More on Money

The following is a quote from a comment on Matt’s blog and my response with regard to money, but also to this Nation’s odd attitudes toward borrowing, lending and the role of Government.

But nobody thinks money changers are the captains of industry who drive innovation, promote wealth and create jobs by allocating dollars, euros and pounds to their most efficient uses. If anyone said money changers deserve a special tax privilege for the profits they earn, because it's in everyone's best interest to promote as much of their uniquely valuable skill set as possible, the whole world would laugh in their face.

I'm not sure this is true. I'm sure it should be true, but I doubt it is.

Consider the current, so very popular, insistence that we can't provide help for those many people who are struggling with debt, we have to make sure that they pay their loans in full. They can't be rewarded for borrowing foolishly, especially for consumer debt. But if they borrowed foolishly, the lending institution lent to a an exactly equal foolish extent. Furthermore, the borrower has been working some actual job, producing some actual useful output that adds to the value of the economy. The lender's whole means of making a living is not to do something productive himself, but to live off the productive labor of some other person. Yet the near universal feeling is that the lender should be protected, and indeed have the full force of the government to support his getting every dime of income he hoped for in making the loan and the borrower (the actual producer of valuable stuff) is on his own.

So, consider the case where the original agreement amounted to the productive worker paying 10% of his income to cover a debt and he has since lost his original job and is making half his former income. To keep the lender earning the same money he had counted on, the borrower must now pay 20% of his income. It seems that the majority of people believe that it would be wrong to change this agreement so the borrower pays say 15% of his income to cover the debt and the lender then makes three quarters of what he originally hoped for. That is the two parties split the foolishness of their borrowing and lending. It seems to me that this is substantially the same as what you state no one would believe.

Note here too that the fact that the worker producing useful output is, quite likely, to require little or no assistance from the government to earn his income. He, or she, may have some minor need of the government in his or her business model. The bank, however, really needs to be able to have the government back it up with extensive legal assistance if it is going to earn its money. The government’s support is an integral part of its business model. So even with this, our small government conservatives favor the bank.

The Nature of Money

Matthew Yglesias has another excellent post up today on what we mean by money.  He references this post by Paul Krugman and this comment on Krugman’s post by Kevin Drum.  All of them make good points that clarify the issues facing us today, issues which are complicated by the poor understanding people have as to what money is, what it does and its role in the economy.  Read all of them, they are informative.

Much of the public, and thus much of our public discourse, is confused over the nature and purpose of money.  A large portion of the population seems to view the quantity of money that we have on hand to be critical to a nation’s wealth and that we need to focus on conserving our money.  This is ironic as no less a figure than Adam Smith argued forcefully in The Wealth of Nations, that this view of money is completely wrong.  According to Smith (who I would say is quite right) is that the wealth of a nation is in the total quantity of useful products and services that it creates out of its resources of land, capital and labor.  Money is just a tool to facilitate the transfer of useful products from one party to another.  If more money in circulation would improve the economy (and  all indications are that it would) then we should print more money and get it in circulation.