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Home History of Money Demerits of Money


Demerits of Money:


The money as medium of exchange played an important role by having put to an end the demerits of barter system. But if we observe the present day problems we find that money also played an important role in creating and promoting these problems. As it is said, "money can serve as a good slave, but not as a good master". Again; "money is like an elephant which performs many a functions and its presence in the circus makes the circus attractive and colorful. But if this elephant gets mad it will create a disaster for the spectators". In the same way, Prof. J.S. Mill says, "If money gets out of order it would give rise to so many distinctive and independent effects". It means that J.S. Mill wanted to control money. Now we see in detail the side merits and dangers of money.


(i) Misallocation of Resources: Under capitalistic economies the resources arc allocated under the signal of money. But because of price distortions and market imperfections the prices do not represent the real value of resources, particularly when due to monopolistic forces the artificial shortage of resources and goods is created. Accordingly, the allocation of resources on the basis of such prices will be un-optimal.


(ii) Unequal Income Distribution: The capitalist system is run on the basis of wages, interest, profit and rent. Such all is represented through money. But under capitalistic economies the resources are misallocated. Such misallocation of resources is attributed to the motive of self interest. The self interest often bypasses the social interest. As a result, the monopolies in the business grow. The people engage themselves in hoarding, speculation and artificial shortages. As a result, the businessmen cum-hoarders earn extra-ordinary profits. While such state of affairs worstly affects purchasing power of the poor buyers. Consequently, the rich get rich and the poor get poor. In other words, there develops unequal income distribution in the society.


All such is attributed to money. This is the reason that Karl Marx and other socialist economists were highly against money. In this respect Karl Marx writes, "Money is like a common whore and it can be accorded as a common pimp for the people and the nations". He further says, "what a capitalist produces with the help of labor of a worker its major part is pocketed by the capitalist himself which Marx calls "Surplus value" such surplus value is responsible for economic inequalities".


(iii) Trade Cycles: So many economists like Hawtry, Friedman and Shwartz are of the view that trade cycles are generated due to money. In other words, money is responsible for business fluctuations. As during boom when MEC is higher the producers in order to earn more profits increase production. For this purpose, they pay higher prices to factors and inputs. They are prepared to pay even the higher interest rate. But in such situation, purchasing power of the people increases more than the increase in production. In this way, there generates inflation in the society. Because of inflation, a 'Mouse-Cat' game starts regarding rise in prices and wages. The laboring class demands for higher wages, they go on strikes; and the producers follow the policy of lock-outs. The banks ask for repayment of loans. The combined result of this phenomenon is fall in profits of the producers. In this way, the economic activities shrink and the economy experiences depression. All this shows that money is responsible for inflation and deflation.


(iv) Fluctuations in the Value of Money: We told earlier that money is like a measure which can be used to measure the values of goods and services. We also told that if money is accorded as a yardstick it often goes on to shrink. It means that value of money often goes on to fall. Now a days, govts. do not have control over their expenditures. As a result, they have to face rising budget deficit While for the sake of economic development govts., are bound to follow a cheap monetary policy. Thus, because of these factors the supply of money goes on to rise persistently. While due to structural problems the production remains lagging. Consequently, the prices in a society go on rising. Whenever, the prices rise the value of money falls. The rising prices badly affect the fixed income group whereas the businessmen and merchants remain benefited. In this way, the gap between the rich and the poor is widened leading to so many social and economic problems.


(v) Deficit in Balance of Payments: In the presence of barter system the goods were traded directly both in case of domestic trade as well as in case of foreign trade. As a result, the world trade was least complicated under gold standard, the transactions were made on the basis of gold. While under Bretton-Woods system, gold, dollar and pound were the components of world's liquidity. But with the passage of time the role of gold in world trade has diminished. As a result, all of the world trade is transacted on the basis of US dollar. And in case of most of the countries, the demand for dollars is far more than supply of dollars. Accordingly, they are facing deficit in their BOPs.


To remove such deficit the countries have to devalue their currencies-or borrow from IMF. Because of these factors the poor and the developing countries are getting poor while the rich countries are getting rich. Thus the economists are of the view that whether it is domestic disparity or international disparity both are due to Money.


(vi) Social Disadvantages of Money: In addition to above problems of money, money has led to create so many social disadvantages. In modern societies, the corruption, bribery, difference between social and private benefit, such all is attributed to money. To earn money each proper and improper step is taken. The craze to earn more money has disrupted the family life. The wealthy person is valued in a society while the man without money is highly discarded. Once Ruskin said, "The ghost of money has captured our souls. Any religion and philosophy of the world does not have power to oust it". The German economist Lud-wig Von Mises, in his book "The Theory of Money and Credit" writes: "Money is held responsible for theft, dishonesty, corruption and murder.

Money is objected when a prostitute involves in prostitution and a corrupt judge shatters the law and justice".


Some people are of the view that the negative role of money we presented -earlier is based upon exaggeration. The smuggling, corruption, men, bribery and ransom cases are due to behavior of the people, not due to money itself. Money is a medium of exchange, it is store of value; and it is a means of deferred payments. Money is in no way responsible for social unrest; the real responsibility is with the people who are over-ambitious to earn money through dis-social, uneconomic and illegal means.


Relevant Articles:


Barter System and its Inconvenience
Evolution of Money and Different Standards of Payments
Definition and Concept of Money
Definition of Money According to Classical Economists
Definition of Money According to Keynesian Economists
Definition of Money According to Monetarists
Representative Money or Modern Money/Plastic Money/Electronic Money
Functions of Money
Role and Importance of Money
Properties/Qualities/Merits of Good Money
Demerits of Money
Money and Near Money

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money

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