In Time is a Missed Opportunity

The recent blockbuster, In Time (2011), forgets to tell us the simple lesson that more money and QE, does not make us richer. The relative scarcity  of resources is still the same, yet the economy is distorted, as few benefit at the expense of many when the money enters the system.

Even though it governs our daily lives,”money” is seriously misunderstood by many. Nothing illustrates this more than the recent Hollywood blockbuster In Time (2011), starring Justin Timberlake and Amanda Seyfried. In this film people stop ageing at 25, but are engineered to live only one more year, having the means to earn more time keeps you alive. In Time, time itself, has become the currency.

There is an extensive discussion on Why using time as currency wouldn’t work… . Yet the reasons given are mostly technical or based on one big fallacy surrounding the quantity of money. The purpose of this post is to correct this fallacy, that more money means that everybody is richer (or able to buy more resources). More money simply make all goods more expensive, as the scarcity does not change. Nor will an increase in the money supply have an effect on interest rates in the long-run, as the proportion of borrowers and lenders is unchanged.

In the following clip Ray Cillian Murphy realizes the simple fact that more money (time) will make time less valuable, when he states that many standing by will soon be running again to save time.

Both Will Salas (Justin Timberlake) and Sylvia Weis (Amanda Seyfried) realize that prices increase, yet they then come to believe that simply throwing 1,000,000 more years into the system will have an effect.

In 1730, prior to Adam Smith, in the “Essay on the Nature of Trade in General”, Irish economist Richard Cantillon highlights that an increase in the quantity of money simply leads to more inflation. This insight is used by Hume in “Of Money” and “Of Interest”:

For suppose, that, by miracle, every man in GREAT BRITAIN should have five pounds slipped into his pocket in one night; this would much more than double the whole money that is at present in the kingdom; yet there would not next day, nor for some time, be any more lenders, nor any variation in the interest (Hume 1752).

As the general price level increases relative prices change in the mean time. This is known as the Cantillon effect. The Cantillon effect illustrates how inflation is not constant over time, different goods will change at different rates and to a different scale. We should expect consumer goods to rise fastest this is what the additional money is spent on first and in largest volume. In addition the additional cash is often badly invested, thus creating mal-investment and subsequent slumps.

Instead of being just another Sci-Fi thriller, “In Time” could have taught us a present day economics lesson. Currently central banks all over the world are flooding banks with cash. Bankers will benfit from first use as yet others will loose due to increased prices of consumer goods.