FUNDAMENTAL TRUTH #4: “Wealth ain’t money; money ain’t wealth.” –Old Pithy

Posted by PITHOCRATES - March 9th, 2010

CONSIDER THREE PEOPLE.  One is a drug addict that breaks into homes to support his habit.  He just scored last night.  Big.  Found about $2,000 in cash.  The second one is a liar.  He lies during job interviews to get jobs he isn’t qualified for.  The boss then fires him when he learns he lied himself into the job.  But he bought a lucky lotto ticket last night.  He won a million dollars.  The third person is a single mom slinging hash at a greasy diner during lunch.  When she works they need 3 waitresses to cover lunch.  When she’s off they need 4.

Right now they have the following money on them or in the bank:  the drug addict has $1,200; the lotto winner has $250,000.  The waitress has $800.  Based on these numbers, who has more money?  Not a trick question.  The lotto winner has the most money.  But who is wealthier?

A year from now the drug addict may be dead.  The lotto winner may be bankrupt.  But the waitress will probably still have $800.  Or more.  So, I ask again, who is wealthier?

WEALTH IS NOT money.  It’s ability.  It’s human capital.  It’s the talent people have that other people will pay them for.  It accrues with time.  And experience.  It doesn’t depend on luck.  You earn it.  You don’t steal it.

Our waitress is a good waitress.  If her diner closed for good tomorrow she could be working at another diner the next day.  In fact, some of her regular customers will probably follow her wherever she goes.  When it comes down to it, soup and a sandwich is just soup and a sandwich.  One diner’s may be just as good as another’s.  For those who want food fast without going to fast-food, service is everything.  Customers want good service.  And diners want good waitresses.  She delivers both.

BEFORE THERE WAS money we traded things.  We bartered.  Those with human capital, the ability to make or do things other people found valuable, made stuff or did things.  They then traded these for things they wanted.  Finding people to trade with AND who had the things you wanted took time, though.  Too much time. 

Time is…wealth.  Taking weeks to search the country for trading partners was time taken away from using that human capital.  The weeks spent searching cost wealth.  You couldn’t build things while you were searching.   People needed something better.  Something that made this exchange of goods and services easier.  Something that could temporarily store wealth.  Something portable.  Divisible.  Scarce.  Durable.

We call this temporary storage of wealth money.  We used lots of things.  Even pigs.  But you can see the limitation in using pigs (not very portable or divisible).  Dirt was more portable and divisible but it wasn’t scarce; it was everywhere.  We soon turned to silver and gold.  Then to silver and gold coins.  You could buy big things as well as small things (coins were divisible).  You could carry them in a pouch (portable).  We’re still finding Roman coins to this day (durable).  And it wasn’t easy to find gold and silver, process it and then mint it into coins (scarce). 

If you spent a week building something, you would take gold and silver in exchange for that thing you built.  Because you knew someone would exchange that gold and silver for the things you wanted.  This was a lot easier than trying to barter.  Can you imagine our waitress trying to barter her waitressing skills for a car?  I’m sure there may be a diner owner somewhere that has a car he is willing to trade for a period of good waitressing skills.  But good luck trying to find him.

WE NEED TO remember that wealth isn’t money.  Giving people money doesn’t make them wealthy.  People get wealthy from their human capital.  The greater their human capital the greater the amount of things they can trade for.  This is what stimulates consumer spending.  It’s recurring.  People can plan based on their recurring earnings.  The greater their earnings they can keep, the more they can spend.  And probably will spend.  Because they know they’re getting a ‘steady’ paycheck.  It’s not a one-time stimulus.  It will most likely be there tomorrow.  If not, they will most likely be able to find another employer who values their human capital.

To truly stimulate consumer spending you need to make it easier to build things.  Or to provide services.  Because that’s what we’re really doing.  Trading things.  Or services.  Money just makes it easier to do.  Without the underlying human capital, money would have no value.  For there would be no goods.  No services.  I mean, what good is having piles of gold and silver if you can’t trade it for something?

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