If I begin talking about trade between two countries, your first image is likely to be Americans losing factory jobs as consumers increasingly purchase cheap Chinese products. Much of this image is correct, but while you will initially perceive it to be a bad thing, I argue it represents progress. After all, didn't the horse and wagon industry lose jobs to the automobile industry?
Vishnu's purseAt the southern tip of India the god Vishnu lives in a temple with several other dieties, where they have been accumulating wealth for thousands of years. In the eighteenth century a king who wished to repent for his sins donated all his riches to god, and these gods received the wealth of kings and the poor. Although the total wealth accumulated is unknown, the treasures—items like gold and jewelled structures, as well as Roman, Napoleonic, Mughal, and Dutch coins—are believed to be worth at least twenty billion dollars.
Figure 1—The Shree Padmanabhaswamy Temple
 Temple, Sri Padmanabhaswamy Temple.jpg)
Why don't the people take the treasure and use it for public projects, or to provide for the poor? Wouldn't the gods want the poor to be cared for? There are the obvious religious reasons against taking the wealth back from the gods, but some public choice economics at play also. If the Indian government took possession of the treasures, people believe it will go to corrupt politicians instead of the poor.
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Ganesh said that he gave the deity whatever money he could spare, which was sometimes as little as one rupee—roughly two cents. Everything in the temple, Ganesh said, came from devotees like him, and he added, “So of course it belongs to God!”.
Wouldn’t it be a good thing, I asked if the deity’s wealth were used to help people? By that logic, Ganesh said, valuable objects should also be removed from churches and mosques. Moreover, he insisted, the money would not “reach the right hands.” ... “If the government takes hold of the temple’s wealth, they will loot it,” Ganesh concluded. —Halpern, Jake. April 30, 2012. “The Secret of the Temple.” The New Yorker. |
Instead, of spending the gods' money, their treasures are stored in secured chambers within the temple where the gods dwell. The non-religious is likely to view the temple's treasures as destroyed wealth, much like taking twenty billion dollar bills and setting them on fire. So long as the treasures are permanently sealed, that is an apt metaphor. Perhaps storing riches within a vault is no different than spending the same amount of money to build a church—except the church provides services, whereas the treasures just sit in the dark). Here is the interesting thing: it may be the case that throwing twenty billion dollars of wealth into a permanently sealed vault is better than building a twenty billion dollar church, and in the end, very little wealth is actually lost.
The benefits of burning moneySuppose you have twenty billion dollars, and in a fit of insanity—or as we shall see, a fit of economic altruism—throw them into a pile a burn it. A video of your act is uploaded to YouTube.com and you are all the public can talk about for two weeks. How cruel of you to destroy billions of dollars that could help poor kids go to college or a single mother without health insurance receive the knee replacement she needs to keep her job. What the public neglects to observe (and what no economist has the bravery to assert) is that destroying a big chunk of money reduces the supply of money, and less money leads to lower prices. A month later everyone finds that each of their dollars can buy more goods and services. A teacher's salary of $35,000 now buys more stuff; the teacher essentially receives a raise! In fact, everyone's wealth increases by the same percentage, although they might not consciously know it, and if they could, are unlikely to credit you as the source of their new wealth.
Remember the money-velocity equation, which says that total income equals the total amount of money exchanged. In a simple world where the only economic activity in a single year consists of Sam paying $2 to Abigail for food, Abigail paying that $2 to Margaret for clothes, and Margaret paying that $2 to Sam in exchange for firewood. These $2 consist of two one-dollar bills, and are the only currency available. Three people earned $2 each, for a total income of $2*3 = $6. Notice also that the total amount of money, $2, was spent three times, for $6 of money-circulation.
Table 1—The Money-Velocity Equation
| M = money supply (# dollars available) |
M= 2 |
| V = money velocity (average # times each dollar is spent) |
V = 3 |
| P*Q = P1*Q1+P1*Q1+... = income (price of each good times quantity of each good, summed over all goods) |
P*Q = 2*1 + 2*1 + 2*1 = 6 |
| MV = PQ (total money exchanged equals total income earned) |
2*3 = 6 |
This equation can tell us how burning money translates into changes in the price level, given some assumptions. First, note that an economy's capacity, which refers to the amount of goods and services their factories, stores, workshops, and offices can produce, does not change as more or less money is available. If the U.S. government prints more money, tire factories will not suddenly become more productive, lawyers will not become smarter, and iPhone apps will not be easier to invent. Second, because of the first assumption, the wealth produced by an economy does not depend on the amount of money in circulation. If the U.S. doubled the number of dollar bills available prices would change, and this transition would take some getting-used-to, but in the end our lives will not be affected.
If this were not the case, governments around the world could become richer and richer simply by printing more money—why stop here, as we could convert to electronic money and increase the money supply to infinity! A few moments of contemptlation tells us the amount of money does not affect an economy, which means that the total goods and services produced (Q1, Q2, ...) does not change when more paper money is created, nor does it change when money is destroyed.
In the MV = PQ equation, if M is decreased by the destruction of money but Q remains constant, how is the equality preserved? One solution is for V to increase, which means that each dollar bill is spent more frequently in any given year. A more likely solution is that P rises. Indeed, except in cases of recession economists consider V to be roughly constant. The destruction of money then lowers prices, which means each person's salary buys more stuff. Each person's wealth increases in proportion to the dollar bills they earn.
↓MV=↓PQ
Does there seem to be an inconsistency? First I said someone destroys billions of dollars, then I said total wealth does not change, then I said wealth increases. The only inconsistency regards whose income we are talking about. If Donald Trump burns twenty billion dollar bills, he is forgoing the consumption of things that could be bought for twenty billion. Total wealth in the country does not change though, which means everyone else receives the twenty billion of stuff that Trump denied himself. It is like twenty people are to eat a cake and one person announces she will not eat a piece so that others can eat it. The size of the pie did not change, but each person's consumption of the pie did.
Consider an example. Trump burns a number of dollar bills equal to λ percent of the money supply. Prices decrease by λ as a result: (1-λ)MV=(1-λ)PQ. If you make $50,000 a year, how does your wealth change? Formerly, your salary purchased $50,000/P worth of stuff, where P is the average price of stuff. Now that P falls λ percent, your salary now buys $50,000/{P(1-λ)} stuff. With a little inspection you can see that the purchasing power of your salary increases by (1-λ)-1, which is positive because λ is between zero and one.
In fact, when Trump burns λ percent of the money supply, everyone's purchasing power rises by (1-λ)-1. If he had 10% of all the money and burned it we could then buy 0.9-1 = 1.11. Our wealth, measured in toys we can buy, rises 11%!
Back to VishnuHow does the burning of U.S. dollars relate to the Shree Padmanabhaswamy Temple treasures? The treasures consist of gold, diamonds, jewels, silver, and the like. All of this is a form of money, a form we call commodity money. They are not like wheat or gasoline, both of which cease to exist once they are consumed. A gold necklace stays gold and thus retains its value in gold whether it was just bought or has remained in the family for a thousand years. These treasures differ little from U.S. dollars. The treasures are more like money than they are jewelry.
There is a slight difference though. U.S. dollars are fiat money, in that it is inherently worthless (the fiber making up dollar bills has almost no intrinsic value). If 1,000 Americans threw 20 billion dollars into a permanetly sealed vault, it would be the same thing as them giving this 20 billion to other Americans. The same can be said for Hindus sealing 20 billion dollars worth of gold and diamonds in a vault, except for one thing. The Hindus would essentially be giving other Hindus almost 20 billion dollars worth of wealth, but some wealth is lost in the transfer. The lost wealth consists of the pleasure people receive wearing gold and diamond jewelry. Whatever the dollar value is to this pleasure, that is lost. The rest consists of a handover of wealth to other people.
For an economist, then, for the people as a whole, giving gold to a Hindu god isn't much of a sacrifice at all.
References(1) Landsburg, Steven E. 1995. The Armchair Economist: Economics & Everyday Life. Free Press: NY, NY.
(2)
Halpern, Jake. April 30, 2012. “The Secret of the Temple.”
The New Yorker.
Halpern, Jake. April 30, 2012. “The Secret of the Temple.”
The New Yorker.
