Wealth Isn’t (Just) Money, Pt 2

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By Jared Miller

We have already explored the idea that wealth is all of the things that money does, and isn’t necessarily money itself. That’s a pretty good foundation. But we still need to expand it further. Maybe a better definition is, “Wealth is all of the things that money does, AND the economic growth that the accumulation of money represents.”

I mentioned in part one that our exaggerated revulsion towards inequality depends on the ideas that the amount of wealth is fixed, and that wealth equals money. Since we’ve already covered the latter, I want to address the idea of fixed wealth by first examining “The paradox of thrift.” The idea is that the more people save, the less money there is in the economy. Less money in the economy means less economic activity, which means people lose jobs and businesses close. In times of economic distress, someone might be able to make the case that this is a genuine concern. But as a truism for all economic activity, it’s complete nonsense.

Maybe that’s a little unfair. Maybe it’s more accurate to say it is the result of another misunderstanding brought about by the use of currency. Once again, it’s much easier to understand the true nature of things without using money. Without proper understanding of wealth, talking about money just muddies the waters.

Let’s say a farmer can produce about a bushel a month: enough to buy about a month’s worth of beef. In this scenario, the economy is in complete equilibrium. It is neither growing nor shrinking, and there is no profit to be had as both parties are simply meeting their basic needs.

If the farmer comes up with a new technique whereby he is able to increase his yield to 2 bushels of grain, he is now building capital (profit) to the tune of 1 bushel per month. In our economy, he would sell this grain for a certain amount of money, but this makes no difference. He now has a surplus of capital to be used for a variety of means.

He could trade for some fruit or some new clothes, or use it to further improve his farm with a plow, or some land, or by paying a farm hand. Or he could save it at absolutely no expense to the rest of the economy. And that’s the most important part.

He has more because he produced more, not because he took it from someone else. If he were to trade the extra production, everyone would benefit from that additional wealth. But if he does not trade it, nobody is worse off. In the modern world, we are one step removed from the appearance of this, but we are not removed from its reality.

To understand, it needs to be completely clear that the word “profit” is not the vomit-inducing, greed-ridden, class warfare cliche that it’s made out to be. As long as it is not earned through fraud or exploitation, profit is good. It is growth. It is the numerical representation of exactly how far societal wealth has expanded — Not shifted, expanded. Profit means that everyone is wealthier, not just the person who earns it. (One might still try to argue that workers must be exploited for profit to exist at all, but that is a topic for another time. If I were to get into that here, this would be so long that nobody would read it.)

The same is true for personal wages, even though it doesn’t feel that way. Income (revenue) minus expenses still equals profit or loss. Profit in this case refers to the amount of value you have added through your labor that is above what you need to live. Like the farmer’s grain, this excess is not a drag on the economy. And increasing it by eliminating expenditures (reducing your consumption of limited resources) is also good for the economy.

Yes, it looks like the economy is shrinking because you aren’t consuming as much stuff. Activity slows down, but consumption of resources is by definition the destruction of wealth. It is absolutely true that businesses and systems that depend on constant consumption will suffer from an increase in thrift. But shifting our habits away from consumption is the best way to ensure both economic stability AND more general distribution of wealth. After all, who suffers most from lack of thrift? Is it the wealthy, or the rest of us? Who benefits most from a throwaway, consumptive mentality?

Increasing production and reducing waste, or more plainly, creating more than you consume: that is the definition of economic growth — not how much money is flying around. The only arguments against this fact result from an unfortunate preoccupation with money, or the immediate effects of personal decision making. When the extended consequences are considered, everyone eventually benefits.

There’s one more characteristic of profit we need to address in order to understand how this relates to inequality. Probably the most important function of profit is as a bat signal to entrepreneurs. High profits are the most clear way to say, “This model works! People want this! You can make money here!” The higher the profits, the brighter the bat signal. As new people copy the success of the first guy, competition forces profit margins to decrease as each competitor fights for a bigger piece of the pie. More new methods develop, efficiency increases, and labor and price are both reduced dramatically over time.

This happens because people see opportunity, and are allowed to pursue it to the best of their ability. But when something happens to limit the ability for new businesses to try their luck, success remains concentrated. The wealth gap grows. Usually, but not always, this happens when often well-meaning restrictions make it too costly for new players to face off with existing ones.

Therefore, if there is an arena where wealth concentration must be fought first, it is the addition of obstacles to entrepreneurial activity, and the reduction of competition by artificial means. That includes an element of personal responsibility for poor financial choices. People like you and me could become entrepreneurs ourselves, or at least stop squandering our own capital for the benefit of the elite. This may be the most important way to battle inequality, because it’s the only arena within which you personally have control.

Shift your definition of wealth. Learn to manage your finances wisely. If you’ve got the stomach for it, act entrepreneurially. Learn patience and stop borrowing money. Then maybe one day your success could contribute to reducing inequality.

 

 

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Wealth Isn’t (Just) Money, Pt 1

wealth 1.png

By Jared Miller

Inequality is a much bigger deal than most libertarians like to admit. Ignoring the gravity of the problem isn’t doing us any favors either. It undermines our credibility, but not because we are completely wrong. It weakens us because it makes us far too willing to dismiss the validity of the opposing view. Instead, we need to be able to admit that it is an issue, and then address the incorrect assumptions that lead people to incorrect answers.

The misunderstanding starts with conventional wisdom that says putting so much wealth in the hands of so few makes everyone else poorer. It does make a certain sense; there is only so much money in circulation, and the more you have, the less I can have. It is certainly the case that extreme inequality has the potential to cause obvious economic harm to those without.

People often try to fight this idea by saying that there will always be a high level of natural inequality no matter what system we have. This is true, but incomplete. We cite things like regulatory capture (which includes general cronyism, punitive tariffs, overzealous occupational licensing, targeted taxation, and other forms of economic protectionism) that make the problem worse by limiting both opportunities for personal growth, and the kind of competition that benefits workers more than employers.

We’ve covered those topics so thoroughly that halfway through that list you probably got bored and skipped to this paragraph. Don’t worry. I won’t judge. Anyway, it’s much more important to challenge our perception of inequality in general. The assumption that all inequality is harmful relies on two of the most prevalent misunderstandings in our culture: the idea that the amount of wealth is fixed, and that wealth equals money.

But wealth isn’t money. I mean, of course it is, but it isn’t only money. This isn’t just philosophical nonsense either. It’s a cold, hard, economic fact. So what is wealth? Wealth is all the things that money does. Though it seems minor, this little nitpick is all the difference in the world.

Money is a shortcut. It is a tool – like a shovel, or a ruler. We use it to measure value, and also exchange the value of labor or investment for the things we want or need. (Since investment is using the fruit of your labor to make someone else’s labor possible, labor and investment are nearly identical for the purpose of this discussion.) If you can satisfy those without money, or with less money, your wealth has increased even if your financial situation is unchanged.

if you meet your personal needs and desires with less money than you make, you are as wealthy as you ever need to be — regardless what the rest of the world tells you. So long as it is the life he wants, a man living in the mountains selling just enough moonshine to keep the lights on and the fridge full is as wealthy as any Wall Street broker. Obviously most of us aren’t content with a shack in the woods, so our desires tend to be a little more extensive.

The good news is that in the modern world, most of them can be met as easily at the low end of the economic spectrum as the top. Housing, transportation, food, electronics, leisure activities, etc… all are within the grasp of the majority of the population. With very little money, we are able to do many of the same things as those with much, much more.

So why doesn’t it feel any better for those of us who have struggled, or are struggling? What about those of us who, no matter how hard we try, can’t seem to get any further? Sure, people with less income have access to the same things, but they may be less desirable or of lower quality: like owning a used Ford Tempo vs a brand new Cadillac. Both satisfy the need for transportation, but one is notably more desirable than the other.

This is a big problem when thinking about our own lives. Typically, as our situation improves, so does the quality of our possessions. This process of slowly “trading up” can leave us feeling as if we haven’t gained a thing. “Yeah, I have a nicer phone, but I’m still living paycheck to paycheck.”  

That’s because, in a way, we haven’t improved at all. Since we are fulfilling the same desires as before with no additional savings or satisfaction of wants, we have not made real progress. We have only “upgraded.”

That’s the funny thing about wealth — it doesn’t always pay the bills. It is an indisputable fact that even the lower class in this country is considerably wealthier than previous generations. For God’s sake, most of us have one of the most powerful pieces of technology in human history in our living room and we use it to kill zombies or play fake football on a television screen the size of a Buick… But when it comes to paying the mortgage or buying groceries, we find ourselves struggling, and barely getting by.

Because of this, we tend to forget the work our money does as soon as it’s complete. This is often why the magnitude of our prosperity escapes us, and is another important opportunity to separate money from our idea of wealth.

It’s also the reason the virtue of contentment holds the key to accumulating the kind of capital associated with traditional wealth. If you can stop upgrading and focus on developing your financial future, you can start saving money immediately. You can divert resources towards retirement, buying your own home, or starting your dream business.

And yes, everything on that list takes money. But that doesn’t change the truth that the product of your labor is going further than it could have. Instead of only having a new car, you could be driving a dependable, used Toyota and saving the other 20 grand for a down payment on a house. One develops your own wealth, the other gives it away to the landlord and the car dealership.

You can even stop taking out loans and paying other people interest for the privilege of using your own property. There is no more obvious example of self inflicted wealth destruction than consumer debt. It is such a direct transfer of wealth from the bottom to the top that you can see it happening every time you get your bill.

You may say the availability of low cost alternatives is just the result of technological innovation. You’re absolutely right! But in saying that, you are already implicitly accepting the premise. If you accept that technology makes things cheaper and more accessible, you automatically accept that labor is accomplishing more while expending fewer resources. Money is doing more — in other words, wealth has increased — even though there is no more money in circulation than before.

Of course, it will be much harder (sometimes impossible) for low income households to make these changes. But the only purpose here is to encourage you to think about wealth in real terms, instead of dollars and cents.

Income and wealth inequality are only truly a problem when they cause others to do without, or when they prevent people from improving their personal situation. Someone may be able to make the claim that this is already happening. But if it is, increased inequality is a symptom, not the cause. It may be an important indicator for the state of the economy, but attacking it directly is missing the point.

In fact, as we will see in Part Two, their profit may be increasing your wealth, too.

 

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Are Libertarians Against Helping the Poor and Underprivileged?

is4slfgDonnie Davis, Feb 26, 2017

A common argument used against libertarianism or libertarian ideas, this particular topic is one that is based in the false notion that we as a political party do not care for the little guy or those who are living in poor economic conditions. Many a times we scoff at this approach to discredit our political viewpoints and simply state that the freedom to fail is just that and that we are not fiscally responsible for other people’s misfortune. As that is the main reasoning for our ideas, a lot of people will still see this as a heartless approach to dealing with this issue.

So, to throw some intellectual reasoning with no emotions involved:

Fiscally conservative = less government spending = minimal taxes = more money in “poor people’s” pockets.

Socially liberal = personal freedom = everyone is free to do as they will unless they violate someone else’s life, liberty, or property = no jail/criminalization for people living their lives = more freedom for “poor people”.

Free markets = no government hoops = more businesses = more competition = lower costs = more opportunity = more jobs and lower cost for “poor people”.

Libertarianism and free markets are the best systems for the poor and wealthy as everyone keeps more of their money and has less restrictions on how they want to live their lives.

Socialism, or more specifically socialist programs, rob from Peter to pay Paul for services provided to Sally. Theft is theft and should be treated as such. Taxation is legalized theft and is a necessary evil that needs to be minimized and recognized as such.

Any regulation, law, or requirement by any governing body may not be permitted to violate rights of any citizen to benefit others; as this is tyranny and should be met with opposition. The same goes with any unchecked corruption of governing bodies, monopolized marketplaces and corporations, and etc. The second amendment is a guarantee to the people that they may use deadly force to protect themselves, their rights, and anyone who they choose to assist that is being victimized.

Proper venues currently exist for providing care and welfare for those who are impoverished. Charities, homeless shelters (if approved by the community), food drives/banks, clothing donations, and many other forms of donations exist nationwide and are completely voluntary forms of social welfare. We as libertarians urge everyone to care for their fellow citizens but WILL NOT FORCE you to pay for their care by means of legalized extortion also known as taxation.

Large, powerful, and over reaching government is never the resolution. An open heart, compassion, and empathy is what is needed and passing laws to force people to open their pockets to fund federal welfare programs is wrong. Allow the people to choose whether or not they wish to donate or be charitable. Freedom of choice is a necessary requirement in the idea of a free nation.

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Money vs Wealth

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Eliyahu Neiman-Jan 23, 2017

Do the wealthy accumulate their riches at the expense of the poor? Some believe that wealth inequality means that the poor must be losing out – because, after all, there is only so much money to go around. However, this is not exactly true. To see why, it is important to understand the difference between money and wealth.

Consider a case focusing on only two people: a tool manufacturer and a contractor. Say that the manufacturer pays the contractor $100,000 to build a production facility. Over the course of a year, the contractor buys $100,000 in tools from the manufacturer. Having paid off his initial investment, the manufacturer now pays $100,000 to the contractor to expand his facility.

How much money has changed hands? Apparently, only $100,000 – three times. But how much wealth has been created? The tool manufacturer has produced $100,000 worth of tools for the contractor. The contractor has built $200,000 worth of construction for the manufacturer. Our two-person economy now contains $400,000 in wealth. It is richer by $300,000. In fact, that would be its GDP if it were a country.

How is it possible that only $100,000 of money has created $300,000 of wealth? The secret is that money is not actually worth anything – other than as a means of exchange. Money represents a collective IOU that can be collected from anyone at all. This allows anyone to use their skill set to create wealth on behalf of anyone else,  requiring nothing in return but an anonymous IOU. Those who find ways to create wealth for consumers accumulate money, which they can exchange for other forms of wealth. This is the reward that the free market delivers for serving consumers. If Bill Gates and Warren Buffet have more money than anyone else, it is because they have created real wealth for consumers, and used their initial profits to create more wealth for consumers to purchase.

Two government activities are particularly harmful to this process:

1. High taxes. By confiscating the IOUs, government becomes the new recipient of the wealth owed in exchange for creative activity. This reduces the reward for wealth creation. (Equivalently, it diminishes the purchasing power of consumers). If government then spends this money on activities which don’t create wealth (i.e. goods or services that don’t improve people’s lives), then it has wasted resources, making them unavailable for real wealth creation.

2. Overregulation. If a small business owner cannot afford to spend the time and energy, or to purchase the additional equipment, required by government regulations, they may not have enough remaining resources to create wealth at a price that consumers are willing to pay. Overregulation can shut down the means of wealth production entirely.

In short, money is just an IOU, or stand-in for real wealth. Anyone, rich or poor, who can sell their services to a consumer has not only earned a share of their own wealth – they have contributed more wealth to the whole economy. Taxing the creation of wealth harms everyone; this is because everyone benefits from being able to purchase the goods and services that wealth creators produce. Policies that benefit poor people most are those that encourage and enable them to create valuable goods and services. When more people are able to create and contribute to the economy, we all become richer.

 

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