The Biggest Economic Fallacy of All — Money VS Wealth
There are a lot of misunderstandings about economics, and many of these misunderstandings affect the decisions we make, especially political decisions. But the worst economic fallacy of all is the confusion of “wealth” and “money.” These are two very, very, very different concepts, and the confusion of the two cost the lives of hundreds of millions of people in the last century, because of foolish political decisions.
My goal with this article is to define “money” and “wealth”, and explain why these are two different concepts.
Before I get into the meat of this article, I need to explain what this article is not going to be about. This article is not going to be a sappy Hallmark card. We often hear clichés about how money doesn’t buy happiness, or about how money doesn’t make one rich. While those sayings may have some value, they are not the subject of this article.
Let’s talk wealth. “Wealth” is that which is material that makes our lives better. This can be goods and services, as well as abstract categories like education, and natural resources. Specific examples of wealth might be; clean water, food, houses, a useful college degree, cars, bicycles, medical services, etc.
When people go to work, they often say they are going out to “make money,” but in reality they are not “making” money, they are creating wealth. The apple farmer goes out, and tends apple trees, and produces apples. Apples are then traded for other forms of wealth. The farmer trades his apples for land, a house, higher education for his children, and assistance from others to help to farm his trees. (Stay with me for a bit.)
The farmer here creates wealth that did not previously exist. He creates wealth in the form of apples. People are then able to eat the apples providing their bodies with nourishment.
At this point many readers might object that the farmer does not directly spend apples on anything. He does not buy a college education for his children by directly spending apples. He first sells the apples to grocery stores, and exchanges the apples for money.
Money, in the modern, Western World has no intrinsic value. If you were stuck on a desert island by yourself with 10 million dollars in cash, those paper bills would have absolutely no value to you apart from kindling and insulation. A sturdy piece of construction paper would have more value than a thousand dollar bill, since the construction paper would provide more kindling.
In our time, money is no longer even backed up in gold. By itself, it’s not even worth the paper it’s printed on.
The only reason that money has any value whatsoever is because it is a convenient medium by which the doctor, the farmer, and the carpenter can exchange goods and services without having to resort to inefficient bartering.
This all may seem obvious. So what’s my point?
The Fixed Pie Fallacy
In the political arena, I often hear people complaining about the rich hoarding money, along with various allusions to the “haves” and the “have-nots.” The rich are said to be getting to keep all of this money, while the poor are suffering. The implication being that if you are rich, that you are taking advantage of the poor. People will also talk about overpopulation, and about how we aren’t going to have enough food, water, and resources to go around.
This gets into what is often called “The Fixed Pie Fallacy.” This is the idea that the amount of wealth in the world can be compared to a pie, like what you eat on Thanksgiving. There is a fixed amount of wealth in the world, and wealth is never created or destroyed. As more people are born, our slice of the pie gets thinner and thinner. Those who are “rich” are taking an unfair share of the pie.
Right away, the key fallacy should seem obvious. Three hundred years ago, there were far fewer people in the world than there are today, yet today the vast majority of people are richer than their ancestors were a hundred years ago.
There are a few exceptions to this rule, countries and regions facing political turmoil and instability, however, apart from those exceptions, the vast majority of people today are better off than they would have been even a century ago, including relatively poor people.
In terms of access to information, many of us carry around devices in our pockets with access to the Internet — a vast Library that is richer than anything owned by the greatest king a mere generation ago. In terms of access to information, anyone reading this article has more wealth than anyone in the world had just 20 years ago.
Furthermore, as Arthur Brooks points out, around the world, starvation-level poverty has fallen by 80% since 1970.
When I was a kid, living in America, mothers used to tell their children that they should eat their dinner and be thankful, because there were starving children in China who would love to have that dinner.
Yet today, China is rapidly becoming one of the world’s leading economic superpowers, despite having a larger population than ever before. This is due to technological developments, and China’s greater openness to free markets (also known as Capitalism) than it was in previous generations. Compare this to the time when the Communists in China sent everyone to work on the farms, and 40–60 million Chinese people starved to death.
Overpopulation and The Environment?
At this point, many readers will have further questions about overpopulation, and about the human impact on natural resources and the environment. I have made videos about some of these topics before, but a detailed discussion of these topics is beyond the scope of this article.
There is an economic irony that there is no correlation between population size and poverty. According to Dr. Thomas Sowell, the well known economist, many of the poorest parts of the world, such as many regions of Sub-Saharan Africa have very low populations compared to many other parts of the world. In other words, those starving people we see on TV in Africa are not suffering due to overpopulation. Their poverty is due to other causes. (Possibly underpopulation to an extent.)
Conversely, consider what was previously said about China.
From an environmental perspective, fossil fuel emissions are one of the greatest concerns that people have with regards to a growing population. Fossil fuel emissions, and their alleged impact on Global Climate, are often Exhibit A for why we need to reduce the world’s human population.
But is overpopulation really the problem here? Existing nuclear technology already has the potential to create safe, reliable, green electricity. The problem is not that we have too many people, it’s that people are afraid of nuclear energy.
We could go on all day about the development of biofuels technology, and ideas to use thorium and other safe alternative fuels as a replacement for fossil fuels in cars. With developments in newer energy sources, such as biofuels and the potential for thorium reactors, concerns about fossil fuel emissions might soon be a thing of the past.
There are a host of issues here that are beyond the scope of this article, but in a nutshell, it’s not that we have too many people or too few natural resources, it’s about using those resources in a way that is wise and efficient.
So what is money?
I hate to repeat myself, but it’s important to reiterate and emphasize these points. Money is not wealth. Money is merely a convenient medium by which we exchange wealth. I sell my ability to create a certain kind of wealth to my employer, and they exchange the wealth I create for the money in my paycheck.
As we grow as a society, we innovate and crate new ways of producing wealth. In the past a farmer could only provide for a handful of people, but today’s farmer feeds 155 people on average worldwide. This means that the farmer has more apples to “pay” more people, and create new economic opportunities. For example, now he can “spend” those apples to buy a bigger house, and send his kids to college, whereas the farmer in 1817 might not have had the same opportunity.
The Fixed Pie Fallacy fails to understand this. It fails to understand that people create wealth in their occupations, and merely use money to exchange that wealth. Access to wealth is what makes us richer, not more money.
Money itself has no inherent value.
That’s why if a 21st Century Scrooge McDuck chooses to swim in a pile of money in a vault, all he is really doing is slowing down inflation rates.
The Failure of “Compassionate” Left-Wing Government Policies
Now here’s where all of this comes together. In the United States, Leftist economic policies almost always focus on taking money from the “rich” and giving it to the “poor”. These government officials fail to distinguish the difference between wealth and money, and look at economics in terms of a “fixed pie”.
Often the Federal Government will try to solve economic problems by simply printing more money, similar to the way Germany did after World War I. This should be terrifying for anyone who knows anything about history. The problem is that printing more money doesn’t create more apples, cars, or houses. It literally only creates an unhealthy inflation of paper which only has value in an abstract theory that we create for ourselves. (This also creates a sense of distrust in the security of said money, but that is beyond the point I am making here.)
If wealth were equivalent to money, governments could simply solve all of our economic woes by printing more cash. That would provide everyone with food, housing, and healthcare, with no one ever having to work. But as any child can see, that simply is not how economics works.
That is why Socialist and Communist systems ultimately collapse. Governments redistribute money by force, destroying any incentive for entrepreneurs to take risk and create wealth.
The same problem can be said of welfare policies. When a government taxes a company say $30,000 and gives that money to someone on welfare, that represents one less person that this company could have hired.
So instead of hiring another person to tend the apple farm, that farmer is forced to pay someone to sit at home. The person sitting at home may be someone who really wants to work, but because the companies around him are being taxed for welfare, there are fewer jobs available, and he is stuck on welfare. Being on welfare he is only consuming apples, instead of producing them.
Alternatively, perhaps the farmer would have spent that money buying a healthy fertilizer from a cow farmer, and producing twice as many apples for the community.
I realize this may be difficult to understand for some, and difficult for others to accept, but most of what is said here is basic economics.
Welfare programs may “feel” compassionate, but as someone who has been on programs like these, they really are insidious. The most compassionate thing that can be done for a person in poverty is to help them to find work. Instead of merely consuming wealth, this person is given the opportunity to create more wealth than they consume. For every $1.00 they are paid at a factory, they create perhaps $1.10 in wealth.
I live in an area where the economy is very weak, and a huge portion of the population is on welfare. Taxes are absurdly high, and despite numerous colleges and universities in the area, young people tend to pack up and leave to go to other states to find work, waving goodbye to Mom and Dad with a tear in their eye in the process. Even if you can find a decent job, taxes in my area are absurdly high. These same welfare programs intended to help the poor, end up creating high taxes, destroying jobs, and putting more people on welfare, who then turn around and vote for the same useless politicians offering to solve all their woes with a handout.
During the past two and a half years since graduating from college, I have worked off and on, despite having two college degrees in biotech. I have received government benefits during that time, including food stamps.
But there was one program that stood out to me as something that was not a useless, futile attempt to throw money at the problem.
A Government Program That Was Actually Helpful
Ironically, the past few years have put a bad taste for government welfare programs in my mouth. We have well established data that shows that welfare programs only create poverty. But my personal experiences with welfare programs showed me first-hand how destructive they can be.
Yet in all of this there was one program that stood out to me as especially useful.
In my city there is a program for people with disabilities where you can go and sit down with an adviser who will help you to find work. In my case, I sat down with this little old lady once every two weeks, and she went over my resume, giving it an overhaul, gave me interview advice, helped connect me with places where I could get professional clothes, and even gave me business cards.
But the biggest thing she did for me was teach me about networking, and helped me to understand how to find connections with people who might know people in my field.
While I won’t go into detail with how that worked, I can definitely say with 100% certainty that this was a government program that has helped me personally. It’s a program that said “Hey, you want to find work? Let’s help you find work.”
Through this program, I was even given the opportunity to work in an HIV research lab for a month, and gain experience, even though I was only being paid minimum wage. (And that was no $15 minimum wage either.) But to be honest, I would have worked in that lab for free, considering the value I gained from having the work experience.
Instead of taxing successful, growing businesses that were looking to hire people, and throwing that money at the unemployed, this program sought to help people with disabilities enter the workforce, and find the job of their dreams.
The big take away lesson here is that redistributing money is not a long term solution to economic problems. Money and wealth are two very different things, and when governments and citizens confuse the two, it leads to destructive governmental policies.
In-depth discussion about welfare, alleged overpopulation, environmental concerns, education reform, and a host of other issues are far beyond the scope of this article.
My goal here is to simply point out that people cannot eat dollar bills. If as a society, we want people to rise out of poverty and become financially independent, it has to start with getting people into the workforce. As people work, they gain experience, and greater opportunities open up. They are then able to reach the next rung in the economic ladder, and start to climb. Unfortunately “compassionate” minimum wage laws only prevent the poor, especially poor young black men, from finding their first job, and beginning the climb, but again, I digress.
If as a society we want to be compassionate, then we need to help people to find work, be it through a government program like the one I described, or through a similar program in a private charity, or by some other means. But until a person is able to find meaningful work that pays their bills, they are doomed to having the shame of being a charity case, and that is not something we should wish on ourselves or on our neighbor.
It’s important to note that this is meant to be a simple article, not a thesis on economics. Obviously many cultures have historically used gold as money — which has objective value, and in this case the money itself has objective wealth. Likewise a quick Google search will give you definitions for “wealth” other than what I describe here, and that’s okay! Keep in mind that words can have different definitions based on the context.
My goal with this article was simply to create a distinction between “money” and “wealth” in this particular context. “Wealth” being that which is material and can be traded, and which makes and individual’s life better. “Money” being the arbitrary medium by which wealth is traded.
No doubt a million hairs could be split with this article, as with any article. But please look at the core of what this article focuses on. Anyone can be a “smarter than you” Internet troll, but someone with real intelligence will take the time to see the real value in the core of what is being discussed here.