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Business 101: What is Wealth?

We often think of “wealth” in terms of big buildings and fancy houses. But in the world of economics wealth is something very different.

Economists believe that wealth has four major components: land, labor, capital, and entrepreneurial ability. One or more of these factors is behind every great fortune.

Land

Land we recognize in the form of houses, farms, condos, co-ops, industrial buildings, warehouses, retail structures and even raw land. We value land on the basis of its “highest and best” use which could be shelter, productivity or even personal preference. We can artificially increase – or lower – the value of land by making it “more scarce” through the use of zoning regulations and other legal devices.

Labor

Labor can be everything from working in the fields to churning out legal briefs from a downtown office tower. The value of labor is determined by its uniqueness and timing. A skill that can be learned in a month does not have much uniqueness and therefore cannot command a high level of payment. A skill that takes a long time to acquire and is in demand will generate substantial compensation – think of the doctor who fixes heart valves.

The value of labor is also impacted by other factors. For instance, plumbers are paid a high wage because they are routinely required in an emergency situation. In some areas unions make it possible for employees to get higher wages because individuals are linked together as a group with a common set of goals.


Capital

Capital is the money we have after expenses that we can now use for investment. It can come from such sources as savings, the grouping of money with others and from inheritances. Capital can be found in something as simple as a savings account, stocks, bonds or in the investment in a new business.

In the United States capital benefits from highly-advantageous tax regulations which mean a dollar earned from investment is often taxed at a lower rate than a dollar earned by labor.

Entrepreneurial Ability

Lastly we come to entrepreneurial ability. This is simply the recognition that all people are different and that the person with drive, ability, and often times luck is likely to be more productive than a person with equal skill but less drive. In economics we really do recognize go-getters – they are often the people with the biggest bank accounts.

There are, of course, other measures of wealth outside economics such as health and happiness, two types of wealth which make everything else worthwhile.

 

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