Wednesday, November 16, 2005

How Do You Teach "Rich?"

In early stages of economics and personal finance classes, students often talk about their desire to be "rich." The topic often arises again when talking about income distribution or tax policy. But I always found it thought-provoking and instructive to ask the students to define "rich."

They frequently begin throwing numbers around, but I tell them they still aren't telling me enough. I like to ask them whether rich is defined by income, or by wealth, or by some combination of the two. This gets students to start thinking in terms of flows (income) vs. stocks (wealth). It also helps them realize that a person can be wealthy and yet have a small income (i.e. the "landed gentry" in their history texts that were land rich and money poor). That realization has implications that can contribute further to the discussion. And you can ask some interesting hypotheticals about people and companies that are wealthy, yet income poor, or those that have strong flows and are yet tottering at the edge of bankruptcy.

Feel free to share your thoughts.

Posted by TSchilling at November 16, 2005 3:58 PM

I remember reading, a number of years ago, an article in The Wall Street Journal titled something like, "The Poorest Man in the World." The article was about a Japanese business man who owned large amounts of Tokyo commercial real estate that, due to the collapse of real estate values, was worth considerably less than the money borrowed to buy it, leaving the gentleman with a negative net worth of several billion dollars, hence the label of "world's poorest man."

Yet, due to his creditors reluctance to foreclose, he continued to manage the properties, continued to live in a penthouse atop one of the large buildings, continued to ride in a chauffeured limousine, continued to live a life of luxury that a person with a net worth of several billion dollars more (i.e. a net worth of "zero") could only dream of living.

Was this man "rich?" Apparently at that time he was, regardless of his net worth.

Posted by: Max at November 20, 2005 3:00 AM

No comments: