Humankind & Resource Distribution—V: Is Money servant or master?

Money is among humanity’s most ingenious inventions and one of its most dangerous instruments of domination. It allows a farmer to exchange a harvest for medicine without searching for a doctor who wants grain. It permits savings to be carried into the future, investment to be financed and complex production to be coordinated. Yet the same instrument can confer command over labour, public policy and essential resources upon those whose financial claims bear little relationship to their contribution to production.

Part IV of this series examined labour as the foundation of productive wealth. The question now is why the means of paying for labour, and of financing the enterprises that employ it, so often acquire power over the people and activities they were designed to serve. To answer it, we must distinguish money from wealth, credit from productive capacity and financial income from genuine social gain.

Money is a unit of account, a medium of exchange and a store of value. These functions are indispensable in a specialised economy. But money itself does not cultivate a field, manufacture a machine or educate a child. Its purchasing power rests upon society’s capacity to supply goods and services, and upon institutions that sustain confidence in its acceptance. A nation may create additional monetary claims without increasing its real capacity to meet human needs. When spending outruns available output, the resulting pressure may appear in prices, imports or financial instability.

The distinction was familiar, in different language, to classical political economists. Adam Smith distinguished the circulating instrument from the productive resources it helped mobilise. Karl Polanyi later warned that treating land, labour and money as if they were ordinary commodities could expose society to destructive instability. His historical interpretation remains contested, but his central concern survives: economic coordination cannot be judged solely by the expansion of transactions.[1]

Modern money is not merely coins or notes issued by a government. Commercial bank lending creates deposits, subject to regulation, capital, liquidity, credit demand and repayment. The Bank of England has explained that banks do not simply lend out a fixed stock of deposits previously placed with them. They create purchasing power when they extend credit, although this does not give them unlimited capacity to lend.[2]

This institutional reality has major consequences for distribution. Credit determines which investments become possible today and which households must postpone essential purchases. A viable small manufacturer denied working capital may remain stagnant, while a politically connected borrower obtains favourable terms. A household financing education may expand future earning capacity; another borrowing at punishing rates merely to purchase food may become trapped in recurring repayments.

The economic significance of debt cannot be settled by declaring all borrowing productive or all borrowing exploitative. The decisive questions are what credit finances, who bears the risks, whether repayment obligations are sustainable and whether the resulting benefits reach those whose labour and taxes support the system.

John Maynard Keynes understood that uncertainty and the desire to hold liquid assets could restrain investment even when productive opportunities existed. Hyman Minsky subsequently explored how periods of apparent financial stability could encourage increasingly fragile borrowing arrangements. Their arguments differ in important respects, but both warn against treating finance as a neutral mechanism automatically converting savings into socially desirable investment.[3]

When financial returns become easier to obtain through trading existing assets than through developing productive capacity, the allocation of talent and capital may shift. Rising land prices can enrich owners without increasing the number of homes. A corporation can improve its market valuation through financial engineering while neglecting worker training. Public authorities may celebrate expanding credit even when much of it finances speculation or the refinancing of earlier debts.

None of these outcomes follows inevitably from the existence of banks or capital markets. Financial institutions can mobilise savings, spread risk, support innovation and connect enterprises with investors. The issue is the structure of incentives and the quality of regulation. Credit directed towards productive enterprise differs materially from credit secured by privileged access to public guarantees, captive borrowers or artificially restricted assets.

Distribution enters the picture before income is earned. Ownership of collateral, access to banking, credit history and political influence affect who can finance an idea. Those already possessing assets can often borrow on better terms, acquire additional assets and reinforce their advantage. Those without collateral may pay more for smaller loans, despite having equally valuable skills or business opportunities.

This is why financial inclusion cannot be measured by the number of accounts alone. An account that receives wages but offers no affordable savings, insurance or enterprise finance may improve convenience without altering economic power.

Meaningful inclusion requires fair terms, transparent pricing, accessible dispute resolution and institutions capable of financing people whose principal assets are knowledge, work and trust.

The contrast becomes especially clear in Pakistan. Governments repeatedly borrow to meet recurrent obligations while productive firms face expensive credit, uncertain taxation and unreliable infrastructure. Banks may find government securities commercially attractive, particularly when public borrowing requirements are large. Such investments can help finance the state and manage bank liquidity; they can also, under some conditions, reduce incentives to seek out riskier productive lending. Whether crowding-out occurs must be examined empirically, not assumed in every period.

Pakistan’s public-debt problem is consequently more than an accounting dispute about interest expenditure. It concerns what borrowed resources build, which citizens ultimately service the obligations and whether future taxpayers inherit stronger productive capacity or merely the costs of present consumption. Debt used for reliable power, public health, education or transport can create assets benefiting successive generations. Debt financing avoidable privilege and administrative inefficiency offers a very different legacy.

Inflation compounds the problem. Workers whose wages adjust slowly can lose purchasing power while owners of certain assets are better positioned to preserve wealth. The effects vary by household, debt position and asset holdings; borrowers with fixed nominal obligations may sometimes gain from unexpected inflation. But persistent monetary instability makes long-term planning harder for workers and small enterprises, and it weakens confidence in public institutions.

A more equitable monetary order would not abolish credit or suppress legitimate returns on investment. It would require banks to assess productive potential rather than political proximity, regulators to contain systemic risks, governments to disclose the uses and costs of borrowing, and competition authorities to prevent financial concentration from becoming a source of unaccountable power.

Cooperative and community-based financial institutions deserve serious examination in this context. Their governance arrangements can sometimes align lending with local enterprise and member welfare, though they are not immune from weak management, capture or default.

The relevant question is not whether an institution carries a socially attractive label, but whether its ownership, incentives, risk controls and measurable outcomes improve access and productive opportunity.[4]

The International Monetary Fund’s research on financial development similarly cautions that finance can support growth but that its benefits depend on institutional quality and that excessive financial deepening may create vulnerabilities. More finance is not automatically better finance.[5]

For our wider inquiry, the essential principle is that money represents a claim upon real resources. Its legitimacy as an economic institution depends upon whether those claims encourage useful production, distribute opportunity and protect the conditions of human freedom. When claims multiply independently of social contribution, or when public authority guarantees private gains while transferring losses to workers and taxpayers, money ceases to be merely a servant of exchange.

The next Part VI will examine trade: the productive cooperation through which different skills and regions enrich one another, and the circumstances in which commercial power converts exchange into extraction.

Money is a remarkable social instrument. A civilisation begins to lose control of it when the multiplication of financial claims becomes more important than the improvement of human lives.

Endnotes

[1] Karl Polanyi, The Great Transformation (1944), chapters on fictitious commodities; Adam Smith, The Wealth of Nations (1776), Book II.

[2] Bank of England, “Money creation in the modern economy,” Quarterly Bulletin, 2014 Q1.

[3] John Maynard Keynes, The General Theory of Employment, Interest and Money (1936); Hyman P. Minsky, Stabilizing an Unstable Economy (1986).

[4] International Labour Organization, Social Finance Programme, research and resources on inclusive and cooperative finance.

[5] Sahay et al., “Rethinking Financial Deepening: Stability and Growth in Emerging Markets,” IMF Staff Discussion Note 15/08 (2015).

[To be continued]

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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds an LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.