invested, money, including gold and silver. That wealth increased as goods and services are produced, as trade happens, as economic output increased. That economic output is what we refer today as Gross Domestic Product, or GDP.
Smith wrote: “The demand for wage-earning workers naturally increases with the increase of national wealth and can’t possibly increase without it.” He pointed out at the time that North America, in his opinion, while not as rich as England, was thriving more, advancing faster and further in acquiring riches.
He said the most decisive way to measure that was population increase; that while the population in Great Britain, according to his estimates, wasn’t expected to double in less than 500 years, that the British colonies in North America were doubling every 20 to 25 years.
And because there was such demand for labor to produce things, to grow crops, there was encouragement for parents to have more children, larger families, because having another child wouldn’t be a burden on the family; it would actually be an opportunity for that child to earn wages—hopefully when they grew up, as opposed to child labor.
Now, Smith had some concerns also. Again, this was written over 200 years ago. He said that stock, that capital is employed for the sake of earning a profit, but that there’s a disconnect; that rising profits isn’t in his opinion a sign of increasing wealth.
He wrote, “On the contrary, profit is naturally low in rich countries, and high in poor ones, and is always highest in the countries that are going to ruin fastest.”
He felt that merchants and manufacturers had a way of decreasing competition, leading to monopolies and excess profits, or profits above what he considered the natural way. And Smith was concerned about too many profits. And we do have rules today about monopolies, having excess profits. Smith was much more focused on the benefit of wages, particularly wages for workers.
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