Money ‘As If’ it was Magic


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Most of us who have money think of money ‘as if’ it was a commodity with magical properties. We believe that it is a kind of stuff that appreciates over time, that is instantly convertible into any good or service that we might demand (through a process called ‘shopping’), and that may be ‘produced’ in one time period and consumed in another.

Various metaphors have been used for this kind of thinking, with money having been likened to squirrels’ acorns, cans of baked beans (see my Acornomics on Scoop, 25 October 2013) or survivalists’ preserved peaches (Google: ‘Mayan prophecy “canned peaches”‘!). These metaphors all fall short, as none of these commodities are sufficiently magic. Unlike money subject to compound interest, acorns (for example) do not appreciate over time. Some alcoholic beverages appreciate over long periods, thanks to the process of fermentation enabled by that magic-like fungus, yeast. Yeast is thus a good metaphor for interest.

One concept used in advanced abstract economic growth modelling is economic putty-putty (yes, you may google it), which conveys a sense of plasticity while maintaining the fiction that economic output can be traded across time ‘as if’ old output (goods and services) was indistinguishable from new output.

The commodity metaphor I will use is necessarily a figment of the imagination. It’s ‘magic resin’, and gives us the neologism ‘resinomics’. Think of this yeast-infused resinous commodity as being amber-coloured and organic. Unlike gold, it appreciates continuously over time through a process of compound interest. Like gold bullion it may be stored in bulk or divided into small pieces of different sizes. Magic resin is instantly convertible (‘shopable’!) into a good or service appropriate to the amount of resin offered. Resin-money is destroyed when it is spent, conveying a sense of impoverishment through spending.

From a resinomic point of view, our individual and collective accumulations of resin (ie money) represent our economic wealth. The ‘economic problem’ is understood as how to make and accumulate as much resin as possible given limited resources. We understand production (and employment) as a process of ‘making money’. Thus, as businesses, we do things like catching fish in trawlers not because we want to catch fish, but because we want to ‘make’ money; money that we want because we understand it to behave as if it was magic resin.

Do you (dear reader) think of money in this way, as if it was magic resin? One simple test is the following question:

Which of these – ‘exports’ or ‘imports’ – represents the benefit of international trade?

If you were even tempted to answer ‘exports’ then this is the way that you most likely think about money. Of course it only takes a moment’s reflection to realise that the benefit of an exchange is what you get (‘imports’ in this example), and that the cost of an exchange is what you give up. We too easily think, however, that acquiring imports means that we give up the magic stuff that we regard as wealth.

TDB Recommends

It was good to see a commentator (Draco) to my last week’s posting on The Daily Blog (House Prices, Interest Rates and Money, 21 June 2015) agree that “money is a technology, not a commodity”, saying “all income needs to be spent in near real time to keep the economy moving“. While I’m sure I would differ with Draco on precisely how money works as a technology, at least he(?) understands the conundrum of money. Money, as a circulating medium, is a means that facilitates prosperity; money is an economic means, not an end in itself. Money is a means to wealth; it is not wealth.

Economic Problem Solving

To understand why so many economic issues are so intractable, we need a way of thinking about why so many people think about these problems through the particular frames that they choose to use. The classic case of confused economic thinking is the pension problem.

A good reference point here is David A Moss (a Harvard Business School professor), and his 2007 book A Concise Guide to Macroeconomics; What Managers, Executives and Students Need to Know (see relevant excerpts in Google Books). While Moss is no economic radical, he clearly understands the realities about wealth that most economics textbooks shy away from.

Moss has an excerpt called “The Pension Dilemma and the Centrality of Output”, at the end of his chapter on ‘Output’. That chapter clearly explains that economic output is ‘goods and services’, not money. In the excerpt he explains how there are no economic advantages in ‘pre-funded’ pension schemes (like the Australian pension fund) vis-à-vis ‘pay-as-you-go’ schemes (such as New Zealand Superannuation). Pre‑funded schemes are based on the principle that output saved today (eg 2015) can be consumed tomorrow (eg 2040) as if it was acorns or canned food or magic resin. The reality, however, is that whatever the scheme, tomorrow’s pensioners can only consume tomorrow’s output. They cannot consume today’s output tomorrow.

Moss says:

“The underlying problem is more straightforward than it seems. The amount of [current] output that a country produces is its ultimate budget constraint, regardless of how many stocks or bonds or social security cards may be floating around. Unless its output grows, a country cannot give more to its retirees without giving less to its workers. The key point to remember is that as a society, it is output, not financial wealth, that we have to rely on in the end.”

For Moss, and most economists who are not employed in the finance industry, it’s economic growth that matters, not financial claims (of which money is the most ‘liquid’). The appreciation of pension funds that ‘invest’ in speculative assets is as illusory as any financial bubble. Indeed, these pre-funded retirement funds are significant culprits in inflating our perceptions of our wealth, and in creating financial crises when the bubbles burst.

I disagree with Moss’s apparent emphasis on steady economic growth. Success for me is an ‘elastic’ economy that is able to produce more goods and services when it has to, and conserves resources when it can. There’s a much greater chance that we can support our populations in relative comfort in 2040 if we focus today on productivity growth through input conservation over the next decade or so, rather than doing our best to squander resources today that we could save (ie conserve) and use if necessary to provide sufficient goods and services tomorrow.


It is a common and sometimes useful abstraction to think of one thing ‘as if’ it were another. Many of us think of God ‘as if’ He was a man. Neoclassical economists think of ‘economic men’ ‘as if’ they were rational pleasure-maximising pain-minimising beings with substantial foresight. Most of us (especially politicians, journalists, business persons and finance sector professionals) think of money ‘as if’ it were Magic Resin, as described above. (See this article ‘Stock Takes: Super Fund kudos shows Govt folly‘ from today’s NZ Herald as a resinomist report of our own sovereign wealth fund as a font of appreciating resin.) While most economists think differently, too many, especially when they are formulating public policy, think ‘as if’ they believe that money is akin to magic resin.

The reality is that money is a very useful medium of exchange (a social technology), material wealth is the goods and services (output) that we produce and enjoy, and that all output has a lifespan (very short in the case of services; slow depreciation in the case of a house).

We can however use output today to facilitate more output tomorrow. That process is called (by economists) ‘investment’ (not to be confused with what finance sector professionals call “investment”). Investment is essentially a process of ‘planting’ rather than consuming purchased output, for example as planting seeds in the ground or as demanding ‘plant and equipment’ to facilitate future production. Merely holding unspent money (or financial assets which are claims on money) in the expectation that it will appreciate like maturing whisky is a practice built on quite erroneous thinking about money. Yet almost all our policy debates – from retirement income to Greek debt to inequality – are all too easily framed around the assumption that unspent money accumulates ‘as if’ it were magic stuff.


  1. IMO, saving money in itself is not really a problem over the longer term. The key issue is surely CREDIT. My problem with credit is that it spends EXACTLY like money, i.e. the two are “fungible” (is there a difference between what you can do with cash vs what you can with a credit card?). When credit is extended, especially when not backed by anything (i.e. created out of thin air via fractional reserve banking, for example, or deficits that will NEVER be paid back by design (see the US economy)), ALL existing actual money (i.e. private and public savings, pensions funds, insurance etc) must mathematically instantly become worth less, since there is now more “money” (i.e. actual money+credit) chasing the same amount of goods and services.
    There is intrinsically nothing wrong with saving any surplus wealth you have earned through your labour to be (presumably) spent at a future date (especially if the item you want to buy can’t possibly be paid for by what you earn on your weekly income) or to save for the inevitable day when you will no longer be productive to society (in that you create more wealth than you can immediately use and so produce capital growth) – I’m not remotely advocating HOARDING money here.
    The problem when monetary policy is deliberately inflationary (due to debt “stimulus” or QE, for example) is that any saved money gets increasingly worth less (i.e. have negative real interest rates) and so those that have savings then decide to chase asset classes that are perceived to retain (and even grow) their “hard-earned” money’s value – e.g. houses, stocks, commodities, bonds etc. This is generally highly detrimental to the broader economy for obvious reasons (i.e. these bubble “assets” are rarely what you could describe as productive and their value is thus largely or entirely fictitious).
    That’s my basic understanding of “money” and savings, and I’m almost certainly missing many important points – hopefully someone here will fill me in to what those are.

    • Charles Eisenstein wrote an appendix to his book “Sacred Economics” (look past the new-agey sounding title, it’s a ground-breaking book), in which he addressed the fractional reserve vs. full reserve debate. In a nutshell, his argument is that in practice there’s no difference because money only *exists* in the moment it is being used to facilitate a *transaction*. The money comes into existence when you get paid by someone, then vanishes again, then comes back into existence when you spend it (whether straight away or later), then vanishes again.

      To fit this in with Keith’s analogy, there’s no magic resin which can be “saved”. When a transaction takes place, some surplus goods or time that someone is willing to part with (ie output) changes hands, and a claim on output (“money”) is extinguished, either current output at the time you receive the money, or later output when you decide to spend “saved” money.

      Let’s go deeper, and ask what money is really for? Let’s say its a measure of reciprocity.

      So when 1% of society uses the financial system to recycle an increasingly large pile of claims on output (which they call “wealth” and claim to have “created”), instead of letting them be extinguished through spending which (among other things) funds paid jobs, two things happen.
      * One, potential transactions are prevented (eg hungry families, and edible food in supermarket dumpsters).
      * Two, the 1% claim that those hungry families are the ones letting down their side of the reciprocity (ie they owe a “debt”), and that families are going hungry because there’s not yet enough economic “growth” to fulfill everyone’s needs.

      Both of these claims are clearly false. It’s the 1% piling up all the money that owe a “debt” to balance the reciprocity, and rather than causing inflation, allowing more money to flow through the real economy merely allows more transactions to connect currently wasted stuff with the people who need it.

  2. There is this meme about that the pensioner population is somehow impoverishing future generations.

    Yet those people pay taxes. All sorts of taxes.

    And they are shoppers/consumers. They shift tax money from the government back to the ‘productive sector’ via the pensioners, either directly or indirectly.

    They also help to sustain services such as public transport, medical centres, insurance, and public dining…by using them.

    Many of them support for free, or nearly, children and grand children, financially and socially.

    Many volunteer – and for many years. If the Productive Few had to pay for those services – there wouldn’t be enough money available to provide even a fish-net of civility.

    No. Paying pensions is lost money being hoarded in baggies under the mattresses of those, those Pensioner People.

    I wonder how such a silly meme became loosed upon the shallow-minded.

  3. “Merely holding unspent money (or financial assets which are claims on money) in the expectation that it will appreciate like maturing whisky is a practice built on quite erroneous thinking about money. Yet almost all our policy debates – from retirement income to Greek debt to inequality – are all too easily framed around the assumption that unspent money accumulates ‘as if’ it were magic stuff.”

    But… it does!

    It’s called interest. Compounding interest particularly will make money grow while it simply sits doing nothing.

    So I don’t think the problem is that people misunderstand how money works. I think most people understand it quite well really (apart from how it’s created, another story that).

    Because money = survival (food and shelter are obtained via money, most of us couldn’t provide our own food and shelter needs entirely on our own) money drives a great amount of human behaviour.

    So many people do a huge number of horrible things they would rather not do for money. So many people go to a “job” in an “office” or other “workplace” every day, killing their souls, for money.

    How our money is structured, that it earns interest, drives much of the behaviour of our society. It becomes not just a means of exchange, but also a store of wealth.

    • Unless you have it stashed away “under the mattress” money is not sitting there. Banks take in deposits, much of it with short redemption times, and lend out long. This imbalance is why the authorities panic at the sniff of a run on deposits.

      • True, the banks lend it out and it is thereby circulated. A means of exchange.

        I guess what I mean by “doing nothing” is that the depositor sees the balance in their bank account, they’re not doing anything. That person is not doing any work, creating anything, they let their money “sit” in the bank and it accumulates.

        Although that money may be used for productive purposes by the borrower it is not being used directly for productive purposes by the lender, it is loaned by that person (via the bank as an intermediary). Yet the person lending received payment, while not being productive. And it is this aspect of lending / borrowing that is a structural feature of the system which drives much of our behaviour.

        And I am also aware that the money banks loan is not just depositors money. The banks create new money as credit when they make loans. And then they charge interest on it.

        Banks are in the business of creating money (as debt) and destroying money when the debt is repaid. Which is a structural feature of our monetary system that economists do not recognise and which most likely has a big impact on our economy, and our behaviour.

  4. I found this on AlJazeera today:

    When the people challenge the very core of the problem with our society, the control of money and how it is created, the authorities are very quick to react.

    And again, because money drives so much behaviour, because money for most = survival, it is money and how it is created by whom and with what structures which is the core root of much of our problems. Including environmental.

    What NZ needs is an alternative currency. Like, yesterday. I would prefer to see an interest free demurrage currency, because it would circulate quickly. Creating employment, matching our needs with our resources (particularly human needs of work and caring with excess labour).

    It needn’t even replace the NZDUSD. It could be a second currency, alongside NZDUSD. Maybe call it the “Kiwi”.

  5. Respectfully Keith’s analysis is incomplete. While I am too lazy, and probably insufficiently knowledgeable, to devote the amount of time and space required to adequately expand on this subject I will offer up a couple of teasers.
    The real issue in this and in many economic quandaries is not money itself but “value”. As Keith has pointed out a great flaw, one of many, with the neoliberal construct is the economic human. Why? One answer is the variability of value, i.e. it is dependent on time, person, circumstance to cover a few.
    Money is not purely a means of exchange it is also a store of value. Given that aggregation / accumulation of value / money is a required to launch great enterprises how can one compensate for time cost (e.g. forgone opportunity, erosion of value due to price movements) unless there is a return on the accumulated value / money. Islamic lending does so by claiming that the return is a share in the profits but closer examination shows this is a fudge. Now what is the efficient level of return on money is another extremely complex question but as a generalisation it should at least match the rate of inflation

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