22. Ten Toxic Myths About Money
What role should finance (and financiers) play in rebooting the economy once the Covid pandemic subsides? The Government’s bailout has already lit a bonfire of long-held dogmas. But is this just a temporary aberration or are deeper changes afoot?
I think pressure for far-reaching change is now immense, having been building for decades before the pandemic hit. However, the powers that be will do their level best to deny this and return to business as usual as quickly as possible. Their power, their riches, their very survival rests on the continuation of the Money Mirage — the belief that money and wealth are one and the same thing. Yet everything about this pandemic points us in a different direction: to basing policies on the approach that ‘we can afford what we can actually do’ rather ‘we can only do what we can financially afford’.
The Money Mirage isn’t just one misconception. It works as a bundle of related misconceptions that, separately and together, distort our understanding of what’s happening and obscure our vision of possible ways forward. That’s what makes it so powerful. It’s like a piece of intellectual velcro: if one hook doesn’t snare you, another one is just waiting to get you.
Here are ten key strands within this bundle, each presenting itself as eminently sensible and obvious when, on closer inspection, it turns out to be nothing of the sort.
- “Money is wealth and wealth is money.”
Money is just a symbol we use to represent wealth. Money is wealth to the degree the word ‘dog’ written on a piece of paper is a real, live panting barking organism. The King Midas story exposes this myth. Which of the following do you think is a wealthier society? 1) A society where all the food and shelter you need is available, but where there is no money? 2) A society where you have all the money in the world but no food and no shelter? The real economy and the financial system are two different universes, but the belief that they are one and the same dominates and distorts the way our economy is actually run.
2. “Money is the only and best measure of wealth.”
Even if money isn’t actually wealth, surely it’s the best possible measure of wealth? No. Money only measures the things that money measures. If something is not measured by money or not traded using money (like housework, or care-giving volunteered by a friend, or the workings of the environment, or intangible public goods such as peace and trust) as far as the Money Mirage is concerned it doesn’t exist. But it does. Viewed in the round things that and are not measured by money or not traded for money probably account for at least a half of all real wealth creation.
Meanwhile, most of the money measures that do exist are misleading. Take GNP, for example. This is a money measure of economic activity. According to GNP calculations, a car ride shared between two people is wealth destroying because it reduces the amount of money spent. But a car accident is wealth creating because it forces people to spend lots more money. It’s crazy that a bogus measure such as GNP still lies at the heart of economic policy making. But it’s true.
3. “The amount of money in a particular party’s coffers tells you how rich they are.”
It certainly seems that way, but that’s because we confuse two very different things: money as wealth (not true) and money as an instrument for the exercise of power (true). In our society, the rules by which money operates — it’s institutional set-up — hands those who have money the power to access and exercise control over available resources (at least, those resources which can be bought by money). The amount of money in a particular party’s coffers doesn’t tell how rich they are. It tells you how much power over resources they have.
4. “The measure of an enterprises’s economic contribution is how much money it makes. If it ’makes money’ then, by definition, it is creating wealth. If it loses money then it is eating up wealth.”
Accounting methods which produce profit/loss numbers tell us nothing about the economic contribution of an enterprise. Which is more wealth creating: a mafia branch which makes huge amounts of money via racketeering and extortion or a farm that produces a lot of food but only breaks even? Banks literally ‘make’ (i.e. manufacture) money. When they extend loans they are effectively conjuring money into existence out of thin air. That doesn’t mean they are wealth creating. Very often, they are wealth extracting.
Most of the wealth creating (or wealth destroying) performance of enterprises is determined by externalities (effects on other parties) which are not measured in their profit and loss accounts.
5. “You ‘pay for’ things with money.“
Not true. In reality, we pay for things with the work, energy and materials that go into making them available — ‘using up’ resources, not money. Money payments are just an institutional overlay sitting on top of this underlying reality. Really, money is used as a means to settle debts — to recognise the work, energy and materials that have gone into making something and as a means by which available resources (people to do work, raw materials, equipment etc) are corralled and deployed to get stuff done.
6. “Things can only get done if someone has the money to pay for it.”
In our society, unfortunately, that’s often true. But there is no economic reason for this. It’s because those who have money have power over the allocation of resources, and have the ability to say Yes or No to things being done. Belief that we can only do what we can ‘afford’ financially, focuses decisions on the pluses and minuses in the bank balances of people who have money. That’s got nothing to do with the underlying economic reality where we can ‘afford’ what we can actually do.
In reality, money is just one of many mechanisms humans have used to arrange and organise the deployment of available resources. Hunters and gatherers got lots of things done without having any money to ‘pay’ for them. Other societies used other mechanisms such as military force (empires, feudalism). Democratic decision making procedures are another alternative.
7. “People, families and enterprises simply have to ‘live within their means’ and ‘balance their books’ (as measured by plusses or minuses in their bank accounts) because this represents an unavoidable economic necessity.”
This is true in Universe One money has been institutionalised so that it’s the only way people can access available resources. But this has nothing to do with money itself and everything to do with the institutions (rules, enforcement mechanisms etc) that have been constructed around it. And these institutions do not change the underlying economic reality, which is that people simply have to be able to access food, water, shelter etc to survive. These are physical, physiological things addressed by th real world of availability of resources, not the plusses and minuses that may or may not exist in a tally of abstract symbols.
8. “Governments and economies are just households and firms writ large. If a firm or household spends more money than they have and go bust, the same will automatically happen to the government/economy.”
Quite the opposite in fact. Very often, things that make perfect sense at one level make perfect nonsense when put together at another level. If you are in a hall and somebody shouts ‘fire’, it makes perfect sense for you to run for the door. When everybody does this, there is a crush at the door and more, not less, people die. If everybody decides to ‘save money’, individually, each one of them boosts their bank balance. But when you put all these actions together across the economy as a whole, because everybody is spending less, demand drops and wealth creation slows rather than accelerates.
These ‘emergent’ system effects are often counter-intuitive. And crucial.
9. “Supply and demand are measured and coordinated by the amount of money people are prepared to spend on things.”
Only in a partial, distorted way. In modern markets ‘demand’ is only recognised if people have money to pay things. If they don’t have money to pay for things, then there is no ‘demand’ even if there is a need that’s crying out to be meet. In the Irish famine, people desperately needed food, and the food was there. But there was no ‘demand’ for food because they didn’t have the money to pay for it. So the food that was there was exported to where the ‘demand’ was (people in England who had money to spend on it) … and a million people starved to death.
10. “You can measure things like efficiency and productivity in terms of money.”
See 2) above. Money measures of efficiency and productivity only measure the things that money measures, and ignore the things it doesn’t. That means that in reality, something may be far more, or less, efficient and productive than the money measures say.
The challenge before us
As the pandemic slowly eases and attention turns to how to get the economy back on its feet, you can be sure all the siren songs of the Money Mirage will start wailing ever louder. Never mind ‘we can’t afford to pay for it’, ’we have to settle our debts’, financial this, fiscal that, monetary the other: real wealth is created by people working in the real world of material resources to make useful things. That’s what we need to focus on, and if that requires far-reaching institutional change so be it.
I’m not saying this institutional change is easy or obvious. Everything I’ve written above begs all sorts of questions. Let’s return to these myths to ask some of these questions:
- “Money is wealth and wealth is money.” If that’s not true, what is wealth, and how is it created?
- “Money is the only and best measure of wealth.” If that’s not true, how do we measure wealth?
3. “The amount of money in a particular party’s coffers tells you how rich they are.” If money is not the way to organise control over available resources, what is?
4. “The measure of an enterprises’s economic contribution is how much money it makes. If it ’makes money’ then, by definition, it is creating wealth. If it loses money then it is eating up wealth.” If this isn’t true, then how do we measure an enterprises’s economic contribution?
5. “You ‘pay for’ things with money.” If not, then what is the best way of accessing, marshalling and deploying available resources?
6. “Things can only get done if someone has the money to pay for it.” So how should decisions relating to the deployment of available resources be made and implemented?
7.”People, families and enterprises simply have to ‘live within their means’ and ‘balance their books’ (as measured by plusses or minuses in their bank accounts) because this represents an unavoidable economic necessity.” By what criteria should households, enterprises and governments be given access to available resources?
8. “Governments and economies are just households and firms writ large. If a firm or household spends more money than they have and go bust, the same will automatically happen to the government/economy.” If money isn’t the measure, how do you assess the economic contribution of an enterprise?
9. “Supply and demand are measured and coordinated by the amount of money people are prepared to spend on things.” So what is the best way of aligning real supply to real demand?
10. “You can measure things like efficiency and productivity in terms of money.” What is a realistic way of measuring efficiency and productivity?
If such questions make your head hurt (as they do mine), that’s good. They force us to think, challenge, investigate. The Money Mirage is a sort of mind-forged manacle; a set of blinkers that stops us understanding and therefore being able to address the reality we live in. But seeing these myths for what they are — myths — is just the first step. The real challenge is to answer those difficult ‘so?’ questions, which is what this blog series is all about.
Next in this series: 23. Why Money Doesn’t Measure Wealth
Previous: 21. We Can Afford What We Can Actually Do
The full contents of this blog series can be found here.
Bibliography
Books and articles I found particularly useful researching this blog include:
- Adair Turner, Between Debt and the Devil: Money, Credit and Fixing Global Finance, Princeton University Press, 2017
- Mervyn King, The End of Alchemy: Money, Banking and the Future of the Global Economy, Abacus, 2017
- Mervyn King, John Kay, et al, Radical Uncertainty: Decision-Making for an Unknowable Future, The Bridge Street Press, 2020
- Anastasia Nesvetallova, Ronan Palan, Sabotage: The Business of Finance, Penguin, 2020
- Richard Murphy, The Joy of Tax, Transworld, 2015
