Paper wealth
Encyclopedia
Paper wealth means wealth as measured by monetary value, as reflected in the price of asset
s – how much money
one's assets could be sold for. Paper wealth is contrasted with real wealth, which refers to one's actual physical assets.
For example, if one owns a house and its assessed value increases (relative to the general price level, i.e., assuming no inflation
) then one's paper wealth has increased – the asset has increased in value, meaning it could in principle be sold in exchange for a larger quantity of money, but one's real wealth is unchanged – the real asset is still the same house. It is said that one has "gotten richer on paper," meaning "as an accounting matter": numbers on a balance sheet
have changed, but the physical world has not.
The term "paper wealth" is frequently used in popular discussions of wealth, and in some critiques of capitalism
, finance
, and certain economic theories, but is little-used in mainstream economics
, which instead generally identifies wealth with paper wealth. The term "paper wealth" has some pejorative connotations, suggesting "only on paper (but not in reality)", but can also be used neutrally to mean "(simply) as an accounting matter". Related distinctions are sometimes drawn between real assets and financial asset
s, or between tangible assets and intangible asset
s, the latter particularly in accounting, as detailed below.
or deflation" (a change in the aggregate (nominal) level of prices without corresponding real change). Thus, paper wealth does not "come from" or "go to" anywhere – the prices just go up or down. "It's a common misunderstanding to ask, 'where did the money go'?" which is particularly asked in the case of a stock market crash
or in the bursting of a price bubble. This has more colorfully been described as "A lot of money goes to money-heaven."
is the accounting value of one's assets minus the accounting value of one's liabilities. There are various accounting methods for different assets and liabilities, and they yield different notions of net worth; some methods are more or less volatile than others. For example, one may value ("hold", "mark") assets at book value
, meaning the price for which they were purchased; in this case paper wealth does not change when the potential sale price of an asset changes, but does change if the asset is sold, as the asset is replaced by the sale proceeds. Conversely, one may mark assets at market value
(mark to market
accounting), in which case paper wealth changes as the market varies.
In some cases different measures may differ significantly – for example, one may purchase a stock for $1, and the market value may increase to $100, so the book value is $1 and the market value is $100. Conversely, one may purchase a house for $100,000, and then the housing market may fall, with the identical house next door selling for $80,000. In both these cases, book value and market value (to the extent that there is a market) differ, and which is more accurate may be debatable – one may argue that liquidation value (price obtained if sold immediately) would be a distressed sale and not reflect the potential value in a more orderly sale.
, the distinction between paper wealth and real wealth is part of a larger debate on different notions of value; paper wealth corresponds to exchange value
(value that can be realized in exchanging a good for something else) and real wealth corresponds to use value
(value that can be realized in using a good oneself). This is a traditional distinction, dating from Aristotle
in antiquity to David Ricardo
in the classical economics
of the 19th century, but the distinction is no longer drawn in mainstream economics, particularly neoclassical economics
, and the debate resolved in favor of exchange value – market price is seen as a sufficient notion of value; see Exchange value: Other theories of exchange value for discussion.
In economics, the notion of paper wealth is most associated with the heterodox
school of Marxian economics
, in the notion of fictitious capital
by Karl Marx
, in his critique of capitalism.
Paper wealth is also important in certain theories of economic crises, notably those that believe these to be caused by price bubbles, as described below.
: as people (households) increase in wealth, they are likely to spend more, while if their wealth decreases, they are likely to spend less. This is termed "the wealth effect" (compare income effect
), and is generally attributed to psychological feelings of confidence – one feels rich, so one spends. The significance of the wealth effect is debated; it is generally procyclical
, meaning that when the economy is doing well, asset prices increase, causing consumers to spend more, which provides further stimulus to the economy and risks causing overheating. Conversely, if the economy is doing poorly, asset prices fall and consumers spend less, leading to a vicious cycle and potentially a depression
.
.
These concerns are not widely shared by mainstream economics – elevated asset price levels are considered a concern, but a minor one, while private credit levels are not considered macroeconomically significant, as they are simply a question of distribution.
Austrian economics ascribes price bubbles as due to excess printing of money by central banks, and ultimately inflationary; the resulting bursting of the price bubble and following depression being necessary purging of the previous excesses.
In debt deflation (most associated with Post-Keynesian economics
, but with some mainstream interest), price bubbles are particularly associated with excess private credit growth, especially extension of credit by commercial banks. While the price bubble itself is neutral, people then borrow against these inflated asset prices (as via a home equity line of credit), which increases the credit bubble, and it is the elevated level of debt that is the underlying cause of the ensuing depression.
(consumables), and financial assets (equity and debt in other companies).
At the level of a household, real assets are most commonly a home (both the land and the building), personal belongings (notably cars or other vehicles), and some commodities (such as gold) or collectibles (art). Financial assets most commonly include stocks and bonds (both corporate and government). The status of cash is more debatable – fiat money
is formally a financial asset backed by a government, while a bank deposit is a financial asset backed by a commercial bank, which today is generally backed by a government (via deposit insurance
such as the U.S. Federal Deposit Insurance Corporation
). As such, the value of cash may inflate away – it is a form of paper wealth – but it is generally distinguished from stocks and bonds.
A related technical issue in economics is the aggregation problem
, as debated in the Cambridge capital controversy
– to what extent is it permissible and useful to aggregate different measures? Aggregating different physical and financial assets is, in some views, illegitimate or misleading, though the market value of assets can simply be aggregated by adding. This aggregation is generally accepted practice in economic theory, with disaggregation reserved for accounting or detailed analysis.
In accounting, tangible assets and intangible asset
s are distinguished. In wealth management
, liquid financial assets (roughly corresponding to common understanding of paper wealth, ignoring value of housing) is a key metric.
". At the individual level these are referred to as human capital
, including education
and social connections, while at the social level these are referred to as social capital
, and include communities, social norms, and institutions; more traditionally these were referred to as "civilization
", but this usage is now considered pejorative.
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s – how much money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
one's assets could be sold for. Paper wealth is contrasted with real wealth, which refers to one's actual physical assets.
For example, if one owns a house and its assessed value increases (relative to the general price level, i.e., assuming no inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
) then one's paper wealth has increased – the asset has increased in value, meaning it could in principle be sold in exchange for a larger quantity of money, but one's real wealth is unchanged – the real asset is still the same house. It is said that one has "gotten richer on paper," meaning "as an accounting matter": numbers on a balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
have changed, but the physical world has not.
The term "paper wealth" is frequently used in popular discussions of wealth, and in some critiques of capitalism
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...
, finance
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, and certain economic theories, but is little-used in mainstream economics
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
, which instead generally identifies wealth with paper wealth. The term "paper wealth" has some pejorative connotations, suggesting "only on paper (but not in reality)", but can also be used neutrally to mean "(simply) as an accounting matter". Related distinctions are sometimes drawn between real assets and financial asset
Financial asset
A financial asset is an intangible asset that derives value because of a contractual claim. Examples include bank deposits, bonds, and stocks. Financial assets are usually more liquid than tangible assets, such as land or real estate, and are traded on financial markets....
s, or between tangible assets and intangible asset
Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset...
s, the latter particularly in accounting, as detailed below.
Evaporation of paper wealth
A confusing aspect of paper wealth is that it can increase or decrease across an entire economy, without any changes to the real economy; this is known as "asset price inflationInflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
or deflation" (a change in the aggregate (nominal) level of prices without corresponding real change). Thus, paper wealth does not "come from" or "go to" anywhere – the prices just go up or down. "It's a common misunderstanding to ask, 'where did the money go'?" which is particularly asked in the case of a stock market crash
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...
or in the bursting of a price bubble. This has more colorfully been described as "A lot of money goes to money-heaven."
Example
To illustrate, consider this example: Alice and Bob each own a house (suppose identical and neighboring). In a barter economy, Alice and Bob may decide to swap houses, and later to swap back – there is no notion of paper wealth here, just which house they each own and occupy. In a monetary economy, Alice may offer to sell Bob her house for one million dollars, and Bob may accept, and sell Alice his house for a same one million dollars – in this case they would each own a house, and each have paper wealth of one million dollars (the sale value of the house). If Alice decides to move back to her original house, and offers Bob her house for one dollar (rather than one million), and Bob accepts and sells Alice his house for one dollar, then they will move back to their original houses but now each have paper wealth of only one dollar.Accounting
Paper wealth is fundamentally an accounting matter – one's net worthNet worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...
is the accounting value of one's assets minus the accounting value of one's liabilities. There are various accounting methods for different assets and liabilities, and they yield different notions of net worth; some methods are more or less volatile than others. For example, one may value ("hold", "mark") assets at book value
Book value
In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or Impairment costs made against the asset. Traditionally, a company's book value...
, meaning the price for which they were purchased; in this case paper wealth does not change when the potential sale price of an asset changes, but does change if the asset is sold, as the asset is replaced by the sale proceeds. Conversely, one may mark assets at market value
Market value
Market value is the price at which an asset would trade in a competitive auction setting. Market value is often used interchangeably with open market value, fair value or fair market value, although these terms have distinct definitions in different standards, and may differ in some...
(mark to market
Mark to market
Mark-to-market or fair value accounting refers to accounting for the fair value of an asset or liability based on the current market price of the asset or liability, or for similar assets and liabilities, or based on another objectively assessed "fair" value...
accounting), in which case paper wealth changes as the market varies.
In some cases different measures may differ significantly – for example, one may purchase a stock for $1, and the market value may increase to $100, so the book value is $1 and the market value is $100. Conversely, one may purchase a house for $100,000, and then the housing market may fall, with the identical house next door selling for $80,000. In both these cases, book value and market value (to the extent that there is a market) differ, and which is more accurate may be debatable – one may argue that liquidation value (price obtained if sold immediately) would be a distressed sale and not reflect the potential value in a more orderly sale.
Economics
In economics, particularly political economyPolitical economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
, the distinction between paper wealth and real wealth is part of a larger debate on different notions of value; paper wealth corresponds to exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...
(value that can be realized in exchanging a good for something else) and real wealth corresponds to use value
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...
(value that can be realized in using a good oneself). This is a traditional distinction, dating from Aristotle
Aristotle
Aristotle was a Greek philosopher and polymath, a student of Plato and teacher of Alexander the Great. His writings cover many subjects, including physics, metaphysics, poetry, theater, music, logic, rhetoric, linguistics, politics, government, ethics, biology, and zoology...
in antiquity to David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
in the classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
of the 19th century, but the distinction is no longer drawn in mainstream economics, particularly neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...
, and the debate resolved in favor of exchange value – market price is seen as a sufficient notion of value; see Exchange value: Other theories of exchange value for discussion.
In economics, the notion of paper wealth is most associated with the heterodox
Heterodox economics
"Heterodox economics" refers to approaches or to schools of economic thought that are considered outside of "mainstream economics". Mainstream economists sometimes assert that it has little or no influence on the vast majority of academic economists in the English speaking world. "Mainstream...
school of Marxian economics
Marxian economics
Marxian economics refers to economic theories on the functioning of capitalism based on the works of Karl Marx. Adherents of Marxian economics, particularly in academia, distinguish it from Marxism as a political ideology and sociological theory, arguing that Marx's approach to understanding the...
, in the notion of fictitious capital
Fictitious capital
Fictitious capital is a concept used by Karl Marx in his critique of political economy. It is introduced in chapter 29 of the third volume of Capital. Fictitious capital contrasts with what Marx calls "real capital" which is capital actually invested in physical means of production and workers, and...
by Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
, in his critique of capitalism.
Paper wealth is also important in certain theories of economic crises, notably those that believe these to be caused by price bubbles, as described below.
Economic effects
Paper wealth is attributed as being a factor in economic cycles; in mainstream economics this is interpreted as the wealth effect, while in some heterodox schools it is interpreted as price bubbles.Wealth effect
The most commonly discussed effect of paper wealth is the wealth effectWealth effect
The wealth effect is an economic term, referring to an increase in spending that accompanies an increase in perceived wealth.-Effect on individuals:...
: as people (households) increase in wealth, they are likely to spend more, while if their wealth decreases, they are likely to spend less. This is termed "the wealth effect" (compare income effect
Income effect
In economics, the consumer's preferences, money income and prices play an important role in solving the consumer's optimization problem...
), and is generally attributed to psychological feelings of confidence – one feels rich, so one spends. The significance of the wealth effect is debated; it is generally procyclical
Procyclical
Procyclical is a term used in economics to describe how an economic quantity is related to economic fluctuations. It is the opposite of countercyclical. However, it has more than one meaning.-Meaning in business cycle theory:...
, meaning that when the economy is doing well, asset prices increase, causing consumers to spend more, which provides further stimulus to the economy and risks causing overheating. Conversely, if the economy is doing poorly, asset prices fall and consumers spend less, leading to a vicious cycle and potentially a depression
Depression (economics)
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle....
.
Price bubbles
Less commonly, increases in overall paper wealth are seen as signs of price bubbles – unsustainable increases in the level of prices. These are generally attributed to credit bubbles (prices are bid up using borrowed money), and seen as a significant warning sign of a pending economic crisis; they form the central mechanism of Austrian business cycle theory and debt deflationDebt deflation
Debt deflation is a theory of economic cycles, which holds that recessions and depressions are due to the overall level of debt shrinking : the credit cycle is the cause of the economic cycle....
.
These concerns are not widely shared by mainstream economics – elevated asset price levels are considered a concern, but a minor one, while private credit levels are not considered macroeconomically significant, as they are simply a question of distribution.
Austrian economics ascribes price bubbles as due to excess printing of money by central banks, and ultimately inflationary; the resulting bursting of the price bubble and following depression being necessary purging of the previous excesses.
In debt deflation (most associated with Post-Keynesian economics
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...
, but with some mainstream interest), price bubbles are particularly associated with excess private credit growth, especially extension of credit by commercial banks. While the price bubble itself is neutral, people then borrow against these inflated asset prices (as via a home equity line of credit), which increases the credit bubble, and it is the elevated level of debt that is the underlying cause of the ensuing depression.
Related distinctions
Assets can be distinguished as real (physical) assets, notably property, plant, and equipment (PP&E – real estate, buildings, durable equipment) and inventoryInventory
Inventory means a list compiled for some formal purpose, such as the details of an estate going to probate, or the contents of a house let furnished. This remains the prime meaning in British English...
(consumables), and financial assets (equity and debt in other companies).
At the level of a household, real assets are most commonly a home (both the land and the building), personal belongings (notably cars or other vehicles), and some commodities (such as gold) or collectibles (art). Financial assets most commonly include stocks and bonds (both corporate and government). The status of cash is more debatable – fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...
is formally a financial asset backed by a government, while a bank deposit is a financial asset backed by a commercial bank, which today is generally backed by a government (via deposit insurance
Deposit insurance
Explicit deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due...
such as the U.S. Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
). As such, the value of cash may inflate away – it is a form of paper wealth – but it is generally distinguished from stocks and bonds.
A related technical issue in economics is the aggregation problem
Aggregation problem
An aggregate in economics is a summary measure describing a market or economy. The aggregation problem refers to the difficulty of treating an empirical or theoretical aggregate as if it reacted like a less-aggregated measure, say, about behavior of an individual agent as described in general...
, as debated in the Cambridge capital controversy
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...
– to what extent is it permissible and useful to aggregate different measures? Aggregating different physical and financial assets is, in some views, illegitimate or misleading, though the market value of assets can simply be aggregated by adding. This aggregation is generally accepted practice in economic theory, with disaggregation reserved for accounting or detailed analysis.
In accounting, tangible assets and intangible asset
Intangible asset
Intangible assets are defined as identifiable non-monetary assets that cannot be seen, touched or physically measured, which are created through time and/or effort and that are identifiable as a separate asset...
s are distinguished. In wealth management
Wealth management
Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services...
, liquid financial assets (roughly corresponding to common understanding of paper wealth, ignoring value of housing) is a key metric.
Other forms of wealth
Beyond real assets and financial assets, other valuable intangible assets, which are popularly referred to as "wealth", are formally referred to as forms of "capitalCapital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...
". At the individual level these are referred to as human capital
Human capital
Human capitalis the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value. It is the attributes gained by a worker through education and experience...
, including education
Education
Education in its broadest, general sense is the means through which the aims and habits of a group of people lives on from one generation to the next. Generally, it occurs through any experience that has a formative effect on the way one thinks, feels, or acts...
and social connections, while at the social level these are referred to as social capital
Social capital
Social capital is a sociological concept, which refers to connections within and between social networks. The concept of social capital highlights the value of social relations and the role of cooperation and confidence to get collective or economic results. The term social capital is frequently...
, and include communities, social norms, and institutions; more traditionally these were referred to as "civilization
Civilization
Civilization is a sometimes controversial term that has been used in several related ways. Primarily, the term has been used to refer to the material and instrumental side of human cultures that are complex in terms of technology, science, and division of labor. Such civilizations are generally...
", but this usage is now considered pejorative.