Whenever anyone talks about wealth inequality, the definition of ‘wealth’ is taken for granted. We do not think of it as a concept or a measurement – instead, people seem to see it as something tangible, that can be split and reworked. Perhaps we imagine it to be Scrooge McDuck’s fortune: gold coins and jewels in a silo, with a diving board and a massive dollar sign atop it.

But it is mostly not that. I re-refer you to this (from yesterday’s post):

 

“Wealth” is almost entirely intangible. Most of it is a collection of hypothetical, derived values.

For example, the billionaire numbers that Oxfam uses in its inequality updates are based on estimates from Forbes, the magazine. And basically, their methodology for that is back-of-the-matchbox valuation calculations, based on interviews, self-assessments, and a selection of public filings.

The point is: wealth is not just cash, or gold, or land (even though a small proportion of it is). As that chart above (approximately) illustrates, it is mainly business interests. Those are ‘valued’ numbers. And we talk about business values as “what other people would be willing to pay for this business” – even though there is not actually enough money in the world to pay for all those business interests when valued at the same time.

Money v Wealth

If you look at money in cash and bank accounts, there is about $90 trillion in the world.

Here are asset classes:

• Listed stocks: about $70 trillion
• Real Estate: about $217 trillion
• Unlisted “business interests”? Who knows. But given that most businesses are held privately, some multiple of those two numbers.
• But even without that valuation, “$281 trillion” is way more than there is actual money to pay for the readily-measurable asset classes.

Why am I emphasising that?

Because that’s how taxes are paid – in cash or bank transfer. Those assets need to be liquidated before you can redistribute them.

Is wealth ‘redistributable’?

The short answer is: mostly not.

You can redistribute the income earned from that wealth, and you can perhaps redistribute a small proportion of it through estate duties and capital gains taxes.

But for the rest, you can only really destroy it.

Here’s an example:

• A working farm will represent a significant proportion of a farmer’s wealth.
• But the whole of the farm is worth a lot more than the sum of its parts. Much of the farm’s value will come from the farmer’s ability to take the land, water, seed, climate, biomass and infrastructure, and use it to generate specific foods of a specific quality for sale into particular markets through buyers with whom the farmer has pre-existing relationships.
• A government can redistribute the land, the infrastructure and even the biomass of the farm.
• But it cannot redistribute the working farm. Because that business is dependent on the farmer.
• At best, it can redistribute the potential of a working farm – and allow the new recipients to build that business over time.
• But in the process, much of the original wealth has been destroyed – not redistributed.

The nutshell: a lot of wealth is valuable but not transferable.

It’s just something to think about.

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.