Is Money the same as Wealth?

[The Lonely Rationalist]

I've been wracking brain, reading Francisco's money speech over and over. I'm still not quite able to figure out whether money is the same as wealth.

I understand that money is a physical representation of trade- We use money only as a medium of exchange. I also understand that wealth is that which helps man's survival, luxury, and happiness. But when it comes to "Making money," is that the same thing as creating wealth?

Edited July 4, 2010 by The Lonely Rationalist

[Mindy]

Think of wealth as "extra" money, as net versus gross income. It is the essence of profit. It takes many organisms all their time and effort to stay in existence. Man, sapience at the highest level, can sustain himself these days with a few hours' work a day. The rest is luxury, pleasure, etc. The unconsumed profits a person possesses constitutes his wealth. Items like a fine house, expensive art, jewelry, etc., that are made use of but retain their value for sale to others, contribute to one's wealth.

What in particular puzzled you in Francisco's speech?

-- Mindy

[JacobGalt]

Money, as you pointed out, really only is the medium of exchange (ie. Federal Reserve notes or silver coins) while wealth is all property that has economic value. You can create wealth when you create economic value, that is, make something that is worth more than it cost.

Edited July 4, 2010 by JacobGalt

[DavidOdden]

Money represents wealth. Cars, houses and fine wines are examples of wealth. You can trade some amount of wine for a house, or you can use a standardized unit, a form of money.

[The Lonely Rationalist]

Okay then, I get how money represents wealth. However, while I can see how you can make wealth (Build a house, bottle some wine, etc.), but by doing so, are you "making" money? If money is just a medium of exchange, then can more of it really only be made by printing more?

And Mindy, the only thing that puzzled me there is how he notes that one can "make money," while at the same time describing how wealth is created by man's mind. Is he just substituting the world wealth for money to explain a popular phrase (Making money)?

[The Lonely Rationalist]

In fact, here's something I just thought of:

The new Ipod comes out. People want it, and therefore increase their productivity to get more money from their company. Their company therefore creates more goods than they did before due to increased productivity, thus increasing sales and earning them more money than before. But consumers who bought their product then need to increase their productivity, and on and on and on...

It seems to me that as new wealth is created, older wealth loses it's value: People want the new thing, and less want the old. Therefore the new good's price goes up while the old good's price goes down. In that sense, although wealth was created, money was not.

Am I wrong? Am I totally misunderstanding something? Please point it out if I am, I'm really trying to get this.

[DerekN]

Fiat paper money can only be made by printing it. It's somewhat different when money is gold and silver. Then money gets created when it's mined and used for money. Thing is, gold and silver are also wealth when used in machines and stuff.

...

When the new Ipod comes out, people who buy it save up and/or use their savings and/or don't by things they would normally buy ("older wealth" for example). It is not neccesary for everyone to increase their productivity.

Under free competition, competitors enter the mp3-player market and companies who were already in that market see their profits drop. All the companies start producing their products with lower costs and selling them cheaper. So, to make a high profit again, they need to innovate, come up with something new, like an Ipod with Itunes. And later on new competitors come in again and they need to innovate again.

The amount of money is totally independent of wealth. The amount and value of money can rise and fall in the same or opposite direction as the amount of wealth.

When more wealth is created but the amount of money stays the same, the average wealth becomes cheaper in money terms. When more money is created but the amount of wealth stays the same, total wealth becomes more expensive.

Edited July 5, 2010 by DerekN

[Hermes]

I'm still not quite able to figure out whether money is the same as wealth.

You asked a good question, but you got no good answers.

Wealth is the ability to make money. That was the definition offered to me 40 years ago by Bill Bradford. Better known as the late founder of Liberty magazine, Bill first owned Liberty Coin Service of East Lansing. If anyone knew money, he did. Bill said that even von Mises was incomplete on this and certainly the mainstream economists did not understand money or wealth.

Just now, in response to your question, I checked both Human Action and Samuelson's undergraduate text and both are unclear on this. I also looked the words up in other languages and then reversed the search to check their cognates. Basically, we do not have clear ideas on this. Perhaps if commercial universities had employed capitalist philosophers a hundred years ago, we would be further down the road on this.

I invest much thought to money. Not that I have an abundance of it, but I have been granted several literary awards for writing about it. I have to agree with what I first learned: wealth is the ability to make money.

We are limiting our thoughts to Modern English, attempting to differentiate two closely related concepts. Words are tools. The words "wealth" and "money" have different roots and came to be related only recently and only in modern English. In other languages, "wealth" is "richness" but you have to understand "rich" as "reach" that which is within your grasp. Wealth is well-being. Someone with a lot of money is well-off because they have a lot within their reach. We commonly have no clear ideas on this -- not even Ayn Rand -- because philosophers of money ("economists") have not identified the facts of reality.

Allow me to suggest that if you save money, your accumulation is wealth because it has the potential to make more money through investment or enterprise. If you have a brilliant marketable idea, you are wealthy, as well, albeit without any ready cash. Wealth is like potential energy and money is like kinetic energy.

As neither Ludwig von Mises nor Paul Samuelson differentiated wealth from money in a consistent, unambiguous presentation, you might not bother worrying about it. If you care to, then I offer Bill Bradford's distinction. He was an Objectivist. He was a millionaire. He made his money buying and selling money. I figure he knew what he was talking about.

Edited July 6, 2010 by Hermes

[Mindy]

Okay then, I get how money represents wealth. However, while I can see how you can make wealth (Build a house, bottle some wine, etc.), but by doing so, are you "making" money? If money is just a medium of exchange, then can more of it really only be made by printing more?

And Mindy, the only thing that puzzled me there is how he notes that one can "make money," while at the same time describing how wealth is created by man's mind. Is he just substituting the world wealth for money to explain a popular phrase (Making money)?

I have not re-read the speech. I'm still confident in this as a sound point: one can make money, that is earn wages or goods or whatever, by physical labor. Now physical labor is never purely physical, and it is good in itself, but it doesn't pay well. It doesn't pay well, mainly, because anybody can do it and thus there is a great supply of the labor that will do that work. Even work that is largely physical "makes money."

Wealth, I maintain, is the accumulation of moneys and valuables which are excessive to one's needs. Someone who lives in a Mansion, drives a Lexus, vacations abroad, wears fine clothes, etc., but spends all his income to do so is not wealthy. Someone who has savings in excess of the requirements of his retirement, and also in excess of a reasonable cushion in case of disaster, and who is not in debt, and lives as comfortably as he wishes, is wealthy, even though he drives a (good) used car, etc. You can, therefore, be wealthy on a modest scale (assuming you are happy with the life-style.)

Think of the metaphorical uses of the term. A "wealth of opportunity" means more than one could make use of. A "wealth of information" means all you could possibly ever want or need to know, given, of course, your purpose.

That wealth is a product of man's mind, specifically, focuses on the fact that man's productivity depends on the application of his intelligence. This is so obvious, I hesitate to illustrate, but one's earning potential with a college degree is greater than without it, and so on. One of the things Francisco is speaking relative to is the philosophy that labor deserves more credit than either management or investors or inventors, that work doesn't count unless it is muscular. Muscular work won't get you farther in life than the level of hunter-gatherers, though. "Labor" enjoys a big enhancement to its productivity when it is applied as inventors, etc. conceive it to be, in the production of a new metal or engine, for instance. Rand used a wonderful example of an elevator operator, who spent his day pushing buttons for people, maybe moving a lever and opening and closing a door. Yet he earned enough to support himself, performing less muscular work than would secure a single scavenged meal in nature.

Wealth inspires envy because it proves that men are capable of producing plenty. To the work-ethically-challenged, this is an unbearable rebuke.

-- Mindy

[softwareNerd]

Okay then, I get how money represents wealth. However, while I can see how you can make wealth (Build a house, bottle some wine, etc.), but by doing so, are you "making" money?

One does so only in the sense that wealth is measured in money. As an analogy, you can manufacture steel, or you can manufacture 100 tons (of steel). The latter is the measure, and the when we talk about making money legitimately, it would be about making wealth, measured in money. Strictly speaking, the phrase "making money" is metaphorical. In the strict sense as used by economics, only certain forms of wealth are classified as money (wealth that is accepted as a medium of exchange), while other (non-money) wealth is measured in terms of that money. [Wealth means material values, including claims thereto.] Edited July 6, 2010 by softwareNerd

[Lucio]

I've been wracking brain, reading Francisco's money speech over and over. I'm still not quite able to figure out whether money is the same as wealth.

I understand that money is a physical representation of trade- We use money only as a medium of exchange. I also understand that wealth is that which helps man's survival, luxury, and happiness. But when it comes to "Making money," is that the same thing as creating wealth?

http://www.paulgraham.com/wealth.html

My two cents: You can create wealth, let's say you assemble a MP3 player,

but if you can't sell it in the market at a price above your cost, you're not "making money".

I think "making money" means creating monetizable whealt in a market, vs. just "creating wealth".

Another two cents:

Gold is wealth, and, if broadly accepted in the market in the form of coins, is ALSO money.

A Federal Reserve Note is only a medium of exchange, it's only money, it's not wealth.

Fiat money is the biggest magic trick in the history of governments and economics,

It's so powerful, that 99.99% of the "audience" can't even "see" there's a trick.

Edited July 6, 2010 by Lucio

[Dogstar]

I've been wracking brain, reading Francisco's money speech over and over. I'm still not quite able to figure out whether money is the same as wealth.

That depends on whether or not you borrowed the money. Borrowed money does not add to your wealth.

If you saved $1,000 of your income and borrowed another $3,000, you'd have $4,000 but your wealth would only be $1,000.

Owner's equity (wealth) = Assets (what you own) - Liabilities (what you owe).

$1,000 = $4,000 - $3,000

[m082844]

 

1. I've been wracking brain, reading Francisco's money speech over and over. I'm still not quite able to figure out whether money is the same as wealth.

I understand that money is a physical representation of trade- We use money only as a medium of exchange. I also understand that wealth is that which helps man's survival, luxury, and happiness.

2. But when it comes to "Making money," is that the same thing as creating wealth?

1. Money is wealth is so far as it can be exchanged for things of value.

"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others."-- Francisco's Money Speech

If money is paper, what possible value does it add except as tissue paper or fire tinder if you cannot exchange it? If money is gold, then it may have a bit more value than paper if it cannot be traded for other goods.

Think of Dagney's entry into Galt's Gulch and she was told that she was penniless. Her vast amount of money was no good; it couldn't be exchanged for anything of value in Galt's Gulch. Therefore, That paper she owned is no longer wealth.

2. Yes I think so. Assuming you produced something of value and traded that for money of equal value than yes you created wealth. You've added value to the economy, which didn't exist before, and you're money can be traded for "the product of the effort of others".

[m082844]

Fiat money is the biggest magic trick in the history of governments and economics,

It's so powerful, that 99.99% of the "audience" can't even "see" there's a trick.

It's worse than a trick; it's legal tender laws, and therefore, a muzzle of a gun.