Friday, August 1, 2014

Wealth and Money

The socialist viewpoint on wealth is that wealth equals money, from this viewpoint, there exists a fixed quantity of money so the problem is about how to distribute fairly.
What a chance that Keynes gave the intellectual justification for raising wealth by allowing a central bank to print more money.
The problem is solved ! If there is a not enough wealth, let's print more money, and in debt the state on useless program to stimulate the economy.

So, when I start learning about Bitcoin I asked why Satoshi decided to have 21 Millions Bitcoin with a minimum exchangeable value of 0.0000001 BTC ? Why not 10 Billions ?
The reason is that the amount does not matter as long as that the minimal exchangeable value can buy a cup of coffee. 21 Millions ? 40 ? or trillions of Bitcoins ? It is easy to see it would make no difference at all, and people would not be wealthier by the amount of Bitcoin in circulation.

So if wealth is not money, what is it ?
Contrary to the socialist point of view, the capitalist believe that wealth is infinite. Every one of us is creating wealth every times we trade with each other.
The most popular trading is labor for money. But you can replace labor and money for any other pair of goods you want.
When you work for your customer or boss, and get money for it, you just created wealth.
How much ?
This is a purely psychological concept.
By agreeing to work for money, you explicitly decide that you value your labor less than the money you get in exchange.
The difference between the subjective value of your labor, and the money you got in exchange for it is wealth.

Also, your boss or customer decided, by employing you, that his money was worth less than your labor. So on his side too, he just created wealth equal to the difference between his subjective value of money and the value of your labor.

When two people are trading with each other without any coercion, wealth is created.
If I agree to give you gold ingot in exchange for your pencil, we created wealth, because both of us agreed that we would be better off after making such exchange.

McDonald, by creating  a business which permits low skilled worker to trade their labor created major wealth equals not only to the number of burger it sold, customer it pleased, but to the number of workers that could finally trade their labor against money from any establishment's owner.
The breakthrough of McDonald was not hamburger but the concept of franchise, which permits low skilled workers to create wealth on a massive scale. This is genius.

What destroys wealth ?
If wealth is unlimited and created every time we trade with each others, it follows that every barrier preventing trade from happening is a destruction of wealth.
Any need unfulfilled, any service without its customer is a potential for wealth not yet discovered.
Any process preventing a need and a service to discover each other is a barrier of wealth.

Any trade enforced by coercion, that is against the will of one party, is a destruction of wealth.
When the difference between the subjective value of what is given what is received is negative, wealth is destroyed.
A major government agency created for the sole purpose of diminishing the employment rate is wealth destruction. Maybe its workers gain wealth by trading their labor for money, but the tax payer, that would know why his money is used would put more subjective value on its money than on the state's worker labor. His wealth is destroyed.

Any increase of the total amount of gold, the amount of silver, the amount of bitcoin, the number of fiat money printed is nothing but a temporary illusion of sudden new wealth, and such illusion create bubble. A burst happen like a return to reality, a painful reminder that wealth is defined by your ability to trade, your ability to produce, exchange and connect.

To conclude, I will quote the richest man in babylon :

“Wealth grows wherever men exert energy…If a rich man builds him a new palace, is the gold he pays out gone?  No, the brickmaker has part of it and the laborer has part of it, and the artist has part of it.  And everyone who labors upon the house has part of it.  Yet when the palace is completed, is it not worth all it cost?  And is the ground upon which it stands not worth more because it is there?  And is the ground that adjoins it not worth more because it is there?”

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