Credit Where It’s Due
Exploration
The Industrial Revolution
What is Money For?
The Unifying Theme: Money
And What To Do With It
• Ancient world had a static concept of
wealth: gold, land, slaves
• Modern world defines wealth as investment
and production
• New Institutions to Manage Wealth in New
Ways
• New Routes to Power and Status
How the Universe Changed
Nature of wealth
• Static vs. Dynamic
Views of Interest
• Exploitation vs. Shared Risk
Routes to status
• Nobility or Clergy vs. Trade and
Industry
Nature of Work
• Ad Hoc vs. Scheduled
New Institutions
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Joint Stock Companies
Limited Liability Corporations
National Banks
Insurance
Limited Liability Corporations
• Corp. or Inc. (US)
• Ltd. (Limited – Great Britain)
• GmbH (Gemeinschaft mit beschraenkter
Haftung – Germany)
• S.A. (Sociedad Anonima –Spanish
countries)
Econ 101
Econ 101 (Continued)
About Insurance
• You can insure your car against fire, theft,
and collision
• You can’t insure your car against wearing
out
• Why Not?
About Insurance
• Most cars will not be burned, stolen, or
wrecked
• Every car will wear out
• Therefore everyone would have to pay
premiums sufficient to cover the cost of a
new car
• Why not just save instead?
About Insurance
• Insurance is for rare but catastrophic events
– A large number of people pay a small amount
– A small number of unlucky people collect a
large amount
• Insurance cannot cover routine problems
• Example: Dental Insurance - expensive
– Most dental expenses are routine
– Large expenses often foreseeable (crowns, etc.)
Health Insurance
• Health insurance ca. 1950
– Deliver babies
– Minor operations (appendix, tonsils)
– Terminal Care
• Win-win proposition
– Relatively inexpensive for employer
– Highly valued by employees
Health Care in 1950
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No open-heart surgery
No organ transplants
No bone-marrow transplants
No joint replacements
No MRI, CAT, PET
Blood storage very recent
Leukemia invariably fatal
No AIDS or Alzheimer’s
What Nobody Wants to Hear:
• If an average patient needs $10,000 in
lifetime health care
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Over a 25-year working career = $400/year
Comes to $33/month
Split with employer = $17/month
The healthy subsidize the sick
• If an average patient needs $1,000,000 in
lifetime health care…..
Interest
• Forbidden by Classical world, Bible
• Jews could lend at interest to Gentiles but
not Jews
• New view: repayment for shared risk
• Conceals some real costs
– Costs about 50 cents to clear a check
– It costs money to keep money in the bank
A New View of Wealth
• Unlike matter and energy, wealth is not
conserved
• Wealth can be created (within limits)
• Wealth can be destroyed
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Physical Destruction (War, Disaster)
Death
Government Policy
Change in Culture, Taste, Interests, Confidence
“Power is the Ultimate Aphrodisiac”
-Henry Kissinger
• The Name of the Game is Power, Privilege,
Status, Comfort, not money per se
• Examples
– Nomenklatura, former Soviet Union
– Khmer Rouge Cambodia
– Anti-Monopoly