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Money Is Not Wealth

Below is a letter to a college sophomore, Chris Smith, from Indiana.  This young man tells me that he once, when still in high school, “naively believed in free trade” but “now see[s] the numerous weaknesses” in the case for free trade.  I’m dismayed to report that he says also that he “regularly read[s]” Cafe Hayek – a fact that tells me that I have in this blog done a poor job explaining the case for free trade.

Mr. Smith:

Thanks for your e-mail.  You ask why I deny that we Americans get poorer if we buy more from foreigners than foreigners buy from us.  “Don’t we accumulate wealth the more we save what we earn instead of spending it?” you inquire.

Although you pose your question rhetorically, the answer to it is not obviously “yes.”  I’ll answer your question with questions that would surely be put to you by another Smith, Adam.  What good is having money if it is ultimately not spent?  How wealthy would Bill Gates be if he were prevented from spending any of his money?

Suppose that you work hard for Amazon and that Amazon pays you in Amazon gift cards.  An officious neighbor who says that he wants to ensure that you grow richer successfully uses threats of violence to prevent you from spending any but a tiny fraction of your gift cards.  As a result, after fifteen years you have in your closet a cache of gift cards worth $1 million – cards that you earned by selling your labor services to Amazon.  Your meddlesome neighbor knocks on your door expecting to be thanked for his role in making you rich, and he reminds you, with much self-satisfaction, that he will continue to enrich you by continuing to obstruct your efforts to spend your gift cards.

Have you really been enriched by your neighbor?  Did your neighbor, by obstructing your efforts to exchange your earnings for clothing, furniture, and other goods and services that you and your family would have otherwise consumed, improve your economic well-being?  Sure, you have lots of pieces of plastic the nominal values of which add up to a great deal of dollars.  But obstructed in your efforts to transform those piece of plastic into goods and services for consumption you are not rich; you are poor.  And so it is that when Uncle Sam obstructs our efforts to spend our earnings as we see fit, Uncle Sam makes us materially poorer even if his efforts succeed in having us accumulate lots of money.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030