The current political obsession with public debt has crowded out any sensible consideration of the other side of the balance sheet, the quality of the assets which that debt is financing. We are too concerned with money to think about wealth.

In the ABC television coverage of the 2004 federal election, when Howard’s victory was becoming clear, an exhilarated supporter explained to the reporters why he had voted for the Coalition:

‘It’s because I’ve become wealthy: when John Howard was elected in 1996, my house was worth only $200,000; it is now worth $800,000.’

Presumably his house in 2004 was much the same as it had been in 1996. In all probability it was a little more run down by the ravages of weather, children and guests. Was he really more wealthy?

It’s easy to ridicule a political zealot who doesn’t understand asset price inflation, but his confusion of money with wealth is commonplace. Financial commentators report with enthusiasm when share prices rise, even when there has been no change in a company’s material conditions. Financial salespeople have re-named themselves as ‘wealth managers’.  And, of course, the global financial crisis is just that – a financial crisis. Although failures in the financial sector by now have affected the real economy, its origins were financial. There has been no tsunami or war wiping out our physical infrastructure and we still have the same human assets of skills and experience.

In the absence of physical destruction, environmental catastrophes or, on the positive side, major technological breakthroughs, our wealth does not vary much over the short term. Money, by contrast, as a measure of wealth, is highly volatile, as any shopper in Zimbabwe knows.

If we are to make wise personal and investment decisions, if we are not to be carried away with illusions caused by asset price inflation and deflation, and if we are to understand the real meanings of terms like ‘national debt’, we need to understand money, and to distinguish it from those things it denotes – our real wealth.

In our human evolution, money is a relatively new phenomenon, and, while it has given us huge convenience in terms of facilitating trade and investment, it has often been misunderstood.

We read in the Christian Bible ‘For the love of money is the root of all evil’ (Timothy 6:10). This may be read, by the left, as a warning to the rich; perhaps it is. But it is also sound practical advice – to remember that money, itself, is fairly useless.

Timothy’s Epistle had no influence, however, on the devout Portuguese and Spanish conquistadores who invaded South America in the fifteenth and sixteenth centuries. They stole so much gold from the Incas that they caused a huge bout of inflation when they returned to Europe. Their plunder, carried out at huge human cost, had the same effect as Robert Mugabe running the note printing presses overtime.

Five hundred years on we are no wiser. There are periodic financial crises, such as the Great Depression, and while we do seem to learn for a while, we soon forget. Hugh Stretton, in his textbook on economics, points to changing notions of corporate objectives. The early management theorists, such as Chester Barnard, referred to corporations having complex objectives, generally in terms of making or doing something for society’s benefit. Of course they had to make a profit, but that wasn’t the prime objective; it was merely a precondition for survival.

But, from the 1980s to the present day, making money has become the prime objective of many corporations. Those corporations which make long-term investments with modest but assured returns, are punished on the stock market.

Even governments have become obsessed with money: our government budget papers, which used to be full of explanation about what the government is doing, are now full of financial data. The current political obsession with public debt has crowded out any sensible consideration of the other side of the balance sheet, the quality of the assets which that debt is financing. We are too concerned with money to think about wealth.

Personally, I was struck a few years ago when a former student visited our university to thank his lecturers for his learning. He had done very well, his family having taken over a business in a growth market, and he hosted a dinner for us in the University restaurant. In his speech he thanked us all, and then went on to explain how, when his family took over this business, it had been entirely product and service focussed. As best as I can reconstruct his following words, he went on to say ‘We transformed it into a real business, about making money’.

None of us responded, but we all felt that somewhere in our teaching we had failed. As teachers we had that same feeling as a parent has on learning that a child has joined an extremist religious sect. We were witness to the early emergence of what was to become the Global Financial Crisis.

Some Winter reading:

• On corporate objectives, Chapter 29 “Theories about firms’ purposes” of Hugh Stretton Economics: a new introduction (UNSW Press 2000).
• On what money is, a very clear work is John Kenneth Galbraith Money, whence it came, where it went (Penguin 1975).
• On the history of money, Niall Ferguson The Ascent of Money: A Financial History of the World.  (Penguin Press, NY, 2008). This has recently been shown as a series on ABC Television, and a DVD of the series will soon be available in ABC shops.