Tuesday, August 23, 2011

In Which I Try to Understand Money Again

Is money that isn’t spent ‘lost’ to the economy?

A wealthy man who doesn’t ‘invest’ his wealth in some way, but ‘hoards’ it, is generally assumed to be taking money out of the economy that he could be spending on products or employees wages or creating further wealth by doing whatever is what made him wealthy in the first place, or that the government could be spending for him. Whether or not you consider it a bad thing that someone should a) have a lot of money and b) not spend it, there seems to be a certain amount of agreement between left and rightwing commentators that it’s better for the wealthy to spend their money than to hang onto it. (They then start arguing about everything else, of course.) But does it actually matter?

If it’s in a bank or whatever, which is the most likely way of ‘hoarding’ it, then it is being invested, just not by the owner of the wealth. It’s helping people buy houses and start or improve businesses or increase their pensions or whatever. Not all of these will be good investments, but that would be equally true if the owner were spending it himself.

If it’s land*/buildings/cars/yachts, then you could argue that the resources are not tied up at all, wealth having been distributed by the original buying. Also, these things tend to require expenditure on maintenance and so by their existence cause the wealthy to spend money.

If it’s under the bed... This is where it gets interesting, possibly. If Mr Croesus has a great pile of gold bricks under his bed, has he taken money out of the economy? His bricks are a way of storing wealth, but until he tries to sell them and buy something else, that is until he tries to use them as a medium of exchange, are they worth anything at all? Hasn’t he just increased the value of circulating gold by keeping some of it out of circulation? And isn’t the same true of banknotes? Even more clearly in fact, since banknotes have no intrinsic value whatsoever.

*Actually, I’m beginning to wonder about where land figures in all this. But someone is going to own that land, and to put it some purpose that suits them, rather than being necessarily beneficial to others. After all, you can’t spend land. Unless it’s a large amount of good agricultural land that is left to run wild, or land on the edge of a prosperous town that a lot of people could benefit from living on and finding employment nearby if it were used for housing... So land is indeed something that, just by having it and not using it, the owner is keeping wealth out of the economy. Or is he? This is what happens when I start thinking with my fingers.**

**I have a degree in mathematics, which I enjoyed doing. I understand some pretty complicated concepts, or at least I did twenty years ago. But money just gives me a headache. I’m going in search of cold beer.


Mark Wadsworth said...

"If it’s in a bank or whatever, which is the most likely way of ‘hoarding’ it, then it is being invested, just not by the owner of the wealth."

Correct. It's as simple as that. Nothing to worry about.

Land is trickier, but remember it only has value when it is a scarce resource (and nothing to do with efforts of the owner from time to time); ergo it is a limiting factor; ergo we should try and maximise use of it; and taxing it would help - people use things more efficiently if they have to pay for them.

For sure, for most land the best use is "homes and gardens" but by the same token, you are only paying for it because it is a scarce resource from which you can exclude others, so I see no overriding reason for a purchaser to pay the previous owner £££; far better to compensate everybody who is excluded via the tax system.

CIngram said...

So I got something right then. But what about the gold bricks/suitcase of banknotes under the bed? Is that money lost to the economy?