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"If a man has an apartment stacked to the ceiling with newspapers we call him crazy. If a woman has a trailer house full of cats we call her nuts. But when people pathologically hoard so much cash that they impoverish the entire nation, we put them on the cover of Fortune magazine and pretend that they are role models." - B. Lester

My aunt posted this to her facebook page. She believes that people are poor because some other people are rich. I know that is totally fallacious, but I don't know how to explain it to her. Can any one help me to explain it to her?

Giskard
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Bob L.
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    A good answer here should distinguish between being rich, and hoarding cash. – FooBar Jun 06 '17 at 12:01
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    It's not totally fallacious. If you allow the top 1% of people to control as much wealth as the bottom 90% possess collectively, issues with efficiently leveraging the whole of that wealth tend to follow. You've got a bottleneck and aren't taking maximum advantage of the parallelism available within the system (even if rich people don't hoard). To say nothing of the ethical questions around whether or not it's actually right or socially beneficial to allow so few to control so much. – aroth Jun 06 '17 at 12:03
  • It's not really fallacious. Money represents ressources, and earth's ressources are finite. So by definition those that have money deny others the use of those ressources (Money's sole purpose, one can argue). And those who have a lot of it have a bigger scale effect in that sense. – Magisch Jun 06 '17 at 12:45
  • I once wondered something like this, so I went to wolframalpha.com and starting trying things like M-[one of the money supplies] / population of the US. Even the broader money supplies were FAR less per capita that I would have thought. So when it stops flowing... – steve_0804 Jun 06 '17 at 13:38
  • Also, investments vs. hoarding, as I see it: Investments aren't "money," they're financial products, with varying degrees of liquid value. If someone keeps a portfolio full of financial products that produce monthly/quarterly/etc. cash, which the person then spends (on costs of living, more financial products, etc.), I'd dare say they're sustaining the liquidity of the economy while only "hoarding" certain financial products. (Btw, I agree with your aunt....but I'm not sure she knows what "hoarding cash" would actually mean. And the person from the quote probably ought to know better.) – steve_0804 Jun 06 '17 at 13:48
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    If a man has an apartment stacked to the ceiling with cash we call him totally crazy!!! And he's never going to the cover of any magazine (maybe some newspaper if he's got robbed in some crazy way)...

    Rich people isn't people that stacks a lot of money...

    Rich people are rich because they (or their ancestors) allocate scarce resources (inclunding money) effectively to better suits other peoples needs... and receive a return on the investment made...

    note that i am excluding people that get rich by excuse means...

     – Lucas Oliveira Jun 06 '17 at 14:12
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    Another thought: Consider the transaction of acquiring an investment. I have cash and want more shares of, say, Boeing. You have shares that you want to sell. I give you money (via a brokerage, but let's gloss over that part) and you give me shares. Now I have shares and you have money. Money has flowed, and you spend that money as you see fit. An exception is the IPO, where the cash goes to the issuing firm; they generally spend it on labor, supply chain, capital investments, etc. My point is, I'm not sure a mindset of "wealth means hoarding cash" reflects reality. – steve_0804 Jun 06 '17 at 14:29
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    You might be interested to read Bertrand Russell's essay In Praise of Idleness. "What a man earns he usually spends, and in spending he gives employment. As long as a man spends his income, he puts just as much bread into people's mouths in spending as he takes out of other people's mouths in earning. The real villain, from this point of view, is the man who saves." – Colonel Panic Jun 07 '17 at 09:20
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    I think what this statement is trying to get to is the problem of rent seeking. Other possibilities - the problems with cash being spent on non productive assets (eg real estate), mergers and industry consolidation, or the lack of captial reinvestment, But it is not clearly stated in that statement. – JWT Jun 07 '17 at 13:45
  • Don't waste your time arguing with crazy people, relatives or not. – Ed Plunkett Jun 07 '17 at 17:17

10 Answers10

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But when people pathologically hoard so much cash that they impoverish the entire nation

This sentence seems to imply that we should fault the rich not because they are rich, but because they do not spend their riches.

Ok, let's scrutinize this assertion, and not go into philosophical and sociopolitical arguments about inequality, justice, etc, which is a totally different discussion and off-topic on this site (although I suspect that your aunt may in the end has something like this in mind...)

Who said rich people don't spend their riches?

1) Last time I heard, we are all too ready to criticize them for "lavish life-styles". But lavish life-styles cost a lot of money, so it appears they do spend a lot...so part of their riches becomes income for the rest.

But they are still rich!

2) Yes, because most of their wealth is invested in productive economic activities (directly or indirectly through mutual funds etc).

It follows that wealth is NOT "hoarded" - because hoarding means "stash away wealth, don't spend it, don't invest it, just stash it away from any interaction with other humans and economic activities". A "Scrooge McDuck" kind of situation.

This is not what is happening in today's world, and so the specific sentence from this excerpt is simply factually wrong.

Now, the fact that even without hoarding, rich people may stay rich or become richer, the fact that there are people dying of hunger while others live lavish life-styles, in other words the issue of wealth and income inequality could be certainly an on-topic subject here if, indicatively,

a) It was examined as regards its effects on economic efficiency (there is growing evidence that efficiency and distribution are linked and that inequality affects negatively efficiency and economic growth, see for example this recent IMF report)

or

b) It was placed and studied in the context of normative economics (and "normative" is not a synonym for "value judgements" or "opinions"). I would suggest to check this meta-thread on the matter.

Alecos Papadopoulos
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  • Quick question about a couple of lines you included, if that's alright. You mentioned that considering the ethical and distributional concerns would be off-topic for this site, but there is an economic subfield dedicated to social choice theory. Is that subfield generally downplayed on this SE? (I ask as a relatively new user, and unsure of the general characteristic of the site). – AndrewC Jun 05 '17 at 21:42
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    @AndrewC Social Choice is not normative if done right. You choose a set of properties and find what sort of functions fulfill them. You do not ask people to like your chosen properties, you tell them where they lead to. (You would probably argue for their relevance though.) The field of Social Choice is perfectly on-topic for Economics.SE. Claiming that dictatorships are awesome due to Arrow's theorem would not be on-topic, nor would it be Social Choice. – Giskard Jun 05 '17 at 22:00
  • @AndrewC user denesp I believe answered your question. Just to re-inforce it, Social Choice theory is very much on topic here. But asking whether/arguing that, democracy/capitalism/socialism is a good/bad regime, and any other such value judgement, howevere more sophisticated, is not (stack-exchange call it "answers that ask for/require opinion-based answers). – Alecos Papadopoulos Jun 05 '17 at 23:36
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    I understand that the super-wealthy invest more than they spend, and your point is that both investment and spending are ways that their money "touches" other people. However, could it be that if the super-wealthy spent a greater proportion of their income it would be more efficient at creating or distributing wealth? – composerMike Jun 06 '17 at 02:49
  • @composerMike Why certainly it could be the case -but this is another issue of course, and much more complex, since it has to do withe the actual structure of a market economy, not just with what rich people do and don't. – Alecos Papadopoulos Jun 06 '17 at 08:26
  • @denesp, I'm totally on board with the democracy/dictatorship/capitalism being good/bad lies far outside the more 'objective' central tenants of social choice and wouldn't be appropriate on these boards. I was more thinking about the line "philosophical and sociopolitical arguments about inequality, justice, etc" being off topic. After all, some of the most known papers in social choice debate normative features of what predictions ought suggest. Examples include Harsanyi's first point in his 1955 Cardinal Welfare paper, where he proposes "to examine the precise ethical meaning... (cont) – AndrewC Jun 06 '17 at 11:43
  • ...of Fleming's crucial postulate" and examines it's "acceptab[ility] according to common ethical standards." Diamond (1967) in his famous rebuttal to Harsanyi makes the normative connection even more explicit- "I wish to argue that one [of Harsanyi's axioms] is not consistent with notions of justice held by some individuals. Since this is an ethical discussion, the argument will take the form of an example which suggests the problem inherent in the axiom..." Fundamentally, Kalai Smorodinsky bargaining differs from Nash's solution partly on normative grounds- monotonicity as a bargaining (cont – AndrewC Jun 06 '17 at 11:51
  • axiom vs IIA is partly a value judgement of what features the solution should have. Again, I really don't mean to sound argumentative or accusatory- I'm just curious where the line is for on vs off topic. Thanks guys! – AndrewC Jun 06 '17 at 11:53
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    With regards to point 1 - they may "spend their riches", but it might not be in a diverse set of places. People who shop for yachts probably don't go to discount stores; the movement of money in one subset of goods does not guarantee movement in the whole set of goods. – Myles Jun 06 '17 at 12:03
  • @AndrewC This (your question about Social Choice) should really be a separate meta post. Let us stop spamming here. I encourage you to post your question on meta. – Giskard Jun 06 '17 at 13:55
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    @AlecosPapadopoulos "Why certainly it could be the case..." and if it is the case this answer is 100% wrong. That's a very important thing to just gloss over. Without going into whether or not investing helps the economy just as much as spending does and without determining the actual degree of these two options, then it is entirely possible that "wealth isn't hoarded" and "vast concentrated wealth impoverishes the nation" are BOTH true. – Shane Jun 06 '17 at 21:46
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    @Shane Whether wealth concentration has overall negative effects is a different matter all together, and my answer has nothing to do with it. I am not glossing over it, I am just answering the question, which was about whether hoarding "impoverishes the nation", not whether wealth concentration does it. – Alecos Papadopoulos Jun 06 '17 at 22:38
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    @Myles While people who shop for yachts do not go to discount stores, the people who build yachts may go there. – Volker Siegel Jun 07 '17 at 02:15
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    You answered whether or not money that's "hoarded" is removed from the economy and doing nothing at all, or not. Yeah, billionaires aren't swimming in McDuck styled vaults. 115% agree with that. But that doesn't answer the question of whether or not these hoards of invested wealth impoverishes the nation. If there isn't enough demand for investment, interest rates get low enough that it may as well be a swimming pool. Look at the metaphor from @Myles. It is possible that money doesn't go where it needs to go. – Shane Jun 07 '17 at 03:14
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    @VolkerSiegel Granted, but the proportion of revenue they receive from the yacht building determines the rate they transfer money to other subsets of goods and services (e.g. the discount stores). – Myles Jun 07 '17 at 05:53
  • Actually the stock market has changed quite a bit with the introduction of hedging, shorting and similar. This could have the effect that the very rich do not gain wealth from investing in companies that makes profit but from trading better than others and therefore are making money from other people losing money. That could have a negative effect on the economy. – Bent Jun 08 '17 at 10:54
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Her position isn't quite untrue. If you define poor and rich relatively, you cannot have "poor" without having "rich." However, this has little to do with hoarding.

We often think of money in terms of the medium it is stored. We typically understand a vault full of cash. However, such a vault isn't doing anything. Money does things when it is in motion. It is a medium of exchange, not just a medium of storage. When it comes to impoverishment, we're talking about people who want to spend money but don't have it. We're focusing on the exchange half of the equation.

Goods and services will always be exchanged. Nobody really wants "dollars." You can't eat them. You can't build a house with them (well, not a structurally sound one). What you can do is use them to facilitate exchanges of goods and services.

If someone hoarded a bunch of money and made it clear that money isn't going to be returning to service any time soon, it would have a substantial effect on prices, but in the end, the people who want to eat bread will eat bread. The people who want to buy Rolexes will buy Rolexes.

The one case I can think of where hoarding could actually "impoverish a nation" is if they hoard large sums of currency and the threat that they may use it all at once wreaks havoc on the market. If you know that a bunch of dollars could suddenly enter the market at any moment, you know that the value of any dollar could deflate rapidly at any moment. Accordingly, you'll try to minimize how often you're holding onto a dollar. You'll focus on holding on to tangible goods instead. This could slow the velocity of a market, which could impoverish people who can't get the things they need because the market is moving too slowly out of fear.

Brythan
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Cort Ammon
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    And even if a rich person just left their cash in the bank, the bank could leverage that money to help other people build houses by loaning it out. The only way that hoarding cash in itself could be detrimental to the economy is if it actually was just vaulted away. As long as it's circulating it's fine. Even in your bad situation, the money would drive up inflation temporarily, which the reserve would respond to by raising interest rates. The raised interest rates would cause people to save and the velocity would slow down again. Problem solved. – Stephen Jun 06 '17 at 06:06
  • @Stephen Problem solved, if the economy runs rationally and the horder isn't explicitly trying to maximize the terror they can cause with the money, of course. – Cort Ammon Jun 06 '17 at 06:08
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    How much cash would this take? It might be possible if Bill Gates were to do this to Zimbabwe. But even if China dumped all of their US dollars back into America (and why would they do that - it would impoverish themselves?) it would only have short term repercussions. Inflation and interest rates would chew it up for a short period of time until the economy adjusted again. – Stephen Jun 06 '17 at 06:27
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    @Stephen You're kidding yourself if you think loaning that money out helps other people more than it helps the bank. If the net effect of circulating the money is that the bulk of someone's income now goes to the bank as interest on a loan, then mainly what's happening is you're entrenching that person's poverty. – aroth Jun 06 '17 at 11:57
  • There is also the inverse problem; the hoarder just left their cash in the bank, but threatened a bank run when they went to withdraw all of it simultaneously (especially if it is a sum too large to be reasonably achieved by a small branch). Depending on how capably the bank reacted (most T&Cs have a withdrawal limit for short-notice transactions, so they would probably just quote that), the hoarder could try to incite a panic. – Myles Jun 06 '17 at 12:00
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    The problem here is that money is self converging. If you have a lot of money, it's very easy and painless to make more. If you have none, you have to generate all of it, all active, none of that is passive. That's the problem OPs aunt is trying to adress. And it's one that doesn't really have an answer in capitalism and that is why many people these days aren't too much in favor of it anymore. – Magisch Jun 06 '17 at 12:51
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    @aroth bank loans money to people that can repay it. People who can repay it are offering a service that is needed (ex: you need to prove that your business is viable to get a load). If you are thinking of mortgage, then the person taking the mortgage decided that it was indeed a good decision and would increase their way of life. – the_lotus Jun 06 '17 at 15:46
  • @aroth a bank loaning money to a mortgagee helps create wealth. The morgagee now has an asset that is worth something and provides them with utility (shelter). The bank has a mortgage on their books which generates revenue. If the mortgagee didn't take out the loan then they would have to rent. On a macro scale if nobody took out mortgages there would be a huge housing shortage and rents would be too damn high. – Stephen Jun 06 '17 at 23:23
  • Money is a medium of exchange, but modern money is backed by debt, the collective debt of people who owe money. Money is typically "created" in a pair with an equal amount of debt in today's economy; it is "loaned into existence". This means someone having a net of X of money is mirrored by some other collection of people having a net X of debt. Things get interesting when you have "types of money"; you borrow 100, get 100 cash, spend it on something that "could be sold for" 1000; are you 100 under zero or 900 above zero? The zero-sum nature of our cash creation matters, however. – Yakk Jun 07 '17 at 20:26
  • @Yakk Where it gets interesting is where you start to think about the disparity between cash (which can't be created by debt) and money (which can). Why can money by banks be created even though cash can't? It's because we've collectively and consciously chosen, as a society, to treat reverse bank debt as money. – user253751 Jun 07 '17 at 22:37
  • @immibis banks can "create cash" by converting money into cash. Cash is just crystalized money. – Yakk Jun 07 '17 at 23:10
  • @Yakk If that were the case, bank runs shouldn't cause problems, right? The bank can just convert all their money into cash and give it out to depositors. Who needs FDIC? – user253751 Jun 07 '17 at 23:21
  • Note that central bank account balances usually count as "cash" - however that doesn't invalidate what I've just said, because normal banks can't create it on demand like they can create bank-money. – user253751 Jun 07 '17 at 23:23
  • @Stephen Actually if they leave it in a bank which loans it out, it could have some of the effects describe in the question. Because then the banks would control a greater percentage of the money in the market. – user253751 Aug 06 '21 at 12:28
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The argument is largely based of the following premise:

You have 10 Million Dollars. Say in one case you gave it all to 1 already rich millionaire, and in the other case you gave $1000 to 10,000 poor people, where we define a poor person as someone who does have somewhere to live (not homeless) but lives paycheck to paycheck and to whom even something like their Microwave breaking could mean not eating properly for a while.

The person who is already rich would probably struggle to spend that $10 Million quickly. What most rich people would do in that situation is invest it. The kind of things you could easily spend \$10 Million Dollars on are in very select industries, which are predominantly run by already rich people, effectively passing the money from 1 rich person to the other.

What all this means is that it takes a long time for the system as a whole (and in turn, those who require aid from their government) to see the money again. Furthermore, the rich have much more opportunities to avoid tax than someone making minimum wage at Walmart.

However, if you give the 10,000 poor $1000, they will likely spend it almost immediately. The money very quickly goes from wages back into the economy and back into wages again, driving growth. This in theory leads to better wages for workers and lower inflation, as well as more tax revenue for the government.

Now, this uses very general examples and assumes a lot of things, but it's pretty much the argument that the post is trying to make.

SGR
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    The tax evasion argument is more powerful then it sounds. In essence, most rich people in today's america pay much less in taxes then they should, crippling the public sector. This alone is a major downfall of allowing anyone to have a lot of money in the first place: Money buys opportunity for corruption and finding loopholes. – Magisch Jun 06 '17 at 12:54
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    Slight correction: typically someone making minimum wage pays effectively little to no tax in the US (other than sales tax). State taxes are offset by the EIC. It would be more accurate to say that the rich have more opportunity than the middle class to avoid taxes. – Jared Smith Jun 06 '17 at 18:17
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    @Magisch "most rich people in today's America pay much less in taxes than they should" Don't these rich people pay millions of dollars in taxes each year? How much tax someone should pay is subjective. – Matt Jun 06 '17 at 19:33
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    @Matt The "paying less than they should" in that sentence should be read as "paying less than they would if the people writing the tax codes were competent and hadn't filled it with loopholes". As an aside, the rich pay about 20% of the country's taxes, but own about 90% of the country's wealth. – Shane Jun 06 '17 at 21:58
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    @Shane What one senator sees as a loophole another sees as an intended tax break. A loophole must be unintentional. Do you have any such examples with evidence it was in fact unintentional? We generally don't tax wealth, we tax income so I dont see the point of your final statement. Do the rich receive 90% of government services? – Matt Jun 06 '17 at 22:24
  • Ultimately it's all down to the velocity of the money. If it's flowing around the economy too fast, or there is too much of it in the economy it will drive inflation. If it's not flowing it will drive bad deflation (good deflation is the result of improved efficiency in the creation of goods). Bad deflation is extremely economically dangerous. Too much inflation is similarly dangerous. Central banks aim to keep inflation in a narrow band by restricting or easing money supply by controlling interest rates. Deflation is the worldwide threat right now, but most of that is good deflation. – Stephen Jun 06 '17 at 23:28
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    @Matt Considering the main service provided by the government is the creation and maintenance of a prosperous society, then yes -- by definition -- the people who've accumulated 90% of the prosperity are receiving 90% of the service. The only reason we tax income instead of wealth is that it's very hard to track wealth and (until recently) income and wealth scaled rather nicely together. – Shane Jun 07 '17 at 03:37
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    @Matt If only one of them sees it as a loophole, then it's a loophole. The fact that one is incompetent and the other is corrupt, instead of both being incompetent, doesn't make that not true. Google "unintentional/unintended tax loophole" Here's one: https://www.forbes.com/sites/peterjreilly/2016/10/06/if-donald-trump-exploited-supreme-court-approved-loophole-what-does-it-mean/#782b21477b62 – Shane Jun 07 '17 at 03:38
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    @Shane People are taxed based on their wealth. If you see the top 1% as the "rich" people, they vastly underpay in taxes. If they hold 90% of the country's wealth, they should be paying 90% of its taxes. That number however is close to 20-30% right now. A prime function of the government is to enable a wealthy and prosperous society. Case in point would be corporate welfare. So yes, they recieve 90% of the services, probably more right now since they by and large control the political process too. – Magisch Jun 07 '17 at 06:07
  • "This in theory leads to better wages for workers and lower inflation..." If the money is getting respent quickly, how does that lower inflation? – MH.Q Jun 07 '17 at 11:57
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    @Shane "the rich pay about 20% of the country's taxes, but own about 90% of the country's wealth" citation please. – Jared Smith Jun 07 '17 at 12:44
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This particular statement posted is actually two separate statements that are being conflated despite not being related:

Statement 1:

People who collect many newspapers or cats are called "nuts" by "us"

Statement 2:

People who have a lot of money impoverish the nation, but "we" treat them as role models and put them on the cover of Fortune

The verbal slight of hand here is that newspapers or cats are comparable to money. The basic reason that "we" find the latter to be desirable is that money is more useful than cats or newspapers.

Even someone who loves cats will eventually find that for each additional cat they purchase or acquire their desire to have an additional cat diminishes. This is called marginal utility.

Someone who collects newspapers actually may have a pathological problem with their collection. Newspapers are generally only useful once, or shortly after they were printed. The have reducing utility for each passing they they are collected and take up time and space to store appropriately. In rare cases, some newspapers and cats can hold value to others. However, typically they are not exchangeable and so they only provide utility to those who have some kind of attachment to them.

Cats and newspapers are also not easily fungible. With currency, you can have smaller units. So you could purchase an item for 10 cents with a dollar and still keep the portion that you did not spend. This is very difficult if you are trying to exchange for goods or services with a cat. Similarly, newspapers are not easily convertible. While they may have a high utility to someone, they do not have much utility to other people.

Money, on the other hand, is useful because, typically, it is something that is both fungible and convertible.

According to the APA:

Being careful about how you spend your money can earn you a reputation for being frugal, but when the penny-pinching goes too far and money is essentially hoarded, that can be a symptom of obsessive compulsive personality disorder.

Frugality is a symptom of obsessive compulsive personality disorder (OCPD) when a person "adopts a miserly spending style toward both self and others,...

“People with OCPD are people who are very preoccupied with details, making lists, workaholic, very frugal. People with OCPD do not have intrusive thoughts, so they don’t worry about their symptoms. To them, they wonder, why is everyone else not as organized and as neat as I am?”

People with OCPD might be so frugal that they'd go to a food pantry or skimp on essentials, even if they had enough money for all they need.

During a recession or economic hard times, when tight budgeting is widely admired, it can be tough to know if you’re overdoing it. The most important sign that you’re going too far, he says, is when your frugality negatively affects relationships or the quality of your life because you can’t spend time or money on fun or relaxation.

Or put another way, pathological hoarding is only the lack of action to spend money, not the collection of it.

Further, people who have a lot of wealth generally do not have a lot of cash, per se. The people on the cover of Fortune, as the quote mentions, have large holdings of companies. And what cash they do have, the bank turns around and invests the money themselves, such that money is rarely sitting in a vault somewhere being hoarded.

When they invest their wealth, their value is derived from their holdings. When we say someone is worth $x million/billion dollars we are saying how much money you could get by selling all of their ownership and converting it to cash by selling it. Ownership of a company is less convertible than money, though still more convertible than cats. If you sell several million shares of a company, the price will probably go down because of the additional quantity supplied. When the price goes down, the value of the company goes down. This means there is less money for the company to spend on increasing supply (often by hiring workers), diversifying their products, or acquiring better facilities.

So even when someone has a lot of wealth, they probably are spending the money (not hoarding it) but they are spending it in ways that also have high marginal value for themselves. People who have pathological hoarding collect things with negative marginal value, like cats.

Tl;dr, the FaceBook response should probably be: "Because money is more useful than cats."

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mkingsbu
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    Nice answer, although the last bit is probably more inflammatory than the OP would want to retort with to a relative :P. – Jared Smith Jun 06 '17 at 18:21
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    That depends on the marginal utility of the relative! :P – mkingsbu Jun 06 '17 at 18:50
  • This answer misses the metaphorical intent of the quote. Also, "This means there is less money for the company to spend on increasing supply (often by hiring workers)" is basically an urban legend perpetuated by SV startup cutlure. For the most part businesses grow by taking out loans from banks, and a bank's ability to loan out money is based on people having their money sitting in a bank (money invested in say, the stock market, does not lead to banks being able to give loans). – industry7 Jun 08 '17 at 16:05
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    What is the metaphorical intent that it misses? – mkingsbu Jun 08 '17 at 16:40
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When people hoard cash they actually increase the value of everyone else's cash.

Why? Because if they didn't hold it then some of it would instead be sold to the investors who support the price of the currency using different currencies.

When it was dumped in this manner, everyone else's currency would be decreased in value on a per unit basis, yet most would have the same amount.

luchonacho
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Matthew Czarnek
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    Also hoarding cash doesn't make most goods more expensive in hoarding-adjusted dollars. Rich people don't buy (that much) more food than poor people. So, the price of food doesn't go up just because rich people stacked up a pile of cash in a storage unit. – stannius Jun 06 '17 at 20:27
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This assumes they store their own money in their house. Like a room full of bills. If that's the case, if billions of dollars are stashed. Then it technically would reduce the supply of money and thus increase its value. If that was the case, we could call them crazy (unless it's drug money). But that's not what is happening. They store their money in a bank or invest it. In either case, the bank loans or invest the money to people who needs it.

Brythan
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the_lotus
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I think that your aunt is confusing cause and effect here. Rich people staying rich is seldom the cause of poverty, rather it is a parallel effect. The cause of much poverty and much wealth is the legal/social/economic environment that maintains stratification.

Many poor people stay poor because of the situation that they are in. They live in neighborhoods that the cops only visit when weapons are reported; they pay taxes on most of the money that they earn; medical services are distant; even fresh veggies are scarce. Their local schools are often not very good.

Many rich people stay rich because of their environment. The cops will show up merely at the report of a vagrant; there are lots of tax loopholes to hide their earnings; the University medical center is a mile away; Gelson's and Trader Joe's compete for optimal retail space. The schools are top notch, often blessed with funds secured by local parents.

BTW, I use the term 'environment' to mean more than just a physical location and its character. Rich kids may absorb the concept of tax-free annuities from hearing their parent's casual conversation; poor kids hear about the purchase of new anti-theft bars for the windows.

If your aunt wants to make a more balanced society, she will not do so by resenting the rich. The way to solve the problem is to increase the mobility between groups.

Joaz Banbeck
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One of the most fundamental aspects of economics is scarcity. We have a limited amount of material resources. Not everyone can have everything. However, through specialization, some become very good at making or acquiring a few things such that they have excess. Large-scale trading of excess becomes difficult without a system, thus we have money. Money is a system of perceived value that facilitates trade. However, money is not intrinsically as valuable as its perceived value (you can buy a filet mignon steak, but you can't eat the money at all). This system has lead to two modern economies which I like to call the material economy and the monetary (money) economy.

The material economy is everything you eat, drink, sleep on or in, or otherwise use in your life (your home, car, jewelry, etc.). The monetary economy, on the other hand, is simply the money we use to represent those things.

Here's where the problem with your aunt's statement lies. The first things she lists (newspapers and cats) are material things that physically take up space and thus, when hoarded, act to the detriment of the person's capacity to act productively or live comfortably in their daily life. Money, however, is mostly imaginary. It exists in computer databases and is a tool used to acquire the material goods one needs/wants at their behest, and improve their productivity and ability to live their daily life comfortably. Money is not something that is hoarded in the sense of filling their house with paper money. Instead, people like Warren Buffet frequently invest and move these digital assets to stimulate activity in the material economy. Often, the wealthy do this as an intellectual exercise/hobby for them that adds to the quality of their life and the productivity of other industries as a result of their investments.

Hope this helps.

Drk
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It is difficult to what exposure that lead Lester B. Pearson giving out such statement, the quote itself is a metaphor.

"people pathologically hoard so much cash that they impoverish the entire nation" does not apply directly to any "rich" person, but "people pathologically hoard so much cash".

There is a few category of people that fit such criteria:

  1. Corrupted politicians that hoard cash inside Swiss bank or even in their home.
  2. Rent seekers that collaborate/lobby politicians that create monopoly rent seeking business with little to zero investment in innovation.
  3. Criminal syndicates,
  4. Various investment/hedge funds(e.g. retired funds) that took money from 1,2,3 execute speculation schemes.

So the mentioned quote is more serious than inequality in wealth distribution. Even today, there is too little exposure to public the dangers of such "pathologically cash hoarding".

The stock speculation cycles, subprime loan derivation bubbles, Wallstreet various acquisition, is indirectly due to "pathologically cash hoarding" mentality.

Ironically, what OP aunt think is not all wrong. But it doesn't fit very well to the big picture of the quote.

Obsession in wealth hoarding is indeed the root of the government corruption, thus cause funds use to help minority in poverty vanish in the distribution channel.

mootmoot
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Given that the quote is partially extraneous to the question, I am answering two elements:

People pathologically hoard so much cash that they impoverish the entire nation

As others have pointed out, cash hoarding is unusual and impacts chiefly on the supply of physical money and its price. If we consider banked cash as a hoard, we would mostly consider this malinvestment and pathological as well. But does it “impoverish the entire nation?” No, it only impoverishes the proletariat of that nation by relative emiseration (Capital in circulation : wages; ie by increasing the organic composition of capital). She is advancing some kind of “exploitation” theory.

She believes that people are poor because some other people are rich. I know that is totally fallacious, but I don't know how to explain it to her.

Well, it isn’t fallacious. Apart from the trivial pie division example that larger slices require smaller slices, there’s the classic difference between the price of socially average necessary labour power and the realiseable value embodied in that labour’s product. As noted in relation to relative emiseration, if you take a measure of money over time like %GDP/capita a growing economy with private ownership of capital will show a declining wage.

As far as explaining it to her, or even better talking with her, I’d suggest face to face after shouting her lunch, and with plenty of tokens and pen and paper.

I’d suggest size of the slice, versus size of the pie. The problem of effective demand versus real desires (ie: why the size of the slice matters, because real desires are normative not objective measures, thus share of social power is important,) and probably a simple explanation of Marxist exploitation, including that labour mustn’t get the full product of their labour due to capital depreciation etc.

If you can use these teaching models to help her figure out what she believes about the appropriate ordering for social power, you can equip her with a strong opinion from an allied political economy on whether the rich emiserate the poor and how money works. If you go in trying to re-educate her to your particular normative beliefs she will resist and refuse.

Samuel Russell
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