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Since I like the relatively short writeup in where does the money come from?, here's a new node to discuss some other issues in macroeconomics.

alex_tan is right; I was talking more about wealth than money itself. Until recently, money was based on the value of gold. Originally, the only reason a gold coin was more valuable than a lump of gold is that an authority was willing to validate its weight and purity. Until the 20th century, paper money was literally exchangeable for gold and was valueless if that exchange couldn't be made--the 18th and 19th centuries are filled with economic crises that occured when organizations (not always governments) issued paper money that they couldn't cover with gold, which meant that people who held the paper were wiped out when the gold ran out.

In the 20th century most nations went off the gold standard, so money is now nothing more than a social construct. This is why the relative values of different currencies change over time--the money issued by a particular nation has no value except what people are collectively willing to give it.

The origin of wealth opens up another range of problems. One of the ongoing problems in capitalist economies is that the people who contribute the most labor don't get the most benefit. The US government has, for many years, been engaged in making sure that all new wealth stays out of the hands of people who actually work--and, within the capitalist economic system, that decision makes sense. Karl Marx saw this problem and said that the solution was to make workers the owners of the companies that employ them, so that there's no longer a division between employers and employed. This has been tried with some success, and in fact the creation of the mutual fund and the 401(k) have moved the United States in a Marxist direction...sort of.

It's true that mutual fund ownership doesn't give workers control over their companies--but it does give them a share (albeit a small one) in economic growth. I was able to put away $500 in a 401(k) a couple years ago...after employer matching and interest, it will pay for a full year of my retirement later on, thanks to the leaps that the stock market. While it's not really what Marx had in mind, it is at least a step in the right direction.

"Under capitalism, man exploits man. Under communism, it's just the opposite."
John Kenneth Galbraith

The idea that hard work is worth money is completely bogus. Hard work is only worth something if it produces something that others value. It's the production of things of value that counts, not the work.

This is easy to demonstrate: I can bust my butt all day long breaking a big rock down into a pile of gravel. At the end of the day, I may have worked harder than all but a tiny percentage of the rest of the population. However, unless there is some fabulous market for my gravel, all of my work isn't going to earn me anything.

What counts is whether you create anything that your neighbors value, not how hard you work. The "thing of value" doesn't have to be material, either. It can be an idea, or even the location of a thing. Merely moving something from one location to another can increase it's value.

Later addition:

The great thing about capitalism is that it lets the collective public sets the value of things. In communism and socialism, the state has a say (the only say, with communism) in the value placed on things. This invariably leads to values that are inconsistent with reality. This is why capitalistic societies have to be rough on monopolies - they screw up the system by being able to set unrealistic values on things.

Still Later addition:

About Family: it's true that families in capitalistic societies can build up lots of capital and thus become rich. This isn't nearly as easy as it used to be (at least in the US and Great Britian), however, since estate taxes and other forms of confiscation level the field pretty quickly. Even worse, the fortune must be divided among many heirs, now that first-born sons have no legal advantage in court.

As interesting as ximenez's writeup is, I still have two confusions.

First, isn't actual money a rather small part of all the stuff that is actually in circulation--what they call M1? And by far the most important part of all the stuff that really affects us is checks, real and virtual, and credit.

Who issues that stuff? It sure isn't the government. The recent crisis in credit has been caused, as I understand it, by the overgenerous issuance of credit by private companies.

This is M2, I think, and there is M3, and a few more that I can't remember at the moment.

And all this stuff is issued, not for some goal of public policy, but to meet the profit motive of all these private companies that do the issuing. This, of course, is subject to all the abuses and distortions that any industry is--after all, this is just another industry: the money and credit industry.

As for my second confusion. 401(k)'s, as best I understand them, are similar to the Registered Retirement Savings Plans in Canada. These allow tax sheltered investments in the stock market. Sure. But what is the mechanism?

Just because I own some shares, probably indirectly through some Mutual Fund, means very little. Do I direct the actions of the companies? Can I tell it where to build its plants? Can I tell it how it must treat its employees?

Ownership is empty without control. This remains where it is has always been.

I can't imagine Karl Marx sleeping comfortably when his name is taken as any possible goal of this bait and switch.

Workers of the World, you have not yet lost your chains!

Money and wealth are a product of our Judeo-Christian European values and heritage. Allan Bloom has proven irrefutably that William Shakespeare invented the human race; likewise, in the days before the socialist take-over, Europe invented the concept of value, which is most naturally expressed as money and wealth. The two inventions are complimentary and interdependent. You can't have one without the other: Observe the degraded and subhuman state of socialist slave-"citizens" in totalitarian charnel houses like Canada, Sweden, and the People's Republic of Cambridge. Are these wretched creatures "human"? No, they are not: "Humanness" is the affirmative choice to be free, to create wealth, to worship our Creator as we are commanded to do, and to defend ourselves and our nation vigorously against those who would denigrate and abuse that Creator. "Humanness" is the realization that we are not apes, and it is the right to maintain our freedom from pernicious propagandandistic pseudo-scientific lies to the contrary. The antlike and mindless socialist slave-"citizens" are both unable and unwilling to make these choices. They have denied their humanity. They have sold their Judeo-Christian European values and heritage for a welfare handout.

Can you imagine a shintoist nation, with no Judeo-Christian European values and heritage to speak of, competing successfully with American Christian industry? It's a clear absurdity. Can you imagine the atheistic socialist slave-"citizens" of modern Europe inventing so grand and powerful a thing as the world wide web? Again, it's clearly absurd.

We invented wealth. Therefore we should get to keep it.

This Marxist nonsense about "workers' control of the means of production" (leftist "stock option" schemes, etc.) is nothing but an attempt to turn back the clock to an earlier and more barbaric time before Shakespeare's great invention, and in so doing to deny God's great hierarchy of Creation wherein businesses should naturally and fittingly be controlled by a single patriarchal owner, with employees as children existing only on sufferance (sense 5, by the way), to be disciplined or eliminated when they fail to demonstrate humility and submissiveness appropriate to their station.
Actually themusic I believe that checks and credit cards are both actually M1, although you may be right.

Ironically, the reason that there is such an extreme gap between the rich and poor is because of family. It is a central and essential part of the human experience, yet it causes much of the inbalance of poverty.
Think about it. You make money and give what you save to your kids when you die, and provide the best education possible, so hopefully they'll have a better life. However, the rich are doing the same, and they have more money to pass on and for education, plus they know the others with money. Assuming equal ability and discounting luck, the rich one will always make more money than a middle class one.

One of the better critisms of Communism was that they took equality to far. They forced everyone to always be equal while America gave everyone equal chance to become rich. Well there can only be so many rich, and thus the same group with minor changes among its lower tiers are always wealthy (barring catastrophe). Communism/socialism is not the answer, but I don't know what is either. We could keep the family and poverty based on bloodline or destroy them both.

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