Many people — including some economists — often confuse money with wealth. This frequently leads to avoidable errors and bad policies. It is best to take money out of most discussions and focus on wealth, unless of course one is specifically discussing money.
Wealth and money are distinct but often used interchangeably because wealth is always denominated in terms of money. The primary distinction is that wealth is real and money is nominal. Wealth is anything that we can consume in the broadest sense of the word. Wealth is what we eat, wear, find shelter in, store for later consumption, drive around in, the machines we use to make stuff, stuff that you can hold in your hands and kick around — the tangibles. Wealth is also the intangibles like know-how (another word for technology), knowledge and skills that humans have.
Wealth can be acquired, possessed, stored, exchanged and consumed. It can also be begged, bought, stolen, borrowed and lent. Money is just a mechanism for facilitating exchange, and of course monetary terms are used to keep track of who has how much wealth, who owes whom, etc. We exchange wealth using money. What we are exchanging is rights: the right to use the wealth. When more people create more stuff (tangible or intangible), wealth increases. The aggregate production of wealth in a specified period is called aggregate income. For an economy, this is known as the gross domestic product (GDP). Who gets how much of the aggregate production is called income. Ideally, a person’s income reflects the person’s contribution towards the production of aggregate wealth.
A point that brings out the distinction between money and wealth is that money can be destroyed more easily than wealth. Suppose a plane carrying $100 million in money crashes. Hundred people each had given $1 million to buy some asset, say, a factory in the destination city. Suppose the plane was a corporate jet, replacement value $10 million. How much wealth was lost? Only $10 million. The $100 million in money that went up in flames did not reduce aggregate wealth. The factory did not go up in flames. Only those who were going to have the rights to the factory are out of that right. They have lost wealth (which they had earned presumably by working to produce the wealth that translated into $1 million each) but the total wealth of the nation decreased only by the $10 million that was the plane was valued at.
Take the case of Joe, the neighborhood super-multi-billionaire. Perhaps he accumulated his fabulous wealth by starting a business selling over-priced smart phones that people lined by the millions to buy. Or perhaps he amassed his wealth by selling cocaine. In any case, Joe had acquired all the Maseratis and French villas as he could wish to own. Then he uses some of his wealth to buy Picassos worth $300 million to show off his position in society. Is his conspicuous “consumption” bad for the economy? Not really.
What he has done by buying $300 million worth of paintings is that he had transferred $300 million to the sellers of the paintings — who presumably would buy other stuff and eventually through the vast nexus of exchanges across the economy, it would mean that Mike Schmuck gets his job of painting some outhouse in the boonies and is able to buy groceries that Dick Farmer has produced. Wealth is created and consumed regardless of who bought the Picasso and for how much.
Maybe Joe the drug lord likes to show off his wealth by smoking his crack cocaine in $1000 bills. Is Joe destroying wealth? No! He’s actually redistributing wealth. To whom? To all the Joe Schmucks who have their savings or their earnings in dollars. When someone destroys dollars they own (regardless of how they came to possess those dollars), they are making the remaining dollars (money) more valuable. Joe is doing a public service by reducing inflation by a very tiny amount.
In effect, Joe the drug lord, by smoking $1K bills, is giving back some of his rights to wealth that he could have consumed and therefore making it available to others. Joe’s destruction of money is an act of generosity. Joe is an altruist. I would call it the “anti-theft of wealth by the destruction of money.” The converse of that act is “the theft of wealth through the creation of money.”
Governments routinely engage in the theft of wealth through the creation of money. Since governments have the monopoly on the creation of money, whenever it wants to consume more, it prints money. It then exchanges the newly printed money for stuff (wealth). This leads to inflation. Inflation means that the money you have will buy less stuff than you could have bought before. How much less stuff? The amount that the government has stolen from you by printing money.
One way out of this theft of wealth through the creation of money is to have a competitive market for the creation of money. In other words, private money. Let whoever wants to create money do so — even the government. What about taxes? Taxes could be paid using government issued money. But for all other purposes, people would be free to use whatever money they want to use.
There is much truth in the old saying that money is the root of all evil. But not the truth that is traditionally claimed for it. The actual truth is that the government’s monopoly to print money with abandon is the root of a great deal of evil. Think about it.