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What is wealth?

Posted By Barry Ritholtz On May 22, 2004 @ 8:34 am In Finance | Comments Disabled

Arnold Kling [1] discusses the concept of Wealth. Arnold is an interesting and thoughtful economist who usually provides intriguing food for thought.

Such is not the case today.

Arnold unfortunately cites David R. Henderson and Charley Hooper, who argue that we are all in the top 1% of the world’s wealthiest people:

“Except for the few hundred thousand who are homeless, the Americans whom the U.S. government defines as poor live exceptionally rich lives. In most ways, their lives are better than those of kings and queens just 200 years ago. Consider the quality and quantity of our food, clothing, refrigerators, televisions, washing machines, stereo systems, and automobiles. . . “

This is such a silly argument, and on so many levels. Without even addressing the factual issues, let’s take a look at the rhetorical problems, one at a time:

1) Any Temporal Argument is Two Sided:

If Henderson and Hooper claim we are “wealthier” today than long dead royalty of Shakespeare’s time, than that is an admission how much poorer we are than people from the lowest rung of society 400 years from now.

Of course, that’s just as foolish an argument. Nobody today thinks to themselves: “Huzzah! I am wealthier than King Henry!”, nor do they lament “Alas! I have less wealth than the poorest schlump to be born in the year 2404. . . woe is me.”.

Quite frankly, its transparently disingenuous. (That’s a polite way of saying its idiotic.)

Compounding their own disingenuousness, H&H “time shift” their initial comparison of wealth from 200 years ago to Shakespeare’s time. Last I checked, the bard was born in 1564 [2] So the actual comparo is over between 440 and 400 years ago.

Here’s why this is so foolish: It is the nature of mankind is to relentlessly raise his standard of living, generation after generation. This has been especially true over the past 500 years. And progress is accellerating at an ever quickening pace. Consider the gains we’ve made this past century, and even this past decade.

Yes, we are much better off than people 400 years ago. But, due to the accellerating pace of progress, the equivalent leap in standard of living is nonlinear — meaning its likely to happen much faster than 400 years into the future. Our gains versus the people who lived in England in the 1600s will likely be had by inhabitant’s of America in the year 2104, a mere 100 years from now. What the living standard will be like in 2404, 400 years hence, is simply inconceivable.

Comparing yourself to Kings who lived 4 centuries ago — or paupers to be born 4 centuries from now — is a fundamentally irrelevant and disingenous issue.

2) Wealth is Relative:

Regardless of the silliness of the historical/future argument, the authors exhibit a fundamental misunderstanding regarding people’s conception of their own financial well being: Wealth is a relative concept.

Some people define wealth as having $100 more than what their brother-in-law has. We try to “keep up with the Jones” because they are their contemporaneous and geographical peers. People do not tend to compare or define themselves vis a vis noncontemporaries.

And consider Gore Vidal’s observation: “It’s not enough that I succeed. My friends must fail.”

When NYC Mayor Ed Koch [3] used to asked, “How’m I doing?” no one had to point out that he wasn’t looking for a comparo with King Solomon [4], Julius Ceasar [5], or Emperor Ming [6].

Wealth is relative to the here and the now. (Its actually rather pathetic that this needs to be pointed out).

3) Deficits, anyone?

Notable due to its absence is any discussion on the impact of deficits on the long term fiscal health of the nation. H&H’s entire debate was a not-so-subtle rail against rolling back tax cuts for the wealthiest 1%.

If we are discussing taxes, than we must also address spending cuts and deficits. The authors do neither.

As a fiscal conservative, I am offended by Henderson’s failure to discuss this. Henderson was a senior economist with President Reagan’s Council of Economic Advisers, so he damn well knows the economic revival which followed Reagan’s tax cuts subsquently led to tax hikes and spending cuts to bring the spiraling deficit under control. The tax hikes and spending cuts were initially made by Reagan himself, and then by each of the next 2 presidents.

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When I first read the excerpt, I initially suspected these authors had suffered some kind of a blunt force trauma to the head . . . In their dementia, their lack of mental accuity led to make rather pedantic and foolish arguments.

Then I went to read the full piece — it is at TechCentral Station, where the full glory of the author’s intents are revealed: Its a diatribe against presidential candidate John Kerry’s plan to rollback the tax cuts for the top 1%.

So in addition to being a poor piece of tortured logistical reasoning, it is also a bunch of partisan hackery.

Arnold Kling: you can do much better than citing intellectual deitrus such as this . . .


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2004/05/what-is-wealth/

URLs in this post:

[1] Arnold Kling: http://econlog.econlib.org/archives/000473.html

[2] born in 1564: http://www.shakespeare online.com/biography/

[3] NYC Mayor Ed Koch: http://en.wikipedia.org/wiki/Ed_Koch

[4] King Solomon: http://jeru.huji.ac.il/eb32s.htm

[5] Julius Ceasar: http://heraklia.fws1.com/

[6] Emperor Ming: http://encyclopedia.thefreedictionary.com/Emperor%20Ming%20of%20Wei%20China

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