Wealth is not money, and money is not wealth

This is the mantra.

If money was wealth, then governments could simply print their way to prosperity. Many have tried, all have failed.

Consider a car, a Lambo to be exact. This Lambo can store up to two people, and can be used to transfer people, at speeds exceeding 200mph.

While a Lambo can store and transfer people, a Lambo is obviously not a person. Does not matter how much you love it.

Likewise, while money can store and transfer wealth, money is not wealth.

Why is this distinction important? Because confusing the two can result in poor economic decisions. Such as printing lots of money.

What is money?

Money is anything that many within a given society believe can be conveniently and safely used to store and transfer wealth with each other, today and in the future.

At one time seashells and even cigarettes served as money. Today’s money is usually in the form of government issued currency, but there is also gold and bitcoin.

Currency is a subset of money. Within a given economy there can be several forms of money, but there is only one currency. If you are not sure, what you pay your taxes in is your currency. In the U.S., our currency is the dollar.

Which means that it is also true that “wealth is not dollars, and dollars are not wealth.”

Per Adam Smith, wealth can only be created by applying productive labor to an economic resource, whereas dollars can be created today at the stroke of a keypad, they do not even have to be printed anymore.

It is much harder to create wealth than it is to create dollars. One requires work, the other does not.

Dollars, and the markets that accept them as payment, enable the transfer of economic assets that have value, that store wealth. With any luck, the currency, the markets, and the whole economy is efficiently creating wealth faster than it is being consumed.

Wealth is always being consumed, a requirement if life.

How much wealth is being produced? Can it be measured? The answers are unfortunately “not sure” and “not directly”, as there is no way to quantitatively measure the amount of wealth being produced, or for that matter, the amount of wealth being stored within a given economy.

But we can indirectly measure wealth, using the standard of living as one measurement. Or perhaps the advancement of science, or the development of needed infrastructure. Or even the GDP provides input.

The government is particularly good at creating dollars, and not so good at creating wealth. It is a decentralized, efficient, market-driven economy that has proven time after time to produce sufficient, if not excessive wealth.

Want to learn more?

www.WTHisAnEconomy.com

Eric Johnson is a husband, father, engineer, pilot, surfer, investor and amateur astronomer who has read a lot of books on economics.