A definition of wealth

© TIM Garrett 2014

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Civilization’s wealth in 2016 is 3,800 trillion US dollars. Adjusting for inflation, in 1980 it was about half this amount. How was this number obtained? It seems like an impossible thing to tally given the extraordinary complexity of our human world.

Very often people characterize wealth in terms of incomes, or at a national level in terms of the GDP. Incomes have units of currency per time, e.g. supposing someone earns $100,000 per year, this is the same as 0.3 cents per second. Wealth, however, has units of pure currency, e.g. a person’s net worth is $1000,000. It is more an expression of what we currently have, in some ways like the traditional economic concept of “physical capital”. Wealth and GDP do not have the units, so the two quantities can’t be compared or spoken about interchangeably.

This dimensional observation provides us a clue: integrating a quantity with units of currency per time over time yields a quantity with units of currency. The integral of global GDP over the entirety of history, adjusting for inflation through the GDP deflator, has units of Wealth.

Or, if integrals aren’t your cup of tea (which is fine), a clue might be to ask the question why is it that GDP is traditionally calculated for the period of one year as the summation of all production within that year? One year is a totally arbitrary length of time to be chosen. Perhaps it is easily relatable to crop cycles and government taxation systems, but nothing of obvious fundamental relevance. Wouldn’t it make just as much sense to do the summation of production for the entire preceding history of civilization? That would appear to yield a quantity more akin to our total accumulated wealth.

Economists would complain about an absence of consumption and decay in this definition. Please see a discussion of how these quantities are still implicitly addressed here. Regardless, As I have shown in the figure above, this admittedly unorthodox definition of wealth has the property of having a fixed relationship to civilization’s total rate of energy consumption; what we have accumulated we must maintain. Both energy consumption and Wealth have been growing at almost exactly the same rate. Between 1970 and the present, both wealth and energy consumption have more than doubled, growing at varying rates through out the years, but always maintain a fixed relationship. The implication is that every one thousand dollars of wealth, adjusting for inflation to the year 2005, has always corresponded to 7.1 +/- 0.1 Watts of energy consumption.

This property is rather remarkable. It’s not just that the quantities are correlated, which could mean anything, but that the ratio of the two quantities is fixed. It appears to link the economy to physics in a very fundamental way, saying essentially that they are the same thing: economic phenomena are physical phenomena. Whatever an economist might feel about the arrogance of physicists, this relationship is actually pretty useful as it allows for the use of physics as a basis for making economic forecasts, much like a weather model.

But there is also a great deal of subtlety to the result’s interpretation. It still remains to be expressed what exactly this definition of wealth actually is.

Certainly wealth is not physical capital as in traditional economic models. That is far too restrictive since wealth should include things like our knowledge, culture, health, and personal relationships. No man is an island. We are so much more than our stuff.

Rather an interpretation of Wealth might more properly allow for the fact that civilization is part of the physical universe and must obey universal physical laws. Here the field of Thermodynamics gets especially useful since it aims to express physical laws in the most general fashion possible, the most encompassing of all being the Second Law. Most simply, the Second Law states that something always happens, and it happens by way of a material flow from high to low energy density (or if you prefer -- which I don’t -- increasing overall entropy).

One particularly beautiful expression of the fact that energy density always decreases (or entropy increases) is that nothing can be isolated: all of space and time are linked. Nothing happens spontaneously as all actions from the past have some influence on the present and future. Equally, no sub-component of the universe can be completely isolated from interactions with any part of the rest. It may take some time of course, but however remote or slow the interactions may be, all parts are connected to and interact with all others.

What about civilization? Applying the Second Law to us, we might make the statement that our collective Wealth is a representation of our international communications and trade, ourselves, our ideas, education and relationships, how they all form a vibrantly interacting and changing whole that is completely integrated with our transportation routes, communication networks, factories, buildings and databases.

With nothing isolated, all elements of civilization must work together. No matter how distant, no element of economic production can be viewed as being entirely separate from any other. We all compete for resources, and we are all part of a vibrant organism we call the global economy.

So, wealth is not in some inert “capital”. Instead, it lies in the relationships between civilization elements. No portion of real economic production simply “disappears” due to isolated "consumption" by humans (this subtraction of consumption is what is normally done when economists calculate physical (non-human) “capital”). Humans are inextricably linked to the rest of the organism’s overall structure. When we go to a movie we are sustaining and adding to that structure by maintain and building on the value of our collective cultural knowledge. When we eat a meal we sustain and create memories that encourage us to continue and build new eating experiences in the future.

And, just as all elements of civilization are directly or indirectly linked at any instant in time, all elements are linked throughout time as well. Power consumption that sustains us against dissipation and decay in the past, nurtures us forward so that we can continue to consume in the present. Money we expended to learn skills in the past allows us to produce more effectively today.

So, going back to the original expression that global wealth might be calculated then as simply a summation of past, inflation-adjusted production (or real GDP). The summation is over the entirety of human history and over all nations. This is what yield the result that civilization’s wealth in 2016 is 3,800 trillion US dollars. GDP grows the web. Wealth is the web. The web is what allows for energy dissipation that allows for the circulations within the web to survive.

The precise calculation methods for wealth are described in Appendix C in this paper:

Are there basic physical constraints on future anthropogenic emissions of carbon dioxide?

and also here with associated statistics

Long run evolution of the global economy: 1. Physical basis Supporting Material