Economics: Sometimes very simple concepts can be enormously illuminating and can hold the key to solving what seem to be puzzles. Equally, it is sometimes the case that the failure to grasp simple concepts can cause a lot of confusion and maybe even create those puzzles in the first place.
Take the distinction between income and wealth. It is a distinction that is central to understanding some important aspects of business and economics. Yet, it is one that appears to elude a great number of people, including many who take it upon themselves to comment on business and economic matters.
Income is the flow of revenue that accrues over a period of time. Wealth is the stock of assets and material possessions owned at a point in time. Obviously the two are related. Wealth derives from income or, more particularly, from that proportion of income that is saved and invested.
The opposite is also true: income is generated from wealth - think of property and rents, company shares and dividends, bank deposits and interest. For most individuals, the biggest part of their wealth, broadly defined, is their human capital, that is their capacity to earn income from work.
Despite the relationship between income and wealth, they are clearly separate and distinct things and are measured in different ways: income is a flow; wealth is a stock.
More pertinently, from the point of view of what follows, a large income does not necessarily connote great wealth, nor does great wealth indicate large current (whatever about past) income. A bright, hard-working recent graduate with a few years' work experience may well enjoy a considerably higher income than his/her retired parent, but is unlikely to have amassed anything like the same quantum of assets and is most unlikely to possess greater wealth.
The concepts of income and wealth are not just confined to individuals. They can be applied equally to households, communities or larger economies, and can be usefully deployed to guide our thinking about macroeconomic performance. Wrongly applied, they can cause confusion and create puzzles where puzzles don't need to exist.
Take the case of the Celtic Tiger. After almost a decade of unprecedentedly rapid economic growth, some commentators would have us believe that Ireland has become one of the wealthiest economies in the world. Then comes the puzzle. How come, if we are one of the richest, that we've got so many tumbledown schools, such a dreadful health system, and such a ramshackle road and rail network?
The apparent conundrum is nicely summed up in the caption: a First World economy with Third World infrastructure.
Apart from being a cue for hand-wringing and gnashing of teeth, this picture is an invitation to conspiracy theorists.
The conspiracy theorists of the right see it as testimony to the ineffectiveness and prodigality of government, evidence that the boom has been wasted by a public sector incapable of managing and delivering big civil engineering projects. (Mind you, there is a grain of truth in this.)
The conspiracy theorists of the left are more inclined to see it as evidence that the wealth created during the Celtic Tiger era has been creamed off and salted away by some controlling class of sociopaths.
The explanation for the apparent conjunction of First World economy and Third World infrastructure (a.k.a. private affluence, public squalor) is actually much more prosaic. Thanks to the enormous growth of the 1990s, the Republic may have climbed to the top tier of the international league in terms of income or gross domestic product (GDP) per capita, but that has not been accompanied by (indeed, it could not reasonably be expected to have been accompanied by) a correspondingly steep rise in terms of wealth.
Simply put, the Republic is not amongst the world's top tier of wealthy countries - and the reason for this is that it has only recently arrived at the position of being amongst the top income-generating economies.
Just as is the case with individuals, so it is with economies: it takes many years of high income to amass substantial wealth. Specifically, in the case of economies, it takes decades of high GDP per capita to generate the resources necessary to build an adequate stock of high-quality infrastructure.
In this regard, it is worth pointing out that the kind of income per capita levels that the State has recently attained were reached several decades ago in those economies whose infrastructure we unfavourably compare our own with.
In the late 1990s, the Republic overtook Italy in terms of GDP per capita (and has more recently also overtaken Italy in terms of gross national product per capita - a more meaningful measure of income). Does this mean that Irish people are on average wealthier than Italians?
Well, consider the past 50 years. For at least 45 of them, income per capita was higher in Italy than in the Republic and, for most of those 45 years, income per capita in Italy was considerably higher. What this means is that, taking the past 50 years together, Italians have had the wherewithal to amass a substantially greater amount of wealth than Irish people, including the wherewithal to build a superior stock of hospitals, schools, sport and recreation facilities, transport networks and other public infrastructure.
We may have overtaken the Italians (and the Spaniards and many others) in terms of income - in the same way as a thrusting 30-year-old professional may overtake his down-shifting 60-something father - but we still lag well behind them in terms of wealth.
It is therefore entirely unsurprising that we lag well behind them in terms of infrastructure. The bad news is that we will continue to do so for quite some years to come.
Jim O'Leary lectures in economics at NUI-Maynooth. He can be contacted at jim.oleary@may.ie
