You probably never heard of Leon Black until this substantial American billionaire took it into his head to purchase a painting called The Scream at auction for $120 million. Mr. Black outlasted all the Saudi princes and Japanese investment groups and now, in return for a portion of his vast wealth, he is entitled to call himself the owner of a small patch of artistic work product that had almost no intrinsic value as a rag of canvas and a messy box of paints until a gifted individual named Munch touched these lifeless materials and added value to them.
So what, in an economic sense, really happened here? If we look at wealth or capital as a kind of essentially collectivist artifact which society has for some reason decided to allow Mr. Black to control for a few moments in the stream of history, has Mr. Black done well with spending a portion of society's assets this way, or has he squandered the capital and wasted the opportunity of that money to do some real good?
Actually, Mr. Black did almost nothing with the condensed social energy that the $120 million represents. The Munch painting is really only a new type of currency that rich individuals or groups exchange between each other. The peculiar advantage of "The Scream" is that, although we certainly know that this large-denomination piece of effectively legal tender can be stolen, it can not easily be replicated. Mr. Black is betting that the unique artistic work product will retain its intrinsic value far, far longer than either a sack of printed dollars or euros. In fact, this new currency may even appreciate greatly in value without Black doing anything at all.
To understand fully how nebulous the concept of capital (or wealth) can be, let us try to imagine two different ways in which the authority controlling the same $120 million investment, could fritter away that amount of cash and achieve remarkably little social benefit. Let's choose for the first method of wealth destruction through spending a hypothetical promising quasi-private alternative energy company that government gifts with $120 million to get rolling. The mission of this particular enterprise is to build the world's first all electric full-size helicopter.
The initial problem is that someone in government has to be able to evaluate that word "promising." Do many government technocrats really have the ability to discern what invention is promising and what is hopeless? If they are that smart, why are they working for a salary? Why don't they have their own companies?
Of course, the true key to making an electric helicopter is to invent a miracle battery. The officially "promising" corporation getting the federal loan doesn't actually promise to do that, it just assumes that some smart people will do that any day and then we can just plug the battery into the marvelous helicopter and take off. This was the design logic of the Chevy Volt.
If the miracle battery doesn't actually come along, the $120 million will have employed several thousand people for a couple years and probably had some stimulus impact on parts suppliers and so forth, so the spending can't be considered a total waste if the manned electric helicopter never flies. The program was good for some people for a little while, but no breakthrough.
Now consider another way to spend $120 million. We identify 100,000 welfare families and we give each of them an income tax rebate check of $1,200. They have never paid income tax, but no matter. The checks go out and the stimulus to many local businesses is immediate. Very little of this bonanaza is going to be saved by anyone--the checks are cashed and turned instantly into purchases of all kinds of things.
It begins to seem that there is no way that money can be spent, or invested, that it won't do at least some temporary good for someone. In the case of the billionaire who buys a work of art for over $100 million, very little of the economic vitality of the capital is subtracted from it, because goods are not created and consumed to no good purpose. For instance, if the rebate checks mainly went for unnecessary or even unhealthy items that were quickly consumed, then the value of the capital is truly consumed as well. If the receivers of the rebates performed no useful work of any type in return for their bonus, i.e. they swept no streets, they performed no service, or produced no durable products, then the economic vitality of the wealth is squandered.
Money spent on research is always just a gamble. The entire investment may only return some knowledge on what NOT to do. Money spent on frivolous, unearned, or extravagant consumption is just a waste, unless the extravagance is for something durable, like a masterpiece that people will oooh and aaah over in admiration for decades, if not centuries.