Monday, June 2, 2008

“You have as much money as you want”



What Is Money?
First, we better get straight what “money” is. Money is something of value that can readily be exchanged for other goods and services, and is measurable. Money must be measurable or else you can’t readily exchange things for it in the marketplace. The “price” is the amount of money needed to exchange the thing being sold for money. If you can’t assign a number to it, then it won’t be money. You can use beads or feathers as money, and say that 10 feathers can be traded for 1 fish, or you could trade 10 ounces of gold for 1 horse, or 25 dollars for a pair of shoes. But you can’t call your house “money” even if you swap it for someone else’s house, because that’s just a trade, but your house cannot readily be exchange for other goods (it takes a few weeks usually and usually is traded for money, not food or cars or clothes, etc.).

Value, on the other hand, means ”something of worth” or in economic terms “something that people demand.” Some things of value, or things demanded, can be converted to money or traded for something else. If you make a widget, you can probably trade (sell) that for money. But creating value does not imply that you have received any money from the effort. You could put a lot of effort into making something that no one wants. If we measure “value” by how much other people demand it, rather than how much effort you put into it, then you actually created no value. If no one wants the thing you made, then no one is going to trade anything for it, including money. You could create something of value to yourself, but if there is no demand for it in the marketplace you cannot exchange it for anything, including money.

However, you can have something, say given to you, that has no value one day (no demand for it), but the next day all of the sudden everyone wants it, and the demand, hence the value, will be higher. In this case, you actually did nothing to create any value, yet you were able to sell it and get some money. Like if you bought a $10 Beanie Baby that turned out to have the wrong color or strange stitching and it all of the sudden is worth $1000. Or if your house all of the sudden is worth twice as much because a developer want to buy all the properties in the are to create a subdivision. I am not saying that a person cannot deliberately create something of value and get a reward for it. I am saying that rewards can come without you even deliberately increasing value.

Renegotiating Pay with an Employer
Can you get more money from your boss if you don’t work any harder? Well, if this were true, then there would never be a case when someone got a raise just by asking and not doing anything different in their job. It would also mean that any layoffs must be due to a decrease in that person’s performance in that job. Obviously, this is not the case. Other factors play into whether someone gets and keeps their job, and what their salary is for the job. Maybe when the person took the job he didn’t have many alternatives in the market. But maybe now there is a greater demand in the market for this person so he can ask his boss for a raise. His boss may also demand this person’s skills more, along with the market, and agree to give the person a raise. The person hasn’t done anything different, in this example. He hasn’t worked harder. The demand for him has changed. Maybe the company had an easy time finding employees with particular skills at one time, but now they are hard to find, so the company is willing to pay more for those skills. Part of the desire of the employee could be to try to gauge what will be increasingly more in demand over time and try to get jobs in that field so that his salary will keep increasing, even if his performance remains unchanged.

How much people demand things, how much they value things, varies constantly. One job may be worth it to you one day, but not the next, or not next year. Similarly for the company: they may really demand a particular skill at one time, but not at another. When those levels of demand and value change after employment has already begun, the natural, free market, response is for the employee and employer to renegotiate the terms of employment. Nothing may have changed at all in the employee’s performance, or the business’s productivity. But changes in the market, in the employee’s and\or the employer’s alternative, may have caused the pay of the employee to change, even increase, without the employee doing anything different.

Having Money Does not Necessarily Mean You Have Created Value
So no, money does not mean that you have created more value. First, value is determined by demand (price is determined by supply and demand). You can produce something that people want, or you might just happen to have something that people want. Second, money is something that is readily exchangeable for other goods, and can be measured. In order to get money for something of value, you must have already traded that thing for money (sold it). Having money from creating something of value means that you had something that other people wanted and you already sold it and got the money. Since money can be owned and can be measured, you can steal it and you can steal a certain amount of it.

You can also get money without even producing anything of value. I can go to the bank and get a loan for a lot of money. Now I have a lot of money, but I didn’t actually produce anything of value. Actually, my ability and likelihood to repay the loan with interest is something in demand by banks so in essence I traded a promise to repay the loan in the future for money now. Of course, this assumes that over time I will be able to produce something in the market that I can exchange for money (sell) which I can then use to pay off the loan plus interest. But I could have a lot of money and also have a lot of obligation to pay a lot of money and interest in the future. I am essential borrowing against future and expected earnings.

Having Money Doesn't Imply Financial Health
So having a lot of money doesn’t tell the whole story of a person’s financial health. It doesn’t reveal the financial obligations of that person. And having a lot of money doesn’t mean they created a lot of value. It might, but it also might be that demand changed and they were in a favorable position. Conversely, having little money doesn’t mean that the person hasn’t created a lot of value. They may have little money and no financial obligations, or they may even have little money but other people are obligated to pay them money, as in a lender. And the person may be facing decreasing demand for the thing they are producing. The bottom line is, value is not always convertible to money and the amount of money does not tell the whole story of the person’s financial health.

Weird Thought Processes Can Occur with a Misunderstanding of Money
I think the notion that “having money means you have created value” can lead people to all sorts of weird thought processes. This would mean that if only those that have a lot of money have created a lot of value, almost as if that were a just reward. Not that people shouldn’t be compensated for when the truly create value, but that if you see anyone with “money” that it means they created value. I think this is very materialistic and misleading view of people. I think this is what causes some people to wear fancy clothes, drive an expensive car, and live in a fancy house: in order to appear to be someone who has created value. The opposite can be true, too. Seeing someone in an older car, with clothes from WalMart, in a humble house means that the person has not created much value and has received their just reward, at least in terms of economics. I think this gets close to what King Benjamin said about declaring that the poor “brought this upon themselves” and that their condition is just, economically.

If it is true that having more money means that a person has created more value, then the next time you talk to a member of the Free Capitalist movement who is short on money, you can just remind him that his money challenges are because he is not creating enough value, or that he doesn't want more money enough, and that he ought to be ought in the market creating more value. If he scoffs at this, then he must not really believe that a person has as much money as he wants.

1 comment:

Anonymous said...

Re: “I think the notion that “having money means you have created value” can lead people to all sorts of weird thought processes. This would mean that if only those that have a lot of money have created a lot of value, almost as if that were a just reward. Not that people shouldn’t be compensated for when the truly create value, but that if you see anyone with “money” that it means they created value. I think this is very materialistic and misleading view of people. I think this is what causes some people to wear fancy clothes, drive an expensive car, and live in a fancy house: in order to appear to be someone who has created value.”

In my association with the FCP, there was a lot of these “weird thought processes” going on because of this principle/teaching. People were always trying to impress each other with their latest purchase so they could show what “producers” they were. The fancier your cars, house, toys, etc., the more people inside the organization thought you were producing value – even if there wasn’t any value being produced.

When the money stopped flowing last year (I never got a straight reason on what exactly happened), a lot of people found themselves in arrears on all their fancy homes, cars, and other toys because they were all mortgaged to the hilt because they were taught and believed in the FCP’s twisted view of debt (which was addressed quite nicely in a previous post). The result for many of FCP members I once associated was bankruptcy and a loss of all the fancy things they valued.

You’re right that having money doesn’t mean value was created. There are numerous “trust fund babies” that don’t work at all and get more per year from money their parents put aside then those who work 40+ hours a week. They don’t create value yet they have money.