Money Talks

I want to talk about a popular paradox known as the rich guest paradox.

There is a town where everyone is in a huge debt with someone but has no money to pay it back.

Here, there is a hotel which is hardly seeing any business anymore. They are to soon shut it down. One day a very wealthy guest shows up and wants to spend some time there as he wants to write his novel in peace. However, before he confirms, he asks for a tour of the hotel. The hotel owner asks for a security deposit which the guest can take back in case he doesn’t like the rooms. The guest obliges. It turns out by a matter of luck this is the exact amount that the hotel owed to the chef as salary for two months which they hadn’t been able to pay. They gave the cash to the chef.

The chef saw that this was the exact amount he owed the grocer for groceries he hadn’t been able to pay for. He paid the grocer. The grocer realized it was the exact amount he owed the doctor for treating his wife’s arthritis, so he paid the doctor. Then the doctor paid the money to the nurse for two months of service he couldn’t pay for. The nurse was new to the town, so she had been staying in the hotel for a few days before she found a house to rent. She too was poor and couldn’t pay the hotel at that time. The money she received from the doctor was exactly what she owed the hotel, so she paid.

Now the hotel had got back the exact amount it had paid the chef. Then the guest has finished his tour of the rooms, and it turns out he doesn’t like it. He takes back his security deposit from the hotel and leaves, never to be seen again. So, everyone’s debt has been paid, but nothing is different from before. No one has earned anything. But now everyone is happy even though the money has done nothing but to return to its first owner. Therefore, this paradox is basically describing how nothing had changed from the start, but along the way, debts were paid, with no money.

So, Did the debt really exist at all?

I’m not an economics expert. I’ll explain this in a logical way.

Everybody lost money in this process. Ideally, with every passing moment, everybody in the world should be making money. Whenever a product or a service passes through various stages of development, some value is added to it.

In this case, people exchanged money. But the service they provided didn’t add any value to them and to the economy of the town. At the end of the day, nobody in the town has any money to buy something new. It’s just that their debts got nullified. If they want to buy something, it will again be on debts.

This is a surreal situation where the town is basically self-sufficient. If everyone keeps doing their job, they can live without having to exchange money as everybody’s work has the same value. But this also means there is no scope for development.

The rich guest was an opportunity to the town. Had the hotel owner managed to make him stay, he would have made some money. That is some extra money to be added to the town which might be used to start new businesses and eventually build a school or recreational centre maybe. An opportunity to start the development of the town. So, the town did miss out on development and growth.

Now, the guest did another important job. His money was a medium of communication. The entire debt circle would be solved had all the people involved just met and sorted it out.

This can be seen in the real world. Money is an absolute medium of communication. Countries talk to each other primarily through trade deals which is nothing but talking through money. You see, money is basically numbers. And there is no confusion in numbers. Numbers transcend language. I may talk in English and you may be a Spanish shopkeeper. I may not be able to communicate to you that I am hungry through language. But I can simply pull out a dollar bill and point to a bar of chocolate. My problem is solved and you have made some money.

But money is not perfect. It comes with its own set of problems. The fact that a set of numbers defined how the world functions itself is a matter of concern.

I hope to talk about it in a future post.