There Are Two Types of Money; I Think

moneyFor a while now, I’ve mused about how it might help to understand money if we think there are two different kinds of money. I think that other people might see some value in this idea.

In a nutshell, the idea is that there are two very different ways in which people use and think about money. I suspect this idea could help us gain insight into some of the economic problems we struggle with.

So What Do I Know

Someone once said that everyone has the right to opinion, but no right to be taken seriously. Should you take my ideas seriously?

I am not an economist. I did take a few courses back in University, and I have had an ongoing interest in the field. All the same, I can’t claim to have much expertise in economics. Economists may well have discussed and discarded these ideas long ago and I just don’t know about it.

However;

For most of my career I created and used transportation planning models. These are similar in some ways to economic models. As a result of my work, I’ve had to make a big effort to understand the behaviour of complex dynamic systems. The economy is certainly complex and dynamic. It is from this angle I’ve approached these ideas.

Get Rich Literature

I never had a real drive to get rich, and have been successful in not becoming rich. However, I did read some books and articles about how to become rich. What I learned is that rich people and the rest of us look at money in very different ways.

The non rich, for the most part, see money as what they need to live their life. Money is for food, clothes and a place to live. Most of us do save money for use later, but it is still meant as a means to buy the things we need to live later in our lives.

Not being rich, I find it difficult to explain exactly how the rich see money differently. From what I can tell, the rich see money as an end in itself. When you have large amounts of money, you have power and influence. While rich people do spend more money on food, clothes and a place to live, they don’t see that as the main purpose of money.

A Brief Aside About Money and The Economy

The flow of money is key for a successful economy. It is not so much how much money there is, but how it moves through the economy that determines the strength of the economy. The same dollar can be re-spent hundreds of times over the course of a year.

A Simple Model of the Economy

In the chart below I’ve tried to show a simplified view of how the economy works to help explain what the two types of money are. I left out some important aspects of the economy because I did not think they were needed and might just confuse the issue.

2kindsofmoney

In this view, I have two classes of people, owners and workers. Of course many people are both. I want to keep things simple, so I will treat them as if they are separate.

Owners invest in the economy, then gain profits and increases in the value of the property they own. Workers contribute their work to the economy and receive wages in return. The workers then spend the money they’ve earned on the products the economy has produced.

Owners also purchase products for their own use, but it is small compared to what workers spend and often small compared to what they gain in profit and asset value. I decided to ignore this spending.

In summary, investment and spending go into the economy, and wages and profits come out. How much workers can spend is dependent on how much they receive in wages. How much owners can invest is dependent on how much they receive in profits.

How to Have a Healthy Economy

We want to have an economy that works best for everyone. How money is split between wages and profits has an important effect on the health of the economy and the equity between rich and poor.

An extreme example will help explain this. If all the money went into profit and none went to wages, then workers would have no money to spend. If no money comes in from spending, the economy will collapse. Something similar would happen if all the money went to wages and none went to profits. Somewhere between these two extremes the economy will be stable.

There must, therefore, be an ideal split between profits and wages that produces the best economy. Send too much money to wages or send too much money to profit and everyone is worse off.

The important question is therefore: how do we get the split between wages and profits to match the ideal?

Thought Experiment: Two Currencies

I see two different types of money. Profits and investments are one kind of money. Wages and spending are a second kind of money.

For our thought experiment, assume that we have different currencies for the two types of money. We further assume that there is a floating exchange rate between the two currencies. We will call the profit and investment money dollars, and the wages and spending money donuts.

Would this arrangement help keep the split between the two types of money close to the ideal? I’d bet dollars to donuts that it would. 😉

If too much money goes to profits, this will cause dollars to have a higher inflation rate than donuts. This would push up the value of donuts relative to dollars. The effect would be to move the split between profits and wages back towards the ideal.

Similarly, if too much money went to wages, it would cause donuts to have  higher inflation rate than dollars. This would push up the value of dollars relative to donuts. Again, this would move the split between profits and wages back towards the ideal.

I don’t see how this could be put into practice. It would be a very disruptive and difficult transition. However, I believe that it is a useful way to look at the issue.

Flaws in the Theory

No doubt, with the simplicity of my analysis, important factors that could affect this idea could be missed. Please let me know of any you may notice.

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