In his revolutionary book, “An Inquiry into the Nature and Causes of the Wealth of Nations,” Adam Smith pointed out something that should have been common sense. Money, gold, or other forms of currency, are not wealth by themselves. They are only symbols of wealth.

Centuries later, people lacking basic economic sense commit this same fallacy that Smith wished to debunk. The fallacy takes many forms, and underlies many ignorant beliefs about public policy and the economy in general.

To illustrate why money is not truly wealth, or put another way, is not valuable in and of itself, imagine the following scenario: You are placed on a deserted island with no hope of being saved. You are alone, and will spend the rest of your life here, which will be however long you can survive on the island. However, you are given a choice by a magic genie you stumble upon: you can either receive $1,000,000 cash in a large bag, or, one week worth of canned food that can be prepared with a simple fire. Everyone with any sense would choose the food.

Why? Because with no one around to accept the cash, the money is worthless. It’s tissue paper, fire starter, bookmarks, or other things paper could be used for. That is it. It has little to no inherent value. What gives it its symbolic value is the fact that other will take it, and give you stuff that actually has a practical purpose in return. Food, housing, cars, entertainment, etcetera.

 

So why does this fallacy need to be pointed out? Because so much misunderstanding comes from it. For example, the issue of income inequality is a big deal right now in the United States. The political left charges that many, if not most Americans have not received a “raise” in multiple decades, and are just as well off as before, while the rich have gotten richer and richer. Many of these statistics are flawed, and I would suggest everyone read chapter 5 of this book, or watch this video at a minimum, to start understanding why, (it’s done better in the book than I could do here) but even if this claim were completely true in terms of money incomes, that doesn’t tell us everything.

As described above, what determines wealth is not money, it is the goods and services you can get with that money. Who in 1970 had an iPhone? No one. The invention of new, improvement on old, and lower prices of existing goods and services increases the standard of living, or in other terms, the wealth of individuals. Even if their incomes remain flat. Therefore, claiming that people are just as well off today as before, with no improvement in their material circumstances should be considered false. Standard of living for every group in America has been going up. Watch the full video below for more:

As mentioned at the end of the video, the real wealth, i.e. goods and services, of households, has increased in the US. You can read this in depth article for more on the subject.

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