How Should Personal and National Wealth Be Measured?
28:01 Share

Audible's best of 2024 picks are here. Discover the year's top audiobooks, podcasts, and originals in all your favorite genres.

From memoirs and sci-fi to mysteries and thrillers, Audible's curated list in every category is the best way to hear 2024's best in audio entertainment. Like a stunning new full-cast production of George Orwell's 1984. Heartfelt memoirs like Supreme Court Justice Ketanji Brown Jackson's lovely one. The year's best fiction like The Women by Kristen Hanna and Percival Everett's brilliantly subversive James.

Audible. There's more to imagine when you listen. Go to audible.com slash imagine and discover all the year's best waiting for you. 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?

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, that paying out gold to purchase something overseas was considered a diminishing of

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 were produced, as

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. And he said the most decisive way to measure that was population increase. That while the population of 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 is 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

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 net worth.

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.

About 30 years after Smith came out with The Wealth of Nations, there was another book on a similar topic by James Maitland, who was a Scottish philosopher and writer, also the 8th Earl of Lauderdale, and he's known as Lauderdale. His book was titled An Inquiry into the Nature and Origin of Public Wealth and into the Means of Causes of

of its increase. Now, similar type title. He quoted Adam Smith numerous times in the book. Sometimes he was in agreement. Sometimes he disagreed with what Smith said. But he was also trying to define what is it that makes up wealth. He said that wealth is not the sum of individual riches. It's not just income and stock, as Adam Smith put it. Not just land, money, rent, wages, output. But he described wealth as capital.

consisting of all that man desires as useful and delightful to him. It's abundance. It's things where people find useful and delightful. He contrasts that then to individual riches, the idea that the wealth of a nation isn't just a sum of the individual riches of households and businesses. Little different definition. He says, individual riches consist of all that man desires as useful and delightful to him, which exist in abundance.

a degree of scarcity.

This is sometimes known as exchange value. But riches differ from wealth, whereas wealth can be abundance. Individual riches is a function of supply and demand. We could have an increase of abundance, and he gives examples like this in his book, a bountiful harvest, which led to a huge increase in crops, but that was actually enough to bring down the price of that underlying commodity. Let's say it was corn or wheat.

And so the riches would decline because the value of those crops went down, even though there was actually an abundance of crops. He writes, grain in short supply might have less value in terms of quality because there's a famine, but still have a higher price due to increased scarcity. But when the grain is in great supply, quality might be better, but the price less. And so he

He says there's no such thing as intrinsic value, where the value is independent of any inherent characteristic of quality. But value is just a function of demand, the desirability and the quality, the supply and demand. So it's the price, the exchange value of a good that drives riches, which is different from wealth. And he gives examples of, and I've seen this when we have lived in Idaho, where there's such a bounty of harvest of potatoes that's

that the farmers were destroying them to keep the price from plummeting.

Another example Lauderdale gives of distinguishing wealth, abundance, from personal riches is if it was discovered that a kernel of corn, one grain, would give you 100 years of health. That is super abundance. But because corn was so plentiful, there would be no change in the value of corn. The price would stay the same, so riches wouldn't go up, even though that abundance, that well-being in the form of greater health, increased substantially.

substantially. Now, Lauderdale pointed out that land and labor and capital is what contributes to wealth. I particularly found his insights on capital helpful. Again, this was published in 1806, and he pointed out that capital can be used for buildings, machinery, and that it supplants labor. In other words, in

Investing that capital in a machine can increase the amount produced, and the machinery could do it more cheaply than just doing it by hand. And because of that capital is invested to increase productivity, some of those earnings should go to the capital owner in the form of profits.

He writes, thus it is by the labor of man performed by his hands or with capital increasing the quality or quantity of what is produced forms the means of increasing the wealth of mankind. Interesting, Lauderdale, and this is sort of an aside, defined what money is. It's very similar to what we classify as money. He said money is useful as an instrument of exchange, a practical standard by which the value of all commodities is measured and expressed.

And that's our definition of money today, a instrument of exchange, a unit of account, and it maintains its value. And that's one way Lauderdale describes the difference between wealth and riches. Riches have to be measured against something to put a price on it, be it in money or relative to something else. Whereas often abundance, wealth that's not based on scarcity, there isn't really a price to it because maybe it doesn't have value in the marketplace, but it does to us individually.

Now, while Adam Smith was worried about too high a profits, monopoly power, Lauderdale also has his concerns. Too much capital in too few hands. Inequality. He felt that there was a time where there could be too much capital, more capital than an individual or business or society could use. And if there was too much capital, and if riches were too concentrated in too few hands, that that was bad. And he gave the example between France and England.

He felt France, there was a much greater concentration of wealth, great riches, and that actually led to the production of luxury goods in France, which France even back then was known for because that's what the wealthy would buy. But everyone else was suffering. Whereas in Great Britain, he felt that the wealth and the income, the wages were more evenly distributed and led to a more dynamic economy.

Lauderdale wrote,

And households wanted to have more kids because they could get wages for them, whereas a lack of opportunity leads to fewer children. Lauderdale writes, in general, however, it may be observed that great inequality of fortune by impoverishing the lower orders has everywhere been the principal impediment to the increase in public wealth.

Income inequality, in his opinion, kept public wealth from increasing. Wealth then being abundance, well-being, health, life expectancy, food, art, entertainment, all that we desire as useful and delightful. In the several centuries since Smith and Lauderdale came out with their blockbusters,

There's been a lot more writing and a lot more progress in terms of investing capital to increase productivity, to produce more output. And the impact on society has been tremendous. Economist Angus Madison has studied this and went back. He calls it deep history. Looking at the GDP per capita, the output per capita, this is in 2011 dollars and found that in

In 1 CE, world per capita GDP was $747. By the year 1000, it had fallen to $723. In the year 1500, it was $900. In the year 1700, it was $978. 1820, right after Lauderdale wrote his book about 15 years later, per capita GDP was still only $1,100.

Then we had the Industrial Revolution. But the amount of wealth or riches from 1 CE through 1820, it barely grew. It was essentially very, very low growth rate. And yet there was great art formed, great architecture, great literature during that time. And I pulled this from a publication by...

by Partha Dasgupta, who's an Indian-British economist. So he's the one that used Madison's work in his publication, and his publication was The Economics of Biodiversity. And he said that great art, great architecture, great literature, and even great scientific and technological discoveries can coexist with general squalor and widespread deprivation of the means available.

They coexisted. Great discoveries, yet most people were poor up until 1820. And then things started to change. Between 1820 and 1900, per capita GDP for the world doubled to $2,500. In 1950, it was $3,300. Year 2000, $9,500. And 2016, $14,600. Now, that's across the world. Now, that's every place. The expansion in per capita GDP was even greater in

and developed worlds. Just look, using Western Europe, between 1820, it was $2,300 per person, 1900, $4,900, 1950, $6,000, and then it absolutely skyrocketed, $40,000 in 2016.

Something happened after 1930. In fact, we see it in life expectancies. Madison does the same thing. The average life expectancy in the year 0 CE was 24 years. It was 24 years in the year 1000.

29 years in the year 1820. 31 years in 1900. Now the population was starting to grow, 1.6 billion people in the year 1900. Life expectancy in 1950 was still only 46 years, 2.5 billion in population. By the year 2000, it was 66 years, 6.1 billion in population. And in 2020, 73 year was the life expectancy in 7.8 billion people. What changed? That's

that allowed greater life expectancy and significantly more per person wealth. Well, it turns out, and this is from a book by anthropologist Jason Hickel, says empirical data from the United States shows that water sanitation measures alone explain three quarters of the decline in infant mortality in major cities between 1900 and 1936. In other words, better sanitation and

and access to more healthcare, including vaccinations, is what allowed life expectancy to increase. Now, there's also been innovations in healthcare innovation. So when we look at the huge expansion of output, it did contribute to higher life expectancy.

But here's the thing, and this is what's interesting. Life expectancy in Portugal is 81 years, higher than the U.S., whose life expectancy is 77 years, and actually went down between 2019 and 2020. Costa Rica has a higher life expectancy than the U.S. at 79 years. But if we look at per capita GDP of those three countries, U.S., the highest, $70,200. Costa Rica, the lowest, $12,500.

per person, but has higher life expectancy, greater well-being potentially than U.S. households. And then the life expectancy in Portugal at 81 years per capita GDP is $24,500, which suggests that we can get higher

higher life expectancies and higher levels of education at a much lower level of per capita GDP. In fact, the UN estimates that it's about $8,000 to increase life expectancy to over 70 years. $8,000 output per person. And in terms of education, about $8,700 per capita GDP, that a nation can deliver that. And then in terms of employment, nutrition, social support, life satisfaction, it can be had for 10%.

$10,000 per capita. Before we continue, let me pause and share some words from this week's sponsors. I bought a used denim coat from a reseller, Odyssey Rebuild. I'd never heard of them. They came across my Instagram feed. But I took the leap. I bought the coat. And once I saw the reseller was using Shopify, I felt a lot more confident in my purchase.

I got a confirmation email from Shopify. I got confirmation when the item was shipped and one when it arrived and I could track it all along. Businesses that want to grow use Shopify because they're able to sell whenever their customers are scrolling or strolling on the web, in their store, on their feed and everywhere in between.

businesses that sell more sell on Shopify, just as Odyssey Rebuild does. Most of the e-commerce I do with small retailers, they're using Shopify. And you can upgrade your business and get the same checkout Odyssey Rebuild uses. Sign up for your $1 per month trial period at shopify.com slash david, all lowercase. Go to shopify.com slash david to upgrade your selling today.

Shopify.com slash David. Sometimes it's just nice to sit back, relax, maybe even take a nap. That's not what you want your money to be doing. You want it to be working hard for you, earning interest, generating returns. That's where the Betterment Automated Investing and Savings app can help. Betterment's technology gives you advanced tools that are built to help you maximize returns. They have diversified portfolios of low-cost ETFs that have been constructed by experts.

High-yield cash accounts, where your money can earn 11 times the national average. And automated investing technology, like automated rebalancing. These tools can help you reach your savings and investing goals.

Betterment is a fiduciary. That means it's their job to act in your best interest. They will never recommend an investment or give you guidance unless they believe it will help you reach your financial goals. So visit Betterment.com to get started. Learn more about the high-yield cash accounts at Betterment.com. Investing involves risk, performance not guaranteed. Cash reserves offer through Betterment LLC and Betterment Securities. Betterment is not a bank.

Back in 1930, renowned economist John Maynard Keynes released an essay called The Economic Possibilities for Our Grandchildren. And he was amazed. Even in 1930, the progress made in terms of life expectancy, the ability to produce through productivity increases, technology, manufacturing. And seeing that progress, he said, I would predict that the standard of life in progressive countries 100 years hence.

So in the year 2030, we'll be between four and eight times as high as it is today. And he was right. If we look at world per capita GDP, it's four times higher today than in 1930. And Western Europe is eight times higher today. Keynes saw that. He saw the trend. And his conclusion based on that is...

is that we would work very differently today than we did in 1930. That everybody would do some work, but we would only work about 15 hours a week. That three hours a day would be enough to satisfy our desire to work. And while some people, what he calls purposeful moneymakers, they might continue to work a lot. Most people, he says, who can keep alive and cultivate into a fuller perfection the art of life itself and

and do not sell themselves for the means of life, in other words, just working, working to get more money, we'll be able to enjoy the abundance when it comes. That we would work less and that our attitudes toward wealth would change. That there will be abundance, that we won't be so fixated on getting more and more money and wouldn't have to work as much. Turns out, as you know, that's not what happened.

Recently, The Economist released an article looking at the U.S. economy, and it was titled, America's Economic Outperformance is a Marvel to Behold.

In 1990, the U.S. accounted for 40% of the nominal GDP of the G7. That includes UK, Japan, Germany, and others. Today, it's 58%. Back in 1990, the income per person in the U.S. was 24% higher than in Western Europe. Today, it's 30% higher. In Japan, back in 1990, per capita income in the U.S. was 17% higher. Today, it's 54% higher than Japan.

And the economist looks at, well, why is that? Well, one is wages are just higher in the U.S. A trucker in Oklahoma, the economist points out, makes more than a doctor in Portugal. We pointed out how Portugal, the per capita GDP is $25,000 versus $70,000 for the U.S. And we've done episodes on nations that are more productive, that create more income per person, that spreads throughout the economy. Everyone that's working makes more than they would, which is why you can have truckers in

in the U.S., making more than doctors in Portugal. But the Economist continues, money is obviously not everything. It's often argued that Europeans make a trade-off between extra pay and a nicer way of life. Instead of clogged roads and overstuffed wardrobes, they have longer holidays and generous maternity leave. What is more, they devote a lot less of their income to health care. And then they ask, is that it? Is it a cultural difference, not wanting to work more that leads to the big disparity in

in terms of per capita income that maybe places outside of the US accept the abundance that's there and just don't want to work as much.

It's part of the story, but not completely. The reality is, as The Economist points out and writes, Americans are getting richer because they're getting more productive more quickly than workers in other rich countries. They point out there's a cost to that. America's economy permits extreme volatility in individual livelihoods. Unemployment soars during downturns. Vast numbers end up chucked to the side. A combination of drugs, gun

Gun violence and dangerous driving has led to a shocking decline in the average life expectancy in America. This suffering is concentrated among the country's poorest, most marginalized communities. Money could mitigate most of these problems, and outperforming America has money aplenty, but this is not what it is spent on.

Now, is there a problem? Well, there is a problem, as we just pointed out. But what about just the fact that the U.S. is growing more productive? It's getting a bigger and bigger share of the pie. The output per person is growing and the riches are growing. What's wrong with that?

Well, there are some constraints. Partha Dasgupta is a British Indian economist. I mentioned that. In that publication on biodiversity, he had a different definition of wealth. It includes produced capitals. What is produced? It includes the human capital, the labor, the knowledge, the technological proudness. Those two combined are an important component that can create massive wealth, as we have seen.

But there's a third component that he includes in what he calls his definition of inclusive wealth. And that third element is where there's some constraints, and that's natural capital. It's the air we breathe, the water we drink. It includes fisheries. It includes forests, oceans. And that natural capital can be used. It can also be regenerated. But it's the

the three combined that lead to inclusive wealth that leads to essentially intergenerational wealth transfer. A few episodes ago, I talked about how the water table, the aquifer in parts of Arizona where it's just not managed, they're being depleted. That's natural capital that's being depleted and it's showing up in more production of agricultural goods, but an

Inclusive wealth definition would reduce that GDP as measured by inclusive wealth for the using up of that natural capital. It's a cost. And that's where there's a constraint.

Dasgupta writes, If, as is nearly certain, our global demand continues to increase for several decades, the biosphere is likely to be damaged sufficiently to make future economic prospects a lot dimmer than we like to imagine today. What intellectuals have interpreted as economic success over the past 70 years may thus have been a down payment for future failure. It would look as though we are living at the best of times and the worst of times.

There's examples of this, just the sheer number of extinctions of different species, 100 to 1,000 times higher today than they have been over the past tens of millions of years.

that could potentially harm the biosphere. So when they've done studies like this, instead of doing GDP per person, what about inclusive wealth per capita? Factoring in what is produced as well as the human capital, is that increasing, but also taking into account the natural capital. And that natural capital, and this just went from 1992 to 2014, it's an estimate, it actually, the natural capital was being reduced. It was being depleted, not regenerated. And

And as a result, while per capita GDP was increasing, the inclusive wealth per capita was growing at a much lower rate.

And as we saw, it's distributed very, very widely where there's a great deal of production per capita GDP in the U.S., less in other places such as Costa Rica and Portugal. But while being in those places, life expectancy, happiness is just as high. And so are we in a situation where we're producing too much in some parts of the developed world to where we're running up against these natural capital constraints?

We know that we can achieve happiness and fulfillment, abundance, long lives, healthy lives on lower levels of income per person. We can grow in a different way. Jason Hickel in his book writes, people often wonder whether there will be enough income in a degrowth scenario for everyone to meet their needs.

The answer is yes, by definition. National income is the obverse, which means it's the other side of the coin, of the prices of all the goods that the economy produces. And we know that when we measure GDP or economic output, it can be estimated by the income. GDP always equals national income. Hickel continues, as long as we are producing what people need, there will always be exactly enough income to buy those things.

What matters, though, he says, is distribution. Ensuring a fair distribution of income is everything, which was Lauderdale's point back in 1806. If there's mass inequality in distribution of income, that can lead to economic problems that ultimately can hurt the economy. Hickel continues, but this requires an entirely different way of thinking about development. Instead of pursuing growth for its own

own sake and hoping that it will magically improve people's lives, the goal must be to focus on improving people's lives first and foremost. And if that requires or entails economic growth, then so be it. In other words, organize the economy around the needs of humans and ecology, including natural capital, rather than the other way around.

Now, in this episode, we've talked about abundance, we've talked about wealth and well-being, the success of capitalism, incredibly successful in reducing poverty, raising the standard of living, but we've also talked about the limits, just the sheer biosphere limits. We can't have continued growth, growth, growth. We need to steer more towards sustainability by incorporating the impact of natural capital.

But we've not talked about policy choices because it first starts with a recognition that it doesn't have to be the way that it is, that it can't continue the way that it is. And I've done a number of episodes on it as I've just grappled myself with what does that mean? I mean, there was one phrase in Hickel's book that just yelled at me. It's like, oh, elites spend their lives thinking about ways to increase their share of national and global income.

And I thought, do I do that? Am I spending more time figuring out how to get more money, a greater percentage of income? Or do we have enough? So I've not talked about policy choices because they're pretty controversial. You could get some distribution through wealth taxes or a universal basic income. Or we could just measure GDP difference and start measuring well-being in terms of a happiness index, in terms of as opposed to GDP. And I'm

not necessarily advocating any of those policy solutions because I'm still trying to figure out and reestablishing

And reading these very old texts and seeing that they were struggling with some of these same issues, figuring out where profit fits, where scarcity fits, what is wealth, what is abundance. We can measure wealth and abundance in different ways. It could be purely GDP, but I think we recognize that life is more than just output, what's produced. We don't need to keep producing more things. We could produce fewer, better things, focussing

focus on our well-being as opposed to continually creating more and more stuff just to keep things churning along, recognizing we have some biosphere constraints of natural capital and start putting that as part of the calculation. That's episode 330. Thanks for listening. Please share your thoughts. You can do that through review on the podcast. You can email us, contact us by going to moneyfortherestofus.com. Thanks for listening.

I have thoroughly enjoyed teaching you about investing on this podcast for almost nine years now. But some topics are just better explained in writing or with a chart. That's why we have a weekly email newsletter, the Insider's Guide. In that newsletter, I share charts, graphs, and other materials that can help you better understand investing. It's some of the most important writing I do each week.

I spend a couple hours on that newsletter each Wednesday morning as I try to share something that will be helpful to you. If you're not on the email list, please subscribe. Go to moneyfortherestofus.com to subscribe to the free Insider's Guide weekly email newsletter. Everything I've shared with you in this episode has been for general education. I've not considered your specific risk situation. I've not provided investment advice. This is simply general education on money, investing in the economy. Have a great week.