Mythical Wealth

Regarding the Brexit vote, Peter Goodman wrote:

As the referendum result reverberated on the morning of June 24, markets plunged from Tokyo to London to New York, erasing $2 trillion in global wealth.
- Peter Goodman, As Britain Confronts ‘Brexit,’ a Canadian Takes Center Stage: Mark Carney, NYT, Sept. 15, 2016

What does it mean to say $2 trillion in wealth was erased? What is wealth? On an apparently reasonable definition, it consists of valued physical possessions, such as cars and houses and loaves of bread. This basic understanding of wealth can be broadened to include things that are not valuable in themselves, but can be exchanged for valued items. Thus money might be counted as wealth, because it can be traded for things that are valuable in themselves. Still, the total wealth of all people might reasonably be taken to consist of the set of all valuable items owned.

It is natural to ask, then, what actually disappeared when markets plunged and $2 trillion in global wealth was said to be erased. No houses or cars or loaves of bread or jars of jam or shirts or shoes evaporated. The sum total of actual things owned by people remained unchanged.

Moreover, the number of shares of stock remained the same, and the companies the ownership of which those shares represented continued to exist. All that changed was how much people were willing to pay for the shares. If yesterday people were willing to pay $10 per share, but today they are willing to pay only $5, the owners of the shares consider themselves less wealthy today, even though they still own the same shares of the same company. It is true that when a share of the company is traded for money, less money is received. But on the other hand, that money is now worth more than it was before, because now it can purchase a full share of the company, whereas yesterday it could purchase only half a share. Thus when the amount of money that people are willing to exchange for any given thing changes, the real wealth of the world, the collection of real things with value, remains unchanged. Some people-the losers-become less rich, because what they own cannot be traded for as much of some other things as before; but at the same time, the owners of those other things can trade them for more of what the losers possess.

Since when the markets plunge the amount of real global wealth remains unchanged, the puzzle is why that should be problematic for the world as a whole. It may be problematic, of course, for the people whose property became less expensive; but that is balanced by the corresponding benefit to prospective purchasers who can acquire that property more cheaply. The real problem for the economy as a whole, then, is not that wealth has actually been reduced (so far as real things owned is concerned, there has been no change) but that the change in relative values destabilizes the system.

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