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Money Is Not Wealth

Posted By Don Boudreaux On June 9, 2013 @ 2:39 pm In Adam Smith,Myths and Fallacies,Seen and Unseen,Trade | Comments Disabled

Boston Globe columnist Jeff Jacoby e-mailed me to ask the meaning of the title of this post from Friday [1].  Alas, the title of that post is mysterious, I now see.  Here’s what I had in mind in choosing that title.

The reason why mercantilists and neo-mercantilists (such as Pres. Obama and Mr. Hal Quinn – the latter of whom wrote the essay to which my post is a response) think that exports are grand – the reason why these people believe that net exports are a sign of ‘winning’ at trade – is that exports bring in money to the home country, and that net exports bring in net sums of money to the home country.  (Ignore here the fact that this latter belief – the one about net exports, or a “trade surplus,” bringing in net sums of money to the home country – is not necessarily true.  Money comes in to the home country also on the capital account.  But that’s a still-kicking horse-zombie that I regularly beat in other posts.)

Well, every business person knows that the more money the business brings in over the amount of money that it spends, the more profitable – the more successful – is that business.  But as accomplished trade economists past [2] and present [3] have pointed out repeatedly, a country is not, in this dimension, analogous to a business firm.  The ultimate point of trade is not to maximize the amount of money the citizens of a country earn; a country is not a profit-seeking enterprise.  Rather, the ultimate point of trade is to improve people’s standards of living.  And standards of living are improved only insofar as people gain greater access to real goods and services.  Money as such – whether it be the fiat paper currency that is so ubiquitous today or the even more ubiquitous electronic digital entries in bank accounts or gold or silver bullion or coin – is a very poor substance for improving living standards.

Try eating money: you’ll starve to death.  Try housing yourself with money: you’ll die of exposure.  Try fashioning shoes out of $5 bills or wearing a dress or pair of pants made of $10 bills.  Your feet will be unprotected and your nakedness exposed.  But if the goal of trade truly is – as Mr. Hal Quinn (like so many others) insists – to “sell more products to our trading partners than we buy from them,” then the goal of trade is to accumulate money rather than acquiring for our consumption real goods and services (“products”) bought from our trading partners.

I often ask, near the beginning of my undergrad classes, a randomly selected student if he or she would be happy if, all of a sudden, he or she possessed an amount of cash – U.S. $$$ – equal in value to Bill Gates’s fortune.  Of course, the student invariably says “yes!!”  ”Now,” I say, “suppose you have those bags of Federal Reserve Notes but you are stranded, all alone, on a desert island.  How wealthy are you?”  Obviously, the answer is “Not very.”  Bill Gates’s wealth lies in the great access he has to the productive powers of millions of people from around the globe; his money is simply a claim to that access.  The money itself is not the wealth.

And note, if Bill Gates mistook his money – literally, his money – for wealth and became a miser, then he would in fact be very poor (at least materially).  The products of his enormous productive prowess would have been exchanged for green pieces of paper bearing monochrome prints of dead American statesmen.  He would, in this scenario, be not much wealthier than my student stranded on the desert island with only bags of billions of U.S. $$$.

When we reckon Bill Gates to be ‘rich,’ we understand, if only implicitly, that he can exchange his money for real goods and services.  It’s his access to unusually large amounts of real goods and services that renders Bill Gates rich.  Had he decided early on that the ultimate goal of his going into business was to sell as many real goods and services to others and, in exchange, acquire over his lifetime as few goods and services from others as possible, he would be a very poor man indeed (to the extent that he sticks resolutely to his absurd commitment – a commitment no less absurd for a country to follow).

Money serves genuine, and often overlooked, valuable roles – even when it is simply being held.  (See W.H. Hutt’s brilliant 1957 article, “The Yield from Money Held [4].”)  But money is not, ultimately, wealth.  And to mistake the pursuit of money for the pursuit of high and rising standards of living – which is one of the many errors of mercantilism and neo-mercantilism – promotes the advocacy of economically harmful policies.

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URL to article: http://cafehayek.com/2013/06/money-isnt-wealth-2.html

URLs in this post:

[1] this post from Friday: http://cafehayek.com/2013/06/youre-simply-stunning-in-that-alexander-hamilton-dress-and-those-abraham-lincoln-pump-wow.html

[2] past: http://www.econlib.org/library/Smith/smWNCover.html

[3] present: http://www.amazon.com/Pop-Internationalism-Paul-Krugman/dp/0262611333/ref=sr_1_1?s=books&ie=UTF8&qid=1315362939&sr=1-1

[4] The Yield from Money Held: http://austrianeconomicsandliberty.blogspot.com/2012/11/the-yield-from-money-held-by-w-h-hutt.html

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