The Theory of Money, Part 4

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Let’s continue on with the theory that will help modern-day money issues make sense. In part 3, we 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.

If society is continually getting new wealth introduced by wealth-gleaners, does that mean society is getting wealthier and wealthier?

No. Wealth is always being introduced into society, but it’s also being lost. When someone spends their wealth on something that depreciates/gets consumed, that wealth is slowly being lost.

For example, when the farmer eats some of the food he has grown (maybe his family consumes 1 Labor Unit’s (LU) worth of food every meal), that wealth has been consumed. It’s all gone.

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 Labor Units (LUs) to paint his house—5 LUs for the paint, and 15 LUs for the painter—how much was lost? The painter has 15 LUs in payment, so that was a simple transfer of wealth, not a consumption of it. And the paint got consumed, but maybe 1 LU’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 LUs total.

This goes to show that when someone chooses to spend their wealth, not all of it is lost from society. But some of it is. Compare that to when someone chooses to save their wealth by stashing their gold coins under their floorboard. When they save their wealth, it’s preserved (assuming the price of gold stays constant). And when someone chooses to invest their wealth, the impact on the total wealth of society depends on what the investment is in.

If the investment is in a company that provides luxury items, then it’s one more thing that people can now consume their wealth on, so it will probably lead to a net decrease in society’s stored wealth. Maybe the paint maker invests wealth into the development of a new kind of paint—glittery black paint—which costs 10 LUs instead of 5 LUs. Even if 3 of those 10 LUs are profit for the paint maker, it’s still 7 LUs getting consumed on paint for the blacksmith’s house instead of only 4 LUs.

If an investment is in a company providing non-luxury items, it could lead to a net increase in society’s stored wealth. For example, maybe the paint maker invests his wealth into developing a new kind of paint that takes the same effort to produce but it lasts twice as long. He has just lowered the cost of living (assuming painting a house is necessary for the sake of preserving the wood so the house lasts). 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.

Or maybe the blacksmith invents a new kind of plough that decreases the time it takes the farmer to glean wealth from the land.

Whether the company is lowering the number of LUs it takes to maintain the same standard of living, or whether it is enabling more wealth to be gleaned from the land, it will be increasing society’s total amount of stored wealth.

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 LUs worth of 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 LUs on guns and ammo instead of on living essentials, it’s similar to black glitter paint; the investment into developing those things will not help decrease the cost of living or increase the efficiency with which new wealth can be gleaned from the land (assuming the innovations don’t cross over and help in other ways), and spending LUs on guns and ammo means those LUs will get consumed and therefore lost from society.

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.

Next week I’ll get to how much gold is needed for a society to store all its wealth in gold.

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