# The science of finance/What is wealth?

Economic science often invites us to wish for growth, in order to fight against unemployment, because it is good for public finances and because it is supposed to improve the quality of our lives. Pollution, the depletion or destruction of natural resources, the psychological distress that often accompanies a consumerist lifestyle, the wasting of wealth to satisfy vanity, and many other effects, are enough to show that there is something insane about the idolatry of growth. But on the other hand, the defense of degrowth does not seem very sensible either, because we must produce wealth to live and live well. Choosing between growth and degrowth is foolish. We want both because we want the growth of the good and the degrowth of the bad, quite simply. But what is good? And what is bad? What is really wealth?

## Goods and services

Work has value as soon as it bears fruit. But what is real fruit?
To be in good health, to perceive well, to be moved well, to imagine well, to think well, to want well, to act well, and all that constitutes a good life of a mind, are all fundamental goods for all minds. Similarly, to be in bad health, to perceive badly, to be moved badly, to imagine badly, to think badly, to want badly, to act badly, and all that constitutes a bad life of a mind, are all fundamental evils for all minds.
Derivative goods are means to achieve fundamental goods. Derivative evils are causes of fundamental evils. Fundamental goods and evils are mutually exclusive but derivative goods and evils are not, because a means to achieve a fundamental good can at the same time be a cause of a fundamental evil.
Goods may be essential or only desirable. Essential goods can be more or less essential, the same goes for desirable goods. Evils can be intolerable or bearable. Intolerable evils can be more or less intolerable, the same goes for bearable evils.
Preventing intolerable evil is an essential good. Being deprived of an essential good is an intolerable evil. Preventing a bearable evil is generally a desirable good. Being deprived of a desirable good is generally not an evil, because desirable goods are far too numerous for one to be able to have them all.
We sometimes distinguish between goods and services. But services are also goods, and even more fundamental goods than others, because a good which is not a service is a good because it provides a service. For example, food is a good because it provides the service of nourishing. Some products are not goods because they provide no service. They generally have a negative value, because getting rid of them has a cost.
Services are consumed at the time they are produced. Goods that are not services are consumed after a certain period of time, short (fresh products) or more or less long (durable goods, including stocks of non-perishable foods). Some durable goods are almost eternal (quality housing, jewelry, works of art, etc.). Others are consumed by use over their lifespan. Even near-eternal goods generally require work to maintain.
A durable good is like a service put in a bottle, can or container. Those who produce the durable good provide the service. Those who use and consume the durable good receive the service. A good is a good only if it provides a service. Good is always to be of service. The economy as a whole is a system of exchange or gift of services.
Workers are sometimes competed with and replaced by durable goods, because these are also service providers.
The wealth accumulated and retained is not only the sum of all the tangible and durable goods that we keep for the services they will render to us, because projects in progress and companies are also durable goods. As with all durable goods they are expected to provide services. A project or company is profitable if the value of the goods and services provided, the revenue, is greater than the value of the costs, the goods and services consumed.
Wealth is always a service or a means of providing services. A service is wealth because it improves the quality of life, or because it is a means of producing other wealth. Workers, tangible and durable goods, projects and companies are wealth because they provide services.
Final consumption is the consumption of goods and services which directly improve the quality of life (in principle, because they can also deteriorate it): food, clothing, housing, health, education, transport, sport and entertainment, communication to long distance... Intermediate consumption is the consumption of goods and services which are used in the production chain of final goods and services. Certain goods, such as means of transport, computers and smartphones, can serve as both intermediate goods and final goods. The line between intermediate goods and final goods is often blurred, because final goods are also generally intermediate goods which are used to produce new goods.
The quality of life does not depend only on final consumption: having a good job and benefiting from good working conditions, feeling secure in the present, for one's future, that of one's children, one's country and all of humanity, respect and be respected, love and be loved, know how to meditate and relax, be at peace with oneself and with others, not despair, breathe good air, benefit from a good climate and a welcoming nature...
The fruits of the Earth are all the riches given to us by Nature, plus all those that we can produce. We too are fruits of the Earth.

## How is wealth created?

Nature constantly creates wealth. Sunlight, rain and wind, Earth, seas and rivers, fauna and flora are perpetually renewed riches.
Workers and durable goods create wealth by providing services.
It is generally necessary to consume wealth to produce new wealth. Supplies must be consumed. Workers must consume wealth to reproduce their labor power. Production goods are consumed by their use, unless they are quasi-eternal.
Wealth combined can produce more wealth than wealth separated. A team of workers can do what separate workers cannot do. Well-equipped workers can produce wealth that cannot be produced without such equipment. They also need supplies. Production goods generally require workers to be used. Projects and companies create wealth with workers, supplies, and productive goods, which could not produce such wealth if they were not thus brought together. Projects joined together can produce more wealth than separate projects, because the completion of one project can increase the value of another project, when there are synergies. The art of producing wealth is always an art of composing wealth already present, just as a symphony is a composition of all the talents of the musicians of an orchestra. Bringing together wealth and carrying out several projects at the same time to find synergies is like finding harmony between several voices. Finding the right progression and rhythm for the projects put together is like finding a beautiful melody and its rhythm. To be good producers of wealth we have to be like Mozart.

## Real wealth and market wealth

Real wealth (capital) at a given time is the set of all durable goods that exist at that time.
Real wealth must include the intelligence, skills and health of human beings (human capital) and natural resources (seas, oceans, rivers and lakes, landscapes, wildlife and natural flora...). Market wealth is the market value of real wealth. It is evaluated based on market prices. When goods are not sold, their market value is assessed based on the market prices of equivalent goods. As human beings are not sold as slaves, their market value cannot be assessed, except by indirect means (discounted lifetime income or price of risk) which are highly questionable. The valuation of natural resources poses similar problems.
Market wealth depends on long-term expectations. Durable goods have a market value because it is anticipated that they will be used, and that they can be sold. Companies have a market value because we anticipate that they will make profits. But lifestyles, and anticipations of future lifestyles, can vary. Such variations are difficult to predict. If, for example, humans give up on air tourism, all the infrastructure and equipment intended to produce and consume airplanes, including the airplanes themselves, automatically lose their value. If fiancés lose the habit of offering diamonds, the market value of diamond stocks will be greatly diminished. Expectations are very fluctuating. They vary with the occurrence of unforeseen events (disasters...) and are often irrational (animal spirits) because no one can predict with certainty what the future holds. This is why the market value of shares can vary suddenly. Billions of dollars can disappear in a day without a note having been burned, simply because human beings have changed their minds.

## The ubiquity of options

The freedom to choose is the most fundamental good. If we remove freedom, we remove most fundamental goods. If everything is prescribed in advance, minds are nothing more than servants or slaves. And the freedom to choose is also generally a condition of efficiency and intelligence. A program that wants to prescribe everything in advance is most often too rigid, prevents us from adapting to novelty and condemns us to failure.
Having the freedom to choose means having options. We have an option when we have the possibility or the right to do something but not the obligation. For example, a lottery ticket is an option on its eventual gain. We have the right but not the obligation to collect the gain if there is one.
When exercising an option is simply to cash in an immediate gain, the agent's freedom to exercise the option is more or less fictitious. In general, agents do not refuse to cash in their gains. But the same is not true if the exercise of an option exposes to the risk of loss.
Usually we reason about options that offer only two possible choices: either we exercise the option, or we don't. But we can also reason about options that have many possible choices. To exercise the option is then to choose one possibility among the many offered. For example, if A and B are two two-choice options, to be exercised on the same date, the two together can be considered a single four-choice option: exercise A and B, exercise A without B, exercise B without A, exercise neither A nor B.
Not to exercise an option is to exercise the option not to exercise it. When we have a two-choice option, we always have at the same time the opposite option of not exercising it. We exercise one when we do not exercise the other.
An option is European style (more commonly we say European) when the date of its exercise is fixed in advance. It is American style when the date of the exercise can be chosen. A durable and consumable good is an option on its consumption. One acquires the option by acquiring the good, one exercises the option when one consumes it. It is an American option whose maturity is the consumption limit date.
A capital good is an option on its use. If not worn out by use, there is an unlimited succession of European options, one option for each day, or period, of use. But if worn by use, it is similar to a batch of American options. Each time we use it, we consume part of its potential use, which amounts to exercising an American option.
A natural wealth is an option on its use. If it is renewable, like land that is not degraded by its use, it is an unlimited succession of European options, one for each day, or each period, of use. If consumed by its use, such as a natural reserve of oil, it is similar to a batch of American options.
A skill is an option on its exercise. It is a succession of European options for every day, or all periods, of work.
Designing a project means acquiring the option to carry it out. If the project is dated, it is a European option. If the project is not dated, if we can choose the moment of its realization, it is an American option.
A buy or sell decision is usually the exercise of an option and the acquisition of a new option at the same time.
When we have 1000 dollars, we acquired the option to spend them, to buy everything that is sold within the limit of 1000 dollars. The option is exercised by spending the 1000 dollars. It is an American option with perpetual duration.
As soon as there is uncertainty about the value of the expected services, a purchase is similar to the purchase of an option. It's like buying a lottery ticket. As soon as one is free to choose the dates of the expected services, a purchase is similar to the purchase of an American option. The only purchasing decisions that do not look like option purchases are those for which there is no uncertainty either about the dates or about the value of the services expected.
When we acquire a durable good, we acquire the option of reselling it. It's an American option. The exercise of the option, the sale, is at the same time the acquisition of a new option, the sum of money transferred by the buyer.
A loan, if there is a risk of default, is like an option on its repayment. It is a European option, or a succession of European options, if the repayment dates are fixed in advance. To exercise the option is to be reimbursed, if possible. Ownership of a business is like an option on its profits. It is a succession of European options, for all the dates of payment of the dividends. To exercise the option is to receive the dividends, if any.
To hire an employee is to acquire an option on the services they can render.
To freely have the means to provide services is always to have a portfolio of options, because freely providing a service to others or to oneself is the exercise of an option. Wealth is always a wealth of options. The means to provide service and the freedom to make good use of them are the foundations of wealth.

## Savings and investment

Everything that is produced is consumed or saved. It is the law of the excluded middle: everything that is produced is consumed or is not consumed. To be saved is to be preserved, is not to be consumed. A stock of durable goods is a savings, like a squirrel's stock of nuts.
Accumulated wealth is the sum of all the durable goods we have preserved and all the projects in progress. A durable good can be considered as a project, the plan to use it. Conversely, a project can be considered a durable good. Its purchase price is the money that must be paid to realize it. Like all other durable goods, it is purchased to provide services. Its revenues are the services it produces.
When we advance the money to carry out a project, we create a durable asset, the project, and we buy it at the same time, we become the owner of the project. The project we created is a durable asset that we keep until it is finished. The money that we have advanced, that we have invested in a project, is therefore saved.
One way of investing is to buy production goods to carry out the project of using them, but we can also invest without purchasing any production goods, because we can carry out projects by renting all the goods which we need. What matters for there to be investment, and therefore savings, is not the purchase of production goods, but the money advanced to carry out projects that we hope will be profitable.
A company can be considered a project. To own shares is to be co-owner of a project. The money saved by the shareholder was invested in a project.
Increasing a stock of unsold goods is usually unwanted savings. It can also be counted as an unwanted investment, because we plan to sell unsold items. If we always count stocks of goods as investments, savings equals investment. This is an accounting equality. With the law of the excluded middle, we then obtain: everything that is produced is consumed or invested.
A company party can be counted as an investment, because it can increase the value of the company, by encouraging team spirit for example. All the money spent on the party is invested and therefore saved, since an investment is always a savings. By drinking bottles of Champagne, we save their value. The adage is therefore confirmed: a bottle drunk is a bottle won, not a bottle lost. Lost bottles are those that are never drunk.
Net investment equals net saving. It is the change in overall wealth over a given period. It is equal to the change in value of the sum of all durable goods that are preserved, if we count the projects in progress as durable goods retained, and to the change in value of all projects in progress, if counts all durable goods kept as projects in progress, plans to use them, or sell them.
The purchase of a durable good intended for consumption, a pair of shoes for example, is a saving as long as the good is not consumed, but it is generally counted as consumption, not as an investment, because we anticipate the consumption for which it is intended.
Buying a bond, or any other way of lending your money, is saving because the bond is kept. When we lend our money, the lender's savings are offset by the borrower's dissavings, and overall savings are zero, because we have not retained more wealth. No wealth has been created.
Keeping money in a bank account is a way of saving by lending money to the bank. As with bonds, overall savings are zero. No wealth is created. The customer's savings are offset by the bank's dissavings.
Buying a lottery ticket is a savings because it is kept until the day of the draw. Games of chance are generally zero-sum games. Whatever is gained by some is lost by others, and vice versa. The sale of lottery tickets is a savings for the buyers and a dissaving for the seller, who will have to pay the winnings. Overall savings are zero. As with bonds, no wealth is created from the sale of lottery tickets.
Financial products, except stocks and bonds, often resemble lottery tickets in zero-sum games. In such cases, the savings of the buyer of a financial product is offset by the dissavings of the seller, and the overall savings is zero. No wealth is created.
Acquiring an option is a savings, because the option is retained. It is consumed on the day of exercise. If the exercise of an option is the acquisition of a new option, it is a saving which replaces the previous one.
Cryptocurrencies are like lottery tickets. Buying them is therefore a savings, but it is not a good investment.
Even final consumption can be accompanied by a form of savings, because it can produce good memories that are kept. A good memory is wealth that has been saved.

## What is a liability?

An asset is a durable wealth, or a right to receive wealth. A liability is a debt, or a duty to return or provide wealth.
Both assets and liabilities can be risky. A lottery ticket is a risky asset for the buyer and a risky liability for the seller.
A liability is not necessarily the duty to pay money. It can be the duty to provide a good or service.
Short selling is the sale of an asset that has been borrowed. It must be returned when the loan is due and therefore repurchased that day, if it has not been repurchased before. When we have sold short, the asset that we must return is a liability. Short selling is the financial technique for playing on falling prices, because we make a profit if the price of the asset that we have sold short decreases.
If a project is risky, it happens that we do not know if it will bring in revenue or on the contrary cause a cost that we will have to pay. Such a project is neither an asset nor a liability, but a random asset-liability. This is what happens when a company has unlimited liability. Limited liability companies do not expose their owners to the risk of paying debts and are therefore always assets.
A wealth or a portfolio is composed of assets and liabilities, risky or not, and random asset-liabilities.

## What's the point of saving?

We can save to carry out projects and thus produce new wealth.
We can also save to preserve wealth. If these riches will be useful to us, this amounts to carrying out the project of using them and thus producing new wealth. But if these preserved riches remain useless, like gold buried in a garden, nothing is produced. Now wealth is given to us to produce wealth. This is why Jesus condemns hoarding as a crime: “throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.” (Matthew 25:30). Buying gold means locking it in a safe or a vault. It's like burying it in a garden.
Gold in a vault produces nothing, and its conservation consumes a little wealth: guarding costs. Cryptocurrencies produce nothing, and their conservation consumes a lot of wealth, particularly the electrical energy consumed. This is why cryptocurrencies are not a good investment, but only a money pit.