Non Human Wealth Definition Essay

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For the 2013 film, see Human Capital (film).

Human capital is a term popularized by Gary Becker, an economist from the University of Chicago, and Jacob Mincer that refers to the stock of knowledge, habits, social and personality attributes, including creativity, embodied in the ability to perform labor so as to produce economic value.[1] The subject is closely associated with the study of human resources management as found in the practice of business administration and macroeconomics.

History[edit]

Arthur Lewis is said to have begun the field of development economics and consequently the idea of human capital when he wrote in 1954 "Economic Development with Unlimited Supplies of Labour."[2] The term "human capital" was not used due to its negative undertones until it was first discussed by Arthur Cecil Pigou:

"There is such a thing as investment in human capital as well as investment in material capital. So soon as this is recognised, the distinction between economy in consumption and economy in investment becomes blurred. For, up to a point, consumption is investment in personal productive capacity. This is especially important in connection with children: to reduce unduly expenditure on their consumption may greatly lower their efficiency in after-life. Even for adults, after we have descended a certain distance along the scale of wealth, so that we are beyond the region of luxuries and "unnecessary" comforts, a check to personal consumption is also a check to investment."[3]

The use of the term in the modern neoclassicaleconomic literature dates back to Jacob Mincer's article "Investment in Human Capital and Personal Income Distribution" in the Journal of Political Economy in 1958.[4] Then Theodore Schultz who is also contributed to the development of the subject matter. The best-known application of the idea of "human capital" in economics is that of Mincer and Gary Becker of the "Chicago School" of economics. Becker's book entitled Human Capital, published in 1964, became a standard reference for many years. In this view, human capital is similar to "physical means of production", e.g., factories and machines: one can invest in human capital (via education, training, medical treatment) and one's outputs depend partly on the rate of return on the human capital one owns. Thus, human capital is a means of production, into which additional investment yields additional output. Human capital is substitutable, but not transferable like land, labor, or fixed capital.

Some contemporary growth theories see human capital as an important economic growth factor.[5] Further research shows the relevance of education for the economic welfare of people.[6]

Adam Smith defined four types of fixed capital (which is characterized as that which affords a revenue or profit without circulating or changing masters). The four types were:

  1. useful machines, instruments of the trade;
  2. buildings as the means of procuring revenue;
  3. improvements of land;
  4. the acquired and useful abilities of all the inhabitants or members of the society.

Smith defined human capital as follows:

“Fourthly, of the acquired and useful abilities of all the inhabitants or members of the society. The acquisition of such talents, by the maintenance of the acquirer during his education, study, or apprenticeship, always costs a real expense, which is a capital fixed and realized, as it were, in his person. Those talents, as they make a part of his fortune, so do they likewise that of the society to which he belongs. The improved dexterity of a workman may be considered in the same light as a machine or instrument of trade which facilitates and abridges labor, and which, though it costs a certain expense, repays that expense with a profit.”.[7]

Therefore, Smith argued, the productive power of labor are both dependent on the division of labor:

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour.

There is a complex relationship between the division of labor and human capital.

Background[edit]

Human capital is a collection of traits – all the knowledge, talents, skills, abilities, experience, intelligence, training, judgment, and wisdom possessed individually and collectively by individuals in a population. These resources are the total capacity of the people that represents a form of wealth which can be directed to accomplish the goals of the nation or state or a portion thereof.

It is an aggregate economic view of the human being acting within economies, which is an attempt to capture the social, biological, cultural and psychological complexity as they interact in explicit and/or economic transactions. Many theories explicitly connect investment in human capital development to education, and the role of human capital in economic development, productivity growth, and innovation has frequently been cited as a justification for government subsidies for education and job skills training.[8]

"Human capital" has been and continues to be criticized in numerous ways. Michael Spence offers signaling theory as an alternative to human capital.[9][10]Pierre Bourdieu offers a nuanced conceptual alternative to human capital that includes cultural capital, social capital, economic capital, and symbolic capital.[11] These critiques, and other debates, suggest that "human capital" is a reified concept without sufficient explanatory power.

It was assumed in early economic theories, reflecting the context, i.e., the secondary sector of the economy was producing much more than the tertiary sector was able to produce at the time in most countries – to be a fungibleresource, homogeneous, and easily interchangeable, and it was referred to simply as workforce or labor, one of three factors of production (the others being land, and assumed-interchangeable assets of money and physical equipment). Just as land became recognized as natural capital and an asset in itself, human factors of production were raised from this simple mechanistic analysis to human capital. In modern technical financial analysis, the term "balanced growth" refers to the goal of equal growth of both aggregate human capabilities and physical assets that produce goods and services.

The assumption that labour or workforces could be easily modelled in aggregate began to be challenged in 1950s when the tertiary sector, which demanded creativity, begun to produce more than the secondary sector was producing at the time in the most developed countries in the world.

Accordingly, much more attention was paid to factors that led to success versus failure where human management was concerned. The role of leadership, talent, even celebrity was explored.

Today, most theories attempt to break down human capital into one or more components for analysis[13][14][15] – usually called "intangibles". Most commonly, social capital, the sum of social bonds and relationships, has come to be recognized, along with many synonyms such as goodwill or brand value or social cohesion or social resilience and related concepts like celebrity or fame, as distinct from the talent that an individual (such as an athlete has uniquely) has developed that cannot be passed on to others regardless of effort, and those aspects that can be transferred or taught: instructional capital. Less commonly, some analyses conflate good instructions for health with health itself, or good knowledge management habits or systems with the instructions they compile and manage, or the "intellectual capital" of teams – a reflection of their social and instructional capacities, with some assumptions about their individual uniqueness in the context in which they work. In general these analyses acknowledge that individual trained bodies, teachable ideas or skills, and social influence or persuasion power, are different.

Management accounting is often concerned with questions of how to model human beings as a capital asset. However it is broken down or defined, human capital is vitally important for an organization's success (Crook et al., 2011); human capital increases through education and experience.[16] Human capital is also important for the success of cities and regions: a 2012 study examined how the production of university degrees and R&D activities of educational institutions are related to the human capital of metropolitan areas in which they are located.[17][18]

In 2010, the OECD (the Organization of Economic Co-operation and Development) encouraged the governments of advanced economies to embrace policies to increase innovation and knowledge in products and services as an economical path to continued prosperity.[19] International policies also often address human capital flight, which is the loss of talented or trained persons from a country that invested in them, to another country which benefits from their arrival without investing in them.

Studies of structural unemployment have increasingly focused on a mismatch between the stock of job-specific human capital and the needs of employers.[8] In other words, there is increasingly a recognition that human capital may be specific to particular jobs or tasks and not general and readily transferable. Recent work has attempted to improve the linkages between education and the needs of the labor market by linking labor market data to education loan pricing.[8]

Competence and capital[edit]

The introduction is explained and justified by the unique characteristics of competence (often used only knowledge). Unlike physical labor (and the other factors of production), competence is:

  • Expandable and self-generating with use: as doctors get more experience, their competence base will increase, as will their endowment of human capital. The economics of scarcity is replaced by the economics of self-generation.
  • Transportable and shareable: competence, especially knowledge, can be moved and shared. This transfer does not prevent its use by the original holder. However, the transfer of knowledge may reduce its scarcity-value to its original possessor.

Competence, ability, skills or knowledge? Often the term "knowledge" is used. "Competence" is broader and includes cognitive ability ("intelligence") and further abilities like motoric and artistic abilities. "Skill" stands for narrow, domain-specific ability. The broader terms "competence" and "ability" are interchangeable.[citation needed]

Knowledge equity (= knowledge capital – knowledge liability) plus emotional equity (= emotional capital – emotional liability) equals goodwill or immaterial/intangible value of the company.

Intangible value of the company (goodwill) plus (material) equity equals the total value of the company.

Marxist analysis[edit]

In some way, the idea of "human capital" is similar to Karl Marx's concept of labor power: he thought in capitalism workers sold their labor power in order to receive income (wages and salaries). But long before Mincer or Becker wrote, Marx pointed to "two disagreeably frustrating facts" with theories that equate wages or salaries with the interest on human capital.

  1. The worker must actually work, exert his or her mind and body, to earn this "interest." Marx strongly distinguished between one's capacity to work, Labor power, and the activity of working.
  2. A free worker cannot sell his human capital in one go; it is far from being a liquid asset, even more illiquid than shares and land. He does not sell his skills, but contracts to utilize those skills, in the same way that an industrialist sells his produce, not his machinery. The exception here are slaves, whose human capital can be sold, though the slave does not earn an income himself.

An employer must be receiving a profit from his operations, so that workers must be producing what Marx (under the labor theory of value) perceived as surplus-value, i.e., doing work beyond that necessary to maintain their labor power.[20] Though having "human capital" gives workers some benefits, they are still dependent on the owners of non-human wealth for their livelihood.

The term appears in Marx's article in the New-York Daily Tribune "The Emancipation Question," January 17 and 22, 1859, although there the term is used to describe humans who act like a capital to the producers, rather than in the modern sense of "knowledge capital" endowed to or acquired by humans.[21]

Neo-Marxist economists such as Bowles have argued that education does not lead to higher wages by increasing human capital, but rather by making workers more compliant and reliable in a corporate environment.[8]

Importance[edit]

The concept of Human capital has relatively more importance in labour-surplus countries. These countries are naturally endowed with more of labour due to high birth rate under the given climatic conditions. The surplus labour in these countries is the human resource available in more abundance than the tangible capital resource. This human resource can be transformed into Human capital with effective inputs of education, health and moral values. The transformation of raw human resource into highly productive human resource with these inputs is the process of human capital formation. The problem of scarcity of tangible capital in the labour surplus countries can be resolved by accelerating the rate of human capital formation with both private and public investment in education and health sectors of their National economies. The tangible financial capital is an effective instrument of promoting economic growth of the nation. The intangible human capital, on the other hand, is an instrument of promoting comprehensive development of the nation because human capital is directly related to human development, and when there is human development, the qualitative and quantitative progress of the nation is inevitable.[22] This importance of human capital is explicit in the changed approach of United Nations[23] towards comparative evaluation of economic development of different nations in the World economy. United Nations publishes Human Development Report[24] on human development in different nations with the objective of evaluating the rate of human capital formation in these nations.

The statistical indicator of estimating Human Development in each nation is Human Development Index (HDI). It is the combination of "Life Expectancy Index", "Education Index" and "Income Index". The Life expectancy index reveals the standard of health of the population in the country; education index reveals the educational standard and the literacy ratio of the population; and the income index reveals the standard of living of the population. If all these indices have the rising trend over a long period of time, it is reflected into rising trend in HDI. The Human Capital is developed by health, education and quality of Standard of living. Therefore, the components of HDI viz, Life Expectancy Index, Education Index and Income Index are directly related to Human Capital formation within the nation. HDI is indicator of positive correlation between human capital formation and economic development. If HDI increases, there is higher rate of human capital formation in response to higher standard of education and health. Similarly, if HDI increases, per capita income of the nation also increases. Implicitly, HDI reveals that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation. This process of human development is the strong foundation of a continuous process of economic development of the nation for a long period of time. This significance of the concept of Human capital in generating long-term economic development of the nation cannot be neglected. It is expected that the Macroeconomic policies of all the nations are focused towards promotion of human development and subsequently economic development.

Human Capital is the backbone of Human Development and economic development in every nation. Mahroum (2007) suggested that at the macro-level, human capital management is about three key capacities, the capacity to develop talent, the capacity to deploy talent, and the capacity to draw talent from elsewhere. Collectively, these three capacities form the backbone of any country's human capital competitiveness. Recent U.S. research shows that geographic regions that invest in the human capital and economic advancement of immigrants who are already living in their jurisdictions help boost their short- and long-term economic growth.[25] There is also strong evidence that organizations that possess and cultivate their human capital outperform other organizations lacking human capital (Crook, Todd, Combs, Woehr, and Ketchen, 2011).

Cumulative growth[edit]

Human capital is distinctly different from the tangible monetary capital due to the extraordinary characteristic of human capital to grow cumulatively over a long period of time.[26] The growth of tangible monetary capital is not always linear due to the shocks of business cycles. During the period of prosperity, monetary capital grows at relatively higher rate while during the period of recession and depression, there is deceleration of monetary capital. On the other hand, human capital has uniformly rising rate of growth over a long period of time because the foundation of this human capital is laid down by the educational and health inputs.[27] The current generation is qualitatively developed by the effective inputs of education and health.[28] The future generation is more benefited by the advanced research in the field of education and health, undertaken by the current generation. Therefore, the educational and health inputs create more productive impacts upon the future generation and the future generation becomes superior to the current generation. In other words, the productive capacity of future generation increases more than that of current generation. Therefore, rate of human capital formation in the future generation happens to be more than the rate of human capital formation in the current generation. This is the cumulative growth of human capital formation generated by superior quality of manpower in the succeeding generation as compared to the preceding generation.

India[edit]

In India, rate of human capital formation has consistently increased after Independence due to qualitative improvement in each generation. In the second decade of 21st century, the third generation of India's population is active in the workforce of India. This third generation is qualitatively most superior human resource in India. It has developed the service sector of India with the export of financial services, software services,[29] tourism services and improved the Invisible balance of India's Balance of payments. The rapid growth of Indian economy in response to improvement in the service sector is an evidence of cumulative growth of Human Capital in India.

Criticism[edit]

Some labor economists have criticized the Chicago-school theory, claiming that it tries to explain all differences in wages and salaries in terms of human capital. One of the leading alternatives, advanced by Michael Spence and Joseph Stiglitz, is "Signaling theory". According to signaling theory, education does not lead to increased human capital, but rather acts as a mechanism by which workers with superior innate abilities can signal those abilities to prospective employers and so gain above average wages.[8]

The concept of human capital can be infinitely elastic, including unmeasurable variables such as personal character or connections with insiders (via family or fraternity). This theory has had a significant share of study in the field proving that wages can be higher for employees on aspects other than human capital. Some variables that have been identified in the literature of the past few decades include, gender and nativity wage differentials, discrimination in the work place, and socioeconomic status.

The prestige of a credential may be as important as the knowledge gained in determining the value of an education. This points to the existence of market imperfections such as non-competing groups and labor-market segmentation. In segmented labor markets, the "return on human capital" differs between comparably skilled labor-market groups or segments. An example of this is discrimination against minority or female employees.

Following Becker, the human capital literature often distinguishes between "specific" and "general" human capital. Specific human capital refers to skills or knowledge that is useful only to a single employer or industry, whereas general human capital (such as literacy) is useful to all employers. Economists view firm specific human capital as risky, since firm closure or industry decline lead to skills that cannot be transferred (the evidence on the quantitative importance of firm specific capital is unresolved).

Human capital is central to debates about welfare, education, health care, and retirement..

In 2004, "human capital" (German: Humankapital) was named the German Un-Word of the Year by a jury of linguistic scholars, who considered the term inappropriate and inhumane, as individuals would be degraded and their abilities classified according to economically relevant quantities.[30]

"Human capital" is often confused with human development. The UN suggests "Human development denotes both the process of widening people's choices and improving their well-being".[31] The UN Human Development indices suggest that human capital is merely a means to the end of human development: "Theories of human capital formation and human resource development view human beings as means to increased income and wealth rather than as ends. These theories are concerned with human beings as inputs to increasing production".[31]

Mobility between nations[edit]

The rights and freedom of individuals to travel and opportunity, despite some historical exceptions such as the Soviet bloc and its "Iron Curtain", seem to consistently transcend the countries in which they are educated. One must also remember that the ability to have mobility with regards to where people want to move and work is a part of their human capital.[32][33] Being able to move from one area to the next is an ability and a benefit of having human capital. To restrict people from doing so would be to inherently lower their human capital.

Intangibility and portability[edit]

Human capital is an intangible asset – it is not owned by the firm that employs it and is generally not fungible. Specifically, individuals arrive at 9am and leave at 5pm (in the conventional office model) taking most of their knowledge and relationships with them.

Human capital when viewed from a time perspective consumes time in one of key activities:

  1. Knowledge (activities involving one employee),
  2. Collaboration (activities involving more than 1 employee),
  3. Processes (activities specifically focused on the knowledge and collaborative activities generated by organizational structure – such as silo impacts, internal politics, etc.) and
  4. Absence (annual leave, sick leave, holidays, etc.).

Despite the lack of formal ownership, firms can and do gain from high levels of training, in part because it creates a corporate culture or vocabulary teams use to create cohesion.

In recent economic writings the concept of firm-specific human capital, which includes those social relationships, individual instincts, and instructional details that are of value within one firm (but not in general), appears by way of explaining some labour mobility issues and such phenomena as golden handcuffs. Workers can be more valuable where they are simply for having acquired this knowledge, these skills and these instincts. Accordingly, the firm gains for their unwillingness to leave and market talents elsewhere.

Risk[edit]

When human capital is assessed by activity based costing via time allocations it becomes possible to assess human capital risk. Human capital risks can be identified if HR processes in organizations are studied in detail. Human capital risk occurs when the organization operates below attainable operational excellence levels. For example, if a firm could reasonably reduce errors and rework (the Process component of human capital) from 10,000 hours per annum to 2,000 hours with attainable technology, the difference of 8,000 hours is human capital risk. When wage costs are applied to this difference (the 8,000 hours) it becomes possible to financially value human capital risk within an organizational perspective.

Risk accumulates in four primary categories:

  1. Absence activities (activities related to employees not showing up for work such as sick leave, industrial action, etc.). Unavoidable absence is referred to as Statutory Absence. All other categories of absence are termed "Controllable Absence";
  2. Collaborative activities are related to the expenditure of time between more than one employee within an organizational context. Examples include: meetings, phone calls, instructor led training, etc.;
  3. Knowledge Activities are related to time expenditures by a single person and include finding/retrieving information, research, email, messaging, blogging, information analysis, etc.; and
  4. Process activities are knowledge and collaborative activities that result due to organizational context such as errors/rework, manual data transformation, stress, politics, etc.

Corporate finance[edit]

In Corporate finance, human capital is one of the three primary components of Intellectual capital (which, in addition to tangible assets, comprise the entire value of a company). Human Capital is the value that the employees of a business provide through the application of skills, know-how and expertise.[34] It is an organization’s combined human capability for solving business problems. Human Capital is inherent in people and cannot be owned by an organization. Therefore, Human Capital leaves an organization when people leave. Human Capital also encompasses how effectively an organization uses its people resources as measured by creativity and innovation. A company’s reputation as an employer affects the Human Capital it draws.[13][14][15]

See also[edit]

Notes[edit]

  1. ^Claudia Goldin, Department of Economics Harvard University and National Bureau of Economic Research. "Human Capital"(PDF). 
  2. ^W. Arthur Lewis (1954) "Economic Development with Unlimited Supplies of Labour."[permanent dead link]
  3. ^Pigou, Arthur Cecil (1928). A Study in Public Finance. London: Macmillan. p. 29. 
  4. ^Mincer, Jacob Studies in Human Capital. 1. "Investment in Human Capital and Personal Income Distribution". Edward Elgar Publishing, 1993.
  5. ^Hanushek, Eric; Woessmann, Ludger (2008). "The Role of Cognitive Skills in Economic Development"(PDF). Journal of Economic Literature. 46 (3): 607–668. doi:10.1257/jel.46.3.607. 
  6. ^Rindermann, Heiner (March 2008). "Relevance of education and intelligence at the national level for the economic welfare of people". Intelligence. 36 (2): 127–142. doi:10.1016/j.intell.2007.02.002. 
  7. ^[1] Smith, Adam: An Inquiry into the Nature And Causes of the Wealth of Nations Book 2 – Of the Nature, Accumulation, and Employment of Stock; Published 1776.
  8. ^ abcdeSimkovic, Michael (2013). "Risk-Based Student Loans". Washington and Lee Law Review. 70 (1): 527. SSRN 1941070. 
  9. ^Spence, Michael (1973). "Job Market Signaling". Quarterly Journal of Economics. 87 (3): 355–374. doi:10.2307/1882010. 
  10. ^Spence, Michael (2002). "Signaling in Retrospect and the Informational Structure of Markets"(PDF). American Economic Review. 92 (3): 434–459. doi:10.1257/00028280260136200. 
  11. ^The Forms of Capital: English version published 1986 in J.G. Richardson's Handbook for Theory and Research for the Sociology of Education, pp. 241–258.
  12. ^"Who Makes It? Clark's Sector Model for US Economy 1850–2009". Retrieved 29 December 2011. 
  13. ^ abhttp://www.sveiby.com/articles/IntellectualCapital.html
  14. ^ abPaolo Magrassi (2002) "A Taxonomy of Intellectual Capital", Research Note COM-17-1985, Gartner
  15. ^ abSveiby, Karl Erik (1997). "The Intangible Asset Monitor". Journal of Human Resource Casting and Accounting. 2 (1). 
  16. ^O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. p. 5. ISBN 0-13-063085-3. 
  17. ^"Do Colleges and Universities Increase Their Region's Human Capital?".  JournalistsResource.org, retrieved June 18, 2012
  18. ^Abel, Jaison R.; Deitz, Richard (2012). "Do Colleges and Universities Increase Their Region's Human Capital?". Journal of Economic Geography. 12 (3): 667. doi:10.1093/jeg/lbr020. 
  19. ^The Economist (May 27th 2010). on the web at http://www.economist.com/node/16219687?story_id=16219687
  20. ^Marx, Karl. Capital, volume III, ch. 29 pp. 465–6 of the International Publishers edition
  21. ^The Emancipation Question in New-York Daily Tribune, January 17 and 22, 1859Archived 2008-07-31 at the Wayback Machine.
  22. ^Haq, Mahbub ul (1996). Reflection on Human Development. Delhi: Oxford University Press. 
  23. ^UN. "Official website". 
  24. ^Human Development Report, UNDP. "HDR". 
  25. ^Brookings Institution, Investing in the Human Capital of Immigrants, Strengthening Regional Economies, September 2012
  26. ^David Allison. "Human Capital: The most overlooked Asset Class". Investopedia. 
  27. ^Becker, Gary (1994). Human Capital: A theoretical and empirical analysis with special reference to Education. The University of Chicago Press. 
  28. ^Hansen, W. Lee (1970). Education, Income and Human Capital. 
  29. ^Bagde, Surendrakumar. "Human Capital and Economic Development in India"(PDF). 
  30. ^Spiegel Online: Ein Jahr, ein (Un-)Wort! (in German).
  31. ^ abComposite indices — HDI and beyond,http://hdr.undp.org/en/statistics/indices/, retrieved July 27, 2013
  32. ^Arp, Frithjof; Hutchings, Kate; Smith, Wendy A. (2013). "Foreign executives in local organisations: An exploration of differences to other types of expatriates". Journal of Global Mobility. 1 (3): 312–335. doi:10.1108/JGM-01-2013-0006. 
  33. ^Arp, Frithjof (2014). "Emerging giants, aspiring multinationals and foreign executives: Leapfrogging, capability building, and competing with developed country multinationals". Human Resource Management. 53 (6): 851–876. doi:10.1002/hrm.21610. 
  34. ^Maddocks, J. & Beaney, M. 2002. See the invisible and intangible. Knowledge Management, March, 16-17.

References[edit]

  • Géza Ankerl: L'épanouissement de l'homme dans la perspective de la politique economique. Sirey, Paris 1966.
  • Gary S. Becker (1993). Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education (3rd ed.). University of Chicago Press. ISBN 978-0-226-04120-9. 
  • Ceridian UK Ltd (2007). "Human Capital White Paper"(PDF). Retrieved 2007-02-27. 
  • Samuel Bowles & Herbert Gintis (1975). "The Problem with Human Capital Theory – A Marxian Critique," American Economic Review, 65(2), pp. 74–82,
  • Crook, T. R., Todd, S. Y., Combs, J. G., Woehr, D. J., & Ketchen, D. J. 2011. Does human capital matter? A meta-analysis of the relationship between human capital and firm performance. Journal of Applied Psychology, 96(3): 443–456.
  • Sami Mahroum (2007). Assessing human resources for science and technology: the 3Ds framework. Science and Public Policy 34 (7), 489–499. [2]
  • Sherwin Rosen (1987). "Human capital," The New Palgrave: A Dictionary of Economics, v. 2, pp. 681–90.
  • Seymour W. Itzkoff (2003). Intellectual Capital in Twenty-First-Century Politics. Ashfield, MA: Paideia, ISBN 0-913993-20-4
  • Brian Keeley (2007). OECD Insights; Human Capital. ISBN 92-64-02908-7[3]

External links[edit]

Clark's Sector model the for US economy 1850–2009[12]
An advertisement for labour from Sabah and Sarawak, seen in Jalan Petaling, Kuala Lumpur.

For other uses, see Wealth (disambiguation).

"Affluent" redirects here. For other uses, see Affluent (disambiguation).

"Richness" redirects here. For the ecology term, see species richness.

"Wealthy" redirects here. For the American apple cultivar, see Wealthy (apple). For the community in the United States, see Wealthy, Texas.

Wealth is the abundance of valuableresources or valuable material possessions. This includes the core meaning as held in the originating old English word weal, which is from an Indo-European word stem.[1] An individual, community, region or country that possesses an abundance of such possessions or resources to the benefit of the common good is known as wealthy.

The modern concept of wealth is of significance in all areas of economics, and clearly so for growth economics and development economics yet the meaning of wealth is context-dependent. At the most general level, economists may define wealth as "anything of value" that captures both the subjective nature of the idea and the idea that it is not a fixed or static concept. Various definitions and concepts of wealth have been asserted by various individuals and in different contexts.[2] Defining wealth can be a normative process with various ethical implications, since often wealth maximization is seen as a goal or is thought to be a normative principle of its own.[3][4]

The United Nations definition of inclusive wealth is a monetary measure which includes the sum of natural, human, and physical assets.[5][6] Natural capital includes land, forests, energy resources, and minerals. Human capital is the population's education and skills. Physical (or "manufactured") capital includes such things as machinery, buildings, and infrastructure.

Wealth[edit]

Adam Smith, in his seminal work The Wealth of Nations, described wealth as "the annual produce of the land and labour of the society". This "produce" is, at its simplest, that which satisfies human needs and wants of utility. In popular usage, wealth can be described as an abundance of items of economic value, or the state of controlling or possessing such items, usually in the form of money, real estate and personal property. An individual who is considered wealthy, affluent, or rich is someone who has accumulated substantial wealth relative to others in their society or reference group.

In economics, net worth refers to the value of assets owned minus the value of liabilities owed at a point in time.[7] Wealth can be categorized into three principal categories: personal property, including homes or automobiles; monetary savings, such as the accumulation of past income; and the capital wealth of income producing assets, including real estate, stocks, bonds, and businesses.[citation needed] All these delineations make wealth an especially important part of social stratification. Wealth provides a type of individual safety net of protection against an unforeseen decline in one's living standard in the event of job loss or other emergency and can be transformed into home ownership, business ownership, or even a college education.[citation needed]

Wealth has been defined as a collection of things limited in supply, transferable, and useful in satisfying human desires.[8] Scarcity is a fundamental factor for wealth. When a desirable or valuable commodity (transferable good or skill) is abundantly available to everyone, the owner of the commodity will possess no potential for wealth. When a valuable or desirable commodity is in scarce supply, the owner of the commodity will possess great potential for wealth.

'Wealth' refers to some accumulation of resources (net asset value), whether abundant or not. 'Richness' refers to an abundance of such resources (income or flow). A wealthy individual, community, or nation thus has more accumulated resources (capital) than a poor one. The opposite of wealth is destitution. The opposite of richness is poverty.

The term implies a social contract on establishing and maintaining ownership in relation to such items which can be invoked with little or no effort and expense on the part of the owner. The concept of wealth is relative and not only varies between societies, but varies between different sections or regions in the same society. A personal net worth of US $10,000 in most parts of the United States would certainly not place a person among the wealthiest citizens of that locale. However, such an amount would constitute an extraordinary amount of wealth in impoverished developing countries.

Concepts of wealth also vary across time. Modern labor-saving inventions and the development of the sciences have vastly improved the standard of living in modern societies for even the poorest of people. This comparative wealth across time is also applicable to the future; given this trend of human advancement, it is possible that the standard of living that the wealthiest enjoy today will be considered impoverished by future generations.

Industrialization emphasized the role of technology. Many jobs were automated. Machines replaced some workers while other workers became more specialized. Labour specialization became critical to economic success. However, physical capital, as it came to be known, consisting of both the natural capital and the infrastructural capital, became the focus of the analysis of wealth.[citation needed]

Adam Smith saw wealth creation as the combination of materials, labour, land, and technology in such a way as to capture a profit (excess above the cost of production).[9] The theories of David Ricardo, John Locke, John Stuart Mill, in the 18th century and 19th century built on these views of wealth that we now call classical economics.

Marxian economics (see labor theory of value) distinguishes in the Grundrisse between material wealth and human wealth, defining human wealth as "wealth in human relations"; land and labour were the source of all material wealth. The German cultural historian Silvio Vietta links wealth/poverty to rationality. Having a leading position in the development of rational sciences, in new technologies and in economic production leads to wealth, while the opposite can be correlated with poverty.[10][11]

Wealth creation[edit]

Billionaires[12] such as Bill Gates, Jeff Bezos, Warren Buffett, Elon Musk, Charlie Munger and others advice the following principles of wealth creation:

  1. Use of science[13][14][15] and scientific method[16][17], education[18][19][20][21][22][23] (economics), continuous lifelong learning[24][25][26][27][28], reading[29][30][31][32][33][34][35][36] ("Knowledge is power - Sir Francis Bacon, "An investment in knowledge pays the best interest" - Benjamin Franklin[37], "The best investment you can make is an investment in yourself. The more you learn, the more you'll earn" - Warren Buffett[38])
  2. Learning from rich people[39] - billionaires[40] and millionaires

Amount of wealth in the world[edit]

The wealth of households amounts to USD 291 trillion (2013) and is estimated to increase by 55% in five years. The U.S. net worth of $100 trillion and Switzerland's USD 0.51 million/inhabitant are the highest numbers in the world.[41]

The Credit Suisse Wealth Report (mid-2013) estimated that, once debts had been subtracted, an adult required just USD 4,000 in assets to be within the wealthiest 50% of world citizens. However, at least USD 75,000 was needed to reach the top 10%, and USD 753,000 to belong to the most wealthy 1%.[42]

Tim Harford has asserted that a small child has greater wealth than the 2 billion poorest people in the world combined, since a small child has no debt.[43]

Wealthiest Cities[edit]

CityWeatlh
New York$3 Trillion
London$2.7 Trillion
Tokyo$2.5 Trillion
Silicon Valley$2.3 Trillion
Beijing$2.2 Trillion
Shanghai$2 Trillion
LA$1.4 Trillion
Hong Kong$1.3 Trillion
Sydney$1 Trillion
Singapore$1 Trillion

Philosophical analysis[edit]

In Western civilization, wealth is connected with a quantitative type of thought, invented in the ancient Greek "revolution of rationality", involving for instance the quantitative analysis of nature, the rationalization of warfare, and measurement in economics.[10][11] The invention of coined money and banking was particularly important. Aristotle describes the basic function of money as a universal instrument of quantitative measurement – “for it measures all things […]”– making things alike and comparable due to a social "agreement" of acceptance.[44] In that way, money also enables a new type of economic society and the definition of wealth in measurable quantities. In the Roman Empire, just as in modern colonialism, the main force behind the conquest of countries was the exploitation and accumulation of wealth in quantitative values like gold and money. Modern philosophers like Nietzsche criticized the fixation on measurable wealth: "Unsere ‘Reichen' – das sind die Ärmsten! Der eigentliche Zweck alles Reichtums ist vergessen!" (“Our 'rich people' – those are the poorest! The real purpose of all wealth has been forgotten!”)[45]

Economic analysis[edit]

"Savings" redirects here. For the concept of non-expenditure of income per unit of time, seeSaving.

In economics, wealth (in a commonly applied accounting sense, sometimes savings) is the net worth of a person, household, or nation, that is, the value of all assets owned net of all liabilities owed at a point in time. For national wealth as measured in the national accounts, the net liabilities are those owed to the rest of the world.[46] The term may also be used more broadly as referring to the productive capacity of a society or as a contrast to poverty.[47] Analytical emphasis may be on its determinants or distribution.[48]

Economic terminology distinguishes between wealth and income. Wealth or savings is a stock variable, that is, measurable at a date in time, for example the value of an orchard on December 31 minus debt owed on the orchard. For a given amount of wealth, say at the beginning of the year, income from that wealth, as measurable over say a year is a flow variable. What marks the income as a flow is its measurement per unit of time, such as the value of apples yielded from the orchard per year.

In macroeconomic theory the 'wealth effect' may refer to the increase in aggregate consumption from an increase in national wealth. One measure of it is the wealth elasticity of demand. It is the percentage change in the amount demanded of consumption for each one-percent change in wealth.

Wealth may be measured in nominal or real values, that is in money value as of a given date or adjusted to net out price changes. The assets include those that are tangible (land and capital) and financial (money, bonds, etc.). Measurable wealth typically excludes intangible or nonmarketable assets such as human capital and social capital. In economics, 'wealth' corresponds to the accounting term 'net worth'. But analysis may adapt typical accounting conventions for economic purposes in social accounting (such as in national accounts). An example of the latter is generational accounting of social security systems to include the present value projected future outlays considered to be liabilities.[49] Macroeconomic questions include whether the issuance of government bonds affects investment and consumption through the wealth effect.[50]

Environmental assets are not usually counted in measuring wealth, in part due to the difficulty of valuation for a non-market good. Environmental or green accounting is a method of social accounting for formulating and deriving such measures on the argument that an educated valuation is superior to a value of zero (as the implied valuation of environmental assets).[51]

Sociological treatments[edit]

Wealth and social class[edit]

Social class is not identical to wealth, but the two concepts are related (particularly in Marxist theory), leading to the combined concept of Socioeconomic status. Wealth refers to value of everything a person or family owns. This includes tangible items such as jewelry, housing, cars, and other personal property. Financial assets such as stocks and bonds, which can be traded for cash, also contribute to wealth. Wealth is measured as “net assets,” minus how much debt one owes. Wealth is a restrictive agent for people of different classes because some hobbies can only be participated in by the affluent, such as world travel.

Partly as a result of different economic conditions of life, members of different social classes often have different value systems and view the world in different ways. As such, there exist different "conceptions of social reality, different aspirations and hopes and fears, different conceptions of the desirable."[52] The way the various social classes in society view wealth vary and these diverse characteristics are a fundamental dividing line among the classes. According to Richard H Ropers, the concentration of wealth in the United States is inequitably distributed.[53] In 1996, the United States federal government reported that the net worth of the top 1 percent of people in the United States was approximately equal to that of the bottom 90 percent. Cross-nationally, the United States has greater wealth inequality than other developed nations.[citation needed]

The upper class[edit]

Upper class encompasses the top end of the income spectrum relative members of society as a whole. Since they have more wealth and privacy, the upper class has more personal autonomy than the rest of the population. Upper class values include higher education, and for the wealthiest people the accumulation and maintenance of wealth, the maintenance of social networks and the power that accompanies such networks. Children of the upper class are typically schooled on how to manage this power and channel this privilege in different forms. It is in large part by accessing various edifices of information,[clarification needed] associates, procedures and auspices that the upper class are able to maintain their wealth and pass it to future generations.[54] Usually, people of the upper class participate as partisans in elections and have more political power than those of lower classes due to their abundance of resources and influence.

The middle class[edit]

Middle class encompasses the individuals who fall in between the upper and lower class relative to their financial situation. Generally, the population of America associates themselves as middle class. Lifestyle is a means for which individuals or families decide what to consume with their money and their way of living. The middle class places a greater emphasis on income: unlike the upper class, the middle class measures success and potential in the form of money [relative pennies] rather than influence and power. The middle class views wealth as something for emergencies and it is seen as more of a cushion. This class comprises people that were raised with families that typically owned their own home, planned ahead and stressed the importance of education and achievement. They earn a significant amount of income and also have significant amounts of consumption. However, there is very limited savings (deferred consumption) or investments, besides retirement pensions and home ownership. They have been socialized to accumulate wealth through structured, institutionalized arrangements. Without this set structure, asset accumulation would likely not occur.[54]

The lower class[edit]

Those with the least amount of wealth are the poor. Most of the institutions that the poor encounter discourage any accumulation of assets.[54] Lower class members feel more restrictive in their options due to their lack of wealth. This could lead to complications in solving their personal dilemmas, as predicted by the Class Structure Hypothesis. There are many societal standards and designs intentional sabotage and shortcomings to explain the persistent state of yearning and want the lower classes generally experience with their lower quality and quantity of assets. Typical causes are persistent unethical/harmful mentalities and criminal tendencies: misguidedly similar to the upper class in some cases. Many individuals that are in the lower class stay in that class and very few move up in class. Many people in the lower class group believe there isn't such a thing as equal opportunity.

Distribution[edit]

Main article: Distribution of wealth

Although precise data are not available, the total household wealth in the world, excluding human capital, has been estimated at $125 trillion (USD 125×1012) in year 2000.[55] Including human capital, the United Nations estimated it in 2008 to be $118 trillion in the United States alone.[5][6] According to the Kuznet’s Hypothesis, inequality of wealth and income increases during the early phases of economic development, stabilizes and then becomes more equitable.

About 90% of global wealth is distributed in North America, Europe, and "rich Asia-Pacific" countries,[56] and in 2008, 1% of adults were estimated to hold 40% of world wealth, a number which falls to 32% when adjusted for purchasing power parity.[57]

In 2013, 1% of adults were estimated to hold 46% of world wealth[58] and around $18.5 trillion was estimated to be stored in tax havens worldwide.[59]

Wealth in the form of land[edit]

See also: Land law

In the western tradition, the concepts of owning land and accumulating wealth in the form of land were engendered in the rise of the first state, for a primary service and power of government was, and is to this day, the awarding and adjudication of land use rights.[citation needed]

Land ownership was also justified according to John Locke. He claimed that because we mix[clarification needed] our labour with the land, we thereby deserve the right to control the use of the land and benefit from the product of that land (but subject to his Lockean proviso of "at least where there is enough, and as good left in common for others.").

Additionally, in developed countries post-agrarian society (industrial society) this argument has many critics (including those influenced by Georgist and geolibertarian ideas) who argue that since land, by definition, is not a product of human labor, any claim of private property in it is a form of theft; as David Lloyd George observed, "to prove a legal title to land one must trace it back to the man who stole it."

Many older ideas have resurfaced in the modern notions of ecological stewardship, bioregionalism, natural capital, and ecological economics.

Anthropological views[edit]

Anthropology characterizes societies, in part, based on a society's concept of wealth, and the institutional structures and power used to protect this wealth.[citation needed] Several types are defined below. They can be viewed as an evolutionary progression. Many young adolescents have become wealthy from the inheritance of their families.

The interpersonal concept[edit]

Early hominids seem to have started with incipient ideas of wealth,[citation needed] similar to that of the great apes. But as tools, clothing, and other mobile infrastructural capital became important to survival (especially in hostile biomes), ideas such as the inheritance of wealth, political positions, leadership, and ability to control group movements (to perhaps reinforce such power) emerged. Neandertal societies had pooled funerary rites and cave painting which implies at least a notion of shared assets that could be spent for social purposes, or preserved for social purposes. Wealth may have been collective.

Accumulation of non-necessities[edit]

Humans back to and including the Cro-Magnons seem to have had clearly defined rulers and status hierarchies.[citation needed]Digs in Russia at the Sungir Archaeological Site have revealed elaborate funeral clothing on a man and a pair of children buried there approximately 28,000 years ago.[citation needed] This indicates a considerable accumulation of wealth by some individuals or families. The high artisan skill also suggest the capacity to direct specialized labor to tasks that are not of any obvious utility to the group's survival.[citation needed]

Control of arable land[edit]

The rise of irrigation and urbanization, especially in ancient Sumer and later Egypt, unified the ideas of wealth and control of land and agriculture. To feed a large stable population, it was possible and necessary to achieve universal cultivation and city-state protection. The notion of the state and the notion of war are said to have emerged at this time. Tribal cultures were formalized into what we would call feudal systems, and many rights and obligations were assumed by the monarchy and related aristocracy. Protection of infrastructural capital built up over generations became critical: city walls, irrigation systems, sewage systems, aqueducts, buildings, all impossible to replace within a single generation, and thus a matter of social survival to maintain. The social capital of entire societies was often defined in terms of its relation to infrastructural capital (e.g. castles or forts or an allied monastery, cathedral or temple), and natural capital, (i.e. the land that supplied locally grown food). Agricultural economics continues these traditions in the analyses of modern agricultural policy and related ideas of wealth, e.g. the ark of taste model of agricultural wealth.

The role of technology[edit]

Industrialization emphasized the role of technology. Many jobs were automated. Machines replaced some workers while other workers became more specialized. Labour specialization became critical to economic success. However, physical capital, as it came to be known, consisting of both the natural capital (raw materials from nature) and the infrastructural capital (facilitating technology), became the focus of the analysis of wealth. Adam Smith saw wealth creation as the combination of materials, labour, land, and technology in such a way as to capture a profit (excess above the cost of production).[9]

See also[edit]

References[edit]

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