The ancient story of Midas is a well-known story from Greek mythology. After Midas, King of Phrygia, found an old man Silenus in his garden and invited him in for some food and drink, Silenus granted Midas a meeting with Dionysus, the Greek god of wine, parties and more. Because of his hospitality (xenia in Greek), Dionysus granted Midas one wish. Since Phrygia wasn’t that wealthy for a kingdom, Midas asked if everything he touched would turn to gold. Dionysus granted his wish, but as we might already know, this didn’t turn out well. Everything he touched turned to gold, even his wife and daughter. The metaphor for this story is that gold in itself is not valuable. You cannot eat an apple made of gold and you cannot love a golden statue of a woman. It’s what you do with the gold that is important.
This brings me to the economic conception of mercantilism. Mercantilism can be explained by another story: the Hobbit. Smaug the Dragon is a mercantilist. He hoards his gold and doesn’t want to give anything away. Smaug has a lot of wealth, but he doesn’t do much with it. The equivalent character would be Mr. Krabs from SpongeBob. He also only wanted to make money and didn’t want to spend it.
Mercantilism is the view that there is only as much wealth in the world and that we should all collect it and hoard it. Thomas Munn argued that the way a nation could enrich itself was to focus on domestic economy for export.[1] So the least import as possible (because then they had to spend money) and export as much as possible. That way you could always increase the gold at home. This even went so far that during the British Empire, the British made the Chinese addicted to opium so they could trade opium for tea, instead of paying with gold for the tea.[2]
The conception of mercantilism still lives on to this day, even though writers like Adam Smith have intensely argued against it. It comes from the conception that wealth is a zero-sum game. There is only so much gold in this world and if we have more then others will have less and if we have less then others will have more. But this is a wrong conception of what wealth actually is. Wealth isn’t gold. You can’t do much with gold on its own. Just like Midas couldn’t eat his golden apple, we can’t eat golden coins. We need to spend those coins in order for money to be worth something. That is also a reason why if too much money is on the bank and not enough in circulation, then inflation will kick in and money will actually become less valuable. Money is only worth something in relation to other things, as a handy medium, not on its own. That’s just a piece of paper.
Wealth or capital (I will use these terms interchangeably) isn’t a zero-sum game; it isn’t a pie where everyone hastily needs to take a piece or there will no longer be any pieces. Capital can be seen as a pie which has the ability to shrink and grow. This changes the whole relation of trade. If you believe that wealth is a zero-sum game, then when you give your money to something, either you have benefited from that trade or the other has. Someone has to lose in this antagonistic relation. But with the growing and shrinking pie, both can lose, and both can win. This makes the trade relation not antagonistic but rather cooperative.
But how does wealth increase? Mercantilists, as we have seen, believe the only way wealth can increase is by discovering more of the valuable resource. Marx with his ‘labor theory of value’ (which we’ll cover in another post), believed that capital could only increase by the exploitation of the worker his or her ‘surplus value’. Both of these theories fall in the trap of believing that value is something objective rather than subjective. Money is only as much worth as it is because we have a collective idea that money is worth that much, not because of the intrinsic value of the paper. That is equating wealth with money, and we must try to not make that confusion.
Wealth can increase by making mutual beneficial trades. Say an industry needs coal to create the computer chips other companies then use to build computers. We have a four-way relationship here. Company A sells coal to company B, which B uses to make chips to sell to C, which C uses to make computers to sell to us D. All the actors benefit from this relation with one another. A can sell its coal and gets money it can use to reinvest. B can sell its chips for a profit. C can sell the computer and D now has a computer which he can now use to write an article about the conception of wealth. All happy and wealth has increased.
Wealth has increased because resources that would be useless alone (computer chips are useless without computers) become something more valuable. Again, Marx would claim that the added value came from the labor of workers, and he might have a point here. Only this doesn’t make sense when paintings are being sold by the millions, while others where at least as much effort has been put into aren’t even sold for a dollar. There is only value where we believe that there is value.
The idea that your wealth or capital could increase by spending money is quite an unintuitive notion. Obviously if you spend too much, your wealth will not increase. But if you invest, there is a higher chance your wealth will increase more. That is because wealth isn’t a zero-sum game. You don’t lose something per se if you spend money. Thinking about money as being valuable only in relation to other things, could actually increase the solidarity we feel towards other people. The antagonistic idea of economic relations benefit no one. Sure, the British got their tea, but they lost many lives during the opium wars with China. What could have happened if they just decided to trade their money instead of greedily hoarding it? We can now think about spending our money and have the possibility that we might even get better out of that investment. Money is not the goal (which people sometimes forget). You can use money to further your goal. That is something Midas didn’t see and it’s no wonder that later in the story he gets the ears of a donkey. He thought money was a zero-sum game.
[1] “The Ethics of Capitalism”, Daniel Halliday and John Trasher (2020)
[2] Halliday and Trasher (2020)
Elenchus Philosophy 