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23. Why money doesn’t measure wealth

Of the many myths about money, the one that’s most powerful and prevalent is the belief that money equals wealth or, to put it another way, that money is the best measure of value there is.

What a dangerous, damaging mistake this is! In this blog I will show how:

  • money fails to measure many of the most important dimensions of wealth and value
  • money measures wealth that isn’t actually there, generating dangerous illusions about wealth creation
  • a lot of what money does measure, it measures very badly

What money fails to measure

Back in a previous blog I described how economics ‘forgot’ wealth creation to focus on money instead. I showed how one of the founders of economics, Alfred Marshall, deliberately narrowed its definition so that it only counted things that are measured in money terms to the exclusion of a host of other things which he called ‘real wealth’.

Here are some of things that he counted as ‘real wealth’, none of which can be measured by money: (in his words) ’the benefits of culture; the advancement of science; of well-ordered states including peace, law and order; of being a member of a community; of trusted relationships; of public infrastructure; the advantages of a healthy environment; the benefits of citizen rights; of professional skills and personal faculties for action and enjoyment’.

Marshall admitted that those things that can be exchanged for money represent only a ‘very small’ element of real wealth. But he nevertheless made an explicit and deliberate decision to focus on just this very small element to the exclusion of everything else — which would have to be studied by others some other time.

It never happened. As one of his most influential successors, Lionel Robbins wrote a famous essay in the 1930s: “Whatever Economics is concerned with, it is not concerned with the causes of material welfare as such [his emphasis]”. The real economy is awash with a wide range of different services that constitute wealth, Robbins continued. But economics as a discipline is not interested in how this wealth is created. Instead, he insisted, it “deals [only] with the pricing of these services” — the money bit.

One by-product of this fabulous misconception is the measure we call ‘Gross National Product’. This purports to measure wealth creation but in fact only measures those economic activities which formally require a money exchange.

This is what Robert Kennedy said about GNP in a speech on GNP in March 1968.

“Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.”

Kennedy was assassinated two months after he made this speech — but the content and sentiment of his speech live on. Picking up on what he said, and remembering Marshall’s original definition of ‘real wealth’, let’s content ourselves with saying that money fails to measure … say, a half of all real wealth creation.

What money measures but shouldn’t

The other side of the coin is that money is used to measure a whole host of things that it shouldn’t — activities that generate no new wealth at all.

Banks simply conjure new money into existence out of thin air, as explained here. Total global debt is now around 335% of total global gross domestic product. In the UK, the debt bubble is even bigger, with total private sector debt reaching 450% of GDP in 2012 (with debt taken on by financial corporations amounting to an astonishing 250% of GDP.)

Financial derivative traders also conjure money into existence out of thin air by inventing and trading bets on an industrial scale. In 2016 currency exchange futures were 73 times bigger than total global trade. In 2015, the interest rate derivatives ‘market’ was ten times bigger than total global GDP. Adair Turner, former chairman of the UK’s Financial Services Authority summed it up when he wrote in his book Between Debt and the Devil, “Trading in derivatives played a minimal role in the financial system of 1980 but it now dwarfs the size of the real economy.

The tragic and terrifying thing about these activities is that conjuring money into existence out of thin air is being is being used as a mechanism by which access to, and control over, society’s available resources is transferred to a tiny, unaccountable financial conjuring cabal. It just so happens for example, that the total amount of money paid to UK bankers in bonuses since the 2008 financial crash (£80bn) is the same as the amount that was cut from social security and other welfare budgets on the grounds that we ‘didn’t have enough money’ to pay for them.

All of it justified on the basis of a flawed, tragically mistaken belief: that money equals wealth and therefore anything that ‘makes money’ must be wealth creating.

What money measures badly

What about the things that money does measure? We often assume that money prices represent something economically ‘fundamental’ like cost of production or ‘demand’. But very often, that’s not the case.

Prices can significantly under-represent real costs. This is one of the big complaints of the environmental lobby. If you had to factor in all the costs of cleaning up pollution and sorting out global warming, how much more expensive would goods produced using carbon fuels be?

The other side of the coin is that often money prices inflate in ways that lose all touch with reality. Take London house prices, which have risen four times faster than inflation since 1986 to be nine times higher than they were then. If the London housing market was ‘an economy’, over the last four decades its growth rate would rank higher than China.

But this isn’t real growth. No new wealth has been created here. It’s entirely illusory: asset price inflation. In parallel, London’s actual, physical housing stock has lagged shamefully behind the needs of its population, with rising prices forcing people to devote ever higher proportions of their incomes just to keep a roof over their heads.

Speculative booms are the inevitable result of asset price inflation. In such booms, people stop buying the commodity because of its intrinsic use value. Instead, they buy it only because they believe that the price will inflate even further, so that they can sell it later for a profit … without having created new value at all.

A sobering prospect

If you were using a measuring tool to make crucial decisions about the future, would you rely on a tool that misses half the picture by not counting what matters and meanwhile measures stuff that isn’t really there while also mis-representing what it does measure? Would you rely on a tool that gets it so much more wrong than right?

Right now, in our society, that’s exactly what’s happening. I find it terrifying and I hope you do too. As we stare into an economic abyss created by the Covid pandemic, its gets particularly dangerous indeed. More of that in my next blog.

Next in this series: 24. Is Changing How We Spend Money the Answer to our Problems?

Previous: 22. Ten Toxic Myths About Money

The full contents of this blog series can be found here.


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



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