Monday, November 4, 2013

Wealth and Money: Link and delink

By: Shahab Sabahi, Policy Analyst in Energy Security and Policy Research Group

There is a question that boggles critical minds “Is it possible to model an economic system in which accumulation of wealth is delinked from money? “. Here I attempt to put few ideas on a piece of paper about few difficulties to doing so.

Money, as a measure to scale wealth

The value of wealth can be measured by any scales. At the middle stage of society development, an equivalent weight of gold or silver was corresponded to the value of particular wealth. As society advanced towards more complex form; may be characterized with the wealth expansions and wealth ownerships; the scarcity of gold and silver resources curbed the human trades and exchange of wealth. Human’s invention of money was a response to eliminate that limitation of gold and silver.

In this sense, money is just a scale; like the one for kilogram; to weigh the value of wealth. Furthermore money facilitates trades. Assume one owns five pens and desires to exchange the pens for a pair of shoes. If the shoes owner has zero interest to acquire pens for its shoes, but needs to trade its shoes for another goods, such an exchange of wealth would be extremely a hard task.

Indeed money, as just a scale and media for exchanging wealth, could make trades easier.

In this sense the volume of wealth should be corresponded with the volume of money with a constant coefficient without causing any problem.

Money, as tradable goods

What I mean by “tradable goods” is that is present the demand and supply for just money; independent from the demand for wealth. But the question could be “what makes demand for money varies over time and independent from demand for wealth?”

I shall analyze the above mentioned question based upon three facts,
 
1.       Persons who wish to exchange their wealth may have not enough money to seal their deals on time,

2.       Some types of Wealth can be quickly converted into cash (liquid) while some types take times,  

3.       The value of wealth alters over time and space.
The first bullet refers to the fact that distribution of money IS NOT corresponding with distribution of wealth. Suppose I have a house which is worth for $1000. It does not mean that I can exchange my house with another asset with similar value. So I may apply for a loan or sell my house in lower price, if I am under enormous pressure to acquire the other asset.

The second fact speaks by itself. Demands for goods vary over products and time (Interests and the concept of interest rates). Again if I have an $1000 house worth, and another person holds a piece of gold of $1000 worth, it is hard to say that we can achieve our desired assets (or dream cars) with spending same amount of time and energy.
The third fact tells us, the value of wealth can be altered by any changes in policy, people’s appetites, social institutions and lifestyle. Therefore it would be a hard task to keep the ratio of the wealth volume with the volume of money in a constant figure (Hard to keep the volume of money related to the value of wealth.)

Conclusion     
Alike all human’s inventions, money brings about together misery and peace. The correlation between money and wealth are deniable as markets for exchanging variety of wealth require the existence of a single media for easy exchanges of wealth. It makes a strong correlation between money and wealth.

The unequal distribution of money (it is natural), the wealth values alternation over type, time and space, and the fact of liquidity create demand and eventually markets for money. There is NO-EXIT from the notion of the money market institution. Money markets will continue to stand warm and speculators will; again and again; generate profits and losses. However central bankers will remain busy with turning up and down the machine of money supply to balance; as they claim! I do not know; economic system.

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