Money Traps
First Trap: Money = Value = Time.
While it is true that money equals value, not everyone gets rewarded this way.
When an employer gets into a contract with an employee, the employee agrees to sell his time against money during which the employee will provide value.
And that is very tricky.
If you get a job in a bakery and sign a contract to produce 100 pieces of bread per day, you work within the concept of money = value.
Value is in this case, the 100 pieces of bread you must produce during the day.
Whether you take 1 or 10 hours to make the bread is completely irrelevant to your employer as long as he can sell what you made.
You have been hired to provide value, so your job is to provide value.
Period.
The time you take to provide the value is your problem and can be changed at will.
If you buy a giant bread-making machine that makes 100 pieces of bread per hour, you will work 1 hour per day, which gives you enough time to get another one of these jobs to make more money.
If you make all the pieces of bread by hand, you may work 8 or 9 hours per day, and then you’re stuck with one job and little money.
Should you decide to become completely independent and sell bread to anyone for a living, the more bread you make in a given time, the more money you will make.
Unfortunately, most employee contracts don’t work this way. Employees get hired to work a certain amount of hours, not to deliver a certain amount of value.
Let’s take an example.
If you sign a contract to work as a receptionist 8 hours per day, there is nothing much you can do besides…standing up 8 hours per day.
The nature of your task cannot be optimized with production hacks like bread-making as you are forced to sell something that can’t be multiplied: time.
Selling your time is a bad idea because, unlike bread, you can’t sell “more time” with a big machine.
-> you can’t increase the value you are giving against money which will considerably limit your chances to earn more.
Whatever you do, make sure the value you produce is scalable and can always be achieved with less time through an increase in productivity.
In the beginning, we said that when one other person joined the hermit, the total productivity tripled.
As such, make sure that other people can join you in providing value so that they provide value for/with you, which is the definition of an employee.
An employee provides value for his company against which he earns a salary.
A salary cannot be scaled.
To recap, the first trap, when it comes to money, consists of selling your time against money. This contract is a bad deal as it prevents you from scaling your work and multiplying the volume of your income.
Second Trap: The Salary Trap
We outlined above how getting a job prevented you from growing your salary. Getting a job is a trap. We will now go further by looking at how unfair salaries are.
Despite what many people may say, you are not worth your salary. You are worth much more.
Reading the book Start from Zero (cringe book, don’t read it), I discovered that employees make between 3 to 5 times what they are paid.
I expected ratios to be the likes of 1.5-1.9 after taxes.
It’s not.
Let’s take an example.
My friend, who works in a computer science consulting company, told me recently that he had discovered he made his employer 700€/day before taxes.
In a 28-day month, that would be about 14 000€/month. Take off the 25% corporate taxes and you are left with 10 500€.
The company pays my friend a full salary of 2 900€/month (before taxes) and my friend receives 1 900€ on his account (after taxes).
10 500€ – 2 900€ = 7 600€ of profits left for the company.
7 600€/1 900€=4. My friend’s company makes 4 times what my friend makes by doing…almost nothing.
As such, my friend’s net value is 7 600€ (after-taxes company profits) + 1 900€ (after-taxes salary of my friend) = 9500€.
Since my friend doesn’t have any other type of income, his net value is 9 500€.
But what does it mean?
It means that it is implied (because the performances of my friend don’t impact his salary) that my friend produces value worth €9500 per month.
Does my friend receive €9500 on his account?
No.
He gets 1900€. This amount of money corresponds to the value that my friend is allowed to consume per month.
To put it simply, my friend produced 5 apples, but he can only eat 1.
Is it fair?
No.
In a fair society, productive agents should be able to consume an equal sum of what they produce. Practically though, this is never the case for employees.
Their company pays them less than what they are worth in order to make a profit.
When you are an employee, it is your company that decides the amount of value you are allowed to consume because they decide your salary.
A salary is an arbitrary measurement of the total volume of goods and services created by society that one is allowed to consume.
We’ll come back to that.
To summarize: money is earned when value is provided. The money can whether be exchanged against the value of the work provided directly, or against a period of time during which value must be provided.
The money is earned in the form of a salary or/and other streams of income, and its total amount depends (in)directly on the value provided to society.
A salary represents the portion of the total wealth created in society that the earner is allowed to consume:
-> money is a wealth redistributor (the fourth characteristic, further explained below).
To consume a lot, you should produce a lot.
The more everyone produces, the more everyone will consume.
The Wealth of Nations
Let’s imagine a village of 4 people: a baker, a butcher, a politician, and a tailor.
The baker makes 3 pieces of bread per day, the butcher makes 3 rib-eyes per day, and the tailor, 3 suits every 6 months. When the politician goes to buy his daily bread, there are usually only two pieces remaining because the baker kept one for himself.
As such, everyone is fighting for bread, and the bread is very expensive.
The politician printed more money and gave it to people thinking it would arrange things, but the bread got more expensive instantly: there is just not enough bread for everyone.
The normal consumption of the village should be at least 4 pieces of bread/day, 4 rib-eyes/day, and 4 suits/6 months.
But since it is not the case, people are poor and hungry and don’t have much money compared to the prices of things.
The supply of goods is low, and the demand is high, making prices high.
The baker would like to have more money, but hiking the price of bread would mean nobody would buy it, and then the baker wouldn’t be able to buy half of a rib-eye and half of a suit at all.
It’s a dilemma he doesn’t know how to solve.
A bit further down the road stands the same village with the same people: a politician, a baker, a butcher, and a tailor.
The needs of the village are similar: 4 pieces of bread/day, 4 suits/6 months, and 4 ribeyes/day.
Life here though, is different. The baker produces 8 pieces of bread/day, eats one of them, and sells 6 of them, with one remaining daily.
The butcher produces 8 rib-eyes/day and also sells 6 of them, keeping one for himself and leaving one out.
The tailor produces 8 suits every 6 months, sells 6 of them too, and keeps one for himself, etc.
The amount of money that the butcher, baker, and tailor make allows them to buy more than they need in terms of bread, rib-eye, and suits.
People are wealthy and have plenty to eat and dress. They can pay their taxes, and the politician is also quite well-off.
Since there is a surplus in production, the baker, butcher, and tailor decide to decrease their prices to sell the remaining piece of bread, rib-eye, and suit.
They now sell more, while making the same amount of money, which allows everyone to have even more bread, rib-eyes, and suits than before.
100% of what is produced is consumed (understand: bought). People live in abundance, they now have too much bread, rib-eyes, and suits that they have to throw it away.
Life is good.
This story illustrates the differences in terms of productivity which matters greatly to understand poverty (and prices, hence inflation).
Indeed, poverty does not come from a lack of money, as often outlined.
It comes from insufficient production of output.
The Fourth Function of Money
Money is unlimited because it is printed out of thin air.
Goods and services aren’t unlimited.
What money can buy represents the total amount of value that is produced in society.
The first village is poor because its inhabitants don’t produce enough so that everyone has enough to live comfortably.
3 pieces of bread, rib-eyes, and suits are not enough, and people fight over the resources that are scarce and hence, expensive.
In the second village, everyone produces too much, so, everyone has too much.
-> the wealth of a society is equal to the sum of the production of everyone in society.
If no one produces anything, everyone will have…nothing.
If everyone produces too much, everyone will have too much.
Money, in this story, encourages people to produce as the more they produce, the more money they will make, the more they will be able to consume.
If both the baker and butcher produce enough food, the tailor will be able to make a lot of suits back for them.
The amount of money within society is completely estranged from the production volume, and doesn’t change the abundance or scarcity of output in society.
If people produce a lot, everyone will have a lot. If they produce little, everyone will have little.
On top of being an enabler of productivity, money is as we said, also an allocator of resources (also called “total produced-value redistributor”, fourth characteristic) through the distribution of a salary.
What does this mean?
The total amount of money in society must be equal or lower to the total value of output in society. There should be enough money to allow the baker, butcher, tailor, and politician to purchase for themselves a part of what is jointly produced by everyone, and no more.
If you pay people too much, they will consume more, which will increase inflation.
I think this is why salaries don’t catch up. Society has no interest in paying people too much, as this would increase consumption, and hence inflation.
A society can survive as long as it has food and electricity. If everyone starts consuming like crazy, society will collapse.
Inflation has little to do with money itself. Inflation arises when a society consumes more than it produces.This happens when we give money to people that didn’t earn it.
We also see how dangerous it is to give money to people that don’t anything.
Society survive as long as it produces at least as much as it consumes.
This is why you are not able to consume more than you produce.
In theory.
In practice, it’s not the case. Unemployed people and everyone else that doesn’t do anything live at the expanse of the few people that produce.
The reason why my friend earns €1900 and not €9500 is because a huge chunk of his money is redistributed to people that don’t do anything.
This is called solidarity, and this why most people that pay taxes don’t want to pay them.
It’s not fair.
While economics considers that inflation arises when people consume more than they produce, the case could be made that people just don’t produce enough.
The employment-to-population ratio measures the population in age of working, and that actually works.
In Belgium, it’s 50%.
Yes.
Let’s say you have 100 000 people in age of working. Well, 50% of them actually work.
Those 50% carry the entire country forward.
Why do you think taxes are so high?
There are a lot of people that don’t do anything.
Why Capitalist Societies Are Richer Than Communist Societies
In a capitalist system, people tend to maximize profits for themselves. To do so, they must produce as much as they can.
-> capitalism encourages production and makes society rich.
Communism doesn’t work this way.
Communism proposes that the production does not belong to anyone in particular, but to everyone, and promises that everyone will enjoy the production of everyone.
Since individuals count on “everyone” to produce, they are not as encouraged to maximize their own productivity as they would in a capitalist society.
So, nobody works.
They have no reason to since it won’t impact their salary.
If nobody works, nothing is produced.
If nothing is produced, everybody dies of cold and hunger.
That’s what happened in China in the 1950s and in the Soviet Union in the 1930s.
The food production was low because was doing anything, a problem that no amount of money could fix.
The Bottom Line
So, what is money?
Money is energy. You earn money by making efforts, and spend money on stuff someone else spent energy on.
Money has four roles within society.
When a society is constituted by several agents and when these agents produce output and cooperate (exchange), money intervenes as an assessor of value to estimate the worth of goods; value itself as money is exchanged directly against the good; and as a facilitator of trade (productivity) by allowing people to choose what to exchange their production against.
These give people incentives to produce more to maximize their own wealth, hence maximizing society’s wealth.
Money is further redistributed to workers through salaries to make sure they consume less than they produced, highlighting the role of money as a redistributor of the total produced output (allocator of resources).
The money people make is equal to the total value they add to society.
The money people earn is equal to the amount of total produced output they are allowed to consume (the rest going to the pocket of their company, or government).
To increase one’s income, one should increase the value one provides without being bonded to an agreement exchanging time for money, as time is not scalable and can’t increase productivity.
This spurs a new question: does the employee status hurt out total production?
For more articles, head to auresnotes.com.
Photo credits: Photo by Micheile Henderson on Unsplash
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