What Is Wealth?
This article was written by Tom Chatham and originally published at Project Chesapeake
Many people dream of the day when they are wealthy and can leave the workplace behind to enjoy life. But what are they really thinking about when they dream of wealth? What is their definition of wealth? How do they know when wealth has been achieved?
The modern definition that many people would use would be the accumulation of enough money to do what they want without working anymore. To that end, most people build up a savings account, pension account, stock portfolio or other type of retirement account. What do these things have in common? They all represent digits in some computer somewhere. If you had one million dollars in a bank account you might consider yourself moderately wealthy. But what would that mean? If the bank suddenly lost your account information would you still be wealthy? If you had one million dollars in cash and the money suddenly became worthless would you still be wealthy?
Money in the form of cash, computer digits and other types of paper are merely a means to store current excess production for later use. This type of storage carries a considerable amount of counterparty risk and is not necessarily the best means to save for the future.
This type of wealth is potential wealth. That means it does not become actual wealth until you actually use it. A dollar in your pocket or a dollar in the bank is nothing more than a claim on goods. Until you actually cash it in for something it does not matter how many dollars you have in storage. Once you cash it in you become wealthier. This is achieved by getting possession of physical goods. Something you can use for some purpose.
If your neighbor has a million dollars in the bank, a large home with a mortgage and a new Mercedes bought on credit, and he suddenly lost the million dollars for some reason, what would his net worth be? If you lived down the road and owned two acres of land with a clear title, a 35 foot travel trailer and an old pickup truck, and the banks closed or money suddenly became worthless, who would be in the better position?
You can be sure the bank has paperwork showing he does not own the home or the new car so what would they be worth to your neighbor?
True wealth is the possession of real goods. Some people buy more practical things but all physical goods represent your true wealth. Those that are practical will have goods that are not only useful but can actually earn more dollars which can be used to obtain more real wealth. These can be classified as capitol goods. Goods that are worth potentially more than the purchase price. Things that have production capability like an ax, a sewing machine, a set of tools, machining equipment, knowledge, farming equipment or livestock are things that have some capability to generate money.
Land that can be built on or farmed, an old truck, a rifle, a wood stove, quality furniture, art or antiques, gold and silver, a wood lot and even a pile of scrap metal all represent true wealth. They are physical things that you can hold and use and trade for other things at some future date. When the wealth that many people think they have suddenly disappears and the computer digits no longer exist, the only true wealth that will exist will be the things that people physically hold in their hand and own free and clear. If you want to know how wealthy you really are just look around you at the things you really own. In the end that is the only real wealth you may have if all of the potential wealth you entrust to others suddenly disappears into the make believe world from which it came.