A New Notion of Wealth: Extending the Equation
Introduction: There is no such thing as changing the purpose of capital
Changing the purpose of capital is impossible. In the capitalist world we live in capital is a part of wealth used to create more wealth[1]. This is an unalterable fact, because this principle of wealth creation is one of the pillars of our modern world. In itself, this is not a problem. The creation of wealth essentially carries a positive notion. Yet, problems arise from the way the wealth we pursue is defined.
In its most basic definition, wealth is an accumulation of money and valuable assets.[2] The idea that only money and valuable assets are considered wealth leads to various undesirable consequences that inherit the current purpose of capital. The real question is thus not whether we can change the purpose of capital but how we can change the definition of wealth.
The approach I suggest is an extension of our current notion of wealth. Money and assets remain as the core elements of wealth; however, they should be determined with three elasticities: peace, a healthy environment and human dignity. The following will explain each elasticity in more detail.
Peace and stability as fertile soil for growing wealth
When wealth is defined as an accumulation of money and assets, a rise of protectionism, usually preceded by a rise in populism, can well up as one of the consequences. This is not a rare phenomenon but rather gaining momentum nowadays, with Brexit being arguably its most prominent example. Many British citizens were concerned about immigration and making too many contributions to the EU[3]; this essentially means they feared that their personal wealth as well as national wealth would decrease. Similar trends can be observed in other European countries as well as in current US policies. While this might not yet be the end of implementing liberal institutionalist principles, it appears as if in today’s world, realist ideas are more present than ever since the end of the Cold War.
The problem is, that due to this fear of decreasing wealth, the achievements of multilateralism and institutions as well as free trade become increasingly disregarded. The rise of liberal institutionalism after World War II has led to a significant decrease in inter-state wars over the years.[4] Diplomacy and multilateral forums of exchange evolved as the primary means of dealing with problems and conflicts. Nowadays, however, the realist idea that “alliances are only temporary marriages of convenience”[5] seems to hold true, unfortunately. While this might not necessarily mean that the world becomes less peaceful, in realist theory, the increased interstate competition holds higher chances for war; or at least lower chances for the multilateral solving of global problems.
Peace implies security and stability, which are both determinants for the creation of wealth. It is common knowledge, that most investors are risk-adverse, thus they choose investment opportunities in regions that are stable, peaceful and where their investments can yield returns. Thus, peace, or at least political stability is one of the major elasticities of wealth. For example, the same amount invested in Germany or the UK might yield different returns nowadays.
In order to establish peace and in consequence, institutions as a part of wealth, politics should seek for more cooperation, rather than less. Brexit will most likely prove that the wealth of a nation declines with more isolation and less cooperation. This should function as warning to other countries. But there are difficulties for policy makers in pursuing more cooperation, because voters are not omniscient. They want to see results quickly, hence politicians focus on short-term goals for them to deliver results and get reelected.[6] In order to deal with this kind of obstacles, policy makers need to inform the public better about the long-term consequences of their policies. Economic outcomes of a decrease in multilateral cooperation should be assessed earlier and the public should be informed thoroughly about the expected outcomes before decisions are made.
Businesses that do not operate in an exploitative manner, can also contribute to more cooperation and peace in the long run.[7] This is not only true for the countries they produce in, but also for the home country. Businesses should use their societal and political influence to discuss the benefits of institutions and free trade with their government and inform the public about the benefits they create for society thanks to cooperation.
The new equation of wealth is thus: wealth = peace x (money + valuable assets).
More than fresh air: a healthy environment as wealth’s fertilizer
Another consequence of the classic definition of wealth is the exploitation of our earth. One of the biggest failures of multilateral cooperation is the inability to fight climate change. It is more than likely that global climate objectives, which are not even very ambitious, cannot be met in time.[8] Even ‘wealthy’ countries like Germany fail to meet the goals it committed to.[9] The withdrawal of the US from the Paris Declaration and the scandals in the automotive industry are only a few examples of the lack in commitment regarding this issue.
The problem arising from this myopic behavior is the deficit in sustainability. How to create wealth through capital in the long-run if there is no healthy environment? How will the economy keep up its growth when there is no crude oil anymore, no trees to burn down, no bees helping our plants grow? Then all the accumulated money and assets will not be able to buy a healthy earth, and in consequence, healthy human beings.
It sounds naïve, but the first and foremost measure for politics is to actually commit to the objectives they set. If even policy makers are unable to provide credibility, how will individuals change their lifestyle? Or businesses that operate in countries without environmental standards, for example? Furthermore, states should not grant any exemptions for certain industries or developing countries when it comes to environmental protection. Rather they should offer financial or technical support to these countries in order to offset the short-term wealth losses. In the long-run, a healthy environment will provide wealth gains for everyone.
Businesses should invest in good corporate governance in order to end short-termism and increase sustainability. It is proven, that in the long run, businesses with good corporate governance, investing in environmental sustainability, perform better than those which are poorly governed.[10] Additionally, businesses should invest more in R&D to develop environment-friendly technologies that, in the long-run, will enable them to outperform businesses that did not invest in R&D.
Thus, the new equation of wealth should be: wealth = (peace + healthy environment) x (money + valuable assets).
The kernel of wealth: human dignity
Some modern economic theories do not define the wealth of a nation solely based on GDP, but argue that happiness is an important part of wealth as well.[11] One prominent example it the Bhutan Gross National Happiness idea. A main factor is usually the preservation of one’s dignity as one of the main factors of individual happiness. One way to enhance dignity is equality. The classic idea of wealth is one of the reasons for the extreme inequality many societies face today. Absolute equality is not desirable as past experiences has shown. However, the preservation of human dignity, which is increasingly endangered the more unequal a society becomes, is one thing that even a capitalist system has to guarantee.
The quest of increasing wealth has led to the establishment of various unethical business practices, for example tax evasion or accounting fraud. These practices might increase short-term wealth for some businesses, yet they bring damage to a society as a whole and increase inequality. This is because wealth cannot be distributed the way law requires. Currently, inequality in many developed countries is rising[12] while in developing countries countless workers and even children are being exploited for the creation of more wealth and short-term profit.
While people in developing countries occur health problems, extreme overwork and other human rights violations, the inequality in advanced economy might not be life-threatening, but it excludes people from societal participation and prevents poor children from making the same achievements as better-off children. Failing to preserve peoples’ dignity through more equality will decrease wealth in the long run, because society will miss out on the positive contributions these people were to make if they were given the chance to unfold their potentials.
Thus, policy makers should fight the widening of social gaps. Domestically, they should make sure to prevent unethical business practices by implementing efficient regulations and higher fines for breaching laws. Internationally, they should cooperate with governments of developing countries to improve working conditions there. If for example basic health standards at work are established in all countries, all businesses would be forced to comply and could not move to other countries where these standards do not exist.
Businesses should be more willing to invest in countries that preserve human dignity and refrain from unethical business practices. Their profits might decrease in the short run, yet, in the long-run, there will be more human capital available that offsets these initial losses. Business leaders should consider treating workers in foreign countries as they would treat them in their home countries — not necessarily in terms of wages, but at least regarding basic health and security standards. Furthermore, they should commit themselves to paying taxes as intended by law. In the long-run, society will benefit and give back to the business by buying more products and by offering better human capital.
Thus, the new and final equation for wealth is: wealth = (peace + healthy + environment, equality) x (money + valuable assets).
Conclusion: growing a sprout into a tree
A study by McKinsey Global Institute found that firms with long-term orientation outperform firms that focus only on the short term. Eventually, the firms with a long-term focus were able to create more wealth. Therefore, investing in the future and future growth when others do not can be very rewarding for a company.[13] I believe that these findings are not only relevant to individual firms but can also applied to the state level. A government that misses investing in the future with a long-term vision will be unable to promote stable growth of a country and ultimately fall behind.
In a capitalist world, the purpose of capital cannot be changed. The creation of wealth remains the ultimate purpose of capital. However, what we define as wealth can be so much more than the mere accumulation of money and assets. I argued that the equation of wealth should be extended to include three elasticities. First, politics and businesses should make more effort to ensure peace and political stability by increasing international cooperation instead of decreasing it. Nationalism and protectionism will not increase total wealth in the long-run. Second, the international community must make more efforts to ensure a global healthy environment. Only in a healthy environment can the wealth we create bear fruits in the long-run. And lastly, it is imperative to ensure basic dignity for all people because they will be the source of more wealth for everyone. Furthermore, cooperation is necessary not only on the inter-state level, but also on the state-business level, because the problems arising from short-termism cannot be tackled by one party alone.
It is therefore of utmost importance that political leaders as well as business leaders understand wealth as this extended concept and abide from extreme short-term thinking. Only if we implement this concept of wealth together with long-term visions, the full potential of wealth-creation can be unfolded and wealth can be accumulated in a more sustainable manner.
References
Centre for Social Investigation, Economic & Social Research Council. “CSI Brexit 4: People’s Stated Reasons for Voting Leave or Remain.” Centre for Social Investigation, Economic & Social Research Council, 2018. https://ukandeu.ac.uk/wp-content/uploads/2018/07/CSI-Brexit-4-People%E2%80%99s-Stated-Reasons-for-Voting-Leave.pdf.
Forrer, John, Timothy Fort, and Raymond Gilpin. “How Business Can Foster Peace” Special Report 315 (2012): 20.
Frey, Bruno S. Happiness: A Revolution on Economics. The MIT Press, 2008.
Garrì, Iconio. “Political Short-Termism: A Possible Explanation.” Public Choice 145, no. 1–2 (October 2010): 197–211. https://doi.org/10.1007/s11127-009-9561-5.
George, Henry. The Science of Political Economy -Book II The Nature of Wealth. Doubleday & McClure Co., 1897. https://archive.org/details/sciencepolitica01georgoog/page/n343.
McKinsey Global Institute. “Measuring the Economic Impact of Short-Termism,” 2017. https://www.mckinsey.com/~/media/mckinsey/featured%20insights/Long%20term%20Capitalism/Where%20companies%20with%20a%20long%20term%20view%20outperform%20their%20peers/MGI-Measuring-the-economic-impact-of-short-termism.ashx.
Mearsheimer, J.J. “Anarchy and the Struggle for Power.” In The Tragedy of Great Power Politics, 29–54. New York and London: WW Norton & Company, 2001.
Mueller, Kaspar. “Corporate Governance and Globalization: The Role and Responsibilities of Investors.” Selected Issues in Corporate Governance: Regional and Country Experiences, 2003, 21–29.
Plumer, Brad, and Nadja Popovich. “The World Still Isn’t Meeting Its Climate Goals.” The New York Times, December 7, 2018, sec. Climate. https://www.nytimes.com/interactive/2018/12/07/climate/world-emissions-paris-goals-not-on-track.html, https://www.nytimes.com/interactive/2018/12/07/climate/world-emissions-paris-goals-not-on-track.html.
Wilkes, William, Hayley Warren, and Brian Parkin. “Germany and Its Failed Climate Goals,” August 15, 2018. https://www.bloomberg.com/graphics/2018-germany-emissions/.
Footnotes
[1] George, The Science of Political Economy -Book II The Nature of Wealth. P. 293.
[2] Cambridge Dictionary
[3] Centre for Social Investigation, Economic & Social Research Council, “CSI Brexit 4: People’s Stated Reasons for Voting Leave or Remain.” P.4
[4] https://www.systemicpeace.org/conflicttrends.html
[5] Mearsheimer, “Anarchy and the Struggle for Power.” P. 33.
[6] Garrì, “Political Short-Termism.” P. 199.
[7] Forrer, Fort, and Gilpin, “How Business Can Foster Peace.” P. 4.
[8] Plumer and Popovich, “The World Still Isn’t Meeting Its Climate Goals.”
[9] Wilkes, Warren, and Parkin, “Germany and Its Failed Climate Goals.”
[10] Mueller, “Corporate Governance and Globalization: The Role and Responsibilities of Investors.” P. 29.
[11] For example: Frey, Happiness: A Revolution on Economics.
[12] The World Bank, “World Development Indicators — Gini index”.
[13] McKinsey Global Institute, “Measuring the Economic Impact of Short-Termism.” P. 1–2,7.
