Thursday, March 12, 2009

Economic Fundamentals: The Difference Between Income and Wealth

Originally Published 12.24.08

Sophists were teachers in ancient Greece. The original Sophists trained politicians. Thus, the original use of sophistry was in the political arena. I guess not much as changed in 2500 years, has it?

One area where political and media sophistry has thoroughly corrupted a field of study is economics. The result is that economic illiteracy is at an all-time high. Politicians, the media, and some economists have engaged in an Orwellian “newspeak” that by design or chance has twisted public perception. A good example is the difference between income and wealth.

Income is not the same as wealth. Yet, politicians and the media often refer to wealth when describing income. Income is the flow of dollars resulting from productive activity. Wealth is the accumulation of dollars and other assets.

Think of it this way, income is water running out of the sink faucet. Wealth is the water that’s accumulated in the sink. If a lot of water (lots of income) is flowing out of the faucet, but draining just as fast, little water (little wealth) is accumulated. If a trickle of water is flowing (not much income), but the sink is full and stopped, there’s a sink full of water (lots of wealth).

High income earners are not necessarily wealthy. They are productive. Their productivity and value to society generates the high income, but if they have not managed to accumulate large amounts of it, they are hardly wealthy.

By contrast, the wealthy are not necessarily productive. They may not generate any income from their own efforts. They might be living off the wealth created in prior generations. Granted, Grandfather’s trust might generate income when it’s put to productive use, but that’s mostly a reflection of Grandfather’s effort.

Whenever you hear a politician or journalist use the word “wealthy” see if substituting the word “productive” makes more sense. For example, when politicians say they want to “tax the wealthy,” they really want to “tax the productive.”

© 2008 Matt Michel

No comments:

Post a Comment