Money Confusion
Posted by CircuitGuy 10 years, 11 months ago to Economics
Some people have a tendency to confuse money with wealth. Money is a medium of exchange. It's only valuable because other people value it. This allows us to trade without requiring mutual coincidence of wants.
This trade is very powerful. It allows people to specialize in one area, confident they'll be able to trade that one specialty for anything others want to trade.
What makes this trade powerful is people's eagerness to create things that helps others, i.e. to serve others. When I hear serve others, I first think of slavery, but there are two kinds of service-- forced service and service in mutually agreed exchange. “Take your choice-- there is no other.”
What we use to trade should be an afterthought. If you create something that many people want, it really doesn't matter what medium of exchange you use. You will build wealth, and some of that wealth can go back into the business to help more people, some can go to trade with others for whatever you desire, and some can go into other businesses (buying an office building to rent out, investing in mutual funds, etc).
If you invest $1k [USD 2014] in a broad portfolio and things go basically well for the world, after 50 years that wealth will be over $10k in USD 2014, over $100k measured in USD 2064. If you take your $1k invest invest in a plot of rural undeveloped land or commodities such as 1oz of gold, after 50 years you'll have roughly $1k in USD 2014 or $10k as measured in USD 2064.
It becomes very difficult to compare value over a 50 year period. For example, you can't compare the cost of a wealthy person having a film projector and collection of movies to watch on demand in his house in 1964 to the cost of having access to a collection of movies today. I suspect $1k USD 2014 will buy a round trip to a low-earth-orbit space station in 2064, while such a trip today would cost over $100k per person.
Suppose someone's grandfather bought $100 (USD 1964) of rural undeveloped land that's now worth $1000. If it's roughly the same value, why can he buy such more electronics now with that money than he could in 1964. He did not do any work to create value. Where did that value come from? Did someone magically gift it to him?
The same person finds his grandfather buried $100 (USD 1964) on the land. That would have bought over a month's worth of groceries for a small family. Now it won't buy one cart of assorted groceries. Where did that value go? His grandfather did $1000 (USD 2014) worth of work for it, and now most of it is gone. Someone must have stolen it, he thinks.
The same person finds his grandfather invested $100 (USD 1964) in a whole life policy investing in stocks and that got rolled into mutual funds when they became common in the 80s. Somehow this wealth was sheltered from taxes. It's now worth $10,000 (USD 2014), a year's worth of groceries.
All this is enough to make someone think there's a conspiracy going on with all this wealth appearing an disappearing. For most of human history prior to the industrial revolution, wealth did not appear and disappear like this. Wealth and life were more static.
All the amazing things humans do to help one another in voluntary trade drives humankind forward. What we trade along the way is inconsequential. When people buy a $100 product, hopefully it will lead to better and better products and ways to meet peoples needs and wants in 150 years. The $100 note, apart from its value as a collectable, will be worthless in 150 years.
All the value is in people freely doing work to make things to serve other people.
This trade is very powerful. It allows people to specialize in one area, confident they'll be able to trade that one specialty for anything others want to trade.
What makes this trade powerful is people's eagerness to create things that helps others, i.e. to serve others. When I hear serve others, I first think of slavery, but there are two kinds of service-- forced service and service in mutually agreed exchange. “Take your choice-- there is no other.”
What we use to trade should be an afterthought. If you create something that many people want, it really doesn't matter what medium of exchange you use. You will build wealth, and some of that wealth can go back into the business to help more people, some can go to trade with others for whatever you desire, and some can go into other businesses (buying an office building to rent out, investing in mutual funds, etc).
If you invest $1k [USD 2014] in a broad portfolio and things go basically well for the world, after 50 years that wealth will be over $10k in USD 2014, over $100k measured in USD 2064. If you take your $1k invest invest in a plot of rural undeveloped land or commodities such as 1oz of gold, after 50 years you'll have roughly $1k in USD 2014 or $10k as measured in USD 2064.
It becomes very difficult to compare value over a 50 year period. For example, you can't compare the cost of a wealthy person having a film projector and collection of movies to watch on demand in his house in 1964 to the cost of having access to a collection of movies today. I suspect $1k USD 2014 will buy a round trip to a low-earth-orbit space station in 2064, while such a trip today would cost over $100k per person.
Suppose someone's grandfather bought $100 (USD 1964) of rural undeveloped land that's now worth $1000. If it's roughly the same value, why can he buy such more electronics now with that money than he could in 1964. He did not do any work to create value. Where did that value come from? Did someone magically gift it to him?
The same person finds his grandfather buried $100 (USD 1964) on the land. That would have bought over a month's worth of groceries for a small family. Now it won't buy one cart of assorted groceries. Where did that value go? His grandfather did $1000 (USD 2014) worth of work for it, and now most of it is gone. Someone must have stolen it, he thinks.
The same person finds his grandfather invested $100 (USD 1964) in a whole life policy investing in stocks and that got rolled into mutual funds when they became common in the 80s. Somehow this wealth was sheltered from taxes. It's now worth $10,000 (USD 2014), a year's worth of groceries.
All this is enough to make someone think there's a conspiracy going on with all this wealth appearing an disappearing. For most of human history prior to the industrial revolution, wealth did not appear and disappear like this. Wealth and life were more static.
All the amazing things humans do to help one another in voluntary trade drives humankind forward. What we trade along the way is inconsequential. When people buy a $100 product, hopefully it will lead to better and better products and ways to meet peoples needs and wants in 150 years. The $100 note, apart from its value as a collectable, will be worthless in 150 years.
All the value is in people freely doing work to make things to serve other people.
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Why do objectivists seem to see conspiracies and/or huge problems around money? Esp now that raising prices moving money into investments are easy. Just by going into Quickbooks, a word processor, and my payroll software I can adjust things to correspond to raise prices/wages. Even if I hated doing that, prices would change with market conditions anyway. So I don't get what all the fuss is about.
One of the "worst case" realities from history was the "Dark Ages" following the "fall" of the Roman Empire, i.e., the abdication of Romulus Augustulus. For 400 years, local Germanic warlords (<cough> "heroes") looted and hoarded silver "plate" i.e., household goods in huge treasuries that did no productive work. If they had hired laborers to fix their roads, the story would have been much different. We know the tatters of history as mythic stories of Dragons' Lairs wherein huge piles of gold lay unused - Der Ring der Nibelungen, e.g.
"See their multiplier effect nonsense. As a result they believe the government can create wealth by spending money - stimulate the economy."
Yes. I believe you can create wealth by decreasing unused production capacity. The simplified narrative goes that you have workers who would buy things if they had jobs and a factory that would hire workers if people would buy what they produce.
This is tricky to do because maybe some of capacity is unused because people don't want what what that factory makes. An example is during the RE bust. There was excess capacity for experts at trading residential RE. That doesn't mean someone should go out and pay people to move house, as they basically did. Excess car production capacity doesn't mean we should go trash engines by running them with a chemical designed to destroy them, as the "cash for clunkers" prog did. Monetary policy has to be at a macro level, not a boondoggle for industries with gov't connections.
"They argue absurd nonsense that food stamps SNAP creates wealth through the multiplier effect. This is a clear case of the 'broken window fallacy' or if taken literally, theft creates wealth."
This would be the broken window fallacy if they were making this argument, but I think they're saying it's the borrowing that primes the pump. It doesn't matter how you borrow. A tax cut w/o spending cuts would do the exact same thing. The classic example people use is a war b/c it creates a surge of spending that people don't want to go on forever once the pump is primed. If you create a food stamp program or a tax cut, it's hard to take away the punch bowl as the party gets started.
I don't get the parenthetical association of wealth/money with Keynesians.
To say value lost because someone buried fiat money for 50 years was "stolen" is a bit like saying the heat in my house was "stolen" by an open window. An open window was never designed to hold in heat, so it's not a design flaw or a surprise.
Let's define what inflation's like: Our costs appear to go up. We raise prices and find we don't lose customers. We find we lose employees unless we give large nominal raises. As a result, we have to update our menus, price sheets, and employee compensation frequently. When we earn money, we have to get it invested quickly because it loses value.
Why would Keynesians as a group want to understate/overstate inflation or unemployment? The theory says when the national bank sees unemployment it expands the money supply. When unemployment declines, they start taking away the punch bowl right as the party's getting started.
Suppose we're updating our prices every quarter now. Suppose when we do rental contracts, we're cautious about long-term rent structure because we know we can fill those offices at homes at higher nominal prices each year, and we don't know how fast they'll keep rising. Then, in this scenario, the national bank conspires with politicians to say we *aren't* updating our price sheets every quarter and our employees aren't asking us to match other job offers, etc. What the heck? Why would they conspire? Those signs means it's time to tighten monetary policy. Why the conspiracy? Why not just do their job?
Even the definition of the word “inflation,” used when historical inflation figures were being calculated, is no longer offically used. The cause has become the effect.
All definitions at the time (there was only one):
Inflation: “The increased use of paper currency, not warranted by the security or other circumstances.”
The American Dictionary of the English Language, 1899
1) Yes a lot of confusion comes with equating wealth with money (Keynesians)
2) "it's roughly the same value, why can he buy such more electronics now with that money than he could in 1964. He did not do any work to create value. Where did that value come from? Did someone magically gift it to him?"
That is the power of new technologies - inventions. Real per capita income can only increase by increasing levels of technology.
3)"The same person finds his grandfather buried $100 (USD 1964) on the land. That would have bought over a month's worth of groceries for a small family. Now it won't buy one cart of assorted groceries. Where did that value go?"
The value of this money was stolen by government counterfeiting. In a free market (including no government counterfeiting) the price of all goods will decline over time.
4) Trade is important, because it allows specialization, but what is really important about this is the ability to create new technologies. Without trade the value of inventing declines precipitously. The larger the market the more value one (everyone) can derive from inventions, assuming their are property rights for inventions.