Sunday, December 19, 2010

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.  

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