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Money is the root of all Evil

Thoreau_wants Many people — including some economists — often confuse money with wealth. This frequently leads to avoidable errors and bad policies. It is best to take money out of most discussions and focus on wealth, unless of course one is specifically discussing money.

Wealth and money are distinct but often used interchangeably because wealth is always denominated in terms of money. The primary distinction is that wealth is real and money is nominal. Wealth is anything that we can consume in the broadest sense of the word. Wealth is what we eat, wear, find shelter in, store for later consumption, drive around in, the machines we use to make stuff, stuff that you can hold in your hands and kick around — the tangibles. Wealth is also the intangibles like know-how (another word for technology), knowledge and skills that humans have.

Wealth can be acquired, possessed, stored, exchanged and consumed. It can also be begged, bought, stolen, borrowed and lent. Money is just a mechanism for facilitating exchange, and of course monetary terms are used to keep track of who has how much wealth, who owes whom, etc. We exchange wealth using money. What we are exchanging is rights: the right to use the wealth. When more people create more stuff (tangible or intangible), wealth increases. The aggregate production of wealth in a specified period is called aggregate income. For an economy, this is known as the gross domestic product (GDP). Who gets how much of the aggregate production is called income. Ideally, a person’s income reflects the person’s contribution towards the production of aggregate wealth.

A point that brings out the distinction between money and wealth is that money can be destroyed more easily than wealth. Suppose a plane carrying $100 million in money crashes. Hundred people each had given $1 million to buy some asset, say, a factory in the destination city. Suppose the plane was a corporate jet, replacement value $10 million. How much wealth was lost? Only $10 million. The $100 million in money that went up in flames did not reduce aggregate wealth. The factory did not go up in flames. Only those who were going to have the rights to the factory are out of that right. They have lost wealth (which they had earned presumably by working to produce the wealth that translated into $1 million each) but the total wealth of the nation decreased only by the $10 million that was the plane was valued at.

Take the case of Joe, the neighborhood super-multi-billionaire. Perhaps he accumulated his fabulous wealth by starting a business selling over-priced smart phones that people lined by the millions to buy. Or perhaps he amassed his wealth by selling cocaine. In any case, Joe had acquired all the Maseratis and French villas as he could wish to own. Then he uses some of his wealth to buy Picassos worth $300 million to show off his position in society. Is his conspicuous “consumption” bad for the economy? Not really.

What he has done by buying $300 million worth of paintings is that he had transferred $300 million to the sellers of the paintings — who presumably would buy other stuff and eventually through the vast nexus of exchanges across the economy, it would mean that Mike Schmuck gets his job of painting some outhouse in the boonies and is able to buy groceries that Dick Farmer has produced. Wealth is created and consumed regardless of who bought the Picasso and for how much.

Maybe Joe the drug lord likes to show off his wealth by smoking his crack cocaine in $1000 bills. Is Joe destroying wealth? No! He’s actually redistributing wealth. To whom? To all the Joe Schmucks who have their savings or their earnings in dollars. When someone destroys dollars they own (regardless of how they came to possess those dollars), they are making the remaining dollars (money) more valuable. Joe is doing a public service by reducing inflation by a very tiny amount.

In effect, Joe the drug lord, by smoking $1K bills, is giving back some of his rights to wealth that he could have consumed and therefore making it available to others. Joe’s destruction of money is an act of generosity. Joe is an altruist. I would call it the “anti-theft of wealth by the destruction of money.” The converse of that act is “the theft of wealth through the creation of money.”

Governments routinely engage in the theft of wealth through the creation of money. Since governments have the monopoly on the creation of money, whenever it wants to consume more, it prints money. It then exchanges the newly printed money for stuff (wealth). This leads to inflation. Inflation means that the money you have will buy less stuff than you could have bought before. How much less stuff? The amount that the government has stolen from you by printing money.

One way out of this theft of wealth through the creation of money is to have a competitive market for the creation of money. In other words, private money. Let whoever wants to create money do so — even the government. What about taxes? Taxes could be paid using government issued money. But for all other purposes, people would be free to use whatever money they want to use.

There is much truth in the old saying that money is the root of all evil. But not the truth that is traditionally claimed for it. The actual truth is that the government’s monopoly to print money with abandon is the root of a great deal of evil. Think about it.

Atanu Dey on India's Development

Atanu Dey
Chapters
PJ O’Rourke: Every government is a parliament of whores
The Amazing Power of Technology
Swami Vivekanand: To the 4th of July
No True Islamic State
Herbert Simon — Information consumes attention
Yoga has no Religion
Hayek on “The Mirage of Social Justice”
An Open Letter to PM Shri Modi
Prefer a Functioning Economy
Political Discrimination is Socially Harmful
Markets & Competition
Ministry of Power, Coal, and New and Renewable Energy
John Stuart Mill on the Liberty of Thought and Discussion
Reading Ronald Coase
Universal Literacy
Man versus the State
What Comes Before
An ad from 1947: “The Uphill Task Ahead”
Pohela Boishakh, Vishu, and Puthandu Greetings
Rich People Spend More
Goodbye, Mr Lee Kuan Yew
Friday the 13th, Pi Day the 14th & Beware the Ides of March
Money is the root of all Evil
Warren Buffet’s Letter to the Shareholders
The Man Lee Kuan Yew Admires the Most
An Informed Citizenry is the Bulwark of a Democracy
Problems and Solutions
People I Admire – Part Doh
Nelson Mandela on Education
Criticizing Modern Indian Holy Cows Considered Dangerous
Richard Dawkins on the Monotheistic God
List of Pages on Teresa the Merciless
People I Admire
Lee Kuan Yew is under Intensive Care
On Monkeys, Cats & the Generality Principle
The Great Indian Bamboozle has to Stop
2400 hours of electricity for Delhi — every year?
Make India first to “Make in India”
Republic Day Thoughts on Reading the Constitution
A Day of Shame and National Mourning for India
The most dangerous man to any government
Socialism, Competition and Politicians
Open Thread: Ask me anything
Aakash, the “iPad Killer”, Vaporware has Evaporated
The Dreamer and the Dream
Circular Firing Squad of Flying Attack Monkeys Target Rajiv Malhotra
We need more Anandamide, not Jihadamide
Constitutions Matter in our Daily Lives
The Only Home We’ve Ever Known
Adam Smith on the Division of Labor
The Passing of Former President Mr APJ Abdul Kalam
Socialism Works its Wonders in Venezuela - also in West Bengal
Why the terrorists killed the satirists of Charlie Hebdo
Islam Poses an Existential Threat
The Wisdom of the Crowd
On Knowing Enough to Know that You Don’t Know
NITI — New Initiatives for Transforming India
Will India Recover?
The Unbearable Stupidity of Controlling Prices
Nov 14th as the “Day of Shame and Lamentations for India.”
The Indian Constitution — Part 2
Hayek on Valuing Individuals
Mr Modi goes to Washington