What is wealth - really?

Classical economics has traditionally assumed that wealth (from Old English: weal or well being) is material goods plus money plus real estate. From Wikipedia, '"Wealth" has come to mean an abundance of items of economic value, or the state of controlling or possessing such items, and encompasses money, real estate and personal property.'

This concept of wealth infamously excludes the products and services produced by nature, such as fresh, drinkable water, clean air, and so on. The view of wealth as possessions or control over possessions has fostered a very 'unnatural' way of looking at what is of value. This has always made me wonder if we haven't been thinking about this whole notion of wealth incorrectly.

Given my thinking about the free energy standard for money, or in other words, the money = energy idea, I started wondering what we really should consider as wealth. The more I thought about this, and the more I saw problems with the classical definition working to explain what was really happening in our world, the more I came to think about wealth in a very different way.

Let's start with the premise that if money = energy, and money is what we use to buy land and goods (as well as services), then wealth must really be comprised of two kinds of energy. The money part is easy enough. That is the command of future expenditure of free energy to do some work we wish to control. But once we own land and goods how do we think of their value? The energy has been spent, yet we think of some things like land as having inherent value still. Other things we use up and throw them away. They have some kind of short-term value and then become valueless. This implies to me that not everything we normally count as wealth ought to be thought of that way.

In a prior post I mentioned casually that tools are the real source of wealth. Here I would like to expand on that and add it to my proposal to measure value using an energy standard.

As I explained earlier, a tool is any device that provides leverage such that having the tool actually increases the free energy — the energy available to do useful work. Note that we might actually have the same amount of raw energy available to us as before we got the tool, but what the tool does is make more of that raw energy available as free energy. Any device or procedure that either saves (conserves) energy usage, or converts more raw energy into free energy is a tool. We may want to save the term tool for devices to keep some semantic consistency. We can call the procedures, a form of knowledge, something else, but no word comes readily to mind. Maybe one of you can think up a catchy word that embodies the idea of 'knowledge of a procedure that saves energy or increases its availability'. An example of a tool that conserves energy is insulation in our houses. A tool that increases free energy is a solar panel. A procedure that saves energy is switching off a light switch when we know we will be out of the room for a while. A procedure that increases free energy is building and lighting a camp fire.

The purpose of any tool is to help us improve the energy available to us as we go about our lives. Some tools have a seemingly counter purpose. For example a fancy, big, gas guzzling car might seem inconsistent with the idea that we are improving our free energy. But in an environment where image is one of the tools we use to enhance our position in society such a car can be more of an asset then would be generally recognized. As individuals we might not realize why we think a fancy car is improving our free energy prospects, but we certainly understand that by impressing the right people we may advance our station, or at least preserve whatever station we have won. It's only in a world where the gas that is needed to move the car is becoming increasingly costly that we think twice about our choices. Or in a world where the consequences of emitting too much CO₂ are seen as anti-social we might change our values and seek smaller, more energy efficient cars. It all depends on context. Either way it is through expressing ourselves through our image that we preserve our free energy prospects in a society. So SUVs are out, Priuses are in.

Land is also a tool. Land is needed to station any tool we might want to use. For example, if we are engaged in agriculture we are using nature's tool - chloroplasts - to build usable free energy in the form of food. It takes land to do that, so the value of land as a farms seems pretty obvious. But houses and factories are also tools. Houses keep us warm in temperate climates (conserving our personal biological energy). Factories can manufacture other tools so, in principle anyway, they are either making things to conserve free energy (like insulation!) or make more free energy available (like producing coal-fired boilers!) The ultimate value of land is in how it makes free energy. Even the desert of Arizona may become highly valuable land if we construct a large solar collector there.

And, of course, so is labor a tool. The age old instrumental use of human labor is as old as the first field laborers in the earliest agricultural based societies. In classical economics we recognize the roles of capital, land, and labor as the inputs to production and wealth creation. It's easy to see the result of the proper combination of these inputs is, indeed, the products that we desire. People do work to shape things and provide services. They do their jobs to create things. They use energy to do this. And in the best cases their products and services act to increase free energy or conserve (less often) energy. So people, like other things, are wealth in the sense of being tools.

What about aesthetics? In the above referenced post I mention that aesthetics are also a form of wealth. Clearly some aesthetics have nothing apparent to do with utility and cannot be seen to increase free energy. I actually think that aesthetics do play a role in the human quest for free energy. This is too short a space to go into the whole idea, but it seems to me that aesthetics are stimulants to the mind, especially the creative aspects. It is creativity that keeps people searching for alternatives and new combinations. Creativity is involved in developing new tools as much as is engineering. I know that for myself I need an element of aesthetics in my life to keep me emotionally engaged in the creative process. So I would argue that even though there is no apparent connection, in fact there is a very deep biological connection. Incidentally, the same argument holds for play. All mammals use play, in their development years, to promote learning skills, social and physical, that are part of their life history, such as running from predators, or attacking prey.

So wealth is that which promotes access to free energy and the ways in which that plays out are various and complex. But it is access to free energy nonetheless.

The problem for humans is that we've gone overboard in producing things, especially of an aesthetic or play nature. We are an exuberant species, but as I have stated before, not a particularly wise one. Again, when is enough enough? Where should the boundaries be in terms of producing tools that excessively create free energy? And while this is a legitimate question there is another aspect that is even more compelling. We have moved from the production of tools like plows to tractors to combines to the production of toys and faux-aesthetics (big box fashions) that are far beyond our basic needs. We have become consumers rather than producers. We have jobs that all too often are just useless wasters of free energy rather than producing a useful tool or procedure. We are compelled by our exuberance to build bigger things, faster things, prettier things. We are compelled to find new ways to extend credit that are very creative, and on the surface appear to make money. But underneath no new free energy is created. We have activity and ruse. We are not creating wealth anymore. We are wasting what we had. I guess I cling to the hope that if people really understood what true wealth was they would change their attitudes and behaviors. But exuberance and fun are compelling motivators. Arguing that someone needs to learn to be satisfied might be a non-starter in this day and age.

Pity.

Comments

[Constantine]

George,

In a comment a few days back, I made the claim that fixing the value of the currency to BTUs would introduce enormous rigidities and very costly distortions.

Here's an example....

In his recent piece on The Oil Drum, Charles Hall wrote:

"I have been working on this issue for 40 years and have no idea what might be an adequate qualitative and quantitative substitute for petroleum except possibly and with enormous difficulty something based on electricity."

So, even someone as pessimistic as Hall believes that electricity is the best hope. I agree wholeheartedly. As petroleum fades, more and more of our energy usage will be in the form of electricity (and more and more of it will come from renewable sources). That's were we are headed. Applying your thinking to this, the time will come when pretty much the entire cost of something will be the watt hours it took to make it.

But I can't see how electricity can fit into your scheme at all.

For instance, in my city yesterday, the wholesale price of power varied by a factor of 5 throughout the day (a typical spring day). There are days when it varies by a factor or 20. But the variations are not just daily, they are weekly, seasonal and annual. As more and more of our electricity comes from solar and wind etc, it's easy to imagine these variations becoming even greater until society adjusts. Currently, commercial users beyond a certain size are fully exposed to these fluctuations and residential customers and small businesses are partly exposed. (My smart meter was installed last month).

I would argue that BTUs of free energy is far too limited a measure for the task ahead of us and that the current method of allowing the price to fluctuation massively on a daily, weekly and seasonal basis better captures the nature and complexity of the underlying resource to which we absolutely have to adapt. Nature does not bestow her abundance in a steady stream. There are variations and shocks of all sorts.

So it seems, given where we are collectively headed, that your system would make us *less* sensitive to natural variation and would remove a very powerful incentive to adapt ourselves to the planet's variable pulse.

Currently, a manufacturer can significantly reduce energy costs by altering load times.

One could easily imagine a future in which highly energy intensive processes like steel production are ramped up and down on an annual basis based on the seasonal length of the day in Arizona and Nevada (solar resources).

Any currency that was fixed to something like average free BTU, would lose most of the meaning you are trying to give it. The business that altered its production based on market prices (which often fluctuate by more than an order of magnitude during the day) could have the same energy accounts (in BTU) as a business that doesn't. Yet, because energy cost varies so much by time, one enterprise could be very profitable while the other was bankrupt. It's quite possible energy accounting thoroughly and dangerously obscures this reality.

Similarly, in the future when almost everything is electrical, two nations could be producing the same amount of electricity but one could be far better at adapting it's production and consumption to nature's daily, seasonal and other random constraints (and bounties) she imposes. By rights it's currency should be stronger!! But I can't see how your thinking allows that.

[Constantine]

Just to be clear...

I am aware that current *daily* price fluctuations owe little to production constraints imposed daily by nature (since we use nukes and fossil fuels).

Nowadays Those fluctuations are due to the realities of the generation process coupled with consumption patterns.

Because our power gen isn't currently renewable, nature's caprices are mostly felt via consumption.

Nevertheless, energy accounting obscures factors that are important even now. Massive surpluses crop up rather often.

There are actually rare times when the price of power is negative -- they pay you use it at the wholesale level. Such is the complexity of power generation.

So, even without positing a massive shift to renewables, energy accounting seems too simplistic to handle accounting tasks.

I do, of course, accept that EROI is important. It just seems that it's far easier to integrate that concept into conventional economics than it would be to devise energy accounting systems that are more useful than those based on fiat money.

[Russ]

George,
You give some good examples of why I believe that in the modern world "wealth" has become simply too large to be sustainable, physically or morally, at least under the ideological and legal framework we currently inhabit. This is because (1)there are simply too many people (2)who are too empowered by technology to inflict impacts vastly out of proportion to what nature would allow.

What you refer to as "improving the energy available to us" and "exuberance", or what Nietzsche would refer to as the will to power, is now completely out of control, as such monumental power is in the hands of those not intellectually or temperamentally capable of constructively wielding it. I haven't seen you refer to the peter principle, but I gather you agree that, with modern technology, man has "reached the level of his incompetence".

This endemic problem is rendered far, far worse by the aggressive, loutish "libertarian" ideology which says:
As a property owner I have the right to swing my fist wherever I want, and it's up to you to use your property to block me, or to dodge my fist. And if you can't, you have no rights at all, but I have the right to hit you, again and again and again, forever.

So I've come to believe that large concentrations of wealth, and large structures (governmental and corporate) in general, are intrinsically the problem. Therefore all the ideas I'm working on, as far as environmental, economic, and political philosophy have the underlying thread of seeking decentralization, simplification, and sustainability.

Btw, regarding your question about a term for "knowledge of a procedure that saves energy", the term "efficiencies" comes to mind.

[George Mobus]

Hi Russ.

I definitely subscribe to the Peter Principle applied to human mentality. My thesis on sapience is that humans have been so clever that they have now produced a world too complicated and changing too rapidly for the average person's ability to make good long-term judgments. We have risen to our level of incompetence in judgment, but unfortunately we are still being clever. We keep finding ways to make our lives even more complex.

George

[Russ]

Exactly. I've long believed the quintessential American is a yahoo who's good with tools.

[Russ]

George,
The intricacies of economics isn't really my thing so I've been following your recent posts more on general conceptual level than really following the fine threads of the argument. So I don't know how germane this reflection is to what you were saying, or if it's substantive at all.

Anyway, this morning I was rereading the 2007 IPCC summary for policy-makers, and figure SPM2 in Working Group 3 (page 6) has the following information (all expressed simply proportional to an index 1970=1). On this graph, Total Primary Energy Supply(TPES) describes a steady, gentle upward curve. Per capita income has a slope which closely adheres to the TPES slope, but lags beneath it. Meanwhile global (did I mention these are all global figures) total "income" (GDP) has a much steeper slope, is increasing at a faster rate.

So - does this correspondence between TPES and per capita income relate to your contention that money should be pegged to energy supply, while the divergence of aggregate "product" from these curves represents distortions, upward wealth redistribution, and the ever-more humongous bubble of what you called pseudo-wealth?

Meanwhile, on the same graph, the line "carbon intensity" (co2/TPES) describes a long shallow negative curve (though starting to head back up), while "emission intensity" (co2/GDP, i.e. the emissions relative to the "product") went down more steeply (that one's headed back up too). Am I correct in inferring that you're saying the former is a more valid measure?
(I know I'd emphasize the former, while I assume "growth" boosters would emphasize the latter.)

[George Mobus]

Russ,

I'll have to see if I can find this. By your description, though, it certainly sounds right. As I understand these things per capita income is tied to wealth production, whereas GDP aggregates all transactions as if they were wealth production. But when you consider that things like paying hospital bills or the cleanup of New Orleans is counted as part of GDP you have to wonder.

GDP, in my book, is a measurement distortion that makes things look better than they are. Another major distorting factor is the fractional reserves policies in banking. This is where faux-money gets created to boost or juice up the economy in ways that tend ever more to be unhealthy. But primarily it decouples the wealth value from money in a way that distorts people's perceptions of worth.

The final distortion comes from secondary and derivative markets. The stock market used to be a means of just providing liquidity for investors. But then it turned into a speculation game and then an index speculation game, and so on. We are beginning to see that all of that so-called wealth that was churning around was just fluff. People, myself included, made all kinds of money on paper. But that money did not link to any real wealth generation. It was all just trading.

All of these distorting factors have made money nearly useless as a tool for measuring what is actually going on in the economy.

I will have to look at this TPES, as it does sound like an index that gets close to my idea of measuring total free energy as a basis for the volume of currency. Thanks for the tip.

George