Money, Wealth, The Lion and Albert

Let me tell you a funny story about young Albert and Wallace the lion. The final lines of the poem surprisingly express a profound economic truth which gets too often ignored by government officials. As it happens, we can learn quite a bit if we care to look below the surface of simple tales. So here’s the story.

The Lion and Albert

Young Albert was visiting the zoo with his parents, Mr & Mrs Ramsbottom. He was bored and poked Wallace the lion (who was lying in his cage in a somnolent posture) with his stick. The lion swallows Albert whole. Mrs Ramsbottom is vexed and the case finally reaches the authorities. Here is the final part of the poem by Marriott Edgar:

The manager wanted no trouble
He took out his purse right away
And said, “How much to settle the matter?”
And Pa said “What do you usually pay?”

But Mother had turned a bit awkward
When she thought where her Albert had gone
She said, “No! someone’s got to be summonsed”
So that were decided upon.

Round they went to the Police Station
In front of a Magistrate chap
They told ‘im what happened to Albert
And proved it by showing his cap.

The Magistrate gave his o-pinion
That no-one was really to blame
He said that he hoped the Ramsbottoms
Would have further sons to their name.

At that Mother got proper blazing
“And thank you, sir, kindly,” said she
“What waste all our lives raising children
To feed ruddy lions? Not me!

{Text of the poem here.}

Wealth Creation

Now here’s the serious part. Creating wealth (children or whatever) is costly. If that wealth gets wasted (children being eaten by lions or one’s property being taken away by the government), it becomes pointless to produce the wealth. That is people refuse to incur the cost of producing wealth if they cannot enjoy the product of their labors. Mother is rightly indignant and refuses to engage in this costly business of raising children only to feed ruddy lions.

Wealth is created by people who have an incentive to create it. If the government keeps taking away the wealth created by productive people and distributing it to those who don’t produce, eventually the process of the creation of wealth will slow down, if not stop altogether.

In the final analysis, the job of the government is to ensure that there are no barriers or disincentives to the production of wealth. The production of wealth is a positive-sum game. An entrepreneur making a profit by producing something that consumers want to buy is not stealing from the customers. In a market economy both parties to a voluntary trade benefit.

If out of envy or a misguided aim of achieving equality through redistribution the entrepreneur is denied his fair share of the wealth he created, soon enough the entrepreneur will stop producing wealth.

What is Wealth

The distinction between money and wealth is too frequently erased in common parlance. Failing to distinguish between the two has disastrous consequences. Confusing the two, many well-meaning people end up proposing policies that directly lead to poverty.

Money is not wealth. The conflation of money and wealth happens because wealth is always counted or spoken of in terms of money. We say that Bill Gates has umpteen billion dollars or that I have $10K to my name. The dollars (money) is an instrument that is used to represent wealth.

So what is wealth? An operational definition will have to do. Whatever we use to eat, to wear, to shelter, to make our lives more comfortable, to produce, to move from one place to another, . . ., and for a million other human activities is wealth. Wealth is that which is produced by human action.

An economy produces wealth. It produces food and fuel, factories and farms, clothes and cars, roads and railways, computers and candles, shoes and ships, and an endless list of other goods. And services — education, dentistry, haircuts, telecommunication, entertainment, art, scientific discoveries, . . .

What about things that occur naturally and we use them? Is petroleum wealth? Is gold wealth?

Yes, natural endowments such as oil and other minerals found in the earth are (indirectly) wealth. But even in those cases, human action is necessary to transform natural substances into wealth.

Take petroleum. Only about 200 years ago, if your land was oozing that black liquid, you were shit out of luck — your land was worthless for growing crops. Then someone invented the internal combustion engine and some others figured out how to refine the crude oil, and what was a nasty liquid became immensely valuable. It became wealth only because of human action.

A mountain of uranium is not wealth until humans figure out the physics of fission and the engineering of nuclear reactors.

Repeat after me: Wealth is created by human action. Wealth is created through the action of free humans cooperating with other free humans.

Is gold wealth?

Are gold, diamonds, emerald, rubies, pearls wealth? Yes and no. To the extent that they are used in producing wealth (as defined above), they are wealth. Gold and diamonds are used in industrial processes which create wealth. For instance, diamond is used in cutting tools and gold is used in electronics.

Gold is also used as money. When it is used as money, gold is not wealth. Gold in use to produce stuff (wealth) can be called wealth but not when it is used as money. To appreciate that point, we have to talk about money (which we will do eventually.)

Knowledge goes into the production of wealth. Knowledge is the “know how” — how to do something. Technology is another word for “know how.” Technology is wealth (since it helps create useful stuff.)

Wealth is Costly

Something is costly when it costs you something to have or produce. Sounds trivial but still we need to keep that in mind. It costs something to produce.

You don’t get food without at the very least going out and picking up the fruits and vegetable, or hunting an animal and then making them palatable by cooking. You don’t get clothes without labor; nor do factories spring out of the ground unbidden. Roads have to be built and maintained. Cars have to be manufactured. You get the point: enormous effort is usually expended to create wealth.

Money is Cheap

Money, on the other hand, is easy to produce. You can produce money by just printing some of the stuff. These days you don’t even have to print any — simply keep track of how much money people have in a computer spread sheet and then use digital crediting and debiting of the accounts as you buy and sell stuff. What we are doing with money is keep track of the real exchange of wealth between people.

So wealth is costly to produce but money is not costly.

You can double the amount of money everyone has without making anyone better off. But double the amount of wealth available, and you are in fat city.

Another way to fix the distinction between money and wealth is to do a thought experiment. Imagine if all the money were to simply disappear from the world in one instant. That is, all bank notes and all accounts of how much money who has. It would be disastrous but it will not be fatal.

However, if all the wealth were to disappear, it would be fatal. If the houses, the factories, the roads, the food in your pantry, the food in the markets, the clothes on your back — that is all wealth were to disappear, we would be dead within a few days.

For now, we have briefly distinguished between money and wealth. Money is nominal and wealth is real. The real economy and the nominal economy do interact. But they are distinct and that distinction does make a difference. In the next bit, I will explore the consequences (quite serious) of not keeping them separate.

Money is useful but it can be misused to destroy wealth — or at least retard the creation of wealth. It can be misused to steal wealth from the producers of wealth and thus blunt the incentive to produce wealth.

Money lies at the root of much evil that destroy wealth. This is a moral truth that has economic content.

6 thoughts on “Money, Wealth, The Lion and Albert

  1. Interesting. Very interesting indeed. You have very nicely explained the difference between wealth and money. Loved reading. Waiting for the next article on this subject.

    Like

  2. Very nice post. Looking forward to the next part. Also part of the poem quoted almost looks like a debate between Pigou vs. Coase. 🙂

    Like

  3. Interesting write up. Stumbling upon your blog after aged. In a world without currency, i.e the barter world, the distinction between wealth and money disappears. Any thoughts?

    Like

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