Money Isn’t Wealth

by Don Boudreaux on April 20, 2011

in Myths and Fallacies, Seen and Unseen, Taxes

Steve Landsburg – in his armchair or out of it – is brilliant, just brilliant.  This post of Steve’s is a must-read.  Here’s Alex Tabarrok’s take.

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{ 246 comments }

muirgeo April 21, 2011 at 12:40 am

Nice!!! So THIS explains why when we had very high marginal tax rates in the past the economy ground to a halt. And vis-a-vis why the current economy is bustling so well.

Sandre April 21, 2011 at 1:28 am

I’m happy that you finally got it!

Martin Brock April 21, 2011 at 7:16 am

You’re right, muirgeo. The economy did not grind to a halt when marginal tax rates were very high; however, few people paid the high marginal rates, because they avoided the rates with “tax loopholes”. These loopholes encouraged particular expenditures, essentially investment rather than consumption.

The high rates did not transfer vast sums to central authorities for their expenditure. The high rates didn’t exist for this purpose and didn’t have this effect. If high tax rates have this effect, the economy does stagnate.

Anotherphil April 21, 2011 at 8:28 am

You guys realize muirbot is a defunct alpha version version 1.0 and was programmed using the “manifesto” codebase, and the inputs are incapable of accepting updated instruction sets, right?

muirgeo April 21, 2011 at 8:54 am

You are wrong Martin…. the effective tax rate for the wealthiest has gone down significantly… along with our economy.

http://www.quickanded.com/2010/02/effective-tax-rates-of-the-richest-400-americans.html

JohnK April 21, 2011 at 9:05 am

If you had read the comments on your link you would have found this http://www.cbo.gov/publications/collections/tax/2009/effective_rates.pdf which completely refutes the author’s assertion.

BTW cbo means Congressional Budget Office and .gov means government.

Sandre April 21, 2011 at 12:42 pm

LOL. Don’t expect him to be able to digest such facts. You will see him rattling off the same inanities ad nauseum from here until the day he loses his typing ability.

Ryan Vann April 21, 2011 at 1:15 pm

Reading graphs and figures is far too burdensome.

JohnK April 21, 2011 at 9:05 am

tard

Dan April 21, 2011 at 1:12 pm

Surely, muirgeo can’t be telling us that higher taxes equate to a stronger economy. Please tell me he is wiser than that.

JohnK April 21, 2011 at 1:21 pm

I have a pug that spins in circles when excited that is wiser than him.

muirgeo April 22, 2011 at 2:22 am

When was are economy strongest? What year?

Martin Brock April 21, 2011 at 4:07 pm

I never say that the effective tax rate for the wealthiest has not gone down since 1992, muirgeo, so I’m not sure how I can be “wrong” here. Why not respond to me rather than your own straw man? We might even find room to agree.

On the contrary, I’ve said in this forum repeatedly that “supply side tax cuts” (from marginal rates approaching 90% in the 1950s) were actually a bargain between competing parasites, parasites in the central government get more consumption and parasites among the less central authorities also get more consumption.

But you don’t seem to oppose parasitic consumption by statutory authorities. You rather seem to favor the more central parasites over the less parasites, possibly because you’re one of the more central parasites yourself. You work for the CDC or something, right?

Sam Grove April 21, 2011 at 6:09 pm

He is a government licensed professional.

Methinks1776 April 21, 2011 at 6:20 pm

The CDC employs actual scientists and doctors who have shown an ability to engage basic logic. Muirdiot works for an HMO.

Sam Grove April 22, 2011 at 7:13 pm

He’s still licensed by the government.

carlsoane April 21, 2011 at 1:57 pm

Interesting theory. Where are you getting your evidence?

Martin Brock April 21, 2011 at 4:15 pm

That the top marginal income tax rate exceeded 90% is all I need to know. At this rate, anyone with any sort of deduction takes the deduction. If the Federal government had really taken 91% of all income over $400,000 in the 1950s, the economy would have ground to a halt. It didn’t grind to a halt. Many people became wealthy instead. QED

carlsoane April 21, 2011 at 4:20 pm

I meant where are you getting the evidence that the loopholes encouraged investment.

Martin Brock April 21, 2011 at 4:54 pm

The loopholes were for investment specifically, just as many deductions today are for investment.

vikingvista April 21, 2011 at 12:52 am

That is good. Government borrowing and taxing isn’t about spreading the wealth around. It’s all about WHO spreads the wealth around.

Polly April 21, 2011 at 3:11 pm

Or as Bill Clinton said, “I could let you keep more of your money–but what if you don’t spend it right?”!

I’m sure that’s a scary thought for everyone in government, what if we don’t spend it right? They’re more efficient that 300,000,000 people working without a plan. Made by the government, who else.

Scott G April 21, 2011 at 1:33 am

Landsburg’s response is impressive in intellectual circles (but ineffective in most other circles). My response to Elizabeth Lesly Steven’s article differs greatly (see below).

The problem with Landsburg’s response is that it’s difficult for most Americans to follow. I hope he doesn’t expect someone with a high school diploma and factory job to understand it. The large number of rationally ignorant people that Caplan points to in Myth of the Rational voter will most likely not learn of it or understand his argument. It would take careful thought and 10 minutes of quiet for an economically literate person to fully grasp. This is asking way too much for most American’s who are not economically literate.

According to my scorecard Elizabeth Lesly Stevens wins this round. (Since The Fight of the Century is taking place soon I think we should use boxing analogies for a while).

In order to win the next round I would suggest countering Ms. Steven’s article with shame. She is shameless! She should be shamed!

What I would like to see is a place where people like myself and Mr. Kendrick can donate money in exchange for “economic” services that will effectively counter Ms. Steven’s argument such that she finds it very costly to write articles like this. An effective argument is not necessarily one that focuses on countering the technical weakness of the opponent’s argument, but rather one that makes it very costly for the opponent to continue arguing his argument. For example, I would like to see a rap video starring Elizabeth Lesly Stevens. I’m willing to donate $100 to John Papola if he includes her name in an upcoming rap video.

Though Landsburg’s article is not as extreme as the show-off, pyrotechnic genre that Higgs refers to it is still one that most American’s will be reluctant to purchase.

“The academic world of the show-off, pyrotechnic economists who dominate today’s mainstream profession would be impossible without the vast government subsidies that support these economists and the institutions in which they concoct their wizardry. Given a choice, consumers would not buy their glitzy but worthless research reports. The funds that support this superficially impressive intellectual showmanship must be extorted from taxpayers threatened with fines and imprisonment.”

What the serious economists at this blog need to understand is that people like me are working in trenches with our heads down. We’re working on very specialized technologies which require decades of training. We can not focus on this work if politicians and rationally ignorant masses are interrupting our lives like they are.

I have a feeling few of you will change your ways. I have someone more effective on my side: creative destruction. It will force you to provide values to the average American.
Landsburg’s response is impressive in intellectual circles (but ineffective in most other circles). My response to Elizabeth Lesly Steven’s article differs greatly (see below).

The problem with Landsburg’s response is that it’s difficult for most Americans to follow. I hope he doesn’t expect someone with a high school diploma and factory job to understand it. The large number of rationally ignorant people that Caplan points to in Myth of the Rational voter will most likely not learn of it or understand his argument. It would take careful thought and 10 minutes of quiet for an economically literate person to fully grasp. This is asking way too much for most American’s who are not economically literate.

According to my scorecard Elizabeth Lesly Stevens wins this round. (Since The Fight of the Century is taking place soon I think we should use boxing analogies for a while).

In order to win the next round I would suggest countering Ms. Steven’s article with shame. She is shameless! She should be shamed!

What I would like to see is a place where people like myself and Mr. Kendrick can donate money in exchange for “economic” services that will effectively counter Ms. Steven’s argument such that she finds it very costly to write articles like this. An effective argument is not necessarily one that focuses on countering the technical weaknesses of the opponent’s argument, but rather one that makes it very costly for the opponent to continue arguing his argument. For example, I would like to see a rap video starring Elizabeth Lesly Stevens. I’m willing to donate $100 to John Papola if he includes her name in an upcoming rap video.

Though Landsburg’s article is not as extreme as the show-off, pyrotechnic genre that Higgs refers to in his recent post, it is still one that most American’s will be reluctant to purchase.

“The academic world of the show-off, pyrotechnic economists who dominate today’s mainstream profession would be impossible without the vast government subsidies that support these economists and the institutions in which they concoct their wizardry. Given a choice, consumers would not buy their glitzy but worthless research reports. The funds that support this superficially impressive intellectual showmanship must be extorted from taxpayers threatened with fines and imprisonment.” Robert Higgs

What the serious economists at this blog need to understand is that people like me are working in trenches with our heads down. We’re working on very specialized technologies which require decades of training. We can not focus on this work if politicians and rationally ignorant masses are interrupting our lives like they are. We don’t have time to read technical articles about economics.

I have a feeling few of you will change your ways unless creative destruction forces you to change.

Steve Jobs is leading the creative destruction path. 6 billion in profits in three months! He’s done way more for the world than any economist has ever done.

Scott G April 21, 2011 at 1:50 am

“We shall indeed revert to the jungle if we continue on our present course, whether in our private behavior patterns, or in our collective-governmental-institutional dynamic, aided and abetted by the make-work of the so-called social sciences. If we twiddle around with our “scientistic” economics and political science, if we remain so enraptured by esoteric puzzles, if we place exclusive faith in empirical demonstrations or in evolutionary processes, we are contributing to the process of deterioration.” James Buchanan

Actually academic economists will remain a rather small force in the world if creative destruction doesn’t “help” them to provide products and services that people want to buy.

Sandre April 21, 2011 at 2:11 am

If you ever told muirdouche that earth has gravity that keeps us from flying off the surface, then muirdouche would say, “yeah, that explains why bird & aircrafts fly, right!”. LOL. What a persistent idiot!

brotio April 21, 2011 at 2:30 am

*like*

I meant what I said on another thread. Some of the funnest reading on the internet has been your replies to Yasafi. Don’t forsake your friends!

:)

Methinks1776 April 21, 2011 at 8:56 am

ditto!

JohnK April 21, 2011 at 8:41 am

I’m quite positive that the muirdiot believes the Law of Gravity is something written by Congress and signed by FDR.

Methinks1776 April 21, 2011 at 8:57 am

*like*

brotio April 21, 2011 at 11:45 pm

ditto!

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Stone Glasgow April 21, 2011 at 4:26 am

Money is wealth. It is an IOU from the Fed, which is wealth is the same way that an IOU from your neighbor is wealth.

Anotherphil April 21, 2011 at 8:30 am

Except your neighbor doesn’t pay the IOU with another IOU he can print in unlimited supply, just with different serial numbers.

Stone Glasgow April 21, 2011 at 4:58 pm

The government can’t print IOUs (dollars), only the federally protected bank-monopoly can do that. Every IOU issued by the Fed is backed by real wealth. Each IOU comes into existence in exchange for homes, cars, businesses, and government debt. Dollars are backed by those assets (the debt of the United States is backed by its confiscatory power).

Martin Brock April 21, 2011 at 5:07 pm

You forgot to mention mortgage backed securities backed by mortgages on properties worth less than the principal owed on the mortgage by people who are already behind on their payments … and similarly real wealth.

But that “government debt” wealth is real enough. I’ll pay taxes to avoid fines or imprisonment or worse. You can’t squeeze blood from a stone, but I’m not a stone, so that’s not a problem.

Stone Glasgow April 21, 2011 at 6:42 pm

When banks issue loans for overvalued homes, they are creating inflation by allowing new money creation (new dollars for home loans) to outpace wealth creation (value of new homes).

Mortgage-backed securities were a similarly overvalued asset, because the promises of the people holding the base-mortgages were almost worthless. The promises of US banks and Uncle Sam are not worthless, in my opinion.

It is always possible for assets to be overvalued by the market, but the main point remains: dollars are backed by the assets that banks hold as collateral (homes, cars, businesses) and the promise of the United States to steal from its citizens.

Martin Brock April 21, 2011 at 7:08 pm

Right. The promise of an extortionist isn’t worthless either.

Stone Glasgow April 22, 2011 at 2:43 pm

That is correct. Criminals and extortionists can and do keep their promises.

SaulOhio April 21, 2011 at 7:08 pm

The whole point of saying that money is not wealth is that printing more of these IOUs will not bring the consumer goods or resources into existence. It will just inflate the price.

vikingvista April 21, 2011 at 10:50 am

IOU what? I brought a USD to the Federal Reserve. All they gave me in exchange was another USD.

Stone Glasgow April 21, 2011 at 5:03 pm

The IOUs are backed by the assets the bank takes in exchange for its IOUs. If I go to a bank and take a loan against my $100K house for $100K IOUs, the bank takes ownership of the home (effectively), and agrees to return the ownership of my home to me in exchange for the 100K IOUs at any time. Dollars are backed by the homes, cars, and businesses of which banks take ownership when they issue new loans.

Methinks1776 April 21, 2011 at 6:23 pm

You assume too much about collateral.

Stone Glasgow April 21, 2011 at 6:27 pm

Elaborate?

Methinks1776 April 21, 2011 at 9:24 pm

Not all loans are collateralized – revolving debt, for example and unsecured debentures for another. So, not every loan is backed by real assets.

The value of underlying collateral changes. When house values drop, the mortgage lender finds that he essentially owns an only partially collateralized loan.

Stone Glasgow April 21, 2011 at 11:27 pm

Financial or “paper” assets are wealth, as per the economic definition of wealth, which is basically “anything valuable that can be exchanged.” Revolving debt and unsecured debentures are a promise to pay, and are issued to people who have a good reputation (credit rating). Their debt can be bought and sold (making the debt a form of wealth). Bank loans issued for revolving and unsecured loans are “backed” by the assets and promise of the borrower.

If banks loan recklessly to people unlikely to repay the debt, they devalue the currency issued to make the loans. They fail to take an equivalent asset in exchange for new dollars, which inflates the currency. A responsible bank, making a loan to a credit worthy borrower, is issuing new dollars backed by the promise of a credit worthy person and the assets he owns. That person’s IOU (real, exchangeable wealth) backs the new dollars.

When housing values drop, the debt of that credit worthy borrower still backs the dollars issued. Because one of the borrower’s assets declined in value does not release him from the IOU to the bank, and does not remove his other assets from possible seizure by the bank.

When banks make responsible issues of new currency to trustworthy people, inflation is not a problem, and the dollars issued are backed by real wealth. The Fed holds a monopoly on currency creation, and is routinely reckless issuing currency and judging the credit worthiness of borrowers. If anyone were permitted to issue currency, the best bankers would rise to the top, and eventually there would be a few stable currencies with very low inflation, all backed by real assets in the same way. There is no need to “abolish the Fed,” per se. We need only return the business of creating currency to the free market.

tkwelge April 21, 2011 at 8:55 pm

“Dollars are backed by the homes, cars, and businesses of which banks take ownership when they issue new loans.”

What about when the Federal Reserve purposely purchases an asset from a failing bank at high above its “real” value? In that case, you are being given an IOU for, let’s say, 100k that is only redeemable for an asset that is worth 50k. Of course, the federal reserve could still pay me 100k by creating new money, but than they’d be devaluing the money supply and therefore I would be paid back in dollars that were worth less than what was originally owed to me.

tkwelge April 21, 2011 at 8:57 pm

I really miss that “edit” button.

tkwelge April 21, 2011 at 9:56 pm

Yes, I am aware that the Federal Reserve does not own assets like houses and cars that individuals can purchase or redeem from it. The point that I did such a shitty job of conveying is that when the money supply can be manipulated there is little coordination between money, assets, or IOUs that can be used to argue that anything is backed by anything and nothing is redeemable for anything, short of any specific agreement that you have with a specific bank.

tkwelge April 21, 2011 at 10:30 pm

Damnit, missed a comma! Argh!!

tkwelge April 21, 2011 at 10:40 pm

Sigh… I’m proofreading everything from now on. I guess a stoner just can’t wing it anymore…

Stone Glasgow April 21, 2011 at 11:40 pm

You are correct. Issuing loans for overvalued assets, or to people who have poor credit is the cause of inflation. It devalues the dollars issued. This is why the Fed monopoly is harmful. It can get away with inflating because it has no competition.

vikingvista April 21, 2011 at 9:31 pm

You are confusing checks with dollars. If I hold an account with a bank that goes bankrupt, then I become a creditor to the bank’s estate. Checks are IOUs for dollars.

But my holding Federal Reserve notes can never make me a creditor for anything. Nobody owes me anything. And nobody is obligated to trade for my notes. Federal Reserve notes are not IOUs. That is why it is called “fiat money”.

Stone Glasgow April 21, 2011 at 11:38 pm

The Federal Reserve Notes are an IOU; an obligation to return your home to you if you return the notes. They could easily say “The Fed owes you 1/100,000th of your home” on each note. They owe you the house. You owe them 100,000 of their notes.

Put another way, if you returned with 100,000 notes, the bank would be willing to offer you one note stating “The Fed owes you one house.” When you return that note, you own the house again.

vikingvista April 22, 2011 at 11:45 pm

“They could easily say “The Fed owes you 1/100,000th of your home” on each note. ”

This is an absurd contrivance. A debt always stipulates repayment. If a debt stipulated repayment with 1 million bushels of flax, that does not mean that the flax I grow and store for repayment are IOUs.

Secondly, the Fed doesn’t give a damn about my house. I can walk up to the Federal Reserve bank with a bag of notes constituting the remainder of my mortgage, and the most they will give me in return is another bag of cash of newly printed notes.

I don’t know why you talk yourself into this nonsense. Sure, the first paper money, issued by banks, were IOUs. Even Fed Reserve notes were initially IOUs. But the Fed stopped promising owing you anything when they went off the gold standard. One day they owed you gold. The next day, they owed you nothing. Understand fiat currency. It exists.

Your argument here is that because USD dollars are accepted as repayment for a debt, therefore they must be IOUs. You are *defining* any debt repayment as an IOU. Then you are going through absurd contortions to make round reality fit around that square peg.

USD as repayment for a debt is treated just the same as ancient lenders treated gold (or anything else the lender desired) as repayment. Gold was not an IOU then, and USDs are not IOUs now.

Stone Glasgow April 25, 2011 at 7:23 pm

“This is an absurd contrivance. A debt always stipulates repayment. If a debt stipulated repayment with 1 million bushels of flax, that does not mean that the flax I grow and store for repayment are IOUs.

In the same way, a paper silver certificate “dollar” was in 1792 an IOU from the mint for 24.056 grams of silver. If you held one million dollars, the mint owed you 24.056 million grams of silver. If you went to the mine, and dug more silver out of the ground and stored it, that new silver would not be an IOU any more than new bushels of flax. The point remains that those “dollars” were IOUs from the US mint.

The mint would issue paper “dollars” if you brought raw silver to the mint for coining. It would take the silver and give you paper IOUs in return, in exactly the same way that a bank takes ownership of your assets and returns paper.

The silver certificate, when returned to the mint, yielded a specific amount of wealth (silver) in the same way that US dollars today yield a specific amount of wealth (a house) when returned to the bank.

You are confused because there are two ways that currency comes into the world.Most of it comes into existence via bank lending, but some comes into the world because of “quantitative easing,” which is analogous to the US mint printing up “fake” silver certificate dollars and spending them. They are still IOUs (they can still be used to get silver at a fixed rate from the mint), but they are not backed by wealth and they lower the value of existing dollars.

When the Fed creates new dollars “out of thin air” and buys treasuries, they are still IOUs (they can be used to take ownership of a house at a fixed rate from the bank), but they are not backed by wealth and also lower the value of existing dollars.

Sam Grove April 21, 2011 at 3:15 pm

If we put you and a friend on a deserted island with just a sack of money, where would you spend it?

Stone Glasgow April 21, 2011 at 5:10 pm

If I hold an IOU from my neighbor and you move me to a desert island (without the neighbor) the IOU would become worthless as well.

Holding an IOU carries risk, but an IOU from a trustworthy person or company is valuable in the same way as other paper assets: loan agreements, stock certificates, bonds, etc.

People have trouble understanding that money is wealth because they do not understand how dollars come into existence, or the process by which they are backed by real assets.

tkwelge April 21, 2011 at 8:50 pm

The Federal Reserve is not inherently trustworthy. We are all forced to use dollars and using anything else if forbidden, thus creating an artificially high valuation of the dollars themselves, which would be worthless if they weren’t backed up by force.

Stone Glasgow April 22, 2011 at 12:04 am

They are trustworthy in as much as they have not ever defaulted on their promise to return an asset as agreed when its notes have been repaid. And it has a giant thug on its shoulder, who has agreed to support it and its monopoly, which does not create an artificially high valuation of the currency, per se, but allows them to inflate dollars without worrying about losing customers. In a free market people would be free to choose from myriad currencies, judging each bank’s trustworthiness and its inflationary history.

The dollars would hold value without government force. For example, say I forget my wallet one day and walk into your store. I say “I forgot my wallet, will you accept this IOU for a bottle of whiskey?” If you accept, you now hold currency issued by me, backed and denominated in whiskey. (You could presumably trade that IOU with others who know and trust me.) I take ownership of your whiskey and you take ownership of my IOU in the same way that a bank issues IOUs in exchange for your house.

My whiskey IOU holds value without the use of force, and it is backed by my assets and credit worthiness. I may not even hold whiskey in my house, but because I promised to pay, that IOU continues to be worth a bottle of whiskey and would fluctuate in tandem with my wealth, credit history, and how much people in town trust me.

Later, if I come to your store with a bottle and offer to repay you, you might say “I forgot the IOU at home.” And I would say, that’s fine, keep the IOU and the bottle, but pay me a little interest until you find that IOU. If this were to happen, the exchange would be similar to a bank issuing new dollars for a home, and then allowing you to live in the home if you pay interest until you return all the dollars. They have agreed to return the home to you when you return the IOUs to them in exactly the same way that I agree to return that bottle of whiskey to you when you return the whiskey-IOU to me.

vikingvista April 21, 2011 at 9:43 pm

I agree that people don’t understand money. But you are one of those people.

Your goal in trade is obtain wealth. Some goods are called “intermediate goods” because they do not satisfy that goal. Money is a universal intermediate good, with the possible exception of currency collectors.

Stone Glasgow April 22, 2011 at 12:14 am

The term “intermediate good” is only useful in discussing the calculation of macroeconomic numbers, like the GDP, and are useful in avoiding double counting inputs to manufacturing. The term is not useful in referring to paper assets. They are not inputs to a final product, but are instead debt obligations that can be owned, held and traded by people who consider them valuable.

Wealth is anything of value that can be owned and exchanged. Money is valuable and can be owned and exchanged. Money is wealth.

vikingvista April 22, 2011 at 3:18 am

“The term “intermediate good” is only useful in discussing the calculation of macroeconomic numbers”

The only meaningful macroeconomic numbers are the ones that can be reduced to a single person or a single trade. You need to think about what the microeconomic atom of an intermediate good is.

“Wealth is anything of value that can be owned and exchanged. Money is valuable and can be owned and exchanged. Money is wealth.”

To say “money is not wealth” is to say that the ONLY value anyone has for money is in its ability to trade for something else. This is an important concept that you deprive yourself of by defining wealth as anything that’s traded. Everything traded that is not money, has some value to someone other than its trade value. Money was invented to obtain THOSE things. It has no other value to anyone (alright, except currency collectors…or historians…Scrooge McDuck?).

Stone Glasgow April 22, 2011 at 2:50 pm

I agree that macroeconomics is mostly worthless. At best it is an amusing way to look at an economy, but offer little in helping us to understand the world. Examining policies and transactions at the individual level is probably the only real way to understand their impact on real people.

Where did you get the idea that money’s only value is its ability to trade for something else? If I borrow a pound of sugar from you and give you an IOU in exchange, what is the value of that IOU to you? It has two purposes for you. You can trade it with someone other than me, using it as currency, or you can turn it in and get your pound of sugar back.

vikingvista April 22, 2011 at 11:50 pm

“Where did you get the idea that money’s only value is its ability to trade for something else?”

This is funny. Now you go on to support my statement:

“If I borrow a pound of sugar from you and give you an IOU in exchange, what is the value of that IOU to you? It has two purposes for you. You can *trade* it with someone other than me, using it as currency, or you can turn it in [aka TRADE] and get your pound of sugar back.” (emphasis mine)

I rest my case.

Stone Glasgow April 24, 2011 at 12:37 am

Good point Viking. I forgot its third value; money is a store of wealth. You can keep that IOU indefinitely as a low-cost method for storing wealth. There is still no fundamental difference between money and a good that is useless to you but is still wealth (like bauxite, or a truckload of grapes or paper with pictures and text).

There is no reason to differentiate between money and other paper assets. It only causes confusion.

vikingvista April 24, 2011 at 2:17 pm

” I forgot its third value; money is a store of wealth. You can keep that IOU indefinitely as a low-cost method for storing wealth. There is still no fundamental difference between money and a good that is useless to you but is still wealth”

Stone–

I thought I have been explicit, but you are still missing the fundamental difference. Yes, there are all kinds of goods that are intermediate goods for different people. But there is only one kind of good that is always an intermediate good for all people–money.

Many kinds of goods could be money. There could be many different kinds of money circulated at one time. Some money might even have multiple uses both as money and non-money. But it is always the case, that money is unique in that its value (as money) is *only* (with trivial exceptions) in its ability to be traded for non-money.

Before money existed, there was wealth that people wanted to acquire. Money was then invented to facilitate people acquiring that wealth.

If you don’t understand this, then you can’t understand this blog post, you can’t understand the phrase “Money is not wealth”, and you can’t understand money.

Stone Glasgow April 24, 2011 at 7:14 pm

“I thought I have been explicit, but you are still missing the fundamental difference. Yes, there are all kinds of goods that are intermediate goods for different people. But there is only one kind of good that is always an intermediate good for all people–money.”

I think we are both being explicit, but are blind to the other man’s point of view. I hear your argument, which is two-fold:

1. Money is a distinct asset. It is unlike all other assets, including financial assets.
2. Money is unique because it is universally accepted in exchange for wealth.

Perhaps we have gone too far in considering the nature of “money.” I think we must both be talking about different definitions of “money.” Can you please explain to me in simple terms, how currency was invented? How did the first money enter the world?

If you and I and 100 other people were on an island, could we create a currency that operates and comes into existence in the same way that USD are created today? If so, how would we do it?

Martin Brock April 21, 2011 at 5:02 pm

A Federal Reserve Note is an IOU promising another IOU from the Treasury, at the Fed’s established interest rate. The Treasury’s IOU in turn is an IOU from you and me, and we’ll the promise that the Treasury makes on our behalf, because the Treasury shoots us otherwise.

Stone Glasgow April 21, 2011 at 5:28 pm

You are correct regarding the IOU from the US treasury. It is a promise to confiscate wealth from US citizens (at gunpoint) to pay the debt.

You are incorrect regarding Federal Reserve Notes. They are a promise from a bank that agrees to accept the notes in trade for the loans on its books. The people that hold loans against their homes, cars, and businesses can always pay back the loans using the notes. If you take a loan against a $100K home, you can always take ownership of the home for 100 thousand Federal Reserve Notes. If rampant inflation makes the notes worthless, you are still permitted to take ownership of that home with the same (now worthless) notes.

Additionally, the notes are a promise by the state to remove its gun from your head; if you earn 100,000 notes per year you can always have the gun removed by paying about half the notes to the state. Even if the notes become worthless before April 15th, you can still remove the gun by paying with worthless notes.

Further, if you do not owe the state any taxes, and you do not hold any outstanding loans from any US bank, you are accepting the notes in the same way that I might trade an IOU issued by my neighbor. If my neighbor borrows a case of wine from me and writes an IOU, and I offer to trade that IOU for an ounce of gold, you would accept the IOU only because you trust my neighbor to keep his promise. In the same way, you only accept Fed Notes because you trust the US government and the Fed to keep their promises.

vikingvista April 21, 2011 at 10:02 pm

“A Federal Reserve Note is an IOU promising another IOU from the Treasury,”

Except that it obviously isn’t. I don’t care how many Federal Reserve notes you pack into your wallet, neither the Federal Reserve, nor the Treasury, owe you a thing. Nobody does. Federal Reserve notes quite simply are NOT IOUs.

I don’t know where this “money is debt” quackery initiated, but it seems to be metastasizing on the internet. Because almost all USD (and all checks on USD) enter circulation via credit, some people are mislead into thinking that debt is what gives the USD value.

But that is utter nonsense. USD are accepted in exchange for Treasuries because the USD had value first. The Fed needn’t buy Treasuries or any other kind of debt with newly made dollars. They can buy ANYTHING that is for sale.

USD have value because people before you accepted them in trade. And people before you accepted them for trade because they were redeemable in gold or silver. (Of course legal tender laws and payment of taxes in USD helps sustain it, but those would not be enough by themselves).

Checks have value, not because they coincide with debt, but because USD have value. You could conceivably write checks on anything of value. But checks without base money don’t work. The base money matters.

Contrary to the fantasies of the “money is debt” cranks, fiat money exists. And Federal Reserve notes (and their digital equivalants) are fiat money.

Stone Glasgow April 22, 2011 at 12:22 am

I’m afraid you have put the carriage before the horse. The first step to creating a currency is creating wealth. The second step is exchanging that wealth with another person in exchange for an IOU (debt), which can now be traded as currency.

There is a lot of blather about “debt-based” currency, and “out of thin air,” but there is also a lot of confusion regarding fiat and how currencies are created.

Dollars hold value because they can release you from a bank loan. No matter how badly the dollar is inflated, you will still be able to take possession of your home by paying off the loan at face value with the worthless dollars.

vikingvista April 22, 2011 at 2:58 am

“The first step to creating a currency is creating wealth. The second step is exchanging that wealth with another person in exchange for an IOU (debt), which can now be traded as currency.”

You trade one good for another. Then that’s it. Nobody owes anybody anything. It doesn’t matter if the goods are corn, widgets, gold, or USD. None of those goods is a promise for anything. No promises. You are all settled up. No IOUs of any kind come into play. Trading goods is an immediate quid pro quo. No credit, debt, or promises need come into play.

But it turns out that you don’t want the good (the corn, the widgets, the gold, or the USD). Your intention from the start was to trade the good that you obtained. You did not want that good for any other reason, but to obtain another good. You value it for no other purpose, but to trade for something else. It is, for you, an intermediate good.

Intermediate goods turn out to be very popular. They make it so much easier to get what you want in a complex world of many goods and many people. A great many people find that the same particular intermediate good works well for them. You now have a medium of exchange, which is the foundation of money.

USD today serve the same purpose as gold coins to the ancients. They are not in any way whatsoever IOUs. I ask you again, what does the Fed Res owe you? You can’t answer that. They owe you nothing. FR notes are simply not IOUs. There is not a single promise attached to the dollar in your wallet. Not a single obligation. Nothing. You simply hope in the future to find someone who will value that particular good. (Yes, legal tender laws help that).

An IOU is a promise to exchange something in the future. And most IOUs, like the checks that banks issue, are promises to exchange the IOU for…[drum roll]…money. Money is not the IOU. Money is what you GET for the IOU. Once you hand back the IOU, and you receive the money, there is no more owing of anything to anyone. You are squared up. No more promises.

Credit is a loan for something of value. You must first have something of value to base the credit upon. Nobody wants to borrow something that nobody values. Since so many people value a particular medium of exchange, that is the obvious thing for banks to loan out (or to loan out checks against). First the money. THEN the debt. Credit has value BECAUSE money has value, not the other way around.

Imagine the Federal Government paid back all of its Treasuries, and had no more treasuries outstanding. Imagine too that everyone paid back all of their debts. No more private debt outstanding. The money supply would contract to a tiny tiny fraction of its current level. Whatever the economic hardship (or benefit) of such a situation, the demand for USD would not disappear simply because nobody anywhere had any more debt. (In fact, it would likely increase in value because of its scarcity). It isn’t debt that gives it value, it is its function as a workable medium of exchange.

Stone Glasgow April 22, 2011 at 2:53 pm

“You trade one good for another. Then that’s it. Nobody owes anybody anything. It doesn’t matter if the goods are corn, widgets, gold, or USD. None of those goods is a promise for anything. No promises. You are all settled up. No IOUs of any kind come into play. Trading goods is an immediate quid pro quo. No credit, debt, or promises need come into play.”

If I agree to trade a pound of corn for your widget, but promise to pay you later and write you an IOU for a pound of corn, has the trade completed? Is that it? Does anyone owe anyone anything? You have my IOU and I have your widget. Are we done?

vikingvista April 23, 2011 at 12:09 am

“If I agree to trade a pound of corn for your widget, but promise to pay you later and write you an IOU for a pound of corn, has the trade completed? Is that it? Does anyone owe anyone anything? You have my IOU and I have your widget. Are we done?”

If you create an IOU, then you have an IOU. But if you trade corn for gold or widgets for USD, you have not created an IOU. You are settled up. When you buy a soda from 7-11 with USD, that’s it. You don’t owe 7-11 anything, and 7-11 doesn’t owe you anything.

A medium of exchange is NOT an IOU. Using a medium of exchange does not create a debt.

Stone Glasgow April 24, 2011 at 12:42 am

Viking, perhaps you missed my point. I create an IOU, hand it to you, and you hand me your widget in return. I trade a paper asset (an IOU, which is a form of debt) to you, and you give me your wealth (a widget). I have given you a piece of paper and you have given me your wealth. Are we done? Settled up? Is the trade finished?

Stone Glasgow April 24, 2011 at 12:45 am

“A medium of exchange is NOT an IOU. Using a medium of exchange does not create a debt.”

Using a medium of exchange does not create a debt, per se. An IOU can be used as a medium of exchange, but tobacco or gold can also be used. IOUs and gold and tobacco are all forms of wealth that have been used as currency.

vikingvista April 24, 2011 at 2:26 pm

” perhaps you missed my point. I create an IOU, hand it to you, and you hand me your widget in return.”

I’m not missing your point. IOUs do exist. I understand what an IOU is. I understand how IOUs work. And what you describe in that example is indeed an IOU.

What I am telling you, is that USD are absolutely positively without a shadow of a doubt NOT IOUs.

Those IOU arrangements that you describe are not how USD work or get their value. Even if you were confusing the fact of new USD entering circulation via Treasury debt as USD being IOUs, you have it backwards. The Treasuries that the Fed Reserve holds are the IOUs. A Treasury is a paper that says “I owe you US dollars”.

A Treasury gets its value from the value of USD, not the other way around. The Fed Reserve could just as well insert new USD into circulation simply by buying non-debt assets. The USD would still have value. Debt does not give the USD its value.

For all of history, things of value were used for credit and to pay back debts. In the USA today, those things of value aren’t gold, or silver, or slaves, or wheat–they are USD.

vikingvista April 24, 2011 at 2:27 pm

“Using a medium of exchange does not create a debt, per se. An IOU can be used as a medium of exchange, but tobacco or gold can also be used. IOUs and gold and tobacco are all forms of wealth that have been used as currency.”

Yes. I agree. IOUs *can* be used as money. IOUs *are* used as money in the form of checking accounts. But today USD are absolutely not IOUs.

Stone Glasgow April 25, 2011 at 7:54 pm

As I said above, there are two ways that USD enter the world. The first is via bank lending, which involves taking an asset in exchange for new USD, in the same way that the US mint used to take an asset (silver) and return US dollars. The old dollars could be returned to the mint for silver, and new dollars can be returned to the bank to take ownership of a house. When dollars are created in this way, they are backed by wealth, and they are IOUs.

The second way new dollars enter the world is via quantitative easing, where the Fed spends new dollars and buys wealth on the open market (treasuries, MBS, etc). When new dollars enter the world in this way they are not backed by wealth, but are still IOUs, because they can be returned to a bank in exchange for a house. When the Fed does this it is analogous to the old US mint printing up “fake” silver certificates and spending them. They are still IOUs that can be turned into the mint for silver, but they are inflationary.

This situation becomes more complex if we wish to complete the analogy. If the old US mint purchased silver on the open market with silver certificate dollars (IOUs for silver), there would be no harm done. All the IOUs could still be honored for silver held at the mint.

Today, when the Fed purchases assets on the open market, it is analogous to the old mint purchasing silver, because modern USD are backed by myriad assets (not just silver), but the trouble arrives when we realize that USD cannot be returned to the Fed in exchange for those assets. Further, those assets are held by the Fed but all profits derived from them goes back to the US Treasury each year, so those assets are effectively owned by the US government and can never be recovered by citizens holding modern US dollars.

In 1792, the silver in the US mint was still owned by the US government, but all of the silver was “spoken for.” All of it could be recovered by people holding silver certificate US dollars, so there was no harm done.

The situation becomes more complex when we consider that the Fed will later sell its assets back to the open market in exchange for US dollars, which is done to “raise interest rates” by selling treasuries. In reality, this lowers the supply of “fake” US dollars in circulation (dollars are paid back to the Fed, removing them from the money supply) and has nothing to do with interest rate manipulation. In reality, it deflates the currency by removing some of the extra IOUs.

So whenever the Fed holds a large amount of assets, there are extra inflationary “fake” IOUs in circulation, and when the Fed holds little or no assets (treasuries) there are little or no “fake” IOUs in circulation that are generated by the Fed. However, there can still be effectively fake IOUs in circulation if banks are careless in estimating the value of the assets that they accept in exchange for the new dollars they create (each time they issue a loan).

If banks suddenly begin issuing million dollar loans for lumps of coal, tulip bulbs, and tremendously overvalued homes and educations, this will also cause inflation because the supply of new dollars will begin to outpace the supply of new wealth. Issuing loans to extremely poor credit risks is another inflationary activity, because new dollars are backed not only by existing wealth, like homes and cars, but the good credit of the people borrowing the new dollars (good credit is wealth). If the people can be expected to repay the loan even if their lump of coal turns out to be worthless tomorrow, there is no harm done. If the person cannot be reasonably expected to repay, the new money is not matched by appropriate wealth or credit, and is inflationary.

tomharvey April 21, 2011 at 5:06 am

But would Mr. Landsburg’s zinger have had much impact if he had added

“The crucial assumption is that Robert Kendrick is a non-consumer, and that he will burn his money before leaving it to any heirs.”

up front? He apparently acceded to this qualification (supplied by a commenter) down in the comment section at his site.

Would his zinger have as much impact if it were entitled “The Man Who Can’t Be Taxed (Although his Direct Heirs or Other Beneficiaries Can Be)” ?

Captain Profit April 21, 2011 at 11:32 am

I’d think that was rather the point: That the premise of “the idle rich” is a fallacy.

tomharvey April 21, 2011 at 2:21 pm

But the exact point–that the idle rich with no heirs or beneficiaries, who plan to burn their money rather than pass it on, and who derive no satisfaction from the knowledge that they could command a substantial amount of resources, can’t be taxed–is uninteresting.

Daniel Kuehn April 21, 2011 at 7:23 am

The gist of it was good, but this was a little disturbing to read: “Here’s why it’s impossible: For the government to consume more goods and services, somebody else must consume fewer.

Nevertheless, we’ve been reading a lot of people peddling this idea lately. Zero sum game economics is bad economics. It’s bad economics for two reasons: (1.) it lulls conservatives and libertarians into acting like we’re always on the PPF/at full employment, and (2.) it lulls leftists into ignoring how innovation and division of labor expands the pie. No matter who embraces zero sum game economics, it’s bad economics.

I think the post still makes good points – but the fact that people can write sentences like that demonstrates the existence of some confusion.

Methinks1776 April 21, 2011 at 8:58 am

It’s not zero-sum, it’s scarcity.

Daniel Kuehn April 21, 2011 at 9:09 am

Scarcity implies constraints. It does not imply that two values can’t simultaneously grow.

Methinks1776 April 21, 2011 at 9:16 am

It does when one value must grow at the expense of the other.

Daniel Kuehn April 21, 2011 at 9:20 am

Umm… yes… I accept the tautology.

Your point? Again you are describing a zero sum situation, not scarcity. If scarcity comes with the conditions of zero sum, you will have zero sum. So?

Methinks1776 April 21, 2011 at 9:32 am

So, think about what happens when positive expectancy is crowded out by negative expectancy rather than the other way around.

Ken April 21, 2011 at 3:36 pm

DK,

Consumption IS zero-sum. That’s why it’s described that way.

For example, if I am a fisherman, assume I catch 1000 fish today. I then trade those 950 fish (50 of which I keep for myself) for new fishing equipment, food, clothes, gas for my car and boat, whatever. I am better off with the stuff I traded for rather than 1000 fish. The trades were not zero-sum.

If I have B, but value A more B and you have A, but value B more than A, we trade. Since we are both better off after the trade, we say the trade is not zero-sum, rather it was positive sum. However, our trade has NOT increased the number of available A or B. The trade simply efficiently reallocated wealth.

Now if the government comes along and takes 100 of my 1000 fish, I am left with only 850 fish with which to trade. Thus my consumption is reduced because government took my wealth (fish). My trading power has been reduced.

Consumption IS zero sum because if there are X amount of products available for consumption, then tautologically only X amount of products can be consumed. The more the government consumes, the less non-government agents can consume.

Now, imagine instead of trading my 1000 fish directly for consumable goods I trade 950 fish for say $500. However, since I have all that I need all ready and fulfill my daily needs from those 50 fish and $100, I burn the $400 worth of bills I have. I have no need for all that money and fish only because I like it.

Now if the government comes and takes $100 in bills every day from me to purchase $100 worth of consumable goods, they are NOT taxing ME because my consumption level doesn’t change after the taxation. I still consume 50 fish and $100 worth of consumable goods. The only difference is that now I am only burning $300 instead of $400.

At any given time there is a fixed amount of consumable items in the world, all of which will be consumed one way or another. Since the government is now consuming $100 worth of goods, it means that someone else’s level of consumption must decline by $100 or 5 people by $20, or any combination of which you can think. Someone else bare’s the tax because my level of consumption remains the same before and after the tax.

That is Landburg’s point. The fallacy Landsburg is pointing out is confusing the $100 the goverment takes from me in taxes with actual wealth.

Regards,
Ken

muirgeo April 21, 2011 at 9:06 am

Yeah… I guess I don’t see why we look at the government as different from any other private entity in terms of it’s ability to actually make a profit or actually add to the productivity of the economy. Or for that matter for private enterprise to potentially waste the money Mr Kendrick might have invested.

If the government for instance takes a million dollars ( yeah I like how they always have to take ALL of the individuals money) and uses it to advertise our national parks and overseas visitors come in droves and spend lots of money in our parks and outside of them they have contributed to our productivity more than if Mr. Kendrick invested in a Bed and Breakfast that quickly went belly up.

Daniel Kuehn April 21, 2011 at 9:11 am

Well it’s clear why it’s different – but I agree, just because there’s good reason to think it won’t be productive in the way that private entities are productive, that’s no reason to assume a priori that (1.) we will always have crowding out, or (2.) government can never be welfare increasing.

Coming to terms with those points is icing on the cake. It would be nice if we would drop this idea of “a dollar more for me implies a dollar less for you”, period. Then we can get into the mess that is “government”.

Methinks1776 April 21, 2011 at 9:20 am

(1.) we will always have crowding out, or

We always have crowding out.

(2.) government can never be welfare increasing.

That’s like saying it’s worth playing the lottery every week because you have to play to win. The lottery, like government, is a negative expectancy game. Pouring money down a negative expectancy hole is a bad idea even if you occasionally win. It’s simple math.

Daniel Kuehn April 21, 2011 at 9:28 am

Well I’d argue that it’s bad math to treat the government like some kind of random number generator.

But as I was discussing with muirgeo – it would be nice if people just stopped thinking in zero-sum terms. That would be nice to settle out even before we start a conversation about government.

Methinks1776 April 21, 2011 at 9:33 am

Do you not understand the analogy? Do you know how what “expectancy” is?

Seth April 21, 2011 at 9:50 am

Because government spending is typically what Milton Friedman referred to as Type 4 spending or someone else spending someone else’s money which is not spent as carefully* as something like Type 1 spending, you spending your own money.

*Carefully – in ways that are likely to generate benefits

Slappy McFee April 21, 2011 at 10:41 am

Murigeo –

Is there the possibility of the National Park going “belly up” if those customers don’t come “in droves”?

Dan April 21, 2011 at 1:09 pm

Ha!

Captain Profit April 21, 2011 at 11:52 am

“muirgeo” wrote:
> If the government for instance takes a million dollars

Well, I guess I don’t see why we look at the government as different from any other private entity either, because if I as a private citizen take a million dollars from you and use it to make my business more successful, aren’t we all better off? You probbly woulda just wasted it, after all…

Stone Glasgow April 21, 2011 at 10:43 pm

Think of it this way: Each year all citizens of the United States create apple pies. They all have apple trees and they all have wheat fields and cows, sugar beets, and a cinnamon tree. They are creating new wealth (apple pies) and making the proverbial “pie” bigger for everyone. Everyone has more pies, on average, each year. This is not a zero-sum game.

What happens if a big bad man with a gun comes along? The man does not bake pies. He sits in a fancy house on a hill polishing his gun, watching TV, and telling people what to do. What happens when this man descends into the village to confiscate pies? Every time he takes a pie, a villager has less pie. The man does not bake pies, and cannot have pie without making a villager have less pie. The more pies he steals, the less pies people make, fearing he may take any extras. The pie-stealing man on the hill does not help anyone but himself.

Daniel Kuehn April 22, 2011 at 5:29 am

Well right – as I said to Methinks I accept the tautology. If the scenario you set up is zero-sum, then it will be zero-sum.

But we aren’t talking about a village and a pie-stealer here.

crossofcrimson April 22, 2011 at 8:58 am

“But we aren’t talking about a village and a pie-stealer here.”

How does his analogy differ with what you’re envisioning?

Justin P April 22, 2011 at 10:14 am

It doesn’t fit his world view probably. DK is just as partisan as anyone else.

Stone Glasgow April 22, 2011 at 3:00 pm

Daniel,
How does the modern world differ from a village and a pie-stealing man with a gun? Please answer carefully. As Justin said, I think you may disagree with this only because it does not fit your world-view.

Government processes are zero sum because government does not create, it only steals what has already been created. If the pie-stealer take enough pie, and hires others to bake pies in his castle, the pies baked in his castle are still paid for (created) by the labor of the villagers.

Martin Brock April 21, 2011 at 7:41 am

And [b]nothing else has changed[/b].

Something has changed. After the taxation, state bureaucrats are entitled to spend the money, and Mr. Kendrick is not.

If Mr. Kendrick values only piles of banknotes or bits in a computer, his possession of these things does not reorganize any resources. If resources desperately need reorganizing, maybe the bureaucratic reorganization is better than nothing. That’s the Keynesian theory anyway. I’m not defending the theory here, only explaining it.

… when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, …

No. When Mr. Kendrick withdraws cash from a bank, the Federal Reserve replaces the cash with newly created cast. The Fed does so precisely to avoid the rising interest rate. It regulates this (nominal) interest rate. Replacing the cash this way, while the state taxes Kendrick’s cash, can increase the competition to exchange money for real resources, i.e. it can be inflationary.

The problem with transferring Kendrick’s cash to state bureaucrats does not involve the loss of money from the banking system. If this loss were the only problem, bureaucrats could take as much of Kendrick’s cash as they want, because Bernanke will always replace it. This way of thinking about money is precisely the problem.

The problem with transferring Kendrick’s cash to state bureaucrats is precisely that the state bureaucrats are spending it, i.e. the bureaucrats organize more real resources than they would have otherwise, even if they compete for these resources and drive up the price in the process.

In theory, the bureaucratic expenditure could add value to idle resources, just as lending Kendrick’s cash to non-bureaucrats could have this effect; however, in practice, bureaucratic expenditure does not add value, i.e. this expenditure is more like consumption than investment.

If borrowers from Kendrick’s bank borrow only to consume, rather than borrowing to reorganize resources to add value (investing), then leaving Kendrick’s money in the bank is hardly more productive than transferring it to the state bureaucrats; however, if borrowing to consume adversely affects most borrowers (as it should), we can expect transfers through the credit system to reorganize resources more productively.

Credit does not require lending “Kendrick’s money”. Credit does not require any money a priori. Credit creates money. You do me a favor, so I owe you a favor. Being owed a favor is negotiable, because you may ask me to do someone else a favor as a favor to you. These negotiable favors are money.

muirgeo April 21, 2011 at 9:08 am

“Something has changed. After the taxation, state bureaucrats are entitled to spend the money, and Mr. Kendrick is not.”

And how much money would Mr Kendrick have if the government hadn’t stolen money from some one else to run the patent office to copyright the lock design for his inherited company?

Slappy McFee April 21, 2011 at 10:45 am

How many resources would be saved if humans weren’t interested in stealing the property of others, thereby removing the primary reason governments exist?

tkwelge April 21, 2011 at 3:59 pm

Get rid of the patent office and then anybody can make any lock that they want. I think that you are getting away from the original point of the article. We can discuss the merits of patents later.

Martin Brock April 21, 2011 at 5:19 pm

I oppose most taxes, patents and inherited property. Like I’ve said repeatedly, I oppose all corporate income taxes. I favor a progressive consumption tax with marginal rates approaching 100% (which would vastly lower tax receipts). I oppose most patents, including all software patents and business process patents. I favor much shorter copyrights. I favor the expiration of most entitlement to property on the death of the proprietor. I take all of these positions because I am a classical liberal.

Why not communicate rather than pontificate?

Sam Grove April 21, 2011 at 6:17 pm

I favor much shorter copyrights. I favor the expiration of most entitlement to property on the death of the proprietor.

I agree with you but a question: what if the proprietor transfers ownership before death?

Methinks1776 April 21, 2011 at 6:25 pm

Isn’t that what would happen?

Martin Brock April 21, 2011 at 8:22 pm

A titled transferred before death still expires, so if you give me a house and die the next day, I lose title to the house the next day. If you sell me the title at market value, my title does not expire, but your gain from the sell does expire. If you have only money from the sale at this point, this money simply leaves circulation. We burn it to celebrate your passing.

Title expiration is like an estate tax without the transfer of money to a central authority. Estate taxes already cover gifts before death, so this problem is already well understood.

vikingvista April 22, 2011 at 3:26 am

“If you sell me the title at market value, my title does not expire”

Wow. That gives a whole new meaning to “market value”. Who determines? Christie’s? I just sold an old lawnmower to my neighbor for $10. When I die, does he lose the lawnmower because I didn’t go through a Brock-approved market value establisher?

If something is mine, it is mine to give on whatever terms another will accept. If not, then it wasn’t my property after all.

Martin Brock April 22, 2011 at 8:53 am

Market value is the price of an asset in a well advertised, public auction. This meaning is not remotely new.

In principle, the lawnmower could be sold at auction on your death, with your neighbor receiving the $10 he paid for it from the proceeds, the remaining proceeds being removed from circulation.

In practice, the estate tax in the U.S. exempts the first five million dollars worth of assets. Title expiration could be also be progressive in this way, so you could give your lawn mower to your neighbor without worrying about the title, just as you can give your neighbor a mower now and not worry about the gift tax that already exists.

I would exempt less than five million dollars worth of assets from title expiration, personally, but I’m not discussing any accounting for titles that doesn’t already exist.

If you hold title to an asset, the asset is “yours” in precisely this sense. If you hold an office in a state bureaucracy, this office is also “yours”, but in the United States, you may not hold a state office in perpetuity with a right to choose your successor, because the United States departed from this practice a few hundred years ago. I’d like to depart further from it.

What Locke called “property” in his essay “Of Property” in the The Second Treatise of Civil Government is a man’s right to the fruits of his own labor as well as means of production that he personally employs. In Locke’s time, the word already had a broader usage, but Locke’s understanding is very clear from the last sentence of his essay.

“Right and conveniency went together; for as a man had a right to all he could employ his labour upon, so he had no temptation to labour for more than he could make use of. This left no room for controversy about the title, nor for encroachment on the right of others; what portion a man carved to himself, was easily seen; and it was useless, as well as dishonest, to carve himself too much, or take more than he needed.”

Locke is discussing a pre-capitalist, natural state here, and his discussion is more theoretical than historical, but this idea of “property” is the classically liberal idea. Your title to a Treasury note is not “proper” at all in this sense. Your Treasury note is not your property. It is your improperty. Much that we call “property” these days is not property in the Lockean sense.

vikingvista April 23, 2011 at 5:33 pm

Martin Brock–

“Market value is the price of an asset in a well advertised, public auction. This meaning is not remotely new.”

What is new, and false, is that there is some market price that gives the one proper value to things. *Given* an market, you can say things about the market price. But the market price itself holds no moral value. It is the result of the free choice of market actors, not a justification for the violent suppression of free choice. Nor is there any such thing as a standard market. Different markets emerge from different choices of its particular participants. It is just as much a market to hire a solicitor to call around for the best offer, as it is to employ price discrimination, as it is to hold a restricted auction in a private room, as it is to hold an auction on eBay. And with each of those legitimate markets, a very different price may emerge. The legitimacy, the principle, is in the freedom. And freedom can take many routes. Market price is merely a consequence of whichever route freedom takes.

“In principle, the lawnmower could be sold at auction on your death, with your neighbor receiving the $10 he paid for it from the proceeds, the remaining proceeds being removed from circulation.
In practice, the estate tax in the U.S. exempts the first five million dollars worth of assets. Title expiration could be also be progressive in this way, so you could give your lawn mower to your neighbor without worrying about the title, just as you can give your neighbor a mower now and not worry about the gift tax that already exists.
I would exempt less than five million dollars worth of assets from title expiration, personally, but I’m not discussing any accounting for titles that doesn’t already exist.”

Yes. That could be imposed on a population, and is scarcely different than what the government currently imposes. But it breaks the chain of peaceful transactions with violence. I acquired my lawnmower peacefully. My neighbor acquired it from me peacefully. Now you intend to have state thugs violently confiscate that lawnmower from my neighbor should be be unwilling do comply with your threats. On the good-evil spectrum, this is quite an easy call.

“If you hold title to an asset, the asset is “yours” in precisely this sense. If you hold an office in a state bureaucracy, this office is also “yours”, but in the United States, you may not hold a state office in perpetuity with a right to choose your successor, because the United States departed from this practice a few hundred years ago. I’d like to depart further from it.”

We’ve discussed this before. I understand your stipulated might-makes-right theory of law and rights. Yes, the biggest thugs on the block may decide what they will recognize as my property. And they may unilaterally issue title to it. They may issue a title for my lawnmower, my house, my child, my legs, or even my life. I may be powerless to do anything but comply, but I don’t have to claim that their unilateral forceful imposition upon me is anything more principled than the law of the fist. And if I did follow your beliefs in this matter, I’d have no foundation to argue against any kind of oppression.

I don’t really care what the Thugs say I or my neighbors have title to, when it comes to determining legitimate ownership. I care only for what my neighbor did to other people to obtain his property. If all his acts were voluntary, then there is no offended person to dispute his property claims. I’m not about to introduce violence into a completely peaceful and voluntary situation.

“What Locke called “property” in his essay “Of Property” in the The Second Treatise of Civil Government is a man’s right to the fruits of his own labor as well as means of production that he personally employs. In Locke’s time, the word already had a broader usage, but Locke’s understanding is very clear from the last sentence of his essay.
“Right and conveniency went together; for as a man had a right to all he could employ his labour upon, so he had no temptation to labour for more than he could make use of. This left no room for controversy about the title, nor for encroachment on the right of others; what portion a man carved to himself, was easily seen; and it was useless, as well as dishonest, to carve himself too much, or take more than he needed.”
Locke is discussing a pre-capitalist, natural state here, and his discussion is more theoretical than historical, but this idea of “property” is the classically liberal idea.”

I can’t deny that Locke is held as the quintessential classical liberal. And I also cannot defend the entirety of his irrational property rights theory. But I can defend he theory against your claims.

It is true that Locke believed ownership with a consequence of mixing one’s labor with unowned things. But his dispute with large property accumulations had to do with waste and decay. Locke did disagree with you. Outside the problem of wasted resources, that god supposedly gave to the common benefit of all men, he had no problem with unlimited accumulations of wealth as he states in the penultimate paragraph to the same treatise you quoted:

“But since gold and silver, being little useful to the life of man in proportion to food, raiment, and carriage, has its value only from the consent of men, whereoflabour yet makes, in great part, the measure, it is plain, that men have agreed to a disproportionate and unequal possession of the earth, they having, by a tacit and voluntary consent, found out, a way how a man may fairly possess more land than he himself can use the product of, by receiving in exchange for the overplus gold and silver, which may be hoarded up without injury to any one; these metals not spoiling or decaying in the hands of the possessor. This partage of things in an inequality of private possessions, men have made practicable out of the bounds of society, and without compact, only by putting a value on gold and silver, and tacitly agreeing in the use of money: for in governments, the laws regulate the right of property, and the possession of land is determined by positive constitutions.”

“Your title to a Treasury note is not “proper” at all in this sense. Your Treasury note is not your property. It is your improperty. Much that we call “property” these days is not property in the Lockean sense.”

I don’t have treasury notes. I have Federal Reserve notes, which in spite of this whole money is debt canard is something quite different. FR notes function as money. They serve the same role today as gold served it the abstract in which Locke was writing. And Locke had no problem with the unlimited accumulation money.

Again, I understand that you don’t get natural rights. That to you rights are nothing but the unilateral stipulations of strongmen. But almost everyone else in their day to day lives thinks differently. I don’t determine legitimacy by a thug-issued title. I look to my neighbor, I discern his values, and I choose as best I can to refrain from offensive acts that will compromise those values. It is no surprise that my neighbor almost always does the same with me, even without me having to brandish my shotgun or guard dogs.

Yes, the thugs will do what they can to me. But I will still strive, in spite of that, to do what is right.

vikingvista April 24, 2011 at 2:32 pm

Martin Brock–

Apologies for all of the typos I just noticed in my post to you. I have so little time these days to even keep up with the blog let alone proofread.

Ken April 21, 2011 at 8:57 pm

Martin,

What do you propose happens when people die? What about privately owned businesses and assets associated with that business? How many millions of people would have to lose their jobs based on the idiocy of non-inheritance? How much more impoverished would we be if wealth weren’t allowed to be accumulated over generations to all the level of investment and development we have today?

Regards,
Ken

Dan April 21, 2011 at 9:25 pm

What’s wrong with inheritance? I would never fully own anything if I knew it all to be confiscated upon death. All items would be on loan.

Ken April 21, 2011 at 11:13 pm

Dan,

Not sure why you’re asking me that question. That’s what I was asking Martin.

Regards,
Ken

Martin Brock April 22, 2011 at 9:48 am

Privately owned businesses would be sold at auction to the highest bidder. Monetary proceeds from the sales would leave circulation. Your children or other prospective owners that you prefer could bid, and if you’ve prepared them to operate your business effectively, they’d have a distinct advantage when seeking credit to bid. This credit replaces the money leaving circulation, but your preferred successor has an advantage when seeking the credit only if you’ve prepared her well.

No one would lose his job. This sort of thing already happens routinely without vast unemployment. In fact, unemployment is high now, though the estate tax recently disappeared altogether for a year and now exempts the first five million dollars. The vast majority of people in the U.S. never pay any estate tax, because they have small estates. That’s fine, but we don’t want to become a rentier’s culture.

On the other hand, someone you like might be required to get a job rather than consuming the yield of your business without contributing any value to it himself. This necessity doesn’t bother me at all. It’s not a curse imposed on your friend. It’s blessing to him and to your business as well. Working for your neighbors through the market is good. It’s revitalizing.

Wealth would still accumulate over generations. Your business would not dissolve on your death necessarily. This dissolution would be less likely, not more likely, because the new owner would reinvest in the business rather than simply consuming its yields. He’d reinvest to grow the business income beyond the cost of repaying his credit.

Ken April 22, 2011 at 12:50 pm

Martin,

Thanks for sharing your ideas, but I think it’s an abhorent one.

My aunt and uncle started and operated a business. They’ve sold it to their children. However, this wasn’t done on the open market. No one else was allowed to bid (as long as my cousins wanted to buy the biz, my aunt and uncle weren’t going to entertain other offers). Now you’re telling me that my cousins will have to pay twice for the business because deed transfer expires upon death.

How about the situation where a family, consisting of only a father and son, is on the edge of poverty. The father owns a small home free and clear, but is old, so the son works at most part time and spends the rest of their time taking care of his father. Now when his father dies, the son who has spent the last decade or two working as little as possible to make as much time for his father gets booted from the house, since the deed owner is dead.

How about a family farm that has been in the family for generations, but is only farmed just enough to feed the family and to sell enough to cover basics. Again, I know many families like this. Now after a lifetime of working and maintaining a farm with his family, and owned by his parents, this person must be turned out?

How hard do you think people will work if they know NONE of what they earn can be given to their chosen heirs? People will begin to retire early in order to consume their entire lifetime’s worth of earnings. Why create a business and build it into a vast corporation if you have absolutely no say in what happens to it after your ownd death.

You claim that your idea “already happens routinely”, where upon the death of someone, their estate is auctioned off and the proceeds are simply taken out of ciruclation. Please tell me where this has actually taken place.

Regards,
Ken

Stone Glasgow April 22, 2011 at 3:14 pm

“Your children or other prospective owners that you prefer could bid, and if you’ve prepared them to operate your business effectively, they’d have a distinct advantage when seeking credit to bid. This credit replaces the money leaving circulation, but your preferred successor has an advantage when seeking the credit…

If you burn all of the money a person holds when they die, it is exactly the same as burning their home. Money is an asset. A pile of money is a pile of IOUs. They have real value, as does any other financial asset. Would you also burn all of his stock certificates, bonds, and loan agreements?

Stone Glasgow April 22, 2011 at 3:17 pm

Additionally, when new currency is issued, it does not bring new wealth into the world. The currency is issued in exchange for existing wealth.

As you said before, if I do you a favor, wealth has been created by that favor. If you agree to do me a favor in the future, in return for the wealth I have already created, that promise is currency.

Stone Glasgow April 22, 2011 at 3:21 pm

Martin,
If you are so concerned with engineering the future of a wealthy family’s dynasty, would you be equally interested in forcing my brother to get off the couch and get a job?

If rich men’s children are not permitted to be idle in your world, and are forced to be productive at gunpoint, should we not raid every trailer park and housing project in the nation, looking for idle capacity to be pushed into the workforce?

tkwelge April 21, 2011 at 9:59 pm

So you are against people voluntarily giving their assets to anybody that they please? That is essentially what inheritance is. The dying make the choice to keep the money in the family rather than seeing it dispersed to strangers, and you see that as somehow illegitimate?

Martin Brock April 22, 2011 at 9:49 am

I’m against people entitled to monopoly rents, created by the state’s forcible imposition, consuming the value of these rents.

Yes, I see feudalism as illegitimate.

Ken April 22, 2011 at 12:36 pm

Martin,

How is doing what you want with your own possessions “monopoly rents”? How is this “the state’s forcible imposition”?

And now you’re beginning to sound like muirgeo implying that inheritance caused feudalism. Of course, feudalism was maintained through serfs, i.e., slaves, people who were tied to the land and couldn’t go work somewhere else.

If I owned some land and passed it on to my kids, who passed it on to theirs, etc., feudalism would not emerge.

Regards,
Ken

vikingvista April 22, 2011 at 3:43 am

“I favor the expiration of most entitlement to property on the death of the proprietor. I take all of these positions because I am a classical liberal.”

So, when Daddy Warbucks dies, the person with the strongest claim to his property is…Nancy Pelosi? A stranger named “Joe Smith” 6 states away? The community? Anybody but the people that Daddy gave or traded his property to? So you confront the peaceful voluntary transfer from Daddy to his heirs with what? A small army?

There is a name for this, but it isn’t “classical liberal”.

crossofcrimson April 22, 2011 at 9:02 am

“There is a name for this, but it isn’t “classical liberal”.”

To be fair, although I’m not a part of it, there is certainly a branch of classically liberal thought that doesn’t believe inheritance (as we know it) is consistent with property-based ethics/philosophies. I think it’s worth hearing the argument(s) out if you’ve never seen/heard it before.

Martin Brock April 22, 2011 at 10:15 am

No. The person with the strongest claim to the property is the winner of a well advertised, public auction. You may favor Nancy Pelosi when extending credit to bidders if you like. I wouldn’t. I might prefer you instead, if I thought you most likely to prosper as the proprietor.

Your assertion of peaceful, voluntary transfer is nonsense. Property rights are forcible. Large armies already exist to enforce these rights. Your “peaceful, voluntary transfer” is an incredible myth. I only need to open my eyes to see what a lot of nonsense it is.

No. What I describe here is precisely classical liberalism. Shall we reexamine the words Locke, Smith and Ricardo? Are you willing? Or do your own words constitute “classical liberalism” in your mind?

The common usage of words changes, of course. Ironically, some people calling themselves “conservatives” today talk more like the classical liberals, but other modern “conservatives” talk more like the classical conservatives (and even more think like classical conservatives). Needless to say, the classical liberals opposed the classical conservatives.

Stone Glasgow April 22, 2011 at 3:29 pm

Martin,

You are correct when you mention that property rights are forceful. The government uses force to maintain property rights. Without the government, however, wealthy men would employ armies to defend what they have created, and their children would take over the estate, complete with the army, upon the death of the owner.

Methinks1776 April 22, 2011 at 5:43 pm

I agree with Stone. Moreover, I think people will quickly find ways around losing their property upon death. I can think of several ways now.

vikingvista April 24, 2011 at 2:36 pm

Stone–

Property rights are no more forceful than freedom from slavery. You confuse willingness to employ force defend one’s rights against force, with initiation of force. Property rights, like the right to one’s own body, require no initiation of force.

Governments are not needed to defend property rights, but of course they do. They also violate property rights. It is an error to believe rights are defined by what government does. Rights are instead used to JUDGE what government does.

vikingvista April 25, 2011 at 9:03 am

MB–

Strong words. You’ll have to read my post above to you to see how your interpretation of Locke is so wrong. Your mistake appears to be the belief that you only ever needed to read one Lockean paragraph to understand him.

Tip–whenever you come to believe that classical liberalism and fascism is one and the same, you may want to do more reading.

Stone Glasgow April 25, 2011 at 8:03 pm

Viking,
The government uses the threat of force to maintain property rights, which does involve “initiation of force” if a squatter peacefully trespasses onto your land. To remove him, you would have to initiate force and move him (against his will) off of your land.

Humans do not have rights given to them by God. We make up the rights we feel are reasonable, and create a government to make sure everyone enjoys those rights.

vikingvista April 22, 2011 at 3:30 am

“Credit does not require any money a priori. Credit creates money. ”

No. Yes.

Credit creates money1. But without money2, credit wouldn’t exist. There wouldn’t be a demand for credit.

Base money and credit money are distinct concepts. The latter requires the former.

Martin Brock April 22, 2011 at 10:25 am

If by “money2″, you mean goods of real value, like gold or your labor, you’re right, but calling these goods “money” is a misnomer. When we exchange valuable goods for other valuable goods, we aren’t using money. We’re bartering. Money itself is not a valuable good in this sense. Money is an accounting device, no more intrinsically valuable than an entry in an accounting ledger (electronic or otherwise).

Credit (and money) does not require what we commonly call “base money” today, i.e. it doesn’t require a statutory, legal tender. If you want to hold gold in reserve, that’s fine with me, but holding gold is not holding “base money” unless some state imposes gold as a legal tender for credit generally.

If you want to hold Treasury notes (or Federal Reserve notes exchangeable for Treasury notes in open market operations), that’s not so fine with me, but these notes are “base money” in our monetary system. I don’t like this system. I oppose it. I oppose a statutory gold standard for similar reasons.

Stone Glasgow April 22, 2011 at 3:06 pm

“Credit creates money. You do me a favor, so I owe you a favor. Being owed a favor is negotiable, because you may ask me to do someone else a favor as a favor to you. These negotiable favors are money.”

This is exactly correct.

Krishnan April 21, 2011 at 7:59 am

“Someone else must consume less” Bingo. That’s it.

A central aim of the redistributionists is NOT to increase wealth and make things better for all, but to force misery on those that do not have enough (or no) misery.

So, by taking the deposits from the “idle rich” – GOVERNMENT will simply make it impossible for that “idle rich” to do what they want with the deposits they have – like investing in some idea – or as the article noted, the bank investing in someone with ideas …

John April 21, 2011 at 8:39 am

I honestly don’t really get either Landsburg’s or Boudreaux’s rather hyperbolic “one-liners”. Neither are all the convincing to any but the choir and if considered outside the rather narrow confines of the statements are simply wrong.

If Boudreaux really thinks his bank account is not wealth, he can transfer it to my account. I really don’t get why such a claim would be made as some corollary of Landsburg’s statement.

Depending on the assumptions made, Landsburg’s claim may hold — that Robert Kendrick’s consumption doesn’t change at all and that the government consumption displaces other people’s consumption. I don’t really see any reason to assume a zero sum game here. If we assume the 84 million is only money in the bank, substantial slack exists in the economy and the government’s spending actually induces additional investment in productions and employment that is consistent private sector demand such a transfer could be a positive sum outcome.

Would I expect that result? Not really. But I don’t see that Landsburg’s insight is convinccing to the general public–at that appears to be the audience, nor do I see that suggesting money is not wealth helps inform either.

Eric Hammer April 21, 2011 at 11:41 am

I will attempt to explain the reasoning.
The bank account isn’t wealth, but rather a claim on wealth. That claim, if not being exercised by the owner is used by the bank to loan the claim to someone else which they can use to acquire wealth. So say the 84mm is in the bank, someone borrows that claim and gets a house (wealth) or starts a business (wealth) etc.

If the government takes that claim in some way, the owner (which the article assumes is not ever going to claim it, per the referenced article) doesn’t have his status changed. In your example, Don would notice as he presumably has more use for the claim than zero, but Steve’s basis was that the guy had functionally zero consumption.
However, the government taking that claim to wealth means that the bank can no longer loan it to people who want to buy houses or start businesses.

Where it starts getting into Zero-sum/scarcity issues depends on what the government does with the money, i.e. what they do with the claim on wealth . Theoretically they could invest it in something or another that would be even better than the house or businesses that other people would use it for, thus increasing the size of the pie. However, they also could do something that had zero return, and thus shrink the potential pie. Or they could do something that had negative return, and not only shrink the potential pie, but the actual current pie.

Now, where you place government’s ability to spend someone else’s money on someone else in a positive matter is a question for debate. It is pretty easy for me to come up with net-zero or net-negative uses for the money, but not many net positives. (Remember, this is net compared to the benefit it would have in private hands.)

The important thing to remember is that short run the government taking money from the bank account lowers the resources available to non-government, as the pie doesn’t grow that fast. Even if it would grow the pie in the long run, short run it can’t and so the question becomes “Is the claim on wealth better exercised by the government or private individuals?” Considering that government agencies very rarely turn a profit my thought is that pretty generally private enterprises are better for wealth creation and growth.

Hope that helps.

John April 21, 2011 at 3:36 pm

I do appreciate your effort but think you’ve missed the mark. Let’s start with the basics: How are you defining wealth? My just is that to get to money in the bank is not wealth means a very narrow definition of wealth that I might disagree with.

I agree that what the government does will have an impact on thing being a negative, zero or positive sum game. However, the presentation largely presented it as a zero sum setting. If we’re in the famous equilibrium the only two options will be negative and zero sum. A positive sum game becomes possible if we’re not in equilibrium but that was clearly ruled out by Landsburg. I don’t see why, especially given the current state of the economy.

Note, I’m not arguing for such taxes. I think there’s an interesting aspect to it, assuming we could eliminate other taxes. However, we wouldn’t see other taxes removed; all that would be accomplished is loosening the purse strings for our spendthrift politicians and voters. That’s a bad idea.

tkwelge April 21, 2011 at 4:02 pm

“How are you defining wealth? My just is that to get to money in the bank is not wealth means a very narrow definition of wealth that I might disagree with.”

Stacks of paper is not “wealth.” The “wealth” embodied by those stacks of paper depends on what can be obtained in an exchange.

Sam Grove April 21, 2011 at 6:21 pm

An account is merely a record of promises or entitlements. Until they are actually exchanged for goods/services, these entitlements are merely an accounting of wealth that one expects to take possession of later.

The accounting of wealth is not the wealth.

John April 21, 2011 at 9:23 pm

You’re still not defining wealth.

My definition of wealth is basically net worth — some stock of assets at my disposal for satisfying my wants. The fact that money is the unit of account for valuing that stock does not change the use of money as a store of value or, as you indicate, a generalized claim on some future want.

Putting it differently, wealth is a generalize accounting concept indicating the ability of a person to command goods and services in general to meet future demands. Wealth can include real assets, and service contracts, but it can also include financial assets such as money in the bank. Wealth is not the consumption or mere possession of goods and services.

Stone Glasgow April 21, 2011 at 10:17 pm

A wealthy person owns or controls a lot of things, valued by humans, that can be exchanged. There is no fundamental difference between a “paper” asset and a “physical” asset. Both are valuable, and can be owned and exchanged.

vikingvista April 22, 2011 at 4:00 am

“There is no fundamental difference between a “paper” asset and a “physical” asset. Both are valuable, and can be owned and exchanged.”

Why is money designated by a different term if it is not a different concept? If it is a distinct concept, then what is the distinction? Money and bread are valued, yes. Money and bread are traded, yes. Money and bread are eaten, no.

The distinction–the fundamental difference–between money and other traded goods, is that many people value other traded goods for something other than trade. Not true for money. 100% of money’s value (as money) is derived from the value of of those other traded goods. Without other traded goods, money has zero value. Without money, those other traded goods retain value.

The purpose of money, and its only source of value, is in the movement of other traded goods. This is why it is useful to think of wealth as excluding money, for the reason that Landsburg gives. To insist on defining wealth the way you do doesn’t diminish his point at all. It is just a semantic diversion away from his point.

crossofcrimson April 22, 2011 at 9:14 am

“00% of money’s value (as money) is derived from the value of of those other traded goods.”

If you want to make that claim, I think you have to specify fiat currency. Historically “money” IS a good. Gold, silver, wheat, etc. – money simply rises as the standard good of trade. So, I think, in a market where we were talking about more traditional monies Landsburg would be clearly out of his mind. I think things only start getting dicey when we’re talking about fiat currencies. It’s true that, for artificial reasons, fiat currencies don’t seem to be a good in the traditional sense. On the other hand, people do value it independently (even if those reasons are artificial).

Stone Glasgow April 22, 2011 at 3:37 pm

Viking,

It doesn’t matter what we call an asset. We could call money many other things, but money is the word we choose. Because we call some foot coverings “sneakers” and others “boots,” does not mean they are fundamentally different. They are both shoes, in the same way that money and wine are both “wealth.”

vikingvista April 23, 2011 at 12:39 am

Stone–

Since you reply as though you didn’t read it, I will repeat my own post:

The distinction–the fundamental difference–between money and other traded goods, is that many people value other traded goods for something other than trade. Not true for money. 100% of money’s value (as money) is derived from the value of of those other traded goods. Without other traded goods, money has zero value. Without money, those other traded goods retain value.

This is indeed a difference. Perhaps the reason you don’t understand money, is that you haven’t grasped this distinction. Each person has his own purposes for the goods he acquires. But of all goods, money is unique, in that each and everyone of us (with trivial exceptions) has only one and the same use for money–trade.

vikingvista April 23, 2011 at 12:58 am

cross–

“If you want to make that claim, I think you have to specify fiat currency. Historically “money” IS a good. Gold, silver, wheat, etc. – money simply rises as the standard good of trade.”

That is why I included “as money”. Gold can be valued for its electrical properties, its beauty, or even its medicinal purposes. Those are all different things. A fourth different thing it can be valued for is as money. If gold next year became the most widely demanded money in this country, it would affect the price (e.g. relative to silver or oil) of gold. Gold is multi-use, and its use as money can be distinguished from its other uses.

Fiat money eliminates that stacking of different demands, since there really isn’t anything else it is valued for except as money. Unfortunate, because those other uses that gold has help make it a more reliable store of value in the long term.

So my statement works for gold too. 100% of gold’s value *as money* is derived from the value of those other traded goods. If few people would accept gold for trade, then gold would have zero value as money, but would still be valued for its other uses.

Sam Grove April 23, 2011 at 1:07 pm

Money is an instrument.

If money disappeared, but people kept producing goods and services, they would still be able to consume. (Let’s assume a simple economy where they can barter)

If money kept being printed, but people stopped producing goods and services, they would starve.

Stone April 24, 2011 at 1:13 am

“Perhaps the reason you don’t understand money, is that you haven’t grasped this distinction. Each person has his own purposes for the goods he acquires. But of all goods, money is unique, in that each and everyone of us (with trivial exceptions) has only one and the same use for money–trade.”

You are saying that “goods” have two values: they can be traded and they can also be consumed. Currency (IOUs) can also be traded and consumed.

If I borrow a case of wine from you and write an IOU on a piece of paper, and hand it to you, you now hold a piece of paper that has the same two functions as any other “good.” When you return to my home next week, hand me the paper and I hand you a case of wine, what do I do with that IOU? I destroy it. The IOU has been consumed.

The same thing happens to the IOUs (Fed Reserve Notes) when I return them to the bank when I make a house payment. The bank may issue new IOUs to other people, denominated in the same “dollars,” but the process is the same. You held an IOU denominated in wine, but I could just as easily handed you an IOU denominated in anything else. We could have agreed to write the IOU in gold, pigs, dollars, or even unicorns. It would not matter. I could have agreed to pay you one cow for your case of wine, and written you an IOU for one cow. When you turn in the IOU, I burn it and give you a cow. The IOU is a good that has been consumed.

John April 24, 2011 at 8:20 am

vikingvista, re your reply to stone on the 23rd.

If we take your view then we have no way of measuring or really identifying wealth since it’s a subjective concept dependent on each person’s particular goals and plans. Any good can be treated as an intermediate good, not directly valued by the person owning it but only valuing it because it will allow them to get to a directly valued good.

Is that the definition of wealth you want?

vikingvista April 24, 2011 at 3:23 pm

“You are saying that “goods” have two values: they can be traded and they can also be consumed. Currency (IOUs) can also be traded and consumed.”

You do realize that it is circular reasoning to continually define money as IOUs in an attempt to defend the indefensible position that money is IOUs. The currency known today as “Federal Reserve notes”, are not IOUs.

And the currency cannot be consumed (or rather, almost nobody values it for that purpose). Currency is traded for something that is consumed.

“If I borrow a case of wine from you and write an IOU on a piece of paper, and hand it to you, you now hold a piece of paper that has the same two functions as any other “good.””

No it doesn’t. It has only one function–to trade in exchange for something else. In this case, to trade for a case of wine.

“When you return to my home next week, hand me the paper and I hand you a case of wine, what do I do with that IOU? I destroy it. The IOU has been consumed.”

Expiring the IOU is not consuming it. You don’t have to destroy it. You can do what you want with it. But you don’t want to have anything to do with it, because it is no longer of any value. The only thing consumed is wine, the two things traded are wine and IOUs.

BTW, in case you haven’t heard, Federal Reserve notes are not IOUs.

“The same thing happens to the IOUs (Fed Reserve Notes) when I return them to the bank when I make a house payment. The bank may issue new IOUs to other people, denominated in the same “dollars,” but the process is the same. You held an IOU denominated in wine, but I could just as easily handed you an IOU denominated in anything else. We could have agreed to write the IOU in gold, pigs, dollars, or even unicorns. It would not matter. I could have agreed to pay you one cow for your case of wine, and written you an IOU for one cow. When you turn in the IOU, I burn it and give you a cow. The IOU is a good that has been consumed.”

If you are saying that you burn it to heat your house, then it is consumed, but that is one of the trivial exceptions I’ve been talking about. An expiring IOU is not consumption.

BTW, in case you haven’t heard, Fed Res notes are not IOUs. And not being IOUs, Fed Res notes do not expire.

But yes, a mortgage is indeed an IOU. IOUs are routinely denominated in goods that are not IOUs. In the case of mortgages in the USA, the goods that the mortgage IOUs are denominated in, are the non-IOUs known as Federal Reserve notes.

But it is indeed just slightly more complicated. You can repay your mortgage in the non-IOU known as Federal Reserve notes. But usually, you repay your mortgage with another IOU known as a check. A check is an IOU denominated in the non-IOU known as Federal Reserve notes.

Perhaps this is the source of your confusion. You think that because true IOUs are denominated in Federal Reserve notes, that Federal Reserve notes must be IOUs. Well, they aren’t.

vikingvista April 24, 2011 at 3:31 pm

John,

I agree with your second paragraph.

As to the definition of “wealth”, there is no escaping its ambiguity. I would just say that in the context of “Money is not wealth”, the meaning is clear. Money are those things that *nobody* (with trivial exceptions) values for anything other than exchange. Wealth is everything else that people exchange.

One must keep in mind that in that context, a particular good can be valued in different ways, and thus serve as both money and wealth. But dividing goods by function, the meaning is clear. This shouldn’t be too confusing. When gold coins were traded as money, people didn’t use their gold coins to make jewelry. They used their gold coins to trade in exchange for gold jewelry.

Stone Glasgow April 25, 2011 at 8:20 pm

STONE SAID: “If I borrow a case of wine from you and write an IOU on a piece of paper, and hand it to you, you now hold a piece of paper that has the same two functions as any other “good.”

VIKING SAID: “No it doesn’t. It has only one function–to trade in exchange for something else. In this case, to trade for a case of wine.”

The wine IOU has two purposes. It can be “turned in” at face-value for a case of wine, which I would argue is the note’s “purpose.” It can also be traded to someone else, in which case the note finds use as “money.”

I don’t much care to argue that “money” has only one purpose, and that is to trade for other goods, but one thing needs to be perfectly clear: money is an asset; a financial asset like any other. It is as valuable as stocks, bonds or loan agreements.

We have also disagreed regarding the definition of the word “consumption,” which has fueled our debate regarding the definition of “money.” I don’t think these are very important to continue. My original statement was that money is in fact “wealth.”

Even if we accept your fundamentalist conclusions that US dollars are only valuable because government says they are, and that USD are not IOUs, they would will be defined as “wealth,” by any reasonable interpretation of the definition.

Wealth is anything valued that can be exchanged. Money, any way you look at it, fits that definition. To think of money as anything but wealth leads to confusion, and I think it is one of the main reasons that most of us are so confused when estimating inflation, talking about world trade, local economies, taxation and so forth. If money is considered to be wealth, much of the confusion falls away.

Stone Glasgow April 21, 2011 at 10:23 pm

Economics .
a. all things that have a monetary or exchange value.
b. anything that has utility and is capable of being appropriated or exchanged.

Stone Glasgow April 21, 2011 at 10:19 pm

The accounting is not wealth. Credits to electronic accounts, debts that can be sold or transfered, stocks, bonds, options and futures contracts are all wealth because they can be owned and exchanged, and are valued by human beings.

John April 24, 2011 at 6:06 pm

vikingvista, fair enough. Personally I think you’re making things more complicated than need be to make the point about money, as money, being an implied value.

I think the more important thing, though, is that this is not the critical aspect for Landsburg’s point in his essay. His point only holds if we’re on the production possibility frontier. Once we’re on the interior then all bets are off regarding what happens when the government takes the money that was not going to be spent or invested. That has nothing to do with wealth being defined to include or exclude money.

John April 24, 2011 at 6:10 pm

sorry about missing the right Reply link — should have been one level in.

jjoxman April 21, 2011 at 9:09 am

The fundamental misunderstanding of the nature of money is depressing. This is why I make all my advisees take a Money&Banking course (or do readings with me!).

I find even my colleagues often don’t get what ‘money’ is.

Unfortunately, as others have suggested, Prof. Landsburg’s response is somewhat too esoteric for people who don’t get what money is to understand. While I enjoy his (Landsburg) work very much, in my view Prof. Boudreaux has the knack for communication complicated ideas in language non-economists can understand.

Stone Glasgow April 21, 2011 at 6:23 pm

I would say that 99% of Americans do not understand what money is or how it is created. Have you found any books or articles that explains money in plain english?

Stone Glasgow April 29, 2011 at 12:35 am

I found one book that understands money and wealth. Hayek’s “Denationalization of Money,” published 1977.

SweetLiberty April 21, 2011 at 11:04 am

Money is a placeholder for things. If the argument were not money, but rather an 84 million dollar oil rig that was left idle on Mr. Kendrick’s front lawn – then the government could certainly put that rig to better use by taking it and placing it on one of many untapped oil wells in Alaska to add to the nation’s oil reserves (environmentalist objections aside). This “taxation” of one oil rig from Mr. Kendrick would indeed enhance the production of oil (however marginally), while not harming Mr. Kendrick’s present life style (he wasn’t using the rig), nor harming anyone else (they weren’t using the rig either). In fact, in this scenario, it would be a net benefit to society – taking an unused resource and putting it to use. Even if the oil well only produced 1 million dollars worth of oil (which would clearly be a bad investment for an 84 million dollar oil rig under normal circumstances), the net gain is still positive (plus 1 million) as opposed to zero (unused – even less if you consider depreciation). Thus, the assertion “For the government to consume more goods and services, somebody else must consume fewer.” seems falsified when considering tangible assets.

Slappy McFee April 21, 2011 at 11:30 am

While agree with much of your analogy, wouldn’t this simply be a refutation of voluntary trade? Every item sitting on every shelf in every store is currently idle. Instead of going to the shopkeep and making an exchange, I should simply take the item and put it to better use. The shopkeep then should replace the item for the next “customer”. Once the item has become idle in my hands, it would then be acceptable for someone to take it from me. The problem always reverts to, why would the person who will create a better option ever create?

Methinks1776 April 21, 2011 at 11:52 am

Which is why this activity should only be used “judiciously”, when we are not at full employment. When we’re not at full employment, people suddenly stop being people and government theft no longer changes their expectations.

Slappy McFee April 21, 2011 at 12:24 pm

Why is full employment the criteria that refutes my argument? All humans, all the time, are at full employment. You were “employed” while posting your thoughts, and in my example, the various “thieves” were employed in their thievery. Just because I am no longer being monetarily compensated on the weekends while I am playing with my son or mowing the lawn, doesn’t mean I am not being compensated.

Methinks1776 April 21, 2011 at 12:38 pm

Slappy, that was sarcasm.

Slappy McFee April 21, 2011 at 1:16 pm

Sorry — My sarcasm meter was off.

yet another Dave April 21, 2011 at 4:53 pm

channeling DK?

Methinks1776 April 21, 2011 at 6:26 pm

Pingry, actually

Stone Glasgow April 21, 2011 at 6:04 pm

*Like*

Methinks1776 April 21, 2011 at 12:17 pm

This “taxation” of one oil rig from Mr. Kendrick would indeed enhance the production of oil (however marginally), while not harming Mr. Kendrick’s present life style (he wasn’t using the rig), nor harming anyone else (they weren’t using the rig either).

Well, you are harming Mr. Kendrick because you stole his consumption credits (which are in the form of a rig today). Do you only think about today or do forgo some consumption today so that you may be able to consume in the future? This is one of the flaws of Keynes. I don’t know about you, but I produce only so that I can consume. Keynes (and you) see that savings as a drag.

You seem to have no problem deploying an $84 millon rig in pursuit of $2 worth of oil, but that is – by definition – a negative expectancy project. How is that better than letting it sit idle? The rig is idle because there are no positive expectancy projects – no oil wells to drill with a projected NPV of $0 or greater. However, every day people are looking for those positive NPV wells. Why? Because they want to make money. Why? Because they want to consume. People love stuff.

So, what happens if the day after the government confiscates that rig in pursuit of the $2 well, a wildcatter finds a productive well? He can’t produce it because the rig is gone.

SweetLiberty April 21, 2011 at 5:05 pm

Slappy…
Make no mistake, my analogy does describe outright government theft of Kendrick’s oil rig and something I find deplorable on moral grounds. However, it highlights an example where government can consume more goods without someone else consuming fewer. The goal isn’t to refute the benefits of voluntary trade, but to acknowledge that idle goods that can lend themselves to production (be it oil rigs or money) are better if they are put into play rather than remaining idle from a purely objective perspective.

Methinks…
I appreciate your response, but The difference is that Kendrick’s oil rig is idle now when it could be producing oil now. Your “wildcatter” will create a new rig to harvest his productive well – which will happen whether or not Kendrick’s rig is sitting on his front lawn or if the government confiscates it to harvest their own well. Yes, Kendrick’s loses his oil rig, but in this scenario where he never plans to use it, the rig is no more of a loss to him than me losing the stick on my front lawn to a kid who takes it and uses it to dig up earthworms for his fishing expedition.

Stone Glasgow April 21, 2011 at 6:14 pm

Mr. Kendrick’s oil rig, if sitting idle on his lawn, would raise the value of all other oil rigs in the world because the supply of rigs is lower. It is an even trade; he hoards his rig and accidentally raises the value of everyone else’s. When he brings his rig back into operation, it will lower the value of existing rigs.

Hoarding money works in the same way. Every dollar under his mattress left idle (assuming it is not in a bank, in which case it would be active) raises the value of money in circulation. It is impossible to hoard a commodity and harm society. The enjoyment he receives and the raised value of all other oil rigs balance out the idle potential of the rig on his lawn.

Dan April 21, 2011 at 6:31 pm

And, just how many people are likely to have vast amounts of monetary notes under their mattress? How many oil rigs are likely to be intentionally sidelined by those who own them? Both, sitting idle, will lose wealth for the owner.

Methinks1776 April 21, 2011 at 6:53 pm

Stone,

I recently read that something like 300 Billion yen are not in circulation. They’re stored in private safes.

Stone Glasgow April 21, 2011 at 7:14 pm

And there are about 400 trillion yen in circulation. If all 300 billion yen in private safes were spent suddenly, the value of the yen would drop by less than 1/10th of 1%

Stone Glasgow April 21, 2011 at 7:28 pm

Dan, this is a thought exercise. The point is that a rich man with idle wealth is not harming society. It doesn’t matter what form that wealth takes.

Further, taking his idle wealth, running it through the meat-grinder of government waste, and allowing a few political men to direct that wealth into the hands of their well-connected friends, is a truly harmful activity.

Dan April 21, 2011 at 7:48 pm

Ok! No arguments.

Methinks1776 April 21, 2011 at 8:23 pm

Stone,

That wasn’t meant to be a counter-argument on my part, your post just reminded me of this phenomenon in Japan.

Stone Glasgow April 21, 2011 at 10:12 pm

I figured that might have been the case after posting, sorry : )

Methinks1776 April 21, 2011 at 6:51 pm

SL,

Slappy’s point is that nobody would ever produce anything if it can be stolen at the whim of the government, invalidating your claim that “idle goods” (as you call them) are “better if they are put to into play rather than remaining idle from a purely objective perspective”. From a purely objective prospective, that kind of violation of private property leads to no production of any kind of goods. That’s worse. You don’t seem to be grasping the incentive effect.

Moreover, you’re claiming that it doesn’t matter if the rig is producing less than the cost of the rig. What eventually happens if the sum of the parts used in production is worth more than the whole? That is the very definition of wealth destruction. How can wealth destruction be better?

The difference is that Kendrick’s oil rig is idle now when it could be producing oil now.

Clearly, that’s because now there is no reason to put the rig to work now. BTW, the rig analogy does not extend to money. The money Kendrick is holding in the bank (presumably. In fact, that kind of money is never in a bank. It’s actually invested in all kinds of enterprises or lent to the government) is not idle. Thus, it is not analogous to an idle real asset such as a rig. Financial assets are not real assets.

Your “wildcatter” will create a new rig to harvest his productive well

Wildcatters don’t produce rigs – but, why would anyone spend the resources to produce a rig for the wildcatter if they know that it will simply be stolen by government if it should fall idle at any time? Or are you making the fantastic assumption that if a rig falls idle at any time, it is going to stay idle in perpetuity?

Stone Glasgow April 21, 2011 at 7:32 pm

Methinks, I agree with everything except that financial assets are not “real” assets. What is a “real” asset? What is wealth?

Methinks1776 April 21, 2011 at 8:15 pm

Stone,

A “real asset” is a physical asset – such as land, a house, a car, an oil rig. A “financial asset” is a non-physical asset such as money, a bond, a stock.

Stone Glasgow April 21, 2011 at 10:05 pm

Why do you delineate between “financial” or “paper” assets and “real” assets? What makes an IOU from my neighbor (for the case of wine in his basement) any different than a truckload of grapes?

It is arbitrary to claim that a truckload of grapes, worthless to me because I hate grapes and cannot use them to make wine, is wealth but a paper IOU is not. The paper is worthless to me but can be transformed into wine; just like grapes.

Would a truckload of bauxite be considered wealth? (It would be worthless to anyone but an aluminum manufacturer.) If I hold the truckload, and know that my neighbor the aluminum-maker will give me a case of wine for every load of bauxite, how does the rock differ from the paper IOU? Both hold the power to garner a case of wine for its owner, and both are almost worthless and can only be traded for “real assets” with very specific people.

We don’t even need the piece of paper. If my neighbor shakes my hand and says “I owe you a case of wine,” I am now almost one case of wine richer, depending on the credit worthiness of my neighbor.

Methinks1776 April 21, 2011 at 10:59 pm

Stone,

There is a distinction between real assets and financial assets, but they both represent wealth.

Financial assets are fungible. Most real assets are not (raw commodities tend to be). Financial assets are easy to store. Real assets require physical accommodations and insurance. Financial assets are liquid. Real assets usually aren’t (it’s much easier to find a buyer for the claim on wine than for the truckload of perishable grapes).

I originally made the distinction between an idle real asset (the rig) and money in the bank. SL likened Kendrick’s money in the bank to an idle rig. A rig is either idle or in use. Money in the bank is lent out to others, so it is not “idle” – even if Mr. Kendrick is not using it to consume or produce himself.

Stone Glasgow April 22, 2011 at 12:45 am

We agree! Financial assets are a form of wealth, and money is a financial asset (a form of wealth).

I think the line between financial and “real” is more very blurry. Financial assets require maintenance, storage, and insurance costs in the same way that “real” assets do, but many of those costs are paid for by government when it creates rule of law, property rights, courts and police. I would have to pay to have my paper assets protected were it not for the protection of government and rule of law. Because the costs are socialized does not mean they do not exist.

I would even have to purchase insurance on my neighbor’s life if he made a verbal IOU large enough, and I would need to pay to have the insurance documents protected from fire and theft in the same way that I might have to pay for the protection of my wine collection or bauxite mine.

Financial assets are now incredibly easy to protect from damage and theft because they are digital, but it isn’t as if there is a black and white line between “financial” and “real” assets. It is a gradual change from large illiquid assets like factories to ultra-liquid assets like currency. Wine, gold and a handshake IOU all fall somewhere in the middle, in my opinion.

DG Lesvic April 21, 2011 at 11:32 am

Congratulations to Landsburg for his insight, and to Boudreaux for calling our attention to it. This is economics at its best, and a rare thing today.

Shame on those who criticize it on the ground that the average person won’t get it. If they think economics is worthless, what are they doing here?

I don’t get mathematics either much beyond 2 and 2 is 4. Does that entitle me to belittle it, and to tell phsicists that they shouldn’t use it. The thing that’s wrong with its use in economics is not that DG Lesvic can’t understand it but that it can’t possibly contribute to economics. If it could, the fact that Lesvic couldn’t understand it would be irrelevant.

The scientist cannot suspend his work because Lesvic won’t get it. He still has to push on with it and try to make it as clear to others as he can.

Landsburg has done a great job of that, and deserves nothing but credit.

That isn’t to say that he, any more than any other economist, has said everything that could be said on the subject nor even that everything he has said is necessarily true. There is nothing wrong with criticizing and challenging him.

But it’s contemptible to deny the value of his work.

And, by the way, congratulations to Martin Brock for another fine contribution. I started out very much disliking him, and was told by others that he was really a pretty good economist. I have come to realize that they were right. He is indeed one of the best.

Scott G April 21, 2011 at 11:55 am

And how valuable is his work? How much are people willing to pay for it?

DG Lesvic April 21, 2011 at 1:49 pm

If economics has no value to you, what are you doing here?

Scott G April 22, 2011 at 12:26 am

DG Lesvic,

Economics has great value to me.

You missed my point, which is that academic economists provide far less value to most Americans and create far less wealth than most market entrepreneurs. I recommend you read, The Myth of the Robber Barons: A New Look at the Rise of Big Business in America, by Forest McDonald.

Here’s Don Boudreaux’s review of this book:

“Folsom’s book is accessible, eye-opening, and compelling. It is, I believe, the very best short work that punctures the prevailing myth of the robber barons. As Folsom shows, many of the most reviled ‘robber barons’ were incredible benefactors of humankind – J. D. Rockefeller included.”

“Folsom’s chapter on Rockefeller is a special gem. In a few pages, Folsom demonstrates what a truly remarkable human being Rockefeller was. Everyone in the industrialized world today would be noticeably less-well-off had J. D. Rockefeller not lived, or if he had lived in a time and place that would have snuffed out his incredible entrepreneurial creativity.”

“Not all late-19th-century businessmen were admirable. Folsom capably identifies the most notable ‘political entrepreneurs’ (Folsom’s term). Political entrepreneurs made their fortunes by manipulating the political process – by persuading or cajoling government to transfer wealth from politically weak parties to themselves. Market entrepreneurs, in contrast, earned their fortunes by making consumers and workers better off.”

“This is a superb work of business and economic history.”

A similar book should be written comparing the value that market entrepreneurs provide to average Americans vs the value that academic economist provides to the average American. Here’s Buchanan’s takes on the latter (see below for more of the same):

“What does the general taxpayer get when he supports the institutions of higher learning? Does he get, or can he expect to get, value for money, as my English friends would say? In the private market economy, the buyer gets value for his money because of his ability to shop around among alternative sellers. In ordinary governmental services, the taxpayer may not be able to shop around, but his representatives exercise tight controls by specifying in advance just what it is they are paying for. A road improvement, a new firehouse, an extra garbage pickup per week–these are quite specific, and there is relatively little uncertainty about the final results to be expected. The problem with education, and notably with higher education, is the extreme uncertainty about just what the final product is. What is the output that the general taxpayer expects to get for his taxes?”

Methinks1776 April 21, 2011 at 6:53 pm

Scott G,

I hope you will one day realize that not all compensation comes int he form of money.

Scott G April 22, 2011 at 12:00 am

Methinks, I recommend you read, James Buchanan’s “Public Finance and Academic Freedom,” an essay within his book, What Should Economist Do? Here are a few highlights that I’ve picked out to persuade you that academic economists and the value they provide to tax payers is less that what you believe it is. I’m hoping you will elaborate further regarding your comment above about the effectiveness of non-monetary compensation in creating wealth.

“Just what benefit can the average taxpayer expect to get from throwing his money over the ivy wall especially if the scholars presumably at work behind this wall are to be allowed complete freedom to expend this money as they see fit. Once the question is put in this way, it is those who try to defend freedom of the academy from external political controls who are put on the defensive…The greatest fools in the modern world are found in the academy; we all know this…”

“What does the general taxpayer get when he supports the institutions of higher learning? Does he get, or can he expect to get, value for money, as my English friends would say? In the private market economy, the buyer gets value for his money because of his ability to shop around among alternative sellers. In ordinary governmental services, the taxpayer may not be able to shop around, but his representatives exercise tight controls by specifying in advance just what it is they are paying for. A road improvement, a new firehouse, an extra garbage pickup per week–these are quite specific, and there is relatively little uncertainty about the final results to be expected. The problem with education, and notably with higher education, is the extreme uncertainty about just what the final product is. What is the output that the general taxpayer expects to get for his taxes?”

“In this respect, modern institutions of higher learning can yet look to the successful churches of all ages. The priest holds the awe of the successful churches of all ages. The priest holds the awe of the masses only so long as he remains within the temple, only so long as he stays above the crowd, only so long as he speaks to the gods. Once he sallies forth among the rabble, he is seen for the man that he is, his robes for the simple cloth it is, and his voice heard as but one among a multitude.”

“If you will allow me, for a moment, to strip off my academic regalia and express myself solely and exclusively as a member of the general taxpaying public, I should argue that the ‘product’ now issuing from many of our tax-supported liberal arts colleges and universities does not measure up to my standards of human quality improvement. Instead of turning out ‘better’ men and women, some of these institutions seem to me to be producing at least some young men and women who are demonstrably ‘worse’ than their counterparts who did not enjoy the benefits of my tax dollars.”

“It would, of course, be proper, as well as helpful, to say that, recognizing all of this, the academic houses should put themselves in order, that the faculties of our colleges and universities should from within implement reforms which will turn things around. This may occur; all things are possible. But I have personally lost faith in the ability of faculties to initiate and carry through internal reforms.”

Methinks1776 April 22, 2011 at 12:29 am

Scott G,

That was a very looong slaying of a straw man. Show me where in my comment to you I ever said anything about how much I think anything is worth to taxpayers and the effects of non-monetary compensation on wealth creation.

tomharvey April 21, 2011 at 2:02 pm

Given that Martin Brock has efficiently and succinctly refuted Mr. Landsburg in his first two sentences, I don’t quite understand the dual congratulations.

DG Lesvic April 21, 2011 at 3:43 pm

I missed that. I’ll go over it more carefully and see about that. but it won’t change my opinion of either one. Being great at economics doesn’t necessarily mean being right. You can he be wrong and still be great. And I think both of them are great. But it will certainly be interesting to see which one was right, though not necessarily greater. Being a great economist means going at it the right way, and doing a great job of it, even if in the end it isn’t right.

DG Lesvic April 21, 2011 at 11:43 pm

Tom,

I’ve reread a great deal though not all of the above, and I would guess that this is the passage in which you think Martin Brock refuted Landsburg.

First, Landsburg:

… when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, …

Next, Martin:

No. When Mr. Kendrick withdraws cash from a bank, the Federal Reserve replaces the cash with newly created cast. The Fed does so precisely to avoid the rising interest rate. It regulates this (nominal) interest rate. Replacing the cash this way, while the state taxes Kendrick’s cash, can increase the competition to exchange money for real resources, i.e. it can be inflationary.

But, Landsburg’s analysis, like all economic analysis, implies ceteris paribus, all other condtions remaining constant. So you cannot refute it by introducing another factor of change. You must refute it on its own terms, ceteris paribus, with but the one factor of change. As soon as you introduce the second factor of change, you are now longer an economist but historian or forecaster. It’s a fine thing to be an historian or forecaster but not the same thing as being an economist. Landsburg was being an economist, and Martin an historian or forecaster. But he needed Landsburg economics for his history or forecasting, for you could not analyze or predict the joint effect of the various causal factors in the real world without the purley theoretical explanation of their separate effects.

Martin Brock is a very valuable contributor here, but this Landsburg, right or wrong in this case, is someone really rare and special.

Sam Grove April 21, 2011 at 3:34 pm

A question for those who think math is crucial to grasping economics logic: How does math help anyone understand the law of supply and demand?

Doc Merlin April 21, 2011 at 12:46 pm

Its something I’ve been telling people. The cost government is any spending the individual wouldn’t have done the same way for themselves + any costs in as a result of collecting taxes (including welfare loss, costly institutional changes, etc).

Dan April 21, 2011 at 12:57 pm

I can hardly believe I am reading posts about how govt can intervene and possibly appropriate resources with any success comparable to an incentivized individual(s) seeking self-interest.

STATISTICULOUS April 21, 2011 at 1:11 pm

I think that an important question, related to this, is one of production. When I buy a pair of shoes, I exchange dollars for shoes. This is not a zero-sum because I valued the shoes at what I paid or above and the producer valued them at what I paid or below; we each became wealthier. So the question is: Is what the government produces for Mr. Kendrick and the rest of us, valued by us at at least the amount it costs? If the answer is no, then Landsburg is right- on net somebody (and actually everybody as a whole) must consume less. However, if it could somehow be determined that the money “appropriated” from Mr. Kendrick was used to “produce” goods and services of higher value to each individual than their forgone vacation or home loan, then the zero-sum does not apply.

Methinks1776 April 21, 2011 at 1:39 pm

Theoretically, such a thing could maybe occur. It never has.

Ryan Vann April 21, 2011 at 1:50 pm

I’m confused as to what the term wealth is assumed to mean? The way I’ve always understood wealth is as a proxy for production capacity, in which case money is obviously wealth.

JohnK April 21, 2011 at 1:59 pm

The way I understand it is that wealth can be exchanged for money and money can be exchanged for wealth.

Sam Grove April 21, 2011 at 3:36 pm

I think we need a new definition of wealth.
Mercantilists thought that gold was wealth.
The modern version of that is that money is wealth.

My suggestion: The ability to produce goods and services is wealth.

Stone Glasgow April 21, 2011 at 6:18 pm

Wealth is anything human beings value that can be owned, controlled, and exchanged. Money is one form of wealth.

Methinks1776 April 21, 2011 at 6:55 pm

But the money itself is not wealth. Wealth is what money can be exchanged for – goods. Stuff.

Stone Glasgow April 21, 2011 at 9:41 pm

Do stock certificates count as wealth? What about an IOU from my neighbor for the case of wine in his basement? Both are paper assets that are valuable to human beings, and can be owned and exchanged.

It is arbitrary to claim that a truckload of grapes, worthless to me because I hate grapes and cannot use them to make wine, is wealth but a paper IOU is not. The paper is worthless to me but is valuable because it can be transformed into wine; just like the grapes.

Would a truckload of bauxite be considered wealth? (It would be worthless to anyone but an aluminum manufacturer.) If I hold the truckload, and know that my neighbor the aluminum-maker will give me a case of wine for every load of bauxite, how does the rock differ from the paper IOU? Both hold the power to garner a case of wine for its owner, and both are almost worthless to me.

We don’t even need the piece of paper. If my neighbor shakes my hand and says “I owe you a case of wine,” I am now almost one case of wine richer, depending on the credit worthiness of my neighbor.

Methinks1776 April 21, 2011 at 11:02 pm

The paper is worthless to me but is valuable because it can be transformed into wine;

That is exactly what I said.

Stone Glasgow April 22, 2011 at 12:47 am

In the same way that a pile of rocks is worthless to me but is valuable because it can be transformed into wine.

Methinks1776 April 22, 2011 at 12:54 am

I don’t think you mean a pile of rocks can be transformed into wine :)

Stone April 24, 2011 at 1:41 am

The bauxite can be transformed into wine in the same way that paper IOUs can be “transformed” into wine.

Sam Grove April 22, 2011 at 1:13 pm

Money represents entitlement to wealth, to consume.

Money is a function, the function of accounting, it is not consumed at the end of a transaction as are goods and services.

Yes, money is commonly thought of as wealth, but if the government printed up sufficient money to give everyone a million dollars, people would soon find that they still have to work to produce that which they must consume.

John April 21, 2011 at 9:26 pm

That seems more like what we would call capital and labor.

vikingvista April 23, 2011 at 1:27 am

“I think we need a new definition of wealth.”

These semantic games are simply being used to obfuscate the important point of this blog post. It’s true that “wealth” is an ambiguous term. But the ambiguity is shattered by the very phrase “Money is not wealth”. What else can that possibly mean except that of all the values people acquire, money is unique in that it is ONLY valued by everyone for its ability to acquire OTHER values. Money’s value depends entirely upon the value of those things, while the converse is not true. Before money, there was wealth. Money was then created to facilitate acquiring that wealth. Understanding this is essential to understanding money, and anyone who fails to understand it, because of semantic diversions for instance, will fail to understand money.

Stone Glasgow April 24, 2011 at 7:53 pm

Money is valued for its ability to pay bank loans denominated in dollars, and to pay tax debts denominated in dollars. Banks and the US government accept only US dollars, and it is fundamentally for this reason that they are valued.

Dollars are also valuable as a store of wealth and as a “universal” unit of wealth, useful in trade, but they remain valuable only because banks issue loans denominated in dollars and because the government accepts them for tax debts. If banks began issuing notes denominated in Unicorns, and taxes could be paid with the new notes, US dollars would eventually be worthless.

Stone Glasgow April 24, 2011 at 7:54 pm

The definition of wealth is relatively unambiguous. It is anything that people value that can be exchanged.

tomharvey April 21, 2011 at 1:52 pm

I’m starting to suspect that the game with Mr. Landsburg’s outrageous, counter-intuitive claims is to figure out what bizarre, unstated assumptions are required to make them true. Then state them casually, in defense of the outrageous claim, avoiding vicious attacks.

By these rules, commenter “Flop” (at the original site) wins (“he will burn his money before leaving it to any heirs”). Unfortunately, after listing the necessary bizarre, unstated assumptions, the claims turn from outrageous to uninteresting.

That said, I’m in 100% agreement, with Don’s title “Money Isn’t Wealth”, and eagerly await a real exposition of this.

tkwelge April 21, 2011 at 4:12 pm

Worrying about what the heirs will do with the money seems nonsensical as we are largely talking about the short term. Resources cannot be redistributed from non living future people to living people in the here and now in the short term. When money is used for consumption, it is a claim on resources that exist at the moment of consumption, in which case somebody must consume less in that moment if somebody consumes more.

Sam Grove April 21, 2011 at 3:41 pm

To grasp the distinction between money and wealth and the impossibility of making the rich support government spending is to remove money from the logical exposition.

The sentiment “tax the rich” becomes: “Let us make a very few people support a great many people.”

The impossibility of making that work becomes very obvious.

JohnK April 21, 2011 at 3:47 pm

“Government is the great fiction through which everybody endeavors to live at the expense of everybody else.”

– Bastiat

Martin Brock April 21, 2011 at 8:15 pm

“Taxing the rich” cannot work unless you do it in a way that induces the rich to consume less.

I favor a progressive consumption tax for this reason.

Methinks1776 April 21, 2011 at 8:20 pm

Martin, I’ve thought about your progressive consumption tax. I’ve come to the conclusion that I only produce because I want to consume. If you limit how much I can consume, I will limit my production. Why is limiting the incentive to produce a good thing?

In general, I prefer a consumption tax to a production tax – but a flat one.

Also, I wonder how you arrived at the arbitrary figure of $100K per year.

Stone Glasgow April 21, 2011 at 8:47 pm

Great point, I had not thought of this before. A consumption tax yields the same result as an income tax; they both slow wealth creation.

Martin Brock April 21, 2011 at 8:52 pm

A progressive consumption tax need not slow wealth creation, because the wealthiest people don’t consume their wealth anyway.

Stone Glasgow April 21, 2011 at 9:50 pm

No, they let others borrow it so that others may create even more wealth for society.

Even if the wealthiest people convert everything to cash and hide it in their basement, the value of all circulating dollars would rise in direct proportion to the amount removed from the economy, making anyone holding dollars a little richer.

Martin Brock April 22, 2011 at 12:37 pm

The very wealthy invest most of their wealth. They don’t necessarily “lend” it in the sense of extending monetary credit, but they invest it, because their wealth is most valuable in synergy with other wealth.

In practice, the credit system would replace a miser’s dollars hidden the basement with more dollars. This replacement occurs with or without a central bank.

Money obeys no conversation law, like the conservation of mass to which gold is subject, so expecting money to appreciate as you suggest is mistaken. Money appears spontaneously when people want to exchange but cannot effectively barter. It also disappears spontaneously.

Stone Glasgow April 22, 2011 at 2:37 pm

If there are ten pigs and ten dollars in the entire world, and this is all the money and wealth the world contains, and one man takes five dollars and hides them in a hole in his backyard (or burns them), what how much is a dollar worth?

Stone Glasgow April 22, 2011 at 2:42 pm

“Investing” and “lending” are almost the same thing. Either way the wealth (money) is used by someone to create more wealth.

Money appears spontaneously in a free banking system. In our system one bank has a monopoly on manufacturing currency, so money does not spontaneously appear.

Martin Brock April 21, 2011 at 8:51 pm

I don’t remember this arbitrary figure, but if you only seek income to consume, you won’t seek much income beyond the income at which a marginal consumption tax rate is very high. This preference of yours does not limit production, because the world is packed to the rafters with people who will happily seek the income instead.

Your income does not measure your production, the productivity of your personal labor. It measures the marginal value of all resources you govern, including but not limited to your labor.

Beyond a certain level of income, most income is attributable to your governance of resources other than your own labor, so we’re discussing your preference for this governance, not your willingness to labor. If you prefer not to be among the wealthy who govern many valuable resources, that’s fine. The line behind you is practically endless.

I would still pursue wealth if the marginal tax rate on consumption above $100,000 were 100%, and legions of other people would as well, but I’m not proposing this rate. The optimal rate structure is an empirical question.

I don’t earn much over $100,000, and I consume only a small fraction of my marginal income now. I give much of it to my three children in college. I invest much of the rest. With all the taxes I pay, I probably don’t consume 10% of my marginal income over $80,000.

People pursue wealth for countless reasons. For the very wealthy, consumption is not the primary motivation. People like Buffett and Gates clearly demonstrate this fact. They personally consume a tiny fraction of their wealth, so even if a progressive consumption tax would drive you out of the wealth seeking business, it wouldn’t drive them and people like them out, and you’d go on laboring for your $100,000, so the world would be no poorer.

Sam Grove April 22, 2011 at 1:20 pm

Martins idea for a consumption tax is to encourage the wealthy to invest their money to avoid the consumption tax.

I suspect that the wealthy don’t, as a class, consume as much as some people like to think they do, as much of their entitlement is invested.

A consumption tax then would give everyone the opportunity to keep politicians from removing resources from the voluntary economy and improve everyone’s standard of living.

John April 21, 2011 at 9:33 pm

Are you thinking of something like luxury taxes or just a progressive tax based on the number at the bottom of the receipt; $100 = 5% tax, $1000 = 7.5% tax, $100,000 gets 20% tax?

Martin Brock April 22, 2011 at 7:38 am

A progressive consumption tax is essentially a tax on luxurious consumption, but you wouldn’t itemize your consumption expenditures. You wouldn’t account for you consumption at all. You would account for your investment, as you do now with an IRA or a 401k.

Basically, you’d have a tax-deferred, Individual Investment Account (like an IRA) with unlimited contributions. If you receive a billion dollars in an year and invest $999,999,950 through the IIA, you pay the consumption tax on the remaining $50,000.

Unlike an IRA, you wouldn’t retire on this wealth, because you could never consume it all, but you’d never send it to the Federal government either. You could never consume it all, because you could never withdraw it from the IIA fast enough without paying the very high tax on marginal consumption, which would approach 100% on very high levels of consumption.

Under this sort of tax, the very wealthy may govern as many resources as they can acquire in capital markets, but they may not personally consume the yield of all of these resources. Less wealthy people, whose income is largely the marginal product of their own labor, do not pay a high tax on their consumption. Ideally, in my way of thinking, common people pay no tax at all, because like Locke, I believe that a man has a natural right to the fruits of his own labor.

I don’t believe that a man has a natural right to monopoly rents or the fruits of forcible imposition. Some forcible propriety is useful to common people, even if the common people themselves don’t own much property beyond their own labor, but distinguishing the commonly useful force from the politically useful force is a tricky business, so I’m very skeptical of forcible imposition in general, and I don’t want lords of propriety rewarded for seeking it through the state.

Stone Glasgow April 21, 2011 at 8:38 pm

Don, I am surprised that you found this article worthy of a link on your blog. Normally the articles you post (and to which you link) are clear and educational. Mr. Landsburg appears to be somewhat confused about the nature of money, wealth, banking, government intervention and taxation, even if his basic message is correct.

Dan April 21, 2011 at 8:40 pm

A higher tax on income of ‘the rich’, coupled with a reduction on investment returns is a win/win for many. Leftists and the factory worker get their class warfare and we can get overall lowered taxes for upper income folk avoid the govt confiscations. This also can induce investment and job creation.

I am not saying this is a preferred method, only an option for satisfying political expediency. Ist nt this what Clinton and Congressional Republican did in the 90′s?

Of course lowered overall taxes, with no dedcutions, save a small percetage for charitable givings would be far more successful, economically…… In my novice opinion.

And, I am apt to think that a consumption tax will be far more equitable in tax responsibility. And, everyone will have skin in the game.

Martin Brock April 21, 2011 at 9:32 pm

A simple, flat tax formula would not be more productive (IMHO), because lords of propriety will build themselves castles if they may, and castle building is not very productive. Politicians generally build monuments to themselves, and this business is not very productive either. Lords of propriety building castles also buy the favor of politicians building monuments, and none of this business is very productive. The business employs people, but it doesn’t employ these people producing things that these people consume.

I also don’t agree that everyone should have skin in the game, if “skin in the game” means paying taxes. In some utopian ideal, no one pays taxes. In a less than utopian reality, few people pay taxes. These people are not producers, per se, at all. They govern non-human resources (other than labor) and pay taxes from the marginal value of these resources.

This sort of tax is basically what Henry George had in mind, but in his 19th century, classically liberal way of thinking, George too much emphasized taxing the value of land. We want to tax monopoly rents more generally, including the value of things like patents.

Martin Brock April 21, 2011 at 9:14 pm

After reading Landsburg’s last sentence, I suspected that he also favors a progressive consumption tax, so I googled. Here‘s what I found.

“Mr. Wilcox thus believes (as do I and probably most economists) that a consumption tax is better than an income tax, at least in principle. But he withholds his full endorsement for a variety of spurious reasons, mostly born of his false assumption that any consumption tax must be levied at the point of sale. He worries, for example, that a consumption tax is necessarily nonprogressive. But you can easily implement a consumption tax with a Form 1040 that says: ‘How much did you earn this year? How much did you save? Now pay tax on the difference.’ And you can make that tax as progressive as you like.”

I’m feeling sooo smug, right now.

Malikail April 21, 2011 at 10:31 pm

I would like someone like Stone Glasgow who clearly understands the mechanics behind our monetary/inflation system, and appears to support it, to explain to me why any of us should have to live in this dishonest system?

It has one clear purpose, to keep the hamsters (plebs) running ever faster on our wheel for our rewards.

This is perhaps a good way to centrally guide a society towards a progressive goal, a slower version of China’s great leap forward but it is incredibly destructive to the human condition.

We see its effects every day in the decay of society, yet we do not want to have an honest system.

“Money” is the medium of exchange which facilitates the division of labor, it’s this simple without “Money” there is no civilization.

In the world we live in, with the U.S. Dollar as the world’s reserve currency, we do not have an honest civilization anywhere on earth.

I would really like someone to explain to me how on earth this is a good and desirable thing, it’s the most coercive form of manipulation yet invented and the most effective.

Stone Glasgow April 22, 2011 at 12:55 am

Currently, the Fed enjoys a government enforced monopoly in the business of creating currency. I do not support this! Please take a look at my previous posts, above, that explain how the United States would be better served by a free market in currency manufacturing.

The drawbacks are not as horrific as some imagine, but they do create higher than normal inflation, corruption in banking, finance and investing, and bubbles (with the help of government) that would otherwise not exist in a free banking system.

DG Lesvic April 22, 2011 at 7:24 pm

Just reread Landsburg’s piece more carefully, still can’t find anything wrong with it, and am even more convinced that it was great, original economics.

Stone April 24, 2011 at 2:44 am

Landsburg’s main thesis is correct, but he is lost in his attempt to explain why taxing Mr. Kendrick is not good for society.

There are two reasons Landsburg cites to prove taxing Mr. Kendrick is not beneficial, only one of which is correct. The first is that his money is presumably invested somewhere, meaning that someone is using his money to create wealth. If the government takes the money, they are really taking it from the people currently enjoying its use. Mr. Landsburg claims that when the government takes the money, nothing changes, and that it is only when government spends the money that others are hurt. This is incorrect; the government takes wealth only from Kendrick, and nothing changes when government spends what it has taken.

To understand the true nature of this process, it is helpful to realize that “money” is itself a form of “real” wealth. It is a financial asset like any other, and Mr. Kendrick has loaned all of his assets to other people (if he holds it in a bank, stocks, mutual funds, etc). Because he doesn’t actually hold the wealth, but has instead loaned it to others so that it may find productive use, the government theft transfers ownership of those loans to the government. So far, the only loser is Mr. Kendrick.

When the government trades those loan obligations (taken from Mr. Kendrick), they do not destroy the loans. They only transfer the ownership of the loans to a road builder or submarine manufacturer. The people who were originally putting Kendrick’s assets to good use creating more wealth continue to do so, oblivious to the fate of Mr. Kendrick. Landsburg’s attempt to elaborate on from whom the assets are taken is unnecessary; the wealth is taken from Kendrick alone.

The bank has invested it in myriad ways, but to keep it simple, let’s think about it this way: Mr. Kendrick owns 84 ounces of gold. He has loaned them to a shoe manufacturing company in exchange for an IOU from the company, stating “Bob’s shoe company owes the bearer of this note 84 ounces of gold and 5% interest until the gold is returned to the owner of this note.” This is a simple way to think about the fate of the money Kendrick places with the bank.

When the government taxes Mr. Kendrick, it does not take the gold from the shoe company. It takes the note issued by the shoe maker, and when it spends the note the government trades it to the submarine company for a new warship. The shoe maker remains unaffected; it will repay the 84 ounces of gold to the submarine company instead, and continues to make use of the gold for its own shoe-making purposes. It is only Mr. Kendrick and his heirs that are penalized by the tax. Taking the money does not destroy wealth, does not cancel the loans Kendrick made, and does not tax others inadvertently. The tax plainly and clearly taxes Mr. Kendrick and Mr. Kendrick alone.

Refuting the suggestion that it is good for society to take Kendrick’s money is the same argument used to refute any type of central planning, which involves rearranging and directing the wealth of a nation, and has never proven successful. The reasons it is harmful to take Mr. Kendrick’s money are the same reasons it is harmful to take anyone’s money, or force anyone to do anything at the point of a gun. In the end, we are all happier, richer, and live with more freedom when government taxes us as little as possible. Telling Mr. Kendrick what to do with his wealth is no different from telling any citizen what to do with his or her wealth. If I choose to keep keep 84 pennies in a shoebox and never spend them, that is my personal choice. The situation does not change when if I choose to keep $84 million in my bank account, and rearrange my cars until I die. Removing the the freedom of individuals to do as they please with the fruits of their labor is called central planning.

DG Lesvic April 22, 2011 at 7:49 pm

To Landsburg’s critics:

All of these other contingencies you drag in are irrelevant. As Mises explained: “All theorems of economics are necessarily valid in every instance in which all the assumptions presupposed are given. Of course, they have no practical significance in situations where these conditions are not present.”

To make his point, Landsburg had to present it in its simplest possible form, that of the rich guy not doing much more than pushing a few cars around. The question of his possible heirs and all the other contingencies you might imagine are irrelevant to the core of his argument. And I haven’t seen anything that could refute it.. Maybe I’ve missed something, but in this crowded intellectual marketplace, if you want to make an impression, it has to be a clear knockout. And I haven’t seen that from anyone but Landsburg. As far as I’m concerned, he’s the knockout here.

DG Lesvic April 22, 2011 at 8:53 pm

And, by the way, it was not Landsburg’s obligation to state that his theory was that of a rich man with no heirs. He is not responsible for every possible exception to his rule, but only for the rule, in its simplest form.

Economics has to begin somewhere, and that’s where, at its simplest.

DG Lesvic April 23, 2011 at 1:49 am

So, just what law of economics can we derive from Landsburg’s insight?

To any but a socialist, it is obvious that taking from the rich to give to the poor has a production as well as consumption effect. It reduces the incentive of the rich to produce for the poor.

But looking at it from the standpoint of the socialist himself, and assuming no negative effect upon production, what will be its effect upon consumption?

According to Landsburg’s Law, taking from the rich to give to the poor could increase consumption by the poor only so far as it caused a reduction in consumption by the rich. So far as it left them consuming as much as before, it could not increase consumption by the poor, and could only have a neutral effect upon their consumption. The poor gain no consumption from their taxation of the rich. They gain only from that point at which they begin to restrict the consumption of the rich.

For a Warren Buffet, that would have to be at a very high rate of taxation. So, there are two questions: are you really willing to tax at such a high rate, and, if not, why tax the rich any more than the poor?

So even for a die-hard socialist who cannot see the production effect of taxing the rich, Landsburg’s Law is a serious challenge. And, of course, it is even more so for anyone who can see that production effect.

So it is a very valuable tool of free market thought and potent weapon in its arsenal.

It is not the ultimate argument against redistribution. For it still leaves room, however small, for judgment, the quantitative appraisal of the difference between the negative and any possible positive effects of the taxation.

There is another theorem that removes the need for that judgment altogether, but there is room for both. Even if the one is stronger than the other, they’re both strong, and you never know when the one might fail and you’d need the other.

There’s certainly room for both, and the need for both.

Most of the rest is just a lot of chatter.

Stone Glasgow April 25, 2011 at 11:04 pm

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