Understanding the concept of wealth

Wealth, in primitive times would have been attributed to simple things like a reduced chance of being eaten by a predator, an improved ability to survive a fight with another tribesman, and increased hunting performance among others. Over millennia, as the amount of humanity’s collective wealth increased this way the nature of wealth changed. The nature of wealth changed from merely surviving, to becoming more comfortable, healthier, smarter, more organised, and longer-lived. In modern times, the nature of wealth in advanced societies is now shifting from a form determined by control over physical resources to a form determined by control over information.

Wealth affords its owners the power to determine their destiny.

The more the wealth, the greater this power is. But what exactly is wealth and how does it give its owners this power to determine their destinies? Recall the old cliché “health is wealth”. In the previous paragraph, I mentioned that becoming healthier was one of the forms that wealth took once mere survival became something that could be largely taken for granted. One who is healthy can do more things and has more options compared to one who is unhealthy. Therefore between a healthy individual and an unhealthy individual, it is the healthy individual who has more control over his destiny and therefore wealthier in that sense. Let us examine how exactly the wealth that is health comes about. To make our examination simpler, we shall use the far simpler standards of health applicable to the Stone Age. How does one stay healthy back in the Stone Age? One way is to use fire to cook one’s food to reduce the chances of succumbing to a bacterial infection. Another is to keep warm in the winter using the very same fire to cook one’s meals. Warmth and cooked meals constitute the value created out of fire (which itself was created out of other forms of capital such as firewood and the expertise required to harvest this fuel from trees – i.e. lighting a fire). This value would have been wasted if there was no person present to benefit from this value. The heat would have dissipated and the food eventually spoilt. However, a person using this fire benefited from it by becoming healthier.

The way cooking and warmth is turned into health in this example illustrates how value is turned into wealth. The health gained by an individual who cooked his meals and warmed himself with fire gave a certain degree of persistence to the value created by this fire instead of allowing this value to dissipate into the environment. This is a rather roundabout way of arriving at a very simple definition of wealth:

Wealth is captured value.

Health indeed is wealth. Today, a huge amount of capital is “burnt” to create the wealth that is our health. This capital comes in the form of medical and nutritional knowledge and technology, state-of-the-art gyms, parks and bicycle paths, and advertising to promote healthy lifestyles among many others. But how the wealth that is one’s health is used varies from one individual to another. An individual could choose to use their health to party hard every night. Another could choose to use his health to work extra hours to make some extra money. If we compare the outcome of the activities in these two examples, we find different results in terms of what has become of some of the wealth that is the health expended by these two individuals in their chosen activities. The first individual will wake up the next morning not only with a hangover and a less-than-ideal outlook towards the workday he faces, but also with a thinner wallet. The second individual, on the other hand, would have a bit of money in his bank account and the option to work lesser hours in the day he faces having compensated for the foregone income the night before. Which of the two do you think made better use of the bit of wealth that is their health that they “burned” over the night?

With the help of this simple example we are able to come up with an equally simple definition of the concept of wealth management.

Managing wealth involves determining how much of it to consume and how much of it to turn to capital (i.e. capitalised).

The cliché “all work and no play make Jack a dull boy” still applies though. There is no point in being wealthy if one cannot indulge once in a while. But then one cannot remain wealthy if one always splurges. The simple principle that consumption dissipates value, whereas capitalisation retains it for future use cannot be ignored. The natural wealth of the Philippines once lay in its forests. Rather than capitalise on these forests to produce assets that could yield other forms of value persistently, Filipinos consumed forest products by exporting them raw for profit unsustainably (as time eventually revealed). A capital-rich society (i.e. the ones with the capital to turn wood into valuable goods or sustainable income – or both) needed less timber to produce the same amount of wealth. The Philippines, a capital-poor society, consumed relatively huge amounts for timber yet earned far less. Vast tracts of forests could have been preserved and used, say, to attract tourists that could have generated far sustainable income for the economy over an indefinite period. Cutting them down and exporting them at a huge profit created lots of easy money and lots of even easier consumption.

And herein we get the really lucid picture that will serve as an ominous backdrop for that often talked about paradox of Philippine society – why a country so rich in natural wealth remains so impoverished today.

The key to prosperity lies in a society’s ability to manage wealth.

A keen ability to decide how much wealth to spend and how much of it to save and invest is the no-brainer final piece of the puzzle. In the previous three chapters, we have explored the immense cultural and social roadblocks that Philippine society faces in meeting the challenge of acquiring, creating, and applying wealth. Yet even the little wealth that survives this passage into application is squandered because of Filipinos’ utter lack of wealth management faculties.

Like one’s health, financial instruments such as money are a means for capturing value. Money presents a far more efficient way of transferring value and converting it from one form to another. As something saved (say, in a bank account) it can in itself be a repository of wealth. The catch with money is that it is easily spent on goods and services that are nothing more than perceived to be of some value. The deliberations made by a person spending money today are a far cry from the days when wealth was a bit more tangible. In those days, Ten sacks of rice may easily be evaluated as being worth one water buffalo. Today, once an OFW’s toil and “sacrifice” is converted into dollars, the funds are remitted to the Philippines, and eventually find their way into the clutches of his relatives. Once there, it becomes a matter of which corporate marketing approach works best on the limited faculties of Filipinos to imagine what one can do with money.

[Excerpt from the book Get Real Philippines Book 1 which can be downloaded for free here.]

benign0

benign0 is the Webmaster of GetRealPhilippines.com.