“The great wheel of circulation [= money] is altogether different from the goods which are circulated by means of it. The revenue of the society consists altogether in those goods, and not in the wheel [= money] which circulates them” (Smith 1811: 202).Thus money is not synonymous with wealth, and money cannot be consumed in the way that commodities can. There is a widespread belief that real wealth is goods and services available in a nation, though it is sometimes unclear whether this definition of wealth includes real assets like housing or commercial property.
Libertarians are fond accusing Keynesians of saying that “money is wealth” or that “money creation is wealth creation.”
This is, of course, a caricature. One can readily agree that money is not wealth. Money is (1) a unit of account, (2) a medium of exchange and (3) a store of value.
In this role, money is (1) a claim on output or (2) a future claim on output (commodities). However, money does have utility on its own account. People can desire to hold money as hedge against future uncertainty, but even here one can say that this is because of its store of value function that allows purchasing power to be used in the future.
Libertarians frequently invoke one aspect of Say’s law of markets which states that people need to engage in production before consumption. In other words, consumption of commodities must have prior production (at home or overseas). This is certainly true. What does not follow is that supply (total factor payments from production) will equal consumption or investment. Aggregate demand failures can in fact occur.
Now money is a unit of account and medium of exchange (also a store of value): but as a unit of account and medium of exchange it is a thing that facilitates exchange and production. One can agree that money itself is not wealth in the sense that is not identical with commodities, but is a claim on commodities.
In a recession, there are idle resources and capacity utilization has fallen. But the nation’s ability to produce things is not fundamentally impaired. Factories might be idle or running at 50% or 70% capacity with space for further production, and unemployment (idle labour) might be high.
Wealth creation done in the private sector is facilitated by Keynesian macroeconomic management of the economy, and in particular by ending recessions.
Deficit spending in a recession is a way of mobilizing idle resources like labour for creation of public infrastructure. Actual production (= wealth creation) is facilitated in the private sector by paying idle workers money as wages to allow them to consume from the private sector or by payment by government for other commodities from the private sector.
A similar process would occur even if the spending was done privately. For example, if a private businessman decided to build a railway in an area where it was needed, the money for the construction would came from a private loan, and the economic activity that resulted would increase private sector production through idle workers using money wages for consumption and the use of other commodities from the private sector in construction of the railway.
While deficit spending normally involves creation of public infrastructure and not factories or new capital goods directly, the use of idle resources and payment of wages increases demand for commodities. This process increases production (say, by raising capacity utilization) and leads to an expansionary phase of the business cycle where new business and factories are created to expand output.
A recession by definition means idle resources, lower capacity utilization, and unemployment. Deficit spending just puts those idle resources to work. Production increases in the private sector when orders come in, employment falls, people are free to buy what commodities they want by deciding on the basis of subjective valuation.
Far from thinking of money as “wealth,” Keynesians can easily conceive of money as the tool that facilitates production and creation of wealth. There is no contradiction here with the proposition that real wealth is only output.
APPENDIX 1: HENRY GEORGE’S DEFINITION OF WEALTH
I do not follow or endorse the economics of Henry George, but he had an interesting view of wealth that is worth discussing. I quote from a summary of how Henry George defined wealth in his book Progress and Poverty:
It is unclear how production of services fits into this, but it appears to me that a good many libertarians view wealth in a way similar to that of Henry George.
- All material things produced by labor for the satisfaction of human desires and having exchange value. This means that wealth must have all of these characteristics:
- 1. Wealth is material. Human qualities such as skill and mental acumen are not material, hence cannot be classified as wealth.
2. Wealth is produced by labor. Land possesses all the essentials of wealth but one -- it is not a product of labor, therefore it is not wealth.
3. Wealth is capable of satisfying human desire. Money is not wealth; it is a medium of exchange whereby wealth can be acquired. Nor are shares of stock, bonds or other securities classifiable as wealth. They are but the evidences of ownership. None of these satisfy desire directly; if they are destroyed, the sum total of wealth is not decreased.
4. Wealth has exchange value.”
Montes, L. and E. Schliesser (eds), New Voices on Adam Smith, Taylor & Francis Ltd, Hoboken. 225
Smith, A. 1811. An Inquiry into the Nature and Causes of the Wealth of Nations (11 edn; vol. 1), Oliver D. Cooke, Hartford.