Paul Graham: ‘Money Is Not Wealth’. Really?September 27, 2012 3:19 pm
Paul Graham writes very convincingly. So when he makes an argument saying Money is not Wealth and backs it up with strong points on how money is just a medium to move wealth but it is only wealth that can be created, it is very difficult to spot fallacies of any kind in the argument. But we spotted a weak signal of Narrative Fallacy in the argument.
While his argument on how it is wealth that needs to get created is spot on, he goes a little too far with the assumption that Money is just a medium. It used to be, in the old days when there was a more or less “fixed” amount of money. But in today’s world of operation twists and QEs, looking at Money as just a medium to move wealth around, would be a mistake. Why do we say that?
Not because Bernanke can print Money. But because, the premise of Paul Graham’s argument, which is that you need to create wealth – something people want, makes this critical assumption:
“The advantage of a medium of exchange is that it makes trade work. The disadvantage is that it tends to obscure what trade really means. People think that what a business does is make money. But money is just the intermediate stage– just a shorthand– for whatever people want. What most businesses really do is make wealth. They do something people want.”
The issue though, is that the medium is heavily manipulated these days. In a scenario where governments and central banks can essentially create money, just because they can, looking at Money as just an intermediate stage would be a serious mistake. It is very much part of the equation (unless attempts like Bitcoin change the concept of Money) – a central bank issuing currency based on an asset takes a totally different meaning when that asset is just trust.
Startups need to understand that the concept of creating Money is changing, and hence need to err on the conservative side, when the wealth they create, gets translated into Money. One example is valuation. Remember this is more or less free “money” (low interest rates) – the economy is bad but who cares – the cost of capital is unbelievably low, you shd count that in when you raise money, for example.
Is it not strange, that investors conveniently refer to a ‘bad economy’ and never refer to a zero percent interest rate scenario, which shd be the more relevant question – the cost of money?