Wealth

There was an article in the NY Times on Friday that discussed the concept of wealth, something I have talked about in few of these blogs. In it a definition of wealth by Michael Reiter is quoted as follows:
"Wealth" is the present value of the expected stream of future utility [human happiness] that an "infinitely lived individual or a dynasty" [or a nation] could hope to extract from the real resources available now and in the indefinite future, assuming these real resources are allocated and managed now, and over time, so as to maximize that present value of future utils (at the "proper" discount rate).
Now, what is pointed out in the article and what is definitely valid is that the computation of “present value” can be a tricky thing. It requires some agreement on how to discount future value. Now, in reality, while computing present value and the discount factor has challenged many students over the years, most of us simply know what the market value of our assets are.
If one year I own a house that I could sell for $400,000 and a year later the same house can only sell for $300,000, I have lost $100,000 of wealth. The reasons for this drop in value may have something to do with future utility, but if I want to sell it, I will have to accept the Market Value. In fact, if I don’t intend to sell I may still be impacted since the equity is down that amount and borrowing against the house will be impacted.
Economists like to find underlying explanations for the way the economy behaves, and in many ways the models they come up with are reasonable in talking about the past. However, it is also true that economists are not particularly good as a group in predicting the future (at least the fairly immediate future) and this is pretty much borne out by the fact that most of them do no better with investments than the rest of us.
The unpredictability of the market is partly due to the fact that in addition to all the formulas and numbers, the human condition must be added. People, for the most part do not act rationally. If real estate has gone up more than other assets, most people believe it will just keep going up. In fact, economists (at least the majority) find explanations for this behavior and extract into the future based on these trends. When it starts going down, we see the opposite.
I think the poem “If” by Kipling explains this better than most economists ever will.