If you pick up an economics textbook today, you’ll probably encounter a narrative similar to the following: wealth is created when entrepreneurs combine the factors of production – land, labor and capital – to create something more valuable than the raw inputs. Some of this surplus may be saved, increasing the stock of wealth, while the rest is reinvested in the production process to create more wealth.
How the fruits of wealth creation should be divided between capital, land and labor has been subject of considerable debate throughout history. In 1817, the economist David Ricardo described this as “the principal problem in political economy.”
The measure of wealth used by the OECD is ‘mean net wealth per household’. This is the value of all of the assets in a country, minus all debts. Assets can be physical, such as buildings and machinery, financial, such as shares and bonds, or intangible, such as intellectual property rights.
But something can only become an asset once it has become property – something that can be alienated, priced, bought and sold.
The amount of wealth does not just depend on the number of assets that are accumulated – it also depends on the value of these assets. The value of assets can go up and down over time, otherwise known as capital gains and losses.
The price of an asset such as a share in a company or a physical property reflects the discounted value of the expected future returns. If the expected future return on an asset is high, then it will trade at a higher price today. If the expected future return on an asset falls for whatever reason, then its price will also fall. more>