Welcome back! This is the second of a five-part summer series where we try to answer one question that is as old as it is pressing: What is wealth? What is this substance that everybody wants, over which so many wars have been fought, but still, to this day, no one can really define?
Last week we talked about how an error in Adam Smith’s thought seeped through economics, culture, and politics until it rendered our world unintelligible. Today we’ll tell the story of how another breakthrough in economic theory offered a clearer understanding of what wealth really is —and how to acquire it.
Although each episode, including this one, should be enjoyable on its own, you can always start at the beginning by following these links:
On Productivity and Desire
The Undesirables
What is Wealth?
Intuitions for a Knowledge Theory of Value
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:: Hijos del optimismo ::
Here’s to the crazy ones, the misfits, the rebels, the troublemakers, the round pegs in the square holes, the ones who see things differently. They’re not fond of rules. You can quote them, disagree with them, glorify or vilify them, but the only thing you can’t do is ignore them because they change things; they push the human race forward, and while some may see them as the crazy ones, we see genius, because the ones who are crazy enough to think that they can change the world, are the ones who do.”
—’Think different’, the ad with which Steve Jobs relaunched Apple in 1997, when the company was ninety days away from bankruptcy.
What exactly is wealth?
It surely is a crucial kind of matter. It was the ambition that carried Pizarro into Peru to conquer the Inca empire; the motive behind the murder of Fyodor Karamazov. It was the reason King Lear’s daughters betrayed him and the rift that split the founders of Facebook. After the crash of 1929, losing it pushed so many men into committing suicide that people said it "rained bankers" on Wall Street. And through history, it has sent countless regimes against one another. In its pursuit, millions of men, perhaps hundreds of millions, have died. Wealth is at the core of so many human struggles and yet it isn’t entirely clear what exactly it is, or what it is made of.
250 years ago, Adam Smith claimed that wealth was a nation’s productive power. Countries became successful when they managed to organize their populations as if they were in an immense factory, an all-around industrial system capable of manufacturing stuff. And that model of society proved so successful that over the next two centuries, ten generations of Westerners built a civilization around it.
Still today, we conduct ourselves in accordance with that same principle: the more productive you are, the wealthier you will become. Everyone, from the humblest of plumbers to the most influential world leaders repeat the same mantra to their children: work hard; keep your head down; do more; exert yourself; “get stuff done”. Someone will notice and reward you for it.
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But as anyone alive and in the current market can tell you, that piece of advice keeps failing miserably just as often as it is voiced. As George Monbiot wisely put it, “If wealth was the inevitable result of hard work and enterprise, every woman in Africa would be a millionaire.”
So why do we still believe that hard work is the path to success?
Simply put: because we don’t understand what wealth really is. Or maybe because we don’t want to understand it.
We have been told that Adam Smith was only one half of the story: the capitalist version. On the other side, the left had other ideas. But the truth is that dispute was only about the profits of the system; about who ought to get which share of the earnings. Underneath that disagreement, Smith's model of society as a factory was and still is ubiquitous; universal, undisputed across the political spectrum. In the hundred years or so that followed it was adopted by virtually every economist and politician —including left-wingers like David Ricardo, John Stuart Mill, and Karl Marx himself.
Under their aparent disagreement, the right and the left believed that wealth stemed from production. And if labour was the input of production, then value must have come from labour —or, at least, from the cost of production. From this it followed that the amount of labour needed to make something determined what someone else would pay for it because that was precisely the labour the buyer was spared. This idea came to be known as the “labour theory of value” and for a hundred years it was considered state-of-the-art economic science. As true as any natural law.
But reality refused to abide by that. Things that required large amounts of labour, such as bread or water, were often very cheap; while others that involved very little could be expensive, like old wine or pearls. In 1870, three different researchers, working independently, reached a different conclusion.
Value was not a constant, and it was not determined by production: it was subjective. Each person assigns a given value to products according to the utility those things have to them. Moreover, the utility of an item decreases with each available unit, and so value can be measured as the utility of the last unit consumed: by its marginal utility.
Let's consider, in this light, what the value of water is. If there were only one gallon of water in a city, that single jug would have the highest utility —it would save someone’s life— and therefore it would be worth a fortune. But what if there was a water company selling thousands of bottles of water in stalls all accross the city? Each bottle would still be worth something, but not as much as the single gallon of our first example. And what if there were a river crossing that city, transporting trillions of gallons every day? In that case, there would be so much liquid that the last available unit of water would be worthless: nobody would pay anything for it. From here comes that the more abundant something is, the less economic value it has. And if something is so abundant that nobody can keep another person from accessing it, like the water from a river, then that thing loses all economic value altogether, it cannot be exchanged.
Oh — but there are many forms of value, not just economic. Yes, absolutely. Something —and more often than not, someone— can be valuable to someone for many reasons. My children are worth my life. I value a sunny morning in rainy Scotland —like the one I’m enjoying right now— over every other summer pleasure. And yet I can’t trade any of those things with anyone else.
Of course everyone is entitled to our own scale of value. But the question we are trying to answer here is not a moral one. It's not about what should be valuable to each one of us, but about a social agreement on value. What is it that humans collectively desire, so intensely and so reliably, that we can trade it, accumulate it, and store it in something we call “wealth”? And how did we ever reach that agreement about what wealth is?
Value, then, doesn’t stem from production. It is not created in the factory and then revealed as an afterthought in the markets. Value can only occur in the markets, when everything people have to offer meets every desire people have. Economic value emerges when two people agree on what something is worth, in that exchange. Contrary to what Smith had proposed, markets were not really an exchange of valuable goods: they were the actual source of wealth.
If this idea of "utility" sounds kind of blurry, it is because it is. There are a bunch of concepts orbiting the idea of wealth — "value," "utility," "worth" — that mean next to nothing, so much so that venturing inside them feels a lot like walking on quicksand. But in layman's terms, what the marginalists wanted to say, even if they didn't dare say it out loud, was that labour was not the source of value: desire was. Disguised in the concept of "utility" hid a radical new vision of social value. We see value in what we want, what we long for, what we desire. Marginal utility is marginal desire. An item is worth as much as we want its last unit.
The marginal revolution holds that name for a reason. It meant for economics what relativity meant for physics: a complete paradigm shift that upended one hundred years of economic thought. It should have upended our society as a whole, too, because if labour is not the source of value, why are we all still expected to work? Why do we pay benefits to those who do productive labour? Why do we pour tax exemptions over those who invest to create jobs? Why do we continue to discuss productivity as if it was the source of all wealth? And why do we scold countries —and ourselves— about not being productive enough?
Had we internalized what the marginalists said, countries would have had to drop all their plans to become “productive” and instead focus on being “desirable” to other nations: Italian fashion designers and spanish chefs would have taken over the roles we give to chief operating officers everywhere, likeability would have replaced effort in the scale of virtues and we would be teaching our children how to make friends, not how to work hard. We would be running around looking like artists and bohemians, trying to attract people on every corner —and, yes, if you’re wondering, something like this is already happening.
Anyway. The thing is it never came to be. The subjective theory of value never seeped into culture. It remained hidden in the closets of economics, too timid to get out there and speak its truth. In all intents and purposes, society today is still living under the labour theory of value, the economic-equivalent of Newtonian physics.
Why? Well, there are a bunch of reasons.
To begin with, economists had no incentive to make the move. Back in the day, economics was trying to convince the world that it was not a form of philosophy, but a hard, evidence-based science, closer to mathematics or physics than to theology. Economists prided themselves on being nothing short of scientists. How do you measure desire? How does one, dressed in suits and ties, talk about how countries should become more desirable to others?
And so instead they dressed up this theory in many layers of pretended scientificness, such as talking about “utility” and “elasticity”. One of them, Edgeworth, went as far as to imagine a “hedonimeter,” an instrument to read pleasure off the human soul the way a thermometer reads heat.
Moreover, one of the great victories of the labour-value paradigm was that it created an illusion of equal contribution. Since the days are just as long for everyone, and we work a similar number of hours, if we measure people’s worth in labour, everyone can output more or less the same amount. But if we’re talking about creating desire, it would appear that not everyone has the same ability to seduce other people, doesn’t it?
It needn’t have to be like that. Our liberal democracias could have been built on top of a moral stance about universal human value, on the idea that everyone is worthy regardless of how much they contribute to the productive system. But the illusion that equality was rooted on equal labour was a pretty damn good shortcut. Too good to let it go amiss.
Under the marginalist paradigm, on the other hand, not everyone was created equal. People are worth what someone else wants to pay for them. That idea alone would have gone right through the heart of the egalitarian dream of our democracies. The marginal revolution posed an existential threat to liberal societies. And it still does.
But at the bottom of all of this there was a deeper reason. For all its brilliance, the subjective theory of value did not solve the question of wealth. Not really. Stating that value is subjective does not answer the question that we are asking here. It does not establish what value is. It just rebuttes the previous theory, but gives no alternative. What is it that people exchange and why? Just anything that’s scarce? That can’t be true.
Had the labour theory been abandoned completely, the world would have been left without a theory of value altogether. People wouldn’t know what to do anymore. Incentives and penalties would make no sense. What do you incentivize if value is subjective? How do you organize a society without a theory of what is socially valuable?
And this is how we became an orphaned society: one with no father figure left to tell us what to do and how to be good and worthy and virtuous. This is, I believe, the root of the malaise settling over the West today. We really don't know what wealth is. We don't have a working theory of value for our modern, hypercomplex world. For a while, we could afford not to have one. But now social strains have stretched so far that the question can no longer be dodged. That is the reason for this series. (And the reason it is so important that you forward this article to someone else!)
A civilization on a wire
To keep the vacuum away, a third theory emerged that gained ground at amazing speed. They called it “equilibrium”.
Imagine a baker. Every morning she bakes 100 loaves of bread. If they sell out by noon, she’s learned something: bake more. If half go stale on the shelf, she’s learned the opposite. If a product sells more than another, or for a larger margin, she can follow that indication to a better business. She doesn’t need a theory of value, all she needs to do is pay attention to the consumer decisions to get the information she requires to run her business. Now multiply that by every producer and buyer in the economy and you will see how prices and sales are constantly sending little messages (”more of this,” “less of that”), and everyone keeps adjusting to them.
The equilibrium theory states that all these small corrections push the system toward a balance point where what gets made matches what gets bought and the market “clears”. In that theory, even though nobody is in charge, nothing is missing and nothing is wasted. Production adapts to demand until they both reach a point of equilibrium.
Et voilà!
Two irreconcilable theories were suddenly living under the same roof, even when nobody had actually reconciled them — nobody had answered the question of what value is. With general equilibrium, economists could claim that production and consumption balance each other out and the question quietly faded away. Cost of production determines supply; subjective desire determines demand; somehow the forces align; the market clears, and everyone goes home happy —specially the economists and the politicians that don’t have to face a civilizatory clusterfuck.
Equilibrium theory is how we ended up holding two contradictory visions of society at once: one where value comes from the work of producing things, and one that denies exactly that. Instead of choosing between them, we swept them under the rug.
This cute little bit of schizophrenia has gone so far that that today we still believe GDP can be measured in (at least) two ways —through output (production) or through expenditure (consumption)— as if it were obvious that both must add up to the same figure. The notion that the economy is a closed system where a force in one direction produces an equivalent opposing reaction is universal. It underpins the models central banks use to set interest rates, the forecasts governments use to write budgets and the charts in every first-year textbook where two curves cross at a tidy little point.
And yet equilibrium has never been observed. Not once. In a century and a half, nobody has found an economy at rest, or even one heading toward rest. What we find instead are bubbles, crashes, gluts, shortages, and long stretches of turbulence that the models file under “external shocks”, as if reality was the anomaly. No matter. Stubbornly, the idea survives every refutation because it isn’t really a scientific hypothesis: it’s a protective mechanism. The equilibrium theory is a sturdy wire suspended hundreds of meters above the ground of reality and we, the citizens of the rich countries of the 21st century, are the funambulists balancing on top of it. The notion of the economy as a stable, self-regulating mechanical device that always returns to balance is what separates us from falling down, crashing against reality and being forced to acknowledge that we don’t know what wealth is, or how to acquire it. So much that entire faculties are devoted to reproducing this mantra with the same conviction — and the same solid ground — as Thomas Aquinas discussing the sex of angels.
Lessons from the marginalist revolution
In all its ambiguity, there is a fundamental truth that we can extract from the marginalists if we want to have any degree of success in the current world: Wealth is not a form of matter; it is not one kind of asset, nor a type of good: Wealth is a stock of human desire.
And what is it that humans desire? Well, it is a little bit early in this series for that. But even before we get to that point, there are a few very useful things that we can learn to make better decisions; understand our motivations and the actions of others. And to give our children the best chances in life.
Value is not intrinsic; it does not come from ourselves. Value —again, social value— is what other people see in us. Wealth is what other people want from us. People are wealthy when they have a lot of things other people want.
I know this might sound terrifying to some, even disgusting. Because many of us have been raised to believe that teasing, reclaiming attention, seducing, attracting desire is an inmoral thing to do. But it is nothing out of the ordinary. I imagine in any preindustrial town every single person was raised with the responsibility of being of service. Everyone must have had a role. Of course medieval peasants didn’t need to run a huge marketing operation because everyone knew everybody in town, but still people must have had a distinct identity that incorporated their trade or social utility whether it was material —like tools or fabrics— or inmaterial —like songs or stories.
Back in the day, you would have been the town’s butcher, or the blacksmith. Everyone had something they could do for everybody else. And people were known, literally named, for it. Our surnames still carry the fossil record: Smith, Baker, Miller, Taylor. On top of that, people cultivated personal traits and made them very much part of their identity. This is why the other half of the surname record is pure reputation: Armstrong, Swift, Hardy, Sharp, Trueman, Merryweather. Medieval people couldn’t live without a personal brand.
If aiming for desirability makes you uncomfortable, think of it as “being of service” instead. We want to be known to others and we want to be useful to others — so useful that they come to desire whatever it is we bring to the table.
We have been told, many times, that the giants of the industrial era were the great manufacturers. Following the labour theory of value, we believe that manufacturing made people successful. But the Soviets made cars just like the americans. And no one forced us to buy dishwashers and toasters. Value, in the industrial time as well as in any other, came from creating desire for certain products. The European liberal dream, first, the technoutopian vision of the first half of the 20th century, and the American Way of Life, later, three ideals of what life could be were the actual exports of an entire civilization.
The big companies of the industrial era were desire manufacturers. Ford didn’t sell cars; it sold an entire way of living, one so seductive that we redesigned our cities around it. Coca-Cola became one of the most valuable companies on Earth selling sugared water because the water was never the product; the product was the whole idea of America, bottled. If anyone has a product that’s indistinguible from everyone else’s that’s the bankers on Wall Street. The one thing financiers in New York can offer that Spanish bankers cannot is that they’re american.
The pinnacle of capitalism is not some steel mill in Illinois. It is Apple. By almost any standard, Apple is the most successful company in history. And yet the technology it sells is ubiquitous. From a technical standpoint, there is not much difference between an iPhone and any of the Chinese phones sold for a fraction of the price. The difference is that Apple charges roughly three times what the components cost for essentially the same object. That margin — every point of it — is pure desire.
What does Apple have that the chinese low-cost manufacturers can’t replicate? It has a unique voice, a unique brand, a connection with a part of the audience, a portion of their mental real estate.
So how do we become wealthier in this current, crazy world? By understanding what other people want and fulfiling that desire or, if we have the skill for it, make them desire what we have.
On how —and why— to build a personal brand
I believe there are two elements of that pursuit that are deeply buried under our industrial, smithesque mental model of society.
The first is identity. For industrialism to work — both to power the assembly line and to open markets for mass consumption — people had to be the same. The factory needed interchangeable workers the way it needed interchangeable parts, and mass production needed mass taste: millions of people wanting the same car, the same house and the same life. So the social rules of the twentieth century rewarded regularity, homogeneity, punctuality and conformity: the ability to fit a mold and stay in it.
Being a misfit, by contrast — being queer in any sense of the word, standing out, wanting the wrong things — was heavily penalized, and often meant expulsion from the group. Think of the kids at school who stood out, and what was done to them. Having passions that didn’t match your assigned social character was punished too, especially among men: painting, dancing, reading poetry, or even loving too much were not part of the functions expected from men.
What people were doing, essentially, was outsurcing the natural human need for identity to the companies they worked for, or the countries they lived in. It was enough for someone to be exactly like everyone else if the company they worked for manufactured enough desire that they could live and be rewarded placidly off it.
But those times are most evidently over. And we need to go back to building personal brands. Not in the henious way you might have in mind if you think about the fake-influencer-personas we come across sometimes in social media; in the way medieval peasants did. Everyone, in the 21st century, should be able to tell their own story unique, individual story.
And this is a lot harder than it sounds. Because we have spent so much time and effort trying to fit in that we do not know how to stand out anymore. The gears have shifted and now the misfits, the queers, the ones that had it hard to fit, are the ones who are best positioned to reclaim their place in the world.
What does this mean for people like me and you? Well, I believe we should change our focus from being more productive to being more intentional with what we do. Very, very (very!) often we are producing the wrong thing, something that doesn’t really matter for us or anyone else.
Next month I’ll write a post about the extracurricular activities I signed my kids up for, and how I am trying to teach them about building a personal identity that travels with them through life (subscribe to get it in your inbox!)
Instead, we should focus on answering two questions.
The first is about who we are. What do we like, what drives us, why would our trajectory matter to anyone else? This exercise is not about standing out from the masses — like the medieval peasants and their bynames, we’re not aiming for fame — it’s about aligning the self we show with the self we carry. What matters to us, and how do we make it part of the story we tell about ourselves?
None of this needs to be definitive. People change. Who you are is not a photograph; it’s a story and it evolves over time. Also, identities have a surprising capacity for contradiction — even a taste for it. And your story not only can be imperfect: it should be. We are drawn to tales of struggle and redemption. Perfection can’t be true.
The second question is about how we can be of use to everyone else — how we can be valuable. What do we enjoy that other people find desirable? Where is that equilibrium point that proved so elusive to economists? Again, this doesn’t have to mean your job. You can be useful, and desired, for many reasons, even if you’re retired, if you haven’t started working yet. Some of the most useful people in society don’t work at all.
Answer those two questions and you’ll have found your own source of wealth.
Next week: those who were left without one.
See you next tuesday!
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Photo by Art Institute of Chicago on Unsplash
La teoría principal de John Stuart Mill sostiene que una acción es moralmente correcta si promueve la mayor felicidad para el mayor número de personas. A diferencia de otros pensadores, Mill introdujo "los placeres" en la fabricación de productos, utilitarismo lo llamaba , afirmando que los intelectuales y morales son superiores a los físicos. Pensadores que recibieron el aliento liberal del SXIX o del temprano SXX ( Berlin) no sé si tenían la idea del consumo de Cocacola en la cabeza. Y como, esa marca generaba felicidad sumiendo en una infinita infelicidad a las mujeres recolectoras de azucar en Maharashtra. La necesidad imperiosa de la alienación dentro de esta organización social.
El deseo, esa fuerza irracional, que parece que no existe porque no se puede medir. Como el frío, que tampoco existe porque no se puede medir. Y sin embargo fue la fuerza del deseo de pimienta, nuez noscada, te, azúcar, cacao y otras drogas espirituosas las que impulsaron la primera globalización y el despegue y entronización del capitalismo.