Money is Not Wealth

This is a guest post by Greg Linster, a graduate student studying economics at the University of Denver. He blogs at Coffee Theory about things philosophical and shares aphorisms (almost daily) at Aphoristic Cocktails.

The father of modern economics, Adam Smith, once wrote: "All money is a matter of belief."  The question I want to pose (and hopefully answer in this article), then, is: Should we believe?  I’m afraid, however, that the answer is a rather tricky one.

Since Kent’s blog is called The Financial Philosopher and since I'm an economics graduate student with a philosophical proclivity, it seems only fitting that I attempt to tackle a philosophical question about the nature of money.

Most of us wake up in the morning and go to a place called 'work' in order to earn money.  And most of us surely spend money every day.  In essence, money is a medium of exchange that helps us get the things we want and need.  In other words, you provide your labor in exchange for this medium called money, which you can then exchange for others goods or services you want. [1]  However, it’s important to note that money has no intrinsic value (unless it’s commodity money).  Is money, then, really the thing we want?

It seems fairly obvious that most of us would prefer to have more money as opposed to less.  In some ways, this is merely a truism.  After-all, who wouldn’t want to be able to buy more goods and services?  All other things equal, I’d certainly rather have more money in my life!  With that point in mind, I’m not here to deny that material well-being can improve happiness because I believe it certainly can.  However, the quest to acquire money can come with hefty spiritual costs that are oft ignored.

As such, I think most of us, when we say we want money, really mean that we want wealth.  So what, then, exactly is wealth?  Being wealthy means having the actual things, both tangible and intangible, that we want in our lives.  An eclectic array of things can make us wealthy (and in many different ways), e.g.,: a place to live, leisure time, a loving family, wonderful friends, gadgets, a creative outlet, and travel. 

What's interesting to note is that you can be wealthy without having money.  As Kent is fond of saying, "True wealth is not measured by financial means." However, money is needed for some of these things (unless you are bartering) and so to say that money doesn't matter at all isn’t entirely accurate either.

Most of us want the things that money can buy, but often what makes us happiest are the things that money can't buy.  Having a healthy balance between these two is the key to being wealthy and it's a different balance for each of us individually.

I think pursuing wealth is the more important thing than pursuing money, but we usually only hear public discourse surrounding money.  If what we really want is wealth, why do we waste our lives chasing money?  Starting at a very young age, society bombards us with the message that money makes people happy and successful.  As you can see, however, this rests on the mistaken assumption that wealth and money are synonymous terms; they’re not.

I think the French political economist, Frédéric Bastiat, would agree with me.  He famously wrote:

I cry out against money, just because everybody confounds it, as you did just now, with riches, and that this confusion is the cause of errors and calamities without number. I cry out against it because its function in society is not understood, and very difficult to explain. I cry out against it because it jumbles all ideas, causes the means to be taken for the end, the obstacle for the cause, the alpha for the omega; because its presence in the world, though in itself beneficial, has nevertheless introduced a fatal notion, a perversion of principles, a contradictory theory which in a multitude of forms, has impoverished mankind and deluged the earth with blood. I cry out against it, because I feel that I am incapable of contending against the error to which it has given birth, otherwise than by a long and fastidious dissertation to which no one would listen. Oh! if I could only find a patient and right-thinking listener!

As you can see, the answer to the question I posed at the beginning of this article is both "yes" and "no".  However, I think Adam Smith, like me, would be fond of how Tim O’Reilly, founder of O’Reilly Media, thinks about money.  "Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations."

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Notes:

[1] We can thank the Phoenicians for inventing metal money.

Related:

Financial Wealth: Real or Perceived?

The Diminishing Marginal Utility of Wealth

Comments

[Kent @ The Financial Philosopher]

Greg:

Thanks for sharing these valuable thoughts. I especially like the Adam Smith idea that "money is a matter of belief."

This speaks to the ego-fed and social convention-created illusion that is money and material wealth.

Money and wealth do have utility but the real illusion is that more money (beyond the point where the basic physiological needs of food, shelter and clothing are met) has diminishing utility.

"Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver." ~ Ayn Rand

"If thou wilt make a man happy, add not unto his riches but take away from his desires." ~ Epicurus

Thanks for such a great beginning to "guest posts" at The Financial Philosopher!

Kent

[Greg Linster]

Kent,

Thank you for the kind words. It's absolutely an honor to kick off the "guest posts" feature here.

I really like both of your quotes.

As you point out, without thinking critically about what money really is, we run the danger of fetishizing it. A consequence of fetishizing money is that we tend to waste our lives chasing it, often to the detriment of other things that can bring us wealth too.

Thanks again!

Cheers,
Greg

[Andrew]

Great post love the quote "All money is a matter of belief." It seems to me the collective agreement in society about the value of money is currently being tested or reevaluated.

To paraphrase Einstein
Money is merely an illusion, albeit a very persistent one.

[Kent @ The Financial Philosopher]

@Greg: Good points. I like money but not enough to chase after it. Like most things in life, a balance is healthy.

Consider this quote Eckhart Tolle:

"You are a human being. What does that mean? Mastery of life is not a question of control, but of finding a balance between human and Being."

I consider the pursuit of money a "human" aspect and contentment a "being" aspect.

There is no need to fight against our own human nature; just be aware of it and the illusions presented by human ego will dissolve.

@Andrew: Yes, the value of money is driven by many factors, including economic policies but also human behavior and psychology. These factors are constantly in motion.

Thanks Andrew and thanks again to Greg...

Kent

[Jerry Buchko]

A thoughtful and thought provoking post, Greg. I really enjoyed it.

There is something about this notion of intrinsic value distinguishing commodity money and the money we typically use every day that I struggle with a bit.

It seems to me that the value of the numerous objects human societies have used as 'money' have always been based on context & mutual agreement. For example, in one set of circumstances we may agree that a gold coin or a diamond or a hundred dollar bill or a shell would be more valuable than a gallon of water; and under a very different set of circumstances we may decide the gallon of water is more valuable.

Given that we are the ones who impart value to these objects, how can any money object be said to have intrinsic value?

[Greg Linster]

Thanks for the kind words, Jerry.

It sounds like you are interested in the diamond-water paradox. I think what you're essentially asking is why are diamonds valued more than water when water is necessary for life and diamonds are not?

In a passage from "An Inquiry into the Nature and Causes of the Wealth of Nations", Adam Smith states, "The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any use-value; but a very great quantity of other goods may frequently be had in exchange for it."

The classical economists toiled over this question; however, the pioneers of the marginal revolution were ultimately able to allegedly explain the paradox with the following.

It's not the total usefulness of diamonds or water that matters, but the usefulness of each additional unit of water or diamonds that matters. Since water is in such large supply in the world, the marginal utility of water is low and the marginal utility of diamonds is high, thus allegedly resolving the paradox.

[Jerry Buchko]

Thanks, Greg. I think the diamond-water paradox approaches the general ballpark of what I'm wrestling with, though I'm not sure marginal utility explains why any particular object, like commodity money, can be said to have intrinsic value.

Using the elements in your explanation of marginal utility, it seems to me that the value of any particular characteristic of an object, e.g. it's usefulness, it's scarcity, etc., is wholly dependent upon context. And if this is the case, then how can any object be said to have intrinsic value?

For example, if one were dropped into the middle of a desert, which stretched to the visible horizon in every direction, and circumstances were such that one would need to walk unaided out of that desert and could choose to acquire either the diamond or the gallon of water, not both, it would seem reasonable to assert that the gallon of water would become more valuable. If a diamond had intrinsic or non-conditional value, then wouldn't it always be the more valuable choice regardless of circumstances?

Asked another way, why does the scarcity characteristic of an essentially useless object necessarily make it intrinsically valuable?

[Kent @ The Financial Philosopher]

Jerry & Greg:

I believe you may be getting into the area of human psychology, such as perceived value and rationality, which makes scientific arguments less valid.

For example, the person in the middle of the desert might buy the diamond instead of the water because they might expect to be saved or to be near civilization. Their decision would be based more on experience or lack of rational thought.This enters into the area of perceived risk.

This may be a better example of my point: If it appeared to most people on the planet that the end of the world was coming but the stock market was open, why not buy as many shares of stock as possible? If the world didn't end, you'd profit tremendously. If the world did end, you'd lose nothing.

Thanks for provoking thought this morning.

Kent

[Greg Linster]

Great question, Jerry.

The subjective theory of value (and ultimately marginalist economics) dismisses the claim that anything can be intrinsically valuable. So, the answer to your first question would be that nothing is intrinsically valuable because value is entirely subjective.

I think those who believed in intrinsic theories of value would be stumped by your question, which is ultimately what spawned the subjective theory of value.

[Godless Freedom]

I think overindulgence and immediate gratification also contribute to the notion that money will make you happy. As a society we've been brainwashed by ad agencies to think that we need more and we need it now and we need money to achieve that. If people just bought, took and used what they needed and funnelled any surplus to those without then it wouldn't be the money that is making one happy but rather a lifestyle of moderation, compassion and charity.