The Journey from Production to Wealth to Money

Production and wealth are related but different terms

To understand this, let's first understand what money is.  Money is a medium of exchange that must be backed by wealth.   What is wealth, then?  Wealth is surplus, unconsumed production.  From the perspective of a simple agricultural economy, we can understand this in the context of John, a wheat farmer.  John eats 100 pounds of wheat per year.  If John grows 100 pounds of wheat in a year, and eats 100 pounds of wheat, he is poor and has nothing at the end of the year.  But if John learns more efficient means of farming and produces 200 pounds of wheat in a year then he has produced more goods than he can consume. Since he can only eat 100 pounds of wheat, he has 100 pounds left over.

   200 lbs produced
  -100 lbs eaten      
   100 lbs excess

The left over 100 pounds of wheat is John's wealth.  This means, for example, that he can take off from farming next year entirely and live off of his unconsumed wealth.  Or, John can trade some of his unconsumed wheat with other people for what they produce.  For example, John can trade 25 pounds of wheat for a fur cloak made by Bob to help him stay warm throughout the winter.

The important point to remember is that John's wealth isn't the 200 pounds of wheat he produced; his wealth is the 100 pounds that he accumulated and did not consume.

By producing more than they consume, producers in an economy are able to trade their excess production for the excess production of other producers. 

The Role of Money

Whatever physical form money takes (paper, gold, silver, salt, etc), money is a medium for trading and storing excess production.  As a medium of trade, John's wheat isn't very effective.  Earlier, John traded 25 lbs of wheat for a fur cloak that his neighbor Bob had produced.  That was very convenient for John but it was only convenient because Bob wanted wheat.  What happens, though, if Bob has plenty of wheat and doesn't need more of John's wheat?  How will John get his fur cloak?  He can't make his own because he doesn't know how.  Now John has to ask Bob what he wants in exchange for the cloak.  It turns out that Bob wants a clay pot.  John talks to Mark who is a potter and offers to trade him wheat for a pot.  Mark, though, has enough wheat and won't make the trade but tells John he needs a straw mat to sleep on.  So John goes to Lilly who is a thresher and makes straw mats.  Fortunately, Lilly needs wheat for her family so she trades her mat for John's wheat.  John then trades his mat for Mark's clay pot and then trades the clay pot for Bob's fur cloak.  Then John goes home and falls asleep, exhausted from the effort of simply getting a single trade done.

To make trade easier, people invented money; an object that everyone in the economy wanted so that everyone would trade their productivity to obtain it.  Why does everyone in the economy trade for money?  Because they want the many products that they can obtain with money.

Money's other role is as a means of storing wealth (unconsumed excess production).  Over time, John's wealth will disappear.  Remember that John's wealth is his excess wheat.  If John leaves his wheat in storage long enough, his wheat will spoil which means he cannot eat it later nor can he trade with it.  Because money never spoils, John can trade his wheat for money and then store the money indefinitely.  

Money's Dependency


What is important to know about money is that money depends on one thing: production.  Production can exist without money but money is worthless without production.  Money and production are forever intertwined in this relationship.  If John doesn't produce wheat, all the money in the world buy you a single slice of bread.  No amount of hoping, wishing or praying can turn those pieces of paper in your wallet into bread you can eat.