Framework for evaluating wealth and spending

Source: The post framework for evaluating wealth and spending has been created, based on the article “An analysis of wealth creation could guide how it’s best spent” published in “Live Mints” on 1st August 2024

UPSC Syllabus Topic: GS Paper3- Economy-mobilisation of resources

Context: The article discusses a framework for evaluating wealth and spending based on how the wealth was earned. It ranks five types of wealth creation from most to least desirable, highlighting the economic impact and fairness of each type.

What is the Framework for Evaluating Wealth?

The framework for evaluating wealth considers how it was earned and how it should be spent. This framework is based on economic fairness and the alignment of rewards with efforts. Understanding the source of wealth is crucial for judging economic fairness and the health of an economy.

How is Wealth Categorized?

Wealth is ranked in five categories:

1. Talent and Effort: Wealth from personal skills and hard work, like a successful retail chain or a popular jewelry designer.
2. Innovation: Money made from creating something new, like an invention which benefits society.
3. Externalities: Profits that impose costs on society, like pollution from cars.
4. Monopolistic Advantages: Earnings from industries with little competition, such as utilities or large tech platforms.
5. Influence Rents: Wealth gained from manipulating rules and institutions, often unfairly benefiting the wealthy.

What are the Desirable and Less Desirable Sources of Wealth?

1. Wealth from talent, effort, and innovation is highly desirable because it results from honest work and creativity, benefiting both individuals and society.
2. Less desirable sources include wealth generated from externalities, monopolistic advantages, and influence rents. These methods impose costs on society, restrict competition, and manipulate rules for profit.

How Does This Relate to the USA and USSR?

1. The framework highlights differences in economic systems. The USA’s system, during the Cold War, promoted fair competition and innovation, leading to economic growth.
2. In contrast, the USSR struggled economically due to a lack of fair competition and influence rents. This economic inefficiency contributed to the USSR’s collapse, despite its military strength.
3. This comparison shows how a strong institutional framework and fair competition can drive economic success.

Question for practice:

Evaluate how different sources of wealth impact economic fairness and societal benefits according to the framework for evaluating wealth.