Money doesn’t matter

Can one make too much money? Are the poor getting poorer? Will the rich amass so much wealth that it will leave none for the rest of us? No. Unfortunately affirmative responses are all too common and simply betray an ignorance of basic economics.

The mantra “the poor are getting poorer…” is a statistical sleight of hand reinforced by the notion that the economy is like a pie. The slice that the bottom 20% held in 2007 was indeed 0.3% smaller than it was in 1947. But the pie has nearly tripled in size and thus nominal (inflation adjusted) income has more than doubled. In terms of standard of living the poor are even better off. We include in the definition of “poor” even those suffering from a mere dearth of the latest goods. But such a metric is misleading. In terms of creature comforts the “poor” are better off today vs just 50 years ago (e.g. ubiquitous home air-conditioning, inexpensive TV’s, game systems, iPods, smartphones, etc). Compared to even the wealthy of a hundred or two hundred years ago the poor are living like kings – indoor plumbing, refrigeration, plentiful food, washing machines, cars, telephones, and the list goes on. Measured on an absolute rather than relative scale the “poor” in most countries are better off today than in any time in history.

Now, to the first and last point – aren’t some taking “too much” of even this bigger pie? If a few get “all” the money won’t that make everyone else “poor”? To answer this, let’s assume the most extreme case: one wealthy person amasses 99% of all the money in the economy. Surely this is a terribly “unfair” scenario that must be prevented, right? Wrong. Why? How can anything get done with so little money? Easily (in a non-government manipulated economy). In this scenario money would be in HIGH DEMAND. Demand is proportional to price, thus “money” would have a HIGH PRICE. Price is the cost of one good in terms of another good. A unit of money will cost more goods than it used to. So if $1 cost a dozen eggs then now it will cost more eggs, lets say 120. So we go from $1/12 = 8¢/egg to $1/120 = 0.8¢. What has happened? Because dollars are in high DEMAND the PRICE of dollars in terms of other goods has gone UP, whereas the price of other goods in terms of dollars has gone DOWN. This is monetary price deflation and contrary to what the Fed might have you believe it is a good and natural thing. The rest of the people in the economy can go about their business producing and exchanging as they were before simply using pennies in place of dollars. It is production of goods & services that produces wealth, not money. The amount of money in an economy does not matter and has no effect on the productivity of that economy. As long as people continue producing, they can never be “poor” no matter how much the “rich” have.