At the heart of popular economics in today’s world is the misconception of equating money with wealth. People tend to look at money and wealth as the same things and this has led to a great confusion as to how we address the economic problems of our times. The confusion has been perpetuated not only by people who have given into the fallacy but also by those who have a vested interest in keeping the myth intact. The solution requires that we look into what money looks like with respect to wealth.
It all starts with the birth of mankind on this planet. Usually, money is cited as a replacement of the barter system, but what about the pre-barter system? Pre-barter system is simply every-man-for-himself system. You make something and you consume it and that’s the end of it. You need food, you grow food; you need a house, you build your own house. So, when does barter come into picture? Barter comes into picture because not everybody is good at everything. So what you do is exchange your food for my clothes; exchange cattle for the house somebody else built and so on. Barter also exemplifies the concept of voluntary cooperation. People looking for their own benefit enter into an agreement without the use of force.
So far so good. Why do we need money then? Aren’t we perfectly fine with barter alone? Well, what if you want to help somebody in building a house but don’t want all that food he’s offering in return; reasons being that such high quantity of food cannot be consumed before it perishes or that your customer only has food while you want something else as well or you might not want food at all but something entirely different for your efforts. What we need is a common commodity that can be exchanged for various goods. To enable such a transaction we need something which a) is not perishable and holds its value for a long time, b) holds a high amount of value (you don’t want a cart load of food to be worth a cart load of money), c) It must be divisible and d) Having some value of its own (you are not going to take something as valuable just because somebody says so). Thus mankind came up with an idea of money further its productive exchanges.
So, now how to find such a thing that complies with all of the above four qualities. Well the only thing in the history of the world that comes close to satisfying these are precious metals, themost important among them being gold. Gold has high value density, its supply has increased by about 1-2% only over the years (most of the time) and is perfectly divisible (can be cut in the smallest of units), not to mention it has some value of its own. Some people have called it useless the chief among them being JM Keynes who called it a ‘barbarous relic’. In some sense the uselessness of Gold is one of the qualities that make it useful as money. The fact that gold does not react with anything else makes it non-perishable and so it can be preserved for eternity at very low cost. Its cost is actually only regarding its security. In fact, all of the gold ever mined on this planet remains as gold. Unlike diamond which is pure carbon and can be burnt at sufficiently high temperatures to give carbon di-oxide, gold virtually does not combine with any other element and can be purified from contamination at very low costs (you cannot get back a diamond from carbon di-oxide).Thus, its ‘noble’nature makes gold ‘useless’ for any productive activity while makes it immensely useful as an eternal preserver of value.
Let’s get back to the question of barter. Use of one of the commodities as money not only facilitates indirect exchange of goods but also facilitates accumulation of value, i.e. I can build a house with my resources and labour and then exchange it for gold and spend only some part of it while storing the rest for future consumption. This stored or saved money is the ‘Capital’. People save for a variety of reasons. One can use it for future consumption like using it to buy food stuff and clothing in the future. One can use it to further his commercial activity like hire another person to assist in building house and build that house in less time than the first. The second activity is just another example of voluntary cooperation in which two people or entities enter into an agreement to help each other in exchange for money or goods. This logic can be extended to the nth degree and what we have is ‘Capitalism’.
As we can see that this is a very consistent system in which people voluntarily enter into exchange of their goods and services. There is no reason for anybody to force anybody else to give something. Legal force might be initiated only if a violation of a voluntary contract occurs.
The other major point to differentiate between wealth and money is that while wealth deteriorates over time, money remains intact. For e.g. food rots, clothes wear out, cars break down, houses need repair, but the gold once mined remains with mankind forever. And so the wealth needs to be created and recreated, just to maintain the current standard of living. The effect of this is that simply having money cannot give us our standard of living. Wealth has to be created, repaired and serviced. We may end up consuming all of our wealth and we’ll still remain with all our money, but that money would not be of any use; its use is only in enabling our transactions of what we produce. Thus we need to constantly work, if only to maintain our current standard of living.
It’s useful if more and more people work, according to their will, inclination and need. These issues are highly subjective and best left to the individual. But one cannot deny the fact that without working productively no increase in wealth is possible. You can put it anyway you like but at the end of the day it’s only the products and services that matter and enable our living.Of course, we would like to work less and worry less about our daily chores and popular perception would have you believe that we are too materialistic; In fact our material progress is what allows us to enjoy more of our lives and creative pursuits.
Money is a tool devised by mankind as great as fire. It’s important to understand how it works and moves our life around us and only then we can use it to our best ends. A lack of knowledge about money and its relation with our wealth is what is deepening the current crisis. A better understanding of money can surely go a long way in alleviating these problems.