Most economic debates are about income, not wealth. When we talk about income taxes, or welfare benefits, or labor’s share of national income, we’re talking about the amount of goods and services that get created every year, and how those goods and services get allocated among the various people in a society. But in the 2010s, we saw a lot of debate about wealth instead — wealth taxes, wealth inequality, and so on.
I always felt that these debates were a bit of a distraction. That’s partly because — for reasons I’ll explain in a bit — I think income is a lot more important than wealth. It’s also because from a policy perspective, dealing with income is a lot easier than dealing with wealth. But the biggest reason is that I think that wealth is a lot harder for regular people to understand than income.
In general, regular people’s intuitive “folk” understanding of income is pretty close to the way economists think about it. Every month you get a certain number of dollars, and you can spend those dollars on stuff you want — pizza, haircuts, medical care, rent, treats for your pet rabbit, etc. The number of dollars you get represents the value of the stuff you can buy.
That’s pretty much exactly how GDP works at the level of the whole economy — GDP is the total value of the stuff that gets produced in the economy, and it’s theoretically exactly equal to the total income that everyone earns for producing that stuff. So income for a whole economy works pretty much the same as it works for an individual.
Wealth is different, for a number of reasons. For one thing, unlike income, wealth can be negative. This means that a lot of personal wealth isn’t actually the world’s wealth.
Suppose you own $10 million dollars in bonds. Congrats, you’re rich! But bonds are money that one person owes to another person. Which means some other people owe you $10 million. The same bonds that add $10 million to your wealth also subtract $10 million from someone else’s wealth. In other words, many assets are also other people’s liabilities.
Now, that doesn’t mean society as a whole has zero total wealth. Assets like stocks and real estate don’t have any associated liability — if you have a house, no one owes you that house. And that house is real wealth. So the total amount of assets in the world is bigger than the total amount of liabilities. The difference between assets and liabilities is called “net worth”, “net wealth”, or just “wealth”.
The world’s total net wealth was estimated at around $454 trillion in 2023. That sounds like a really huge number. It’s almost five times as big as world income (GDP) in that same year, which was around $105 trillion. For the U.S. alone, wealth was $140 trillion and income was $27.4 trillion, which again is about a 5 to 1 ratio.
Is that a lot? If this were your family, having savings worth 5 times as much as your annual income would be pretty good. The median American family has a net worth only about 2 times as large as the median family income. If you could live off of your savings for 5 whole years without working, that would be pretty good! But on the other hand, it isn’t anywhere close to being able to retire.
This is why despite what some silly people say on social media, confiscating rich people’s wealth wouldn’t be nearly enough to fund the government. Here’s a useful tweet:
Freiman is correct. The wealth of America’s billionaires was estimated at around $5.2 trillion in 2023, while federal government spending was about $6.4 trillion. Confiscating every last penny from Jeff Bezos, Elon Musk, and all the other billionaires wouldn’t fund the U.S. government for one year. And of course you could only do it once.
There’s really just not that much wealth in the world.
In fact, the amount of wealth the world could actually spend is much less than the amount it currently has on paper. One reason is that wealth, unlike income, depends on financial market valuations.
Back in 2022, when stock and crypto prices were crashing, I wrote a post explaining that the wealth that left these assets didn’t actually go anywhere — it just disappeared into thin air:
Here’s how I explained it:
Mark-to-market accounting means that ALL shares or units of an asset are valued at the market price. The market price is the price of the shares that get TRADED.
Suppose there are 1 million total shares of stock in Noahcorp, but that only 1000 shares of Noahcorp get traded on any particular day. And most Noahcorp shares just sit in people’s accounts and never even get traded at all. Now suppose that the 1000 shares that DO get traded go for $300 a share. Mark-to-market accounting means that we value all 1 million Noahcorp shares at $300 a share, including all the ones that never get traded. So the total value of all 1 million shares of Noahcorp — which is called Noahcorp’s “market capitalization” or “market cap” — is $300 million.
Now suppose that tomorrow, those 1000 Noahcorp shares get traded for only $200 a share. The mark-to-market value of the traded shares and the non-traded shares alike goes down to $200 a share. So Noahcorp’s market cap goes down to $200 million.
Noahcorp’s market cap is wealth. So when Noahcorp’s market cap goes down, where did the wealth go? It vanished. It ceased to exist. There aren’t more dollars out there. The number of Noahcorp shares is the same. The only thing that changed is that now people decided to buy and sell Noahcorp shares at a lower price. So mark-to-market accounting says Noahcorp is worth less than before. There is simply less wealth in the world…
But now imagine if one guy (let’s call him “Noah”) owned 999,000 of the shares of Noahcorp…[N]ow imagine that Noah tried to sell all his shares of Noahcorp at once. The price would probably go way down…So Noah won’t get $300 a share. As he keeps selling more and more shares, the price will go lower and lower. By the time he sells all his shares, he’ll have much less than $299,700,000 in cash. In a sense, that means that some of his $299,700,000 in wealth was always somewhat “fake”. There was simply no way for him to get that much in cash[.]
In other words, the total amount of wealth the world could actually spend all at once is a lot less than the $454 trillion it has on paper. Selling off many of the world’s assets at once would crash the price of those assets, and a lot of that $454 trillion would just vanish into thin air.
This means wealth works differently for the world than it does for a single person or household. When you sell stocks or sell your house in order to spend your wealth, you don’t end up changing the price much. You could sell every penny of your wealth and you’d get about the amount of cash that your wealth was worth on paper before you started selling. But the world as a whole is completely different. If everyone in the world tried to sell their stocks and bonds and houses to other people at the same time, all of those assets would crash in price, and the total amount of cash generated from all those sales would be much, much less than the paper wealth number before the sale.
So we can’t think of global wealth — or even the wealth of a single nation, unless it’s a very small one — as the amount of cash that the world could raise. The total amount of cash that the world or a nation could raise is much less than its wealth on paper. It’s much less than 5 years of income.
(Does that mean the paper wealth is fake? Well, a little bit, yes. But there’s really no better way to measure asset values.)
Incidentally, this is one of several reasons that wealth taxes don’t tend to raise a lot of money. When you start taxing financial assets, those assets become less valuable to investors, because owning those assets now means getting taxed. So the market price of the assets drops, which reduces the amount of tax revenue from the wealth tax.
In fact, though, selling assets to raise cash is not actually a very good way to think about how long the world could live off of its wealth. The reason is that the true wealth of the world isn’t a number on a spreadsheet — it’s a bunch of real, physical stuff.
Financially speaking, wealth equals the market value of assets (net of liabilities). But economically speaking, wealth — or what economists call “capital” — is all of the actual durable stuff that we use to produce all the things that we want. It’s the actual houses, office buildings, roads, water pipes, machine tools, cars, trucks, trains, planes, boats, tractors, harvesters, construction machinery, computers, software, and so on. And it’s also the business organizations, the technological know-how, the corporate brands, the relationships, the education and skills, and all the other intangible assets that go into production. It’s anything that’s both durable and productive — anything that lasts for a significant time after you create it, and which can be used to produce useful goods and services.
So if the human race really decided to collectively live off of its wealth, what would that mean? It wouldn’t mean simply selling all of the capital assets to new human owners for lower prices — that would raise some cash for the people who did the selling, but at the end of the day the human race as a whole would have the exact same machines and buildings and corporate brands as before the sale.
Could humans just stop working for a while and live off of their capital assets? No. Sure, some introductory econ textbooks might model capital assets as “seed corn” that you can choose to either eat or plant, but real physical capital isn’t like corn. You can’t eat a machine tool, an office building, or an airplane. If everyone just stopped working completely, the human race would be extinct in a matter of weeks, wealth or no wealth.
A simple way of putting this is that humanity can live on its income even with zero wealth, but it can’t live on zero income no matter how much wealth it has.
Note that this is another way that global wealth works differently from individual wealth. If you, as an individual, have enough assets, you can retire and live a life of indolence. But humanity as a whole cannot do the same.
What humans could do is to stop building new capital assets, and to stop repairing the ones it has — in other words, humans could reduce investment to zero, so that 100% of GDP was consumption. In this scenario, we would still work, but we wouldn’t save and invest. This would allow us to temporarily increase our standard of living, because we’d be able to spend a lot of extra effort and resources on our consumption instead of on maintaining our machines, our vehicles, our business relationships, our technical skills, our education system, and so on.
Right now, consumption in the U.S. is about 68% of GDP — by pushing that all the way to 100%, we would increase Americans’ consumption by almost half. For other countries, who invest more of their GDP, the short-term benefit from switching to a 100% consumption would be even greater.
But this consumption boost would only be temporary. Eventually, all of the capital assets — all of society’s real, physical wealth — would decay. Machines and buildings and vehicles and infrastructure would wear out and fall apart after a decade or two. Business relationships would fall by the wayside, brands would lose their appeal, skills would dull, and knowledge would be forgotten. Humanity would become poorer and poorer — first gradually, and then all at once. After just a few years, our world of indolent plenty would collapse into a brutal fight for subsistence.
Understanding wealth as real productive assets, instead of numbers on paper, helps us to understand the impermanence of the world we’ve built. The walls and institutions that surround you look like they’re built to last forever. But they aren’t. Without constant maintenance and replacement — constant human effort — they will crumble very quickly.
This is why I think income is fundamentally more important than wealth. The modern industrialized world is not something that we built in the past — it’s something we build and rebuild every day with the sweat of our labor. The amount of value we accumulate is much less than the amount of value we produce.
And that’s why I think the discussions about wealth in the 2010s were a bit of a sidetrack. The question of how income is distributed is absolutely central to our standard of living. The question of how wealth is distributed is not totally unimportant, but it’s more of a secondary concern.
