Why do we think that we should be able to “invest” money and get more money back than we supplied?
Let’s take a look at money.
Money is the tool we use to manage wealth. Wealth is the stuff that has intrinsic value for us because it meets a need or desire: air, water, food, shelter, clothing, heath, companionship, meaningful occupation, aesthetic satisfaction.
So, money is not, in itself, what we need or want. Money is what we use to get what we need and want. At it’s foundation, money gets its value from the wealth it represents. For instance, the value of the amount of money it costs to buy a meal is the value of that meal.
For money to have value, it must be linked to something of intrinsic value: wealth.
Let’s take a look at lending and investing.
In general terms, a loan is an arrangement whereby one person (or company) supplies money to another, under specific terms that require the repayment of the money plus some more (interest) over a specific period of time. In most cases there is “collateral”, i.e. something that is worth the amount of the loan that can be seized and sold to pay for the debt if the borrower does not pay as required.
An investment is an arrangement whereby a person (or company) – the “investor” – supplies money to another for a speculative venture. If the venture is profitable, some portion of the profits from the venture is returned to the provider of the “investment money”. If the venture is not profitable, the investor may receive some money back or none at all.
So, what is the basis for the idea that simply by providing money to someone else we should receive back more money than we provided? Getting more money in return would imply that more wealth was created, or that the person we provided the money to has given up some of the wealth that they already had.
In some cases the person we supplied the money to might use it to increase wealth – for example, a chair maker might use the money to buy a new tool that allows her to produce more chairs in the same amount of time. This means she can sell more chairs, and increase her income. For that she is willing to give us some of the increased income.
Note that the money did not increase wealth.
The chair maker, using raw materials, the tool she is able to get with the money we loan her (invest), and her labor, can create new wealth. We get more money back than we provide because she is successful in increasing wealth, and she shares her increased income with us.
But if she is not able to increase her production of chairs, she does not increase wealth. In that case, why would we get back more money than we “invested?”
If it was a loan, we can force her to pay us anyway, either by giving up some of her income or seizing the collateral and selling it. So, we have increased our wealth by taking wealth from someone else. For us, it was a secured extraction of existing wealth from someone else. For the chairmaker, is was simply gambling.
If it was an investment, we may be able to recover some of our investment by selling the tool the chair maker bought, but we will probably lose at least some of our original investment and all of our profit. For both the investor and the chairmaker it was a gamble, and we both lost.
In none of the instances above did our money “make” money.
Even in the instance when we were successful, and received more money back than we invested, it was the efforts of a person, combined with raw materials and tools, which increased wealth, and therefore “made” money.
Money does not make money.
And why should it?
What do you think?