People who are otherwise quite smart become suddenly stupid when the subject is money. I don’t mean they manage their own money poorly, although that is often the case. I mean that they don’t actually understand what money is.

For instance, we are all now painfully aware that Barack Obama believes in some degree of socialism, given his predilection to favor “spreading the wealth around.” The idea is simple. Wealthy people have a lot, and poor people don’t. Money solves problems, so why not take some from the rich to give to the poor? Robin Hood was a hero, and that’s what he did, right? After all (and this is the vital part), those who are rich owe back to the society that’s given them so much.

Wait, what was that last part again?

People who make a lot of money owe a debt to society to use their money for good, and that’s why it’s okay to tax them more heavily in order to do the good things that need doing. This error is the source of the biggest errors people make in thinking about money and government.

In truth, it’s simple. The wealthy don’t owe us. Literally, we owe them. That’s what money means.

If I have $50,000 in a bank somewhere, that means that society owes me goods and services in the amount of $50,000. If I spend $20,000 of it on a car, society doesn’t owe me as much anymore because they’ve compensated me in the form of that car. Everyone collectively still owes me $30,000, which I can collect on in a variety of ways.

Money is an IOU from society that we give people when they give us things we desire or do things for us we want. So when a person makes a lot of money, it means that he has done beneficial things for a lot of people. If he accumulates these IOUs in a storage facility somewhere, he is amassing wealth not because he owes society, but precisely because society owes him the value of all those accumulated and uncollected debts.

To put the point a little more bluntly, people who have debt are the ones who truly owe back to society. That’s what debt means. You’ve enjoyed goods or services that you haven’t yet earned. And when you’ve created enough value in the eyes of other people, they’ll trade their stored-up credit to you and you can be debt-free, neither owing society nor being owed by society.

The thing about money is that it measures value. When I pay you $100 for an item, I am admitting that it is worth about twice as much to me in my life as something else I only pay $50 for. When people pay $12 to see a movie, they’re saying that a movie is worth about four gallons of gas. And when someone sells a million people movie tickets, he makes a lot of money because he did a million favors.

In what sense, precisely, should someone who delivers the finished experience of watching a movie to a million people then be obligated to those people to give them back any portion of the money they freely paid him? In reality, because he has worked while they have leisured, they now owe him. That’s why he can go back to them and let them cut his hair, change his oil, and weed his garden in exchange for some of those dollars.

Here’s a quick test to see whether you are grasping this idea. Who contributes more value to society: a person who makes $100,000 or a person who makes $20,000? If this question is at all difficult for you, it’s because you’re secretly at war with yourself. You despise people who make a lot of money, yet you daily affirm the social value of making a lot of money when you pay more money for the things you want more.

Also, just to admit the obvious, one may also do beneficial things without receiving money. Friends, parents, and volunteers do this all the time. But when someone gives you money, you know one thing: you have benefited them.

“But what if the man who earns $100k does so through pornography and the $20k guy teaches kindergarten?” Alright. “But what if the $100k guy is a doctor and the $20k guy sells cigarettes?” Don’t cherry-pick your examples. Of course people make bad decisions about value, but other people make good decisions about value. That’s the idea of letting people make and spend their own money. The alternative is socialism.

But here’s one final error that may be plaguing some of you. When people make a lot of money, doesn’t that mean that other people become poor? Continued...