Advantages And Drawbacks Of Surplus Money

More money is not always welcome. When there is excessive surplus in the system, it can be a sign of something that is not exactly very healthy. First of all, surplus profits generated by monopolies obstruct efficiency benefits of free markets and are bad per se. Even worse is accumulated capital chasing assets and creating bubbles. To appreciate what it exactly represents, and why it may not always be welcome, read this...
Advantages and Drawbacks of Surplus Money
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What is Surplus Money ?

Surplus money represents savings and wealth.

When you are earning more than you are spending, your bank account will start swelling. This surplus money in your account is actually your saving as well as your wealth. It actually denotes your capacity to purchase in future, and what you purchase using this surplus money actually decides as to what the advantages or drawback of this surplus money will be for your life and fortune. As an individual, it is more a matter of your preferences.

For a society however, surplus money represents accumulated value. In terms of elementary economics,

it represents a store of value with which the owner should be able to buy something later on. How much that store of surplus money will be able to buy will depend on how that money is valued at the point of time of purchase. In other words, the value of money in future will decide how much that money is worth it.

How is Surplus Money created ?

Interestingly, such a situation of surplus money can arrive in different ways.

First take a scenario where the producer is a successful producer and could even be a monopoly, so that he is able to sell his products at a high cost, thereby making extraordinary high profits, and keeps adding surplus money to his bank. Since he is also a part of the society the overall surplus money in the society also grows. Unfortunately though the surplus money within the society is growing, it is not an ideal situation, because the people are not able to purchase items, and overall utility of all people, also called ‘social welfare’ is less than what it could be if the producer was not a monopoly. So even though surplus money is created, the social welfare goes down.

Take a second scenario, where consumers who were earlier spending all their income on purchasing some items, can now purchase those very same items at a lesser price as the market competition leads to improvement in technology and fall in prices. Now every consumer has some money left, which is also surplus money. The overall surplus money in society is again increased. The consumers use this money partly to buy some more products and save the rest for a rainy day. Additional purchase by them creates more demand, and if the market is fully competitive and free, then more producers start producing and selling their products. So the economy grows and there is also some surplus money.

In both the scenarios, surplus money is generated. In the first scenario, it is owned only or largely by the monopoly, and the social welfare actually suffers. In the second scenario, it is distributed across the population, and the social welfare is also rising. What these situations make apparent is that surplus money is neither good nor bad, it is the overall economic scenario leading to the surplus money that matters more.

What can you do with the Surplus Money ?

Now, in either of the two cases, the surplus money can be invested in a new enterprise or for increasing the productivity which in turn can make the prices fall. However, in a monopolist market, the price

is high and fewer people are willing to pay that price, so the scope of further investment is limited. Moreover, increasing the supply will actually bring down the profits, so the surplus money will not be used as investment. In the worst case scenario, the surplus money will chase scarce assets of the economy like land and gold, leading to an escalation of their prices. When that happens, even people will little money will also try and join in, in the hope and expectation of making some profits. This can lead to asset bubbles. Even if it does not, it leads to inefficient allocation of scarce economic resources in the economy, whose productivity and efficiency will fall further.

On the other hand, in a free market, this money can be used as investment to start new enterprises, thereby leading to economic growth. By having new products and improved technology, coupled with competition, prices of products will come down further and the cycle of growth will continue.

As can be seen in both examples, surplus money in the second case leads to benefits for the society and growth of economy, while in the case it leads to prevention of investment, stagnation of economy and inadequate social welfare.

Advantages and Drawbacks of Surplus Money

The advantages are investment leading to economic growth and social welfare, more products and improvement in technology, provided there is a free market and investment is not restricted. If however, the market is not free, this advantage will not accrue to the society.

The drawbacks can arise largely by use of the surplus money to consume excessively. When your kids have more money than they can spend, they are bound to indulge in wastages, and even social and environmental damage. Excess consumption means excess demand, which means rise in prices and inflation. So if there is excess money circulating in the society, inflation is bound to result. In the case of concentration of wealth in the hands of a few and poor demand in the economy, existence of surplus capital can lead to asset inflation and bubbles and destabilise the economy, in the manner 2007 economic crisis happened.

Sometimes certain Governments, who stupidly try to create surplus money “out of nowhere” to address their irresponsible spending, tend to print paper money to solve this problem. However, this excess money only worsens the problem and leads to "hyperinflation", a condition where inflation rises far above normal levels. Countries have experienced hyperinflation of many hundred percent per annum. In such conditions, people have no confidence in the economy, so the investors run away. As the economy collapses and people lose employment, the whole society suffers.

There are always two sides of a coin, and excess of anything in irresponsible hands is bad. Surplus money is no exception.

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