In Part 3, I talked about the options of what someone can do with their excess wealth that they have stored in the form of money: spend it, save it, or invest it. And that there are two types of investments: lending or ownership (which can be anywhere on the spectrum from active to passive forms of ownership).
If society is continually getting new wealth introduced by wealth-gleaners, does that mean society is always getting wealthier and wealthier?
No. Wealth is always being introduced into society, but it’s also always being lost from society. When someone spends their wealth on something that depreciates/gets consumed, that wealth is slowly being lost from society.
For example, when the farmer eats some of the food he has grown (maybe his family consumes 1 Wealth Unit worth of food every meal), that wealth has been lost from society.
Or, when the blacksmith paints his house black, that paint is slowly getting worn off, and the house will need to be repainted in several years. If he paid a total of 20 Wealth Units (WUs) to paint his house—5 WUs for the paint, and 15 WUs for the painter—how much was lost? The painter has 15 WUs in payment, so that was a simple transfer of wealth, not a consumption of it. And the paint got consumed, but maybe 1 WU’s worth of the paint’s price was profit for the paint maker, so that too was a simple transfer of wealth. Assuming the paint maker didn’t have to buy supplies from someone else, then we could consider the rest of the cost of the paint as being consumed–4 WUs total.
This goes to show that when someone chooses to spend their wealth, some of it is lost from society if it is being spent on a good that will depreciate or be consumed.
But what if they are spending their wealth on a service? For example, what if the blacksmith is sore from swinging a hammer all day, so he pays someone to give him a massage? No WUs are directly lost from society as a result of this transaction. Instead, there is simply a redistribution of WUs from one person to another. Sure, there is an opportunity cost because the masseuse’s time could be employed elsewhere in a way that directly helps glean wealth from the land or something, but it’s also possible that a regular massage helps the blacksmith work more effectively, thus lowering the cost of the goods he produces, which means those massages are actually indirectly increasing the wealth of society by lowering the cost of maintaining their current standard of living.
So that’s the discussion on how spending impacts society’s wealth. What about the other two options of what someone can do with their wealth?
When someone chooses to save their wealth, it’s simply preserved (assuming the WU:money exchange rate stays constant) until the owner of the wealth eventually chooses to spend it or invest it. And, in the meantime, it’s providing a great service as an emergency fund to prevent the owner from having to go without food or default on a loan if there’s a sudden drop in income or a sudden expensive emergency.
And when someone chooses to invest their wealth, the impact on the total wealth of society depends on what type of company the investment is in. Let’s explore that one further.
Some companies are inventing things that improve the quality of life but for a higher price. They create products and services that are yet one more thing that people can now consume their wealth on, so their overall impact on society’s wealth is probably negative, although it comes with the benefit of an increased quality of life. For example, the blacksmith invests wealth into a company developing a new kind of paint—glittery black paint—which costs 10 WUs instead of 5 WUs. Even if 3 of those 10 WUs are profit for the paint maker, it’s still 7 WUs getting consumed on paint for the blacksmith’s house instead of only 4 WUs.
Other companies are inventing things that lower the cost of living. They create products and services that make maintaining the current quality of life cheaper. For example, the blacksmith invests wealth into a company developing a new kind of paint that takes the same effort to produce but it lasts twice as long. So now the blacksmith only needs to repaint his house every 10 years instead of every 5 years, so less wealth is being consumed to maintain his standard of living.
Here’s another example of an innovation that can decrease the cost of maintaining the same standard of living: The blacksmith and farmer work together to invent a new kind of plough that is more efficient, so it decreases the time it takes the farmer to glean wealth from the land.
Of course, most companies are a mix of both types–they’re providing some products that increase the quality of life and some that decrease the cost to maintain the same quality of life. And the holy grail is when a company invents something that both increases the quality of life and is cheaper than the current option.
So, overall, investments can lead to wealth-increasing or wealth-decreasing effects on society depending on the types of goods and services the companies are providing.
One thing I haven’t already mentioned is the impact of war and natural disasters on the total amount of wealth a society has. These things cause a society to lose a lot of wealth. For example, if there is a flood that destroys the farmer’s crops, a ton of future wealth has been lost from the society in the space of a few hours or days. Or, if the society starts having to spend a bunch of WUs on guns and ammo instead of on living essentials, it’s similar to black glitter paint; additional wealth will be lost from society as those things get consumed. The idea that war is a great way to boost an economy in a way that improves the wealth of a society is false.
So now we’ve considered the main factors that lead to an increase or decrease in the total amount of stored wealth a society has.
And let me remind you of the big picture to help you see why these principles are important when analyzing the theory of money.
When I write about the theory of money, what I’m really writing about is the effects money has on the amount and distribution of wealth in a society. And the single most important factor that shapes, for good and ill, the amount and distribution of wealth in a society is its monetary system.
So, if a society wants to fulfill its purpose of promoting the wellbeing of its members, having a good monetary system is a major part of that, especially early on when wealth is more scarce.
Maybe one day, our world will have wealth in such abundance that bad monetary systems will have a small enough detrimental impact even on the poor and also the people those systems are exploiting the most that having a bad monetary system won’t be such a big deal. But I suspect that, with increasing wealth in societies, the potential damage a bad monetary system can do increases commensurately. So having a healthy monetary system is always important, especially (1) for the sake of the people being hurt right now by bad monetary systems and (2) to prevent the greater bad that can occur when wealth increases further. Either way, that will help us get to a world of abundance sooner.
In Part 5, I’ll talk about how much money is needed to meet the wealth storage demand in a society.
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