"WHAT SHOULD WE SPEND IT ON?"
OR
"A NEW ECONOMIC INDEX."

By Patrick Shaw Stewart, July and August 1989

"Wealth" is a concept which economists do not seem to be able to agree on. A book on the work of Lord Keynes recently defined it as "the discounted value of an income stream receivable in the future." A dictionary of economics says that wealth is "Goods and other assets in existence at any time which command a market value (i.e. price) if offered for sale." But which goods and which other assets? As The New Palgrave Dictionary of Economics notes, "conceptions of wealth have clashed profoundly and even irreconcilably."

Why should wealth, which has such concrete and powerful effects, be difficult to define? Perhaps there is a common-sense answer to this problem, which the experts are too closely involved to see.

Writing in the 1930s, Bertrand Russell declared that it was better for a rich man to spend his money on champagne and high living than to keep it in a bank, because at least he would provide employment by spending his money.

Modern theorists apparently agree that it doesn't matter, as far as the wealth of the nation is concerned, whether you spend your money on "luxuries" or on "necessities." What matters is that people "consume" the right amount. All consumption is regarded as equivalent. My common sense finds this hard to accept: surely it is better, for the economy as well as for the individual, to repair the roof of a house than to buy an extra video recorder (note, though, that a video is also a "durable" in that it lasts for several years)?

I have devised what I feel may be a new way of looking at these problems. I divide the objects in the world into two simple categories: "things that you want", and, "things that you need". I am using the words "need" and "want" in my own special way. I define things that you need as (1) food, shelter and clothing, and (2) things that save time. "Things that you want" are everything else that can be exchanged. Bicycles, water supplies, computers and hammers are examples of things that you need. Sailing boats, music, cosmetics, fictional books, and tennis rackets are things that you want. (Of course, sometimes you can't get the "things that you need".)

Many things contain elements of both. For example, a second-hand mini is probably 90% a need, while a Rolls-Royce is about 90% a want.

Some articles which are usually regarded as luxuries would be placed firmly in the "things you need" category. The main purpose of washing machines, kitchen blenders or radio-operated garage doors is to save time. They may not be of much value (I wouldn't spend my money on a time-saving sports car, either) but in my rather technical definition they come at least partly under "needs" because they save time.

Sometimes we invest in things we need without knowing exactly how they will save time. We might buy a set of nails and screws, or a screwdriver without knowing exactly what one is going to use them for. Things can also change categories for cultural reasons. Knives and forks save us time, but if they were shipped to China, they might well be prized as ornaments, though they might not be used. In fact there is no intrinsic property of an object which makes it a "need". A cog from a photocopier is of no use in isolation, but it becomes a great time-saver when it is used to replace a worn-out part in a broken-down photocopier.

Where does all this get us? Well, my first observation is that things that you need have an extra value, for one simple reason: they allow us to make more of themselves. They provide the gift of extra time. Let me give an example: imagine an under-developed rural community in Africa, where the sole form of transport is by foot. Suppose that a rich entrepreneur returns to this village, where he was born, and builds a bicycle factory. He recruits workers from many miles around, and they all leave home at dawn, and return by dusk. At first they spend hours each day walking to work, but after a few months they save enough money to buy their own bicycles, and get to work in a third of the time. Now the factory can stay open for longer, and make even more bicycles. The point is that they are making a things that they need, and by using them they are able to spend more time making them. This would not be true, for example, if they were making beer.

We can use the extra time we gain to construct more useful needs, or we can choose to spend it in writing poetry, listening to music, or inviting our friends round for supper. So if we invest in things we need we will have more choice in the future.





Another feature of things that you need is that they are far less prone to fluctuations of demand. It is quite possible for people to lose interest dramatically in a style of music, or a sport.  But it is more difficult to do without your car or washing machine when you have come to rely on them.

You should not conclude that things we need are in some way "better" than the things we want. On the contrary, I suspect that the main purpose of things we need is to allow us to enjoy the things we want (and other wonderful experiences such as the natural world, our own thoughts, and each other's company). I am told that economists deal with these issues in a troublesome discipline called "welfare economics".

I hope that this division into needs and wants can help to answer some important questions in business and economics, such as the ones I started the article with - the definition of wealth, and whether some forms of expenditure are more beneficial than others.

Consider a common-sense definition of "wealth". You might say that it is the "sum of the things of value that a country (or individual) possesses." We can see that this can increase due to outside factors. For example, if rich westerners suddenly developed a passion (for example after a successful exhibition) for collecting ancient Colombian carvings, the wealth of that country would rapidly increase, even before any objects had been bought. (Colombian carvings are things we want - you can't eat them and they don't save time).

This may not seem right. Intuitively you may feel that the wealth of the world at any given moment is limited. If the wealth of Colombia increases dramatically, surely this must be balanced by a relative decline in other parts of the world. Is it possible to imagine all the countries of the world simultaneously becoming richer in this way (that is, without hard work)? I feel not. To take another example, if the stock market index quadrupled in a short period, would we really be four times richer?

Using my needs/wants categorisation, it can be argued that real wealth is limited, and that the ultimate currency of wealth is the set of "things you need." Other things, including money, can be exchanged for them, but these "needs" form the fixed (world) cake which is divided between us.

The "needs-wealth" (the set of things that you need) of a country could perhaps be calculated by some procedure such as identifying all the objects in the country which are things that you need, and working out how long it would take to replace them using a defined level of technology. Or perhaps we could measure the total amount of time which they individually save in normal use. Probably nothing would be gained from such a procedure, but the point is that needs-wealth could theoretically be measured.

Obviously, mankind's lot would be vastly inferior if we were denied access to the natural world. Again, our lives are also enriched when we can appreciate the heritage of art-works and buildings which our ancestors have left to us. Such things are indeed a form of wealth. We could call this second type of wealth, which is probably unquantifiable, "wants-wealth". In practice it is impossible to place a value with any degree of certainty on such things as Norman churches and paintings by Titian. For one thing, the value that could be obtained for one Titian would be quite different to that obtained if all of them were to be sold at once. The market would be flooded. The nearest we can get to working out the magnitude of our wants-wealth is probably by observing how much of our needs-wealth we are prepared to exchange for it.

Note that although it would be possible to live in physical (but not mental) comfort without the world's wants-wealth, survival would be very doubtful if its needs-wealth was destroyed.

I now come to a practical use of my system: analysing the health of an economy. I am suggesting that a community has the greatest probability of accumulating the maximum of both types of wealth if its members concentrate on buying things that they need in the short run (while preserving its irreplaceable wants, such as its heritage.) At least it is essential that a community does not increase its supply of wants at the expense of its needs. A balance needs to be struck, and if that balance lies too far on the side of needs, the economy will decline. The needs allow people to construct extra needs, which can later be exchanged for, or converted into, wants. Needs can be thought of as "feeding back" into the economy, increasing future production.

I suggest that economists should devise standard measures which approximate to "needs" and "wants", and see if "needs" expenditure is correlated with the economic performance of a community. These measures could be used to provide rough "pointers" to the type of expenditure that is occurring. We could monitor the sales of goods ranging from paint to paintings, to construct a sort of needs-wants index, rather like the Retail Price Index, with goods allocated different weightings. This index would be highly subjective, just as the RPI is, but few could deny that index's usefulness. As long as these indexes are calculated in a consistent way, they can provide comparative data from year to year or between different communities or countries.

The theory could be tested by looking at the economic records of different countries in the past. Perhaps we may find that countries undergoing economic "miracles" have a high needs consumption. We might look at Germany after World War II, or Japan or Korea more recently. Such an analysis might allow us to do useful things like predicting the future performance of a stock-market. Or we might look at the type of expenditure that was found in our own economy before periods of successful growth or decline.

You may feel that this theory overstresses materialistic values. In fact it doesn't give any simple answers to the moral and spiritual questions of politics and economic management. One reason is that the future is uncertain, and the further ahead that you look, the more uncertain it is. Natural disasters or human conflicts may destroy the needs-wealth of a country, so it would probably be a mistake to take a very serious-minded approach which concentrates only on building up needs-wealth at any cost. In fact the model probably tells us to behave roughly as we do at the moment, but perhaps it can allow us to understand our problems and choices better.