Don Boudreaux: Off The Money

Here is a short comment by Don Boudreaux providing insight into the uncritical thinking that often goes on concerning what makes you better off.

This short essay by Jim Leaviss in The Telegraph is a fine candidate for Worst Economic Analysis of the Month.  (The competition for this dubious honor is, alas, intense.)  In summary, Mr. Leaviss proposes that cash be banned in order that government can exercise even fuller and firmer control over people’s economic activities.  Here’s a key passage, predictably revealing the wrongheaded man-in-the-street notion that the driver of economic well-being is aggregate spending:

And once all money exists only in bank accounts – monitored, or even directly controlled by the government – the authorities will be able to encourage us to spend more when the economy slows, or spend less when it is overheating.

I’m now too busy with grading and other matters to devote a lot of time to this essay.  I’ll content myself with making only two points.

First, it is astonishing that an adult can be so utterly trusting of any government as this Leaviss fellow apparently is.  He writes as if he never once considered even the possibility that government officials might abuse the awesome power that he wishes to give to them or that government officials might exercise that power in mistake-filled ways.

Second, reading this Leaviss piece makes me think that people can justifiably be divided into to camps, depending on how they answer the following question that appears below in italics.

Smith works really hard and creatively, churning out rivers of new and wonderful goods and services that consumers worldwide voluntarily rush to buy.  In the course of only fifteen years, Smith nets from his entrepreneurial efforts a personal fortune of $10 trillion.  But Smith spends almost none of it.  He takes his fortune all in the form of Federal Reserve notes, stashes these notes in a warehouse, and one day burns the entire $10 trillion of cash before going off permanently to Tibet to live as a monk.

Does Smith’s refusal to spend his accumulated fortune make the rest of us richer or poorer?

Most people, who we can put into camp #1, will answer “poorer.”  Only a relatively small handful of people – those in camp #2 – will answer “richer.”  Camp #2 contains people who think soundly about economics.  Camp #1 contains people – including, I’m sorry to report, not a few professional economists – who think unsoundly about economics.  This Mr. Leaviss would likely be a counselor for camp #1.