Money usually begins with the physical.  It is where we have the most direct contact with money and the stuff we buy.  We can feel the coins and paper currency.  We write checks make bank deposits, use our charge cards.  We see, touch, hear and smell our cars, food, fuel, houses, iPods, computers, books, clothes and all the other many toys, diversions and necessities of life.  Physical money is not at all interior.  It is by definition exterior yet has no meaning or purpose without some interior reciprocal quality or faculty.  A physical manifestation is defined and realized by how we perceive and value that thing.  Think of the old adage “If a tree falls in a forest and no one hears it does it make a sound?”

I always thought that was a bit silly.  “Of course it makes a sound.  The physical laws of nature don’t stop to prove some sort of pseudo philosophical nonsense,” I would think to myself in smug self-confidence.  Of course that misses the whole point of the message.  Whatever occurs in the physical, according to whatever physical laws, only has value and meaning through our experience.  Physical money is distinct and complete in itself.  Money is created and opens up the potential for human development and comfort.

During the last two hundred years physical wealth and the well being that comes from it has exploded throughout the world.  While poverty and deprivation still exists in far too many areas of the globe the advances for much of the world’s population, especially in the developed countries, has been staggering.  Advances in medicine and more simple steps like providing clean water have diminished disease and increased life span.

Yet with the power and impact of physical money in our lives it has failed to provide the answer that it was once thought to hold.  When economics, the science of money, first became prominent in the modern world in the late eighteenth century it was based upon moral and political philosophy.  It sought to answer the question of what is right and good action in the field of commerce.  By the mid nineteenth century economists had adopted a scientific mathematical paradigm and sought to develop rigid models that would define the action of money, markets, and people in predictable ways.  Models were created that assumed human actions regardless of the fact that people seldom acted in that fashion.  Economists seem to have no problem putting the round peg in the square hole if it supports their model.

Science today explores the sub atomic levels and attempts to blend conflicting theories about how the world works.  They no longer have the comfort of a stable universe operating in clearly defined predictable ways.  Economists are just beginning to realize that physical money is equally as turbulent and not rigidly confined by mathematical models.

The failure of traditional economics to accurately define, model and predict money has been well documented in this century.  Following the world depression of the twenties and thirties and the cataclysmic destruction of World War II competing economic theories vied for preeminence on the world stage.  The proving ground was to be the former colonial nations of Africa, and the Middle and Far East, which had fallen far behind developed western nations during the period of mercantile colonialism.  They had served as abundant sources for the raw materials that had fueled the western industrial machine but had failed to develop any means of production themselves and were desperately in need of economic development.

According to traditional economic theory all that was required to foster development was the required capital and the labor to support the newly created means of production, the roads, dams, plants and machinery that would provide the means for economic expansion.  Sadly the money spent did not herald a new era of economic growth for most of these nations and they have remained mired in poverty and debt.  More modern economic theory acknowledges the need for creativity and intellectual capital to compliment the physical investment in plant and equipment.  Numbers alone do not define the wealth of human experience.

Or as I like to say, “The value of a realized life is not expressed in a positive alpha”.

Mike Ryan CFP®

This entry was posted on Tuesday, March 31st, 2009 at 5:02 pm and is filed under Mike Ryan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.