Baby, You’re A Rich Man

On this post at Cafe Hayek, commentator Thomas Hutcheson had this comment in response to the post on the myth of middle-class stagnation:

Thanks, but I’d reather [sic] see [middle-class stagnation] debunked with data showing higher real wages.

Mr. Hutcheson’s comment is typical of an oft-made mistake: monetary income is the same as wealth (riches).  However, it is by consumption, not money, that we become richer.  Let’s look at this in two ways, first with a simple mathematical example, and second with a thought experiment.

Imagine that to live decently (a home, a car, full belly every day, clothing, utilities) costs $1,000 a month.  Your salary (income) is $1,000 a month.  You break even.  Now, let’s say that, though the magic of the market process, the prices of your food, clothing, and utilities falls.  It now costs just $800 to maintain the same standard of living.  You spend that extra $200 on something nice you couldn’t have before (let’s say a pet).  Your wealth has increased by $200 even though your income has stayed the same!

Now, to think about this is a different manner, let’s have a simple thought experiment:

Suppose you see two people.  The first man has a home, car, fully belly, etc.  The second man is homeless, starving, dressed in tatters, etc.  Which of these men would you say is wealthier?  You’d probably say the first man.  Notice no monetary income was given, but you were able to make a judgement.

None of this is to say that there isn’t a correlation between monetary income and wealth; the absolutely is.  But to measure wealth solely upon income is to confuse the issue.