The Paradox of Burning Money
I often find myself revisiting a fascinating economic thought experiment I first wrote about years ago, which was articulated by Professor Alex Tabarrok of George Mason University. The question was simple: what happens to the economy if you destroy your own currency? His answer was counterintuitive: burning your cash makes everyone else a little bit richer. By producing value (earning money) but choosing not to consume it, you create a minuscule deflationary effect, slightly increasing the purchasing power of everyone else's money. The value you created is, in essence, gifted to society.
From Theory to National Practice
While theoretically elegant, the idea of individuals willingly setting fire to their earnings for the collective good is, of course, impractical. It runs counter to the basic human impulse for self-preservation and betterment. But the core principle—that a small, individual sacrifice can translate into a larger societal gain—holds a powerful lesson.
It prompts me to ask a more practical question: Can we, as a nation, agree to a collective, symbolic 'burning' of immediate gain for the sake of long-term, shared prosperity? Can millions of us agree to sacrifice just a little bit to enrich the lives of all?
A Virtuous Circle for India
The core idea I want to convey is this — I brought up this thought years ago. Seeing how our economy continues to grapple with inflation and competitiveness, it's striking how relevant that earlier insight still is. In my blog posts, 'How to break the Vicious Circle' and 'Automation is Inescapable', I had already predicted this challenge and proposed a solution. Reflecting on it today, I feel a renewed urgency to revisit it.
My proposal was to break the vicious cycle of wages chasing prices. Instead of demanding raises that match or exceed inflation—thereby fueling it further—what if we collectively agreed to a simple rule? What if annual wage and salary increases were capped at a percentage of the preceding year's GDP growth, for instance, 75%?
If the GDP grows by 8%, the maximum raise anyone receives is 6%. This isn't about destroying wealth; it's about allowing productivity to outpace compensation growth. This small, widespread act of restraint would create a powerful virtuous circle:
- Lower Production Costs: Our industries become more competitive on a global scale.
- Tamed Inflation: The constant upward pressure on prices is relieved.
- Increased Real Value: Over time, the money we earn buys more, leading to a genuine increase in the standard of living, rather than a nominal one that is immediately eroded by inflation.
Professor Tabarrok's idea, while extreme, serves as a powerful metaphor. The real choice isn't about burning banknotes. It's about whether we have the collective foresight and discipline to forgo a little today to build a vastly more stable and prosperous tomorrow for all.
Regards,
Hemen Parekh
Of course, if you wish, you can debate this topic with my Virtual Avatar at : hemenparekh.ai
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