Guest Post: The Tangled Relationship Between Wealth & Money

Tyler Durden's picture

Submitted by John Michael Greer of Peak Prosperity,

One of the most dangerous mistakes possible to make in trying to understand the shape of the economic future is to think of the fundamental concepts of economics as simple and uncontroversial.  They aren’t. 

In economics, as in all other fields, the fundamentals are where disguised ideologies and unexamined presuppositions are most likely to hide out, precisely because nobody questions them.

In this and future essays here at Peak Prosperity, I will explore a number of things that seem, at first glance, very obvious and basic.  I hope you’ll bear with me, as there are lessons of crucial and deeply practical importance to anyone facing the challenging years ahead.

This is, above all, true of the first thing I want to talk about: the tangled relationship between wealth and money.

Our co-host here, Chris Martenson, likes to remind us all that money is not wealth, but a claim on wealth.  He’s quite right, and it’s important to understand why.

Money is a system of abstract tokens that complex societies use to manage the distribution of goods and services, and that’s all it is.  Money can consist of lumps of precious metal, pieces of paper decorated with the faces of dead politicians, digits in computer memory, or any number of other things, up to and including the sheer make-believe that underlies derivatives and the like. Important differences separate these various forms of money, depending on the ease or lack of same with which they can be manufactured, but everything that counts as money has one thing in common – it has only one of the two kinds of economic value.

The Two Kinds of Value

Economists call those use value and exchange value.

You already know about them, even if you don’t know the names.  Odds are, in fact, that you learned about them back in elementary school the first time that one of your classmates offered to trade you something for the cookies in your lunchbox.  You then had to choose between trading the cookies for whatever your classmate offered and eating them yourself.  The first of those choices treated the cookies primarily as a bearer of exchange value; the second treated them primarily as a bearer of use value.

All forms of real wealth – that is, all nonfinancial goods and services – have use value as well as exchange value.  They can be exchanged for other goods and services, financial or otherwise, but they also provide some direct benefit to the person who is able to obtain them.  All forms of money, by contrast, have exchange value but no use value. You can’t do a thing with them except trade them for something that has use value (or for some other kind of money that can be traded for things with use value).

Most people realize this.  Or, more precisely, most people think that they realize this.

It’s still embarrassingly common for people to forget that money isn’t true wealth, and to assume that as long as they have some sufficiently large quantity of some kind of money that’s likely to hold its exchange value over time, they’ll never want for wealth.  This assumption is understandably made, because in the relatively recent past, this has been true a good deal more often than not, which feeds the belief that it will always be true in the future. 

But that assumption is lethally flawed, and it’s important to understand why.

The Economic Relationship between Money and Wealth

For the last three hundred years, as industrial society emerged from older socioeconomic forms and became adept at finding ways to use the immense economic windfall provided by fossil fuel energy, there have been two principal brakes on economic growth.

The first has been the rate at which new technologies have been developed to produce goods and services using energy derived from fossil fuels. The Industrial Revolution didn’t get started in the first place until inventors and entrepreneurs found ways to put the first generation of steam engines to work making goods and providing services.  At every step along the road from that tentative beginning to today’s extravagantly fueled high-tech societies, the rate of economic growth has been largely a function of the rate at which new inventions have appeared and linked up with the business models that were needed to integrate them into the productive economy.  That’s the source of the innovation-centered strategy that leads most industrial societies to fund basic and applied research as lavishly as they can afford.

The second major brake on economic growth is the relationship between the economy of goods and services, on the one hand, and the economy of money on the other.  Just as wealth and money are not the same, as we’ve seen, the economic processes that center on them are not the same.  The printing and circulation of money is not the same thing as the production and distribution of nonfinancial goods and services, and ignoring the difference between them confuses much more than it reveals.  In my book The Wealth of Nature, I called the economy of goods and services the 'secondary economy,' and the economy of money the 'tertiary economy,' with nature itself – the ultimate source of all wealth – as the 'primary economy.'  For the purposes of this essay and those to come, though, we’ll use simpler labels and call them the 'wealth economy' and the 'money economy'.

During this three-hundred-year timespan, when the money economy stayed in sync with the wealth economy, economic growth normally followed.  When the two economies got out of sync, on the other hand, growth normally faltered or went into reverse. There were (and are) two ways that the money supply can slip out of its proper relationship with the wealth economy. 

The first occurs when growth in the money supply outstrips growth in the production of real wealth, so that the more money is available to compete for any given good or service, and prices normally go up.  That’s inflation.

The second occurs when growth in the money supply fails to keep up with growth in the production of real wealth, so that less money is available to purchase any given good or service, and prices normally go down.  That’s deflation. 

Fighting to Keep the Economies in Sync

In either case, the imbalance hinders the ability of the wealth economy to keep producing goods and services, mostly by throwing a monkey wrench into the machinery of investment — the process by which the money economy allots extra wealth to the producers of wealth to assist them in expanding their ability to create real, nonfinancial goods and services. Whether it’s inflation or deflation that chucks the wrench into the gears, the result is flagging or negative growth.

It’s the hope of keeping inflation and deflation in check that motivates the obsessive tinkering with economics on the part of so many of the world’s governments these days. However poorly that tinkering works out in practice (and it usually works out very poorly, indeed) the politicians can at least claim to citizens that they’re doing something to get economic growth back on track.

Most economists, and for that matter most people who consider economic issues, think and act as though these two factors — the rate of innovation and the money economy’s habit of getting out of sync with the underlying economy of real wealth — are still the only factors that can get in the way of growth. That’s why proposals for putting an end to the current economic mess focus so narrowly on more innovation, on the one hand, and finding some way to gimmick the money economy so that it no longer drags on the wealth economy, on the other. 

Now, of course, scarcely any two people agree on what measures will get the two economies in sync again. Similarly there’s no general agreement over where government support for innovation ought to go. But there’s near-universal agreement that getting these two factors to work right is the way out of the ongoing global economic crisis.

The Tangled Web We've Woven

The disagreements between partisans of various economic schemes, and between proponents of various new technologies, make it easy to miss the fact that something is happening that’s clean outside the box of contemporary economic thought.

The wealth economy and the money economy are certainly out of sync just now, but the problem isn’t in the money economy; it’s in the wealth economy.

The production of real goods and services has run up against limits that are not financial in nature, and today’s economic orthodoxies can’t even imagine that possibility, much less respond to it in any useful fashion.

In Part II: Slamming Face-First into the Limits to Growth we explain why, given our misguided efforts to solve the wrong problems, you can no longer assume that having enough money – of any kind – will guarantee that you will have enough wealth.  Distortions in the money supply driven by the shenanigans of central bankers are not the only force twisting the relationship between money and growth.  The key factor now is a contraction in the wealth economy driven by the economic effects of the exhaustion of easily accessible resources. 

There simply is too much money chasing a limited (and, in some cases, shrinking) supply of real wealth. 

Click here to read Part II of this report (free executive summary; enrollment required for full access).

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Lohn Jocke's picture

I'm all set, I own shares in Apple.

SAT 800's picture

I'm all set too; I've just come in from the yard, where I was shooting my IPE wood bow that I made; it's a kind of a brazilian war bow, I guess; it couldn't be an English war bow, because IPE is a huge noble hardwood tree that grows in Brazil. I can't actually draw the damn thing to full draw, but at around 26" the arrows are fucking deadly, deadly missiles. I shot one in the tailgate of my retired Ford Taurus; if you were using a station wagon door for your chest armor as a knight, I guess you'd be out of luck. All I have right now is junk arrows, which are kind of heavy, but boy are they movin' downrange. The results on high-densisty foam indicate that they would go in the front of a "bad zombie" and come out the back. and you don't have to explain the noise of the 25-06 to the neighbors, either. Although, most of my neighbors are cattle. This is completely off-topic, but a combat qualified bow must be some kind of wealth? It could certainly settle the question of who is going to have the wealth if it came to that; which we hope it doesn't.

Panafrican Funktron Robot's picture

The NBC network seems pretty keen to tell us in their show "Revolution" that a crossbow is a worthwhile weapon that causes concern, even if wielded by a very fucking stupid girl.  

css1971's picture

Nah, these days your cheapest most basic body armour will stop anythng from anything with the word "bow" in it's name with nary a dent.

Big Slick's picture

"Buy my book... and part II of my report"

dark pools of soros's picture

you have a problem with fucking stupid girls?

css1971's picture

Replaced by the crossbow. Much easier to hit something.

But you're not serious of course when you can legally own a magazine fed semi automatic shotgun which can fire stuff like this:

http://www.firequest.com/G12-SP13.html

Thisson's picture

Well, it definitely has exchange value, as I'd sure like to buy it based on that awesome marketing hype thing you just did!

logicalman's picture

Got me a nice 60lb recurve. Those arrows sure do move and with a decent broadhead, do a lot of damage.

My son has one too.

A strong slingshot is a handy item too, with 3/8in steel ball.

tip e. canoe's picture

a water cannon filled with ammonia doesn't hurt either

Gmacks's picture

More money more problems.

Acidtest Dummy's picture

When there is food on the table there are many problems. When there is no food on the table there is only one problem. -Chinese proverb

SAT 800's picture

I usually sum this up as "Reality is a Bitch".

Ignatius's picture

John Michael Greer is an educated, well written, though muddle-headed ass-clown.

I used to read his Arch Druid blog and he had just enough insights to hold my attention.

Peak oil is his main theme and on that he is correct.  Big deal, join the gathering crowd.

I made only one comment to his blog where the subject of money came up.  I simply and humbly noted that a silver quarter from the early 60s could buy a gallon of gas then and that that same quarter could still buy a gallon of gas+ today.  I mentioned gold in the same context.

His response was a rambling tirade of his personal, ideological ignorance.  He immediately inferred in his response that I was some kind of anti-government, gun-toting, raving hillbilly prepper (not true, but it's still early) and that the government confiscated gold before and they'll do it again and they'll send in drones so what good is a gun.... Wha...?  I didn't even mention guns. I guess he assumes nobody should save anything, ever, 'cause someone will target it.

His blog is an intolerant, obediant, well organized girl scout troop.

I deleted that bookmark and ain't been back since.

 

valkir's picture

For me,the best quality of monney/gold and silver/is theyr quantity.

Seasmoke's picture

Your health is real wealth.

Rustysilver's picture

Your choice: $5M or Lung cancer; which would you choose.

SAT 800's picture

Lung cancer for my ex-girlfriend, $5M for me. Easy. what's the next question?

BLOTTO's picture

Very true Smoke.

.

"We are not rich by what we possess but by what we can do without."

- Immanuel Kant

zerozulu's picture

wealth multiplied by money is equal tyranny .

SAT 800's picture

Yeah, but you get a lot of pussy, you know.

ZH11's picture

Economics like philosophy is no science but only one of these schools of thought has the humility to admit it.

 

Economists need to come clean and admit the models only work retrospectively within  limited timescales and that every prediction of the future is flawed on the basis of incomplete information due the inherent human element in economies which are neither rational or predictable 'en masse'.

 

Therefore the above in nothing but a rehash of the physiocrats arguments that ultimately will fail because if anyone knew what the future held they'd never tell anyone else.

 

falak pema's picture

the tangled relationship beween market perception and rich Oligarchs who iconise their  company's profile : Amazon's Profits Versus Apple - Business Insider

If Apple is over valued how does one qualify Amazon? 

Ah the market and the economy; what is behind that flimsy curtain of the invisible hand? 

Fu Man Chu; ever since a command economy and a free market one achieve the same financialised performance; aka CHS's demo, we are justified in popping that question. 

Apparently Cook is not good at cooking Jobs baby for the investors. 

linrom's picture

I think the author is making an ant hill out of mole hole. To simply restate what I think the author says is that there are too many claims on assets by wealthy individiuals who own nothing but DEBT.

SAT 800's picture

Making an ant hill out of a Mole hole is topologically challenging. I'm willing to admit I have no idea what  he's talking about, but I do notice there's a premium level of membership in his club that you get to pay for; if you paid him for this would you be buying wealth? spending money? or buying money and spending wealth? I think I'll continue to pass on everybody who wants to sell me a premium membership in their club. Especially since you can read Bastiat "On Money" on the Von Mises website, for free; and Bastiat was about 2.7 times smarter than this guy; (my estimate).

Frederic Bastiat's picture

read me read me read me!!  I'm dead, so no member fee required!

Seer's picture

I think he's stating that most people confuse money with wealth and that our distortion of money has convoluted our understanding of wealth.  It's questionable, then, as to whether those we think/believe are wealthy are in fact "wealthy."  Again, debt backed by meaningful assets is fine; we have, however, come to the point where debt is pretty much backed by nothing.  I suppose that I could state that both the "rich" and the "poor" are essentially the same: it's relative- they're both primarily measuring their positions of wealth using (mostly) meaningless measurement- un-backed debt.

It's all so convoluted that it's hard to tell whether this is agreeing or disagreeing with your statement- sorry!

etresoi's picture

Wealth = Health, Abundance, Happiness And Harmony, Always = HAHAHA

q99x2's picture

This is true although I believe the finincial oligarchs knew this when they produced the housing fraud to continue to pump the Chinese and emerging market economies. Maybe they thought it was out of balance and could be a way to incentivise emerging nations to come under their NWO.

The natural progression is revolution and war to bring about the rebalance. Pandemics have also been very successful in the past.

I say Open Source anything to do with the monetary system. Programmers will gladly accept the challenge. The antiquated existing system cannot and should not survive or ever reappear.

ali-ali-al-qomfri's picture

Early to bed, early to rise,

makes a man healthy, wealthy and wise.

Notice ‘wealthy’ is only one third of the quality of life triumverte.

edifice's picture

Bullocks, the postman doens't get to my house until at least 2 PM.

NidStyles's picture

 "...Economists call those use value and exchange value."

 

Only bad economists use those terms. There is only Marginal value.

SAT 800's picture

Yeah; well, we know the guy is a fraud. "Enrollment required for full access"; he's in tne financial newsletter business. You type a lot of high sounding rhetoric, which never turns out to mean anything, and then you offer the people educated in North America, who, by definition cannot do critical thinking, a chance to pay you for more babbling and buzzwords. The discouraging thing about this as a social comment, is that it works. Somebody is going to sign up for the "full enrollment"; and "may the road rise up to meet their feet".

Frederic Bastiat's picture

After Obama was re-elected, an aquaintence of mine, who is in the financial newsletter business, threatened to 'Shrug' in the ayn rand sense, and deprive the world of his bearish investment advice.  hahaha. 

Big Slick's picture

I'm not sure about being "a fraud" but Tyler should make thse guys post Part II for free... they're getting a lot of publicity on ZH.

falak pema's picture

what do you mean by "bad"...?

You only know how to use subjective values to define your viewpoint. 

One man's bad is another man's good. But this seems beyond your mental comprehension. 

NidStyles's picture

Yay! You use my own explanation to prove me correct, but then you don't even understand it. I feel very vindicated right now.

 

Marginal Value IS subjective. Also my opinion does matter, because as you would know had you been reading what I have been saying for a year now. I am an Economist. Want to talk about mental comprehension, firgure out why that detail is relevant.

Joe moneybags's picture

The author is making arguments like the rationalizations that I make to myself when I loose money in the stock market.

NidStyles's picture

You mean whether to stop at that third shot before that tranny starts looking attractive or the 8th one when you decide to go get a blow job from it? That kind of rationalization?

Variance Doc's picture

"In economics, as in all other fields, the fundamentals are where disguised ideologies and unexamined presuppositions are most likely to hide out, precisely because nobody questions them."

Bullshit.  Mathematics, engineering and the real sciences (physics, chem, etc) question results (and fundamentals) ALL the time.  In math, we get to prove things - either they are true or false.

Econ, in it's current various forms, is nothing more than a religion at best.

Seer's picture

So, you're saying that economics IS measurable, repeatable and predictable (like math and engineering)?

The author is trying to say that economics isn't properly connected to anything (physical).  I know that this point gets lost when people start seeing the realities behind this: that being that there's no more growth possible.

RopeADope's picture

I think the natural economy will prove to be measurable if the primate species inhabiting this planet ever decides to graduate from preschool economics.

NidStyles's picture

Ahh the old, if only humans were perfect excuse. We are not perfect, and we never will be, get over it.

NidStyles's picture

The author is correct on that but his method of measuring value is wrong.

 

The problem is that most people still do not undersand that economics is about HUMAN choice and interaction on the market, not numerica weighted values created by a human.

Mad Mohel's picture

What was that they taught us when we were kids, "cheaters never prosper". Bullshit!