Tuesday, November 6, 2007

Money (Part II) and Wealth (Part I, I guess)

In my last Pulitzer-winning entry to this blog, I wrote about money, and how it replaced the barter system. To see this previous entry, you'd have to scroll down.

Well I kind of lied. It didn't replace the barter system, it just made it easier to work with. Keep in mind that money isn't wealth, as it has no inherent value. Nothing has inherent value. But if money isn't wealth, then what the heck is? What's a wealthy person if not somebody rolling in dough? And I'm not talking about a guy who fell into the dough vat at Entemenn's and is trying to free himself. He's a goner and dough vats are death sentences.

Anyway, wealth is made up of actual things, and money is just used as an exchange medium to smooth the process along. Let's use a barter example. Farmer Brown wants to use a bag of grain from his farm to buy shoes for his horse from the blacksmith. What's really being traded is the "market value" of Farmer Brown's production, in this case a bag of grain. Now what if instead of the barter system we had money? Well, Farmer Brown would buy horse shoes with money instead. But what's really changed? He got that money by selling his grain. On a fundamental level, he's still using the market value of his production to buy things, only it's money, because having one standard thing that everybody accepts--and can be exchanged with and valued against other commodities--makes things work in case the local blacksmith is allergic to grain.

Or maybe it's you, using the money you earned from your job at McDonald's to buy socks. The labor you gave McDonald's resulted in a certain amount of production, which was worth a certain amount, which was your wage. Instead of buying socks with hamburgers and fast service though, you bought it with money. McDonald's gave you money for your production so you could trade the value of your production in at the store to get socks. Your purchasing power is proportional to the value of your production, ya see? That's what determines wages--productivity.

In these hypothetical exchanges, the actual wealth involved was grain and horse shoes in the first example, and fast food and service and socks in the second example. Money wasn't the wealth, it was just an exchange medium. This distinction is important to keep in mind because it leads to fallacies about economics. When you want to gauge a person's wealth, or a group of peoples' wealth, or a nation's wealth, you don't want to count their money--you want to see what things they actually own. It doesn't make sense to complain about the price of things going up if peoples' income is going up in proportion with rising prices--people still have the same purchasing power.

By the same token, if prices in general are falling (due to businesses becoming more efficient and not because of deflation--more on this later), it is the same effect as everybody having a higher income. In other words, when a Wal-Mart moves into your neighborhood, your income goes up. :-) This economic principle bothers the Wal-Mart haters of the world, but it makes for a great example.

Look around you, at the things in your house. Look at the computer you're reading this off of. All of that stuff is your wealth, not what's in your bank account. Remember this and economics will make more sense, especially when it comes to doohickeys like inflation, deflation, stagflation, claymation, and PlayStation.