Friday, June 16, 2017

Wealth is a Micro/Macro-Economic Concept

I am still thinking about the concepts expressed in this post by Jason Smith (including my comments). Maybe I am thinking out loud (as I write this).

Income and consumption are first of all "micro-economic concepts". On the other hand, "wealth" is easily seen as a "macro-economic" concept for the simple reason that wealth is always a relative term. This difference needs a little explaining.

We can write

Individual wealth equals individual income less individual consumption.

This is clearly a micro-economic concept. It would only have broader macro-economic meaning if the wealth term was compared to other individuals who may or may not also have wealth.

We could also write

entire economy wealth equals sum of individual wealth

which is clearly a macro-economic concept.

The two concepts converge at the formula level except for one thing. What is the unit of measurement?

Of course, we use "money" as the measurement tool. In both formulas the units of money are counted as if money was a physical object.

Now if money really is a physical object, it must have a physical creation and a mechanism of destruction. Bank loans are the usual mechanism assigned to accomplish this task when physical money is allowed into theory.

Further, if money is physical, it is subject to capture. To illustrate this concept, we need to ask where money may reside (among many individual potential owners) at each measurement point in time? Will the same owners have control at every measuring point?

The answers to these two question will have an influence on the concept of wealth itself. I would expect that in a capitalist system, nearly all the money would be under private control. In an oligarch system, nearly all the money would be found under the control of a few "wealthy" private groups. In a communist style of government, nearly all the money would be found to be under government control (in one way or another). No doubt, there would be many flavors of monetary distribution.

Returning to the question of the physical nature of money, money may come from banks but what gives it value? We have already recognized that wealth is relative to the wealth of others. Is money also valued as relative to something?

I would answer "yes". I would suggest that when an individual accepts payment for labor in the form of money, he is accepting whatever currency has been borrowed to make the payment possible. With currency in hand, it becomes the responsibility of the new owner to gain maximum value for the currency from the next exchange.

Why (the reader may ask) would anyone take currency unless they knew the value of that currency? Well, if a person was unemployed, would he seriously consider working for a store owner who offered to pay in the form of "gift certificates"?  If  the person trusted the store owner, no doubt the answer would be "yes". Gift certificates earned in this fashion would have the same physical character as money so long as they were used (finally) in the issuing store.

When money is considered as if it were a gift certificate (issued on the national level) the concepts expressed herein begin to flow into a very understandable context.

Can we fit the concepts expressed here into the data found in the National Income and Product Accounts of the United States (NIPA)? Only with difficulty. The NIPA data is filled with imputed information that detracts from the strict monetary measures suggested here. It would take considerable research to sort the available data into the classifications that are suggested herein. We would also need to sort money created by borrowing into the categories of money-newly-created and money-previously-created-borrowed-again.

"Weath" (as a guiding concept) may be a useful bridge between micro and macro economics, worthy of additional study.

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