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Wealth Creation: Is it a Myth?

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"Can we really create wealth?"

That was a simple thought that popped in my head on the way to work yesterday. The "we" that I had in mind is the all the people in the earth collectively, not individuals. Surely, one individual can create wealth for him or herself. In Silicon Valley alone, there are numerous examples of that. The "wealth creation" that I am referring to is real dollars - not factoring quality of life improvements.

Why am I looking at the big picture and dollar figures themselves? It occurred to me that many things in life are zero sum games. For those unfamiliar with the concept of zero-sum, it's a situation where a loss from one party must be an equal gain by another. In school, you may have learned that energy is neither created nor destroyed. That's an example of a zero-sum game. Also, when your favorite sports team wins, the loss by the other team is balanced (we'll ignore the unnatural case of hockey overtime wins).

Is Wealth Creation a Zero-Sum Game?

Logically, in my opinion, it seems that wealth (in the terms of this article) can't be created. I think of a small system of a few people with money providing services. Money can move between the people for the various services they provide, but money isn't added to group. Now take the 6 people and expand it to 6 billion. It's still a closed system where money shifts around, right?

If I buy a Palm Pre, I'm transferring my money to multiple people, Palm's and Sprint's employees and shareholders, the person who leases the Sprint store to Palm, etc. On the other hand, if I write this article, and Google's advertising program determines that it's about the Palm Pre, Palm and Sprint will be indirectly paying me if I send them traffic. In these scenarios I don't see where new money is created... except by credit. However, credit is balanced by interest rates. I'm sure some of you might be thinking that the government is literally printing up money every day. That can be explained by inflation. Since there are more dollars around, each dollar buys less product.

Am I wrong? Is money being added into the system and I'm simply missing it? If I am wrong, I apologize. It certainly isn't the first-time, nor will it be the last one. If I'm right though... what conclusions must we draw?

  • Every dollar I earn makes someone else (or multiple people) poorer - If wealth is a zero-sum game, that's the sad truth right?
  • Every dollar the US makes, makes the rest of the world poorer - I am really starting to depress myself now.
  • There is no fix for a poor global economy - This is the most interesting one to me. It means that the global economy has no real booms nor real difficulties. It also means that the global economy can't be too bad - since money can't disappear.

Look at that last point for a minute. How can one imagine that the global economy is never in a good or bad state? I look back at credit. If credit is flowing around like water, it seems like there's a lot of money in the system. If credit dries up and everyone wants their money, the lack of free flowing money makes the global economy look bad.

So I don't leave you on a completely depressing note, I'd like to point to an article of a completely opposite viewpoint. The Coyote Blog says that wealth creation and zero-sum finances is a fallacy. He makes some very interesting points. The biggest one I can see is that the quality of life for everyone globally is much improved... thus we are all wealthier. I wouldn't argue this point. Obviously advances in technology is going to make life easier. We, as a human race, are becoming more and more informed of our surroundings and are getting better at adapting those surroundings to make lives better.

In that respect, we collectively create more wealth each and every day.

If you’d like to learn more about wealth creation on your own, it may be a good idea to consult a wealth management company. These experts will help you lay out a plan based on your own personal situation.

Last updated on April 7, 2011.

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43 Responses to “Wealth Creation: Is it a Myth?”

  1. This is a bit of a tangent, since I’m not going to address the actual currency implications in any detail (not my strong point), but I don’t think that the world economy is a zero sum game.

    Natural resources throw off the balance of the zero sum concept. For example, take a look at agriculture. The crops that are harvested in the fall have more value than what was planted in the spring? Why? Because of nutrients in the soil, sunlight, and rain (as well as man-made or man-altered things such as fertilizers). You don’t have to pay for the weather; it’s a freebie.

    So the cash might be floating around, but actual value is injected into the marketplace by an external entity (Mother Earth).

    As far as the cash side of things – maybe government and corporate debt, coupled with charitable giving by the wealth (Bill & Melinda Gates Foundation, etc) is a chunk of the equation? Bill Gates can increase the net worth of 100,000 people by $10,000 each, simply by giving away a billion dollars. And for every trillion dollars of debt the US has, someone has a trillion dollars in bonds.

  2. Ian says:

    Money on it’s own is a zero-sum, but that money often represents real world assets. While the US may print money everyday, in theory, we are also producing more every day.

    As long as the value of our resources, both physical and human, increase at a faster rate than we print money, we’re all good. However, if we deplete our natural resources and outsource our human resources, the money eventually becomes worthless.

  3. Svend says:

    Your making a classic mistake.

    Wealth is NOT money.
    Your can think of dollar notes as
    ‘I owe your coupon’ or as ‘potential work’ meaning your can buy other peoples work time for it (directly or indirectly).

    So if your hire a contractor to build
    your a house. The product(house) is the wealth.

    The dollars on your bank account is just a store of ‘potentially work time’ but not wealth itself.

    So it is not the money itself that
    create wealth but the exchange of money. like from your to contractor
    in exchange for building a house.

  4. Moneymonk says:

    This is a great post.

    I never thought of wealth in this way. I think American become so self sbsorbed, they don’t realize the complications.

    I think it is a zero sum game. For someone to build wealth, someone else must be in debt.

    @Ian

    Yes, human and physical resources must be in effect to money circulating

  5. OxMon says:

    I don’t think wealth is a zero sum game.
    If Picasso and I are given the same brush and paint, he will create a masterpiece while my work will not worth anything. Here different values are created.
    One might argue that it takes the existing money in the market to purchase his painting and turn the creativity into wealth, the amount of money is not a fixed figure, since governments can print more. Taken into account the inflation and foreign exchange rate change, there’s never a fixed amount of money or wealth in this world.

  6. Lazy Man says:

    Interesting discussion here:

    Kosmo:

    Aren’t natural resources zero-sum? Energy can not be created or destroyed, right? You are right about the agriculture, but it’s cyclical. In theory, we don’t have better agriculture this year than we did 200 years ago… unless it’s through man-made invention improvements. Nature isn’t changing significantly unless it’s man doing it.

    Svend:

    I realize that wealth is not money. I brought up at the beginning the definition of wealth that I was using.

    It’s a good point that money is “potential work.” However, I don’t see how money is being added to the supply. I have to pay the contractor my money for the work – he gets money – I lose it… zero-sum. Perhaps he needs me to build a website to get more business. I take his money, give him work, and he loses his money… zero-sum.

    OxMon:

    You anticipated my argument perfectly. Picasso’s painting would have no value unless someone is willing to pay their money for it. Then they’d lose it and it would go back to being a zero-sum game.

    Just because Picasso is great with paint, it doesn’t mean he can build his own house. He’d have to hire a contractor in Svend’s example. You (OxMon) might be great in that particular skill and hence could balance him out. Maybe it takes a hundred contractors to balance out Picasso, but it still happens.

  7. CJ Bowker says:

    I think the first probably is seperating money and wealth.
    Wealth wouldn’t be a zero-sum game because of the feelings associated with it such as successs, happiness, etc. Wealth is also a perception that could be related to value.
    Money also isn’t a zero-sum game because it is constantly created and destroyed. Dollar are just notes that get destroyed and printed. The Fed adjusts the supply of money through printing money or buying bonds.
    Another way money is affected is if just left it sitting there. A dollar back in 1995 could buy you about a gallon of gas. Let that dollar sit on the table for the last 14 years and today it buys you a third of a gallon. The dollar has not been created nor destroyed but the value has changed greatly. Math does not equal money and money does not equal math.

  8. Meg says:

    Money (i.e. bills/coins) is definitely NOT a zero sum game, since our government can print more of it at will.

    But money isn’t the only form of currency – we can all barter our skills and posessions and services in exchage for other goods and services. In that sense, money still isn’t a zero sum game because you learning a skill or aquiring a good (made from trees, which regenerate, for instance) doesn’t mean somebody else lost a skill or a good.

    Consider this – a few million years ago (or whatever) humans had no money and very few goods and services. Now look at us. Obviously wealth/money/goods/services/bills/currency is not a zero sum game.

  9. OxMon says:

    A few other issues to consider:
    – Savings that are unknown to public (e.g. hiding cash under the mattress), which will affect the inflation balance
    – Change of demand (e.g. population growth, increase of life span)
    – Events that destroy physical goods (e.g. war or natural disaster)
    – Technology that took away human job
    – Discovery and utilization of hidden wealth (e.g. mining, solar power)

  10. Stacy says:

    Wealth or even money alone are not zero-sum games. For example:

    1) Using good materials and solid construction methods, you build a building on Main Street at a cost of, say, $500,000. You operate your business from this building for a number of years, until you grow to need more space. For simplicity’s sake, we’ll say you’ve fully amortized the cost of the building by now, paying for it with income from the business. You move on, but the building remains and is still usable. You rent it out to another business owner, who continues to use it. When you die, your estate sells the building to another owner, who can also use it themselves or rent it out. Buildings easily last 100-200 years or more, so even if it took your entire lifetime to pay off the original cost, the building continues to be a value-adding asset long afterwards. Wealth and future income have been created which are greatly in excess of the upfront cost to build the building, and which wouldn’t have existed without it.

    2) You and I both deposit $100 in the bank. The bank loans out $100, keeping the other $100 in the vault. You and I, and the person who borrowed the $100 all now list $100 in our balance sheets, for a total of $300. This is (primarily) how the money supply grows during good economic times–and contracts during bad, when fewer loans are made. Even after the loan is repaid, the bank will have $200 plus the interest charged on the loan–say, $25 over the life of the loan. With no outstanding loans, there is now $225 in the bank, which in turn pays a few dollars to each of us for the services rendered by our original cash deposits. Assuming the borrower repaid the loan with interested generated by a profit-making venture, wealth has been created and the money supply has expanded by at least $25.

    3) After 150 years, the building from #1 above is destroyed by war or natural disaster. During those 150 years, various owners bought and sold the building, and charged rent which was paid for by the profits of some private business operating in the building. Now that the building is gone, its value no longer exists, it cannot earn any rent, and at least one business can’t operate because there’s no place for it to be. Both existing wealth and future income have been destroyed, and the broader economy will have to pay to rebuild the building, at a price premium of 150 years’ inflation over the original.

  11. I wasn’t debating whether or not natural resources were zero sum.

    I was stating that natural resources are an outside force that is injected into the marketplace, upsetting its zero sum game.

    Kind of like if you and your wife are playing blackjack with $100 each and I walk up to the table and toss $1000 into your pile of money. My money may contrained within a larger zero sum game, but it’s an external resource to YOUR smaller zero sum game.

    I’d also argue your point that only inventions can improve agriculural. Take, for example, the concept of crop rotation. This is not a matter of throwing a fancy new machibe at the problem – it’s a matter of changing a mindset to allow the natural resources to replenish themselves. I guess you might argue that these are inventions, but there are some advances that can be achieved merely through human labor (such as the experiments of Gregor Mendel).

    So, in terms of wealth, I think there are ways to game the system by utilizing resources that are outside of the game.

    Of course, your topic was about actual dollars and cents, which I’m not addressesing (other than mentioning that government debt offsets a lot of private assets)

  12. “You and I both deposit $100 in the bank. The bank loans out $100, keeping the other $100 in the vault. You and I, and the person who borrowed the $100 all now list $100 in our balance sheets, for a total of $300.”

    Whoa. Hold one one second … my accounting background is going to come out. The borrower would also have a corresponding $100 liability on their balance sheet, bringing equity (assets – liabilities) back to $200.

  13. Stacy says:

    Whoa. Hold one one second – my accounting background is going to come out. The borrower would also have a corresponding $100 liability on their balance sheet, bringing equity (assets – liabilities) back to $200.

    True, but there are effectively $300 operating in the economy at that point, unless we both decide to close our accounts simultaneously (a bank run)

  14. Toogie says:

    As someone mentioned above, money is a construct. How much is in the system depends on what the government creates, and how much it’s worth depends on what’s in the economy to buy with it.

    Real wealth, though, involves how many goods there are, how much time and resources it takes to make them.

    You can indeed increase wealth by increasing productivity and decreasing waste. If you grow grass in your yard you add virtually to the wealth of the world. But if you grow tomatoes, you add something to the wealth of the world that wasn’t there before.

    Zero-sum analysis IS useful, but it has it limits in terms of understanding wealth.

  15. Three words: Fractional reserve lending.

    Stacy got it with point #2. The bank loans out $99 of your $100 deposit, but then can count the loan on its books as an asset and loan out 99% of that, etc. basically in perpetuity. (This isn’t totally true, but it’s close enough for purposes of this discussion.)

    Fractional reserve lending ensures that money (which is really credit, these days) is never a zero-sum game.

    -Erica

  16. Craig says:

    I find it amazing to read this, people analogizing wealth to energy and matter. This simple-mindedness is the same ilk that says we should just redistribute the wealth and everyone would be okay.

    Given a pile of about a few ounces of silicon and petroleum all mixed together, how much wealth do you have? You’re lucky if someone will give you a penny for it.

    But if it’s in the form of an iPhone, they’ll give you a couple hundred bucks.

    Let’s look at it another way. If everyone in the world stopped doing any work, what would happen to the wealth of the world? It would go to zero rapidly. Need a loaf of bread? No one will supply it, even if you give them a million dollars. Your “wealth” is no longer wealth, because it has no buying power.

    Wealth is NOT a zero sum game. It is created. Redistribute it from the producers, to the parasites, and you can destroy it, too.

  17. Craig says:

    I find it amazing to read this, people analogizing wealth to energy and matter. This simple-mindedness is the same ilk that says we should just redistribute the wealth and everyone would be okay.

    Given a pile of about a few ounces of silicon and petroleum all mixed together, how much wealth do you have? You’re lucky if someone will give you a penny for it.

    But if it’s in the form of an iPhone, they’ll give you a couple hundred bucks.

    Let’s look at it another way. If everyone in the world stopped doing any work, what would happen to the wealth of the world? It would go to zero rapidly. Need a loaf of bread? No one will supply it, even if you give them a million dollars. Your “wealth” is no longer wealth, because it has no buying power.

    A thousand years ago, was the wealth the same as it is today? If you believe in zero-sum, you would say so. Could the wealthiest king or emperor in the world have an air conditioned, dehumidified room? Could he travel around the world in less than a day? Could he talk to a person instantly on another continent? How many people today have these capabilities? All of them are wealthier than a king.

    Wealth is NOT a zero sum game. It is created. Redistribute it from the producers, to the parasites, and you can destroy it, too.

  18. @ Craig – not sure if you’re talking about me, or someone else. If you’re talking about me, you’re misunderstanding what I’m saying. I’m not saying the natural resources, alone, are wealth. I’m saying that they are an influence outside the marketplace that CONTRIBUTES to wealth. This is what I meant by “value is injected”.

    Take away the sun and rain, and you’re going to have a difficult time growing crops, regardless of how hard you work (it CAN be done, but it’s much easier with those resources)

  19. Lazy Man says:

    Erica, the problem with the bank and your and Stacy’s point is that credit is accounted for with interest.

    You are essentially give up some money now for more in the future. That future money is worth less (as some pointed out) because of inflation.

    So if you make 5% in interest and inflation is 3%, I suggest that 2% goes to risk (i.e money that is lost elsewhere). People don’t get guaranteed 5% interest… not without someone else paying some 7% interest in personal or business loans… and hence a zero sum game.

  20. Arian Nevin says:

    Money is a human convention. It’s not physical wealth. If course physical wealth can be created. Farmers are constantly growing food and products are being manufactured everyday.

    Of course changing the identity of who possesses money doesn’t create any new money. If a nation increases its production and creates more money at the same time there’s more money than before and it’s not worth less.

    http://nationaleconomy.net is a good resource.

  21. Lazy Man says:

    Craig said

    “Given a pile of about a few ounces of silicon and petroleum all mixed together, how much wealth do you have? You’re lucky if someone will give you a penny for it.

    But if it’s in the form of an iPhone, they’ll give you a couple hundred bucks.”

    That’s the point I was making about us “becoming more and more informed of our surroundings and getting better at adapting those surroundings to make lives better.”

    It doesn’t change money though because for someone to buy the iPhone they have to earned money from somewhere else and trade that money.

  22. Bob says:

    You need to realise that money is not wealth, it’s a medium of exchange.

    Let’s say we were both lost on an island and you go fishing and I start collecting wood.

    When you come back, you have 4 fish and I have wood to make 4 fires to cook the fish. When we exchange fish for wood, it make both of us richer since you need wood to cook the fish and I need fish to eat.

    It’s division of labor and marginal utility that allow us to enrich us both at the same time.

    Money simply come later as a medium of exchange (I sell you wood for money and use the money to pay Joe who has other stuff I need).

    Recession come when the limited ressources (land, labor and capital) is poorly allocated in the economy. Real growth (not the credit expansion kind) occur when those limited ressources are allocated in a more efficient way (less ressources are consumed to produce more goods).

  23. Lazy Man says:

    It seems that a few people missed my game here and thought that I didn’t know the difference between money and wealth. For the purposes of getting to the conclusion, I intentionally blurred the line.

  24. Craig says:

    Bob, I appreciated your comments.

    The basis of wealth is work. If everyone works hard at _producing_ goods and services, wealth increases.

    If no-one works, all wealth goes away. Africa is a continent with incredible natural resources, but incredible poverty. Without the rule of law to protect people from thievery, there’s no motivation to produce anything.

    If everyone works hard at suing people, giving handouts, and redistributing wealth, rather than producing it, wealth diminishes. Our success in this nation has been in _spite_ of our government. As our government has gained more and more power, our wealth has begun to diminish.

  25. Chiko says:

    I guess since I gained 4,000% in the stock market in the last six months (http://www.mybarnabas.com/?p=1324), that means that someone lost out. Wow! I guess I see your point. But that is a good thing because it will promote the fact that people have go after what they want.

  26. Bob says:

    Thanks Craig, you are right in your comment, we can also destroy wealth by working.

    Imagine we want full employement and we introduce a new governement program : every unemployed person will dig a hole and then fill it back up. And start over when they are done again and again.

    It doesn’t create wealth, it takes it from productive part of the economy (to pay those unemployed people) and redirect it to unproductive part of the economy as you pointed out.

    Labor has to be allocated in an efficient way too (more utility and less work) to create wealth.

    It’s all about creating more utility with fewer ressources.

  27. Well I am not sure I can answer some of the issues that were brought up but I will try. I admit I am far from an expert in these matters but am a student of them.

    Is money a zero sum game as it currently exists? No. Fractional lending and fiat currency have guaranteed that money will be created by governments. The government takes cloth and ink and a little labor and makes money out of thin air.

    Now to address the question that was brought. If money was stable (not being created at a whim), is wealth a zero sum game? Again the answer is no. 10 People exist on an island each with $100 dollars. The baker currently sells bread for $1 a loaf. It takes him an hour to do it. He takes his profits after buying grain, fuel, etc and develops a method to bake bread faster. He pays the blacksmith money to build his new oven. The baker now can bake twice as fast. He can now sell bread at 75 cents a loaf and still generate the same profit. His customers now have 25 cents left over to spend on other items. What changed? The velocity of the money. Money by itself does not create wealth. The velocity in which is travels through the economy does. The baker is now wealthier as well as everyone on the island because the money flows through the system faster.

    Innovation and ingenuity will always create wealth… even if measured by the imperfect measurement of currency or money.

  28. Adam - NPF says:

    Bob on #22 hit the nail on the head. First of all some definitions need to be setup:
    1) Money is:
    -a store of value
    -a unit of exchange
    2) Wealth is something that provides utility. A car to get around, money to buy stuff, land to produce, etc.

    Adam Smith wrote “The Wealth of Nations” to describe wealth and how to increase it. It basically comes down to more efficieny and the division of labor.

    Using Bob’s example, let’s say two people are on an island and need to do two things to survive: make a fire and eat fish.

    Person 1 is a city-dweller with no useful skills and Person 2 is a professional fisherman. On his own, person 1 can either make 1 fire or catch 1 fish each day. Person 2 can either make 1 fire or catch 10 fish. If they refuse to cooperate, both will die since they cannot do both (though person 2 might be able to store up some fish).

    However, if they cooperate, they will both survive. The “fair” thing to do would be for them to switch occupations each day. Thus both would survive and have a small abundance of fish. The free market solution, would be for person 2 to do all the fishing and person 1 to always makes the fire. This would ensure them the maximum number of excess and provide them with free time to pursue other activities.

    As you can see, money does not enter the equation though wealth is being created (free time is increasing). Wealth creation is accomplished by maximizing efficiency. Getting into the argument about energy and natural resources and you’re talking physics, not economics.

  29. Lazy Man says:

    I guess I suggest that arguing about wealth via efficiency and innovation is entering a discussion of technology, not economics.

    I wanted this article to focus more on the zero-sum nature of money, not the wealth creation which is why I ended the article as I did.

    I think I failed in trying to integrate the two topics.

  30. I am not sure you can have one discussion without the other. And if you did it would only matter to about 4 PhDs who would sit around and argue semantics all day long.

    With fiat money and fractional reserve lending and government printing presses, money will never be an easy subject to discuss rationally. You have to pin down the definitions you are going to use i.e. money = a medium of exchange or a storehouse of value. Both have different connotations and create different arguments.

    You did manage to get a great deal of people thinking about it and explaining how they view wealth and money. Consider that part to be a great success.

  31. Bill says:

    If we can agree that wealth = assets – liabilities and that, to make things simple, cash is one of just a few assets (capital like owning gold mines is another) that exists, we can think of wealth as an increase in cash (stay with me here).

    Besides printing more money (which the government does NOT do, by the way, for purposes of adding cash to the money supply), one OTHER way that the money supply is increased is through the economic phenomenon of fractional-reserve banking. I’ll spare the math, (a great illustration of this is here – http://en.wikipedia.org/wiki/Money_creation), but if a bank gets a $100 deposit, and it’s required to keep (in reserve) 20 percent of that, and all banks lend out all the money they can (deposits – reserves), then that initial $100 “turns into” $500.

    It’s also called the money multiplier.

    Without this functionality, the economy would not grow (oh, sure, if somebody “found” gold, then the money supply just increased and the miner’s wealth certainly rose because he now has more money to purchase other assets like the monkey table and the ceramic pig).

    So Lazy Man, you’re right about the absence of credit being a BIG problem here.

    However, if banks are able to lend out all of their available deposits, money is “created” out of thin air. There will be now $500 in circulation rather than the original $100. Some may gain more money than others and some may lose. But all in all, wealth has been created.

    Now, no lending will take place if the banks have no confidence that they’ll receive their money back and then some (interest). If I’m Steve Jobs and I ask a bank if I can have a $300 loan, I’m going to get it because I will take that $300 and develop a toy that I can sell for a nickel to 1MM people. I pay back the loan and deposit my $50,000 in the bank, thus creating another multiplier effect of $250k!

    So, Apple’s getting richer makes the entire economy all the richer.

    Technology has nothing to do with this effect. It’s simply the lending of money over and over again that causes this effect. Technological advances CAN reduce your production costs, but the price at which you can sell it is determined only by how much somebody is willing to pay. Technology helps profits a lot more than price.

    However, since it’s profits that people deposit, indirectly, profits DO affect wealth creation. If I have more money to deposit, then I improve the money creation.

    The other critical factor to all this is the depositor’s confidence in the banks: No confidence in getting my money back (and then some) = no money creation.

    What we’re facing right now is a double-whammy: Savers have no confidence in banks and banks have no confidence in borrowers, effectively contracting the money supply.

    Hope that wasn’t too much to swallow.

  32. YoungEngineer says:

    So what do you say regarding the stock market? Is this example a creation of wealth?

    If everybody buys stock A at 1.00. Let’s say market cap of 1mil. Now one person has to sell due to some unforseen reason. It’s an illiquid stock and due to his need to sell immediately he sells one share for 0.50 and the market cap instantly becomes 0.5mil. Where did that wealth go?

    Extreme example sure, but that’s how all the banks got hammered in the crisis. Their securities all got pushed down due to the lack of buyers. Not the lack of value.

  33. Lazy Man says:

    If everyone buys a stock (again – each person) as you propose, everyone shares the value of the company equally as you say. The market cap would instantly go to .5M become 1 in 4 billion shares got sold. At least it wouldn’t for more than the blip of the transaction.

  34. Bob says:

    If this stock is so illiquid and is sold at 50% loss, it’s probably because it was not worth 1$/share in the first place… :)

    Price is not value, it’s just the current equilibrium of supply and demand and the anticipation of the future conditions of supply and demand in this market by the market participants. For example if a big hurricane is coming toward your town, you might pay more for food and water in anticipation of limited supply.

    To the question about markets, yes they are zero-sum (unless you’re a market maker), there is no doubt about this. Someone win, someone else lose, the market maker always take his cut.

    That’s not the point, markets were never built to create value or wealth, they are a tool to facilitate transfers between market participants, to provide liquidity so the transactions can be done more easily.

    For example, stock markets help transfer capital from inefficient methods of production to efficient methods of production. When a company is inefficient vs another, the ammount of capital it can raise is limited and more expensive.

    Commodities markets help to allocate ressources from where they are stored or produced to where they are needed most at the margin. Even your supermarket act as a liquidity provider of apple and oranges for example.

    Some markets are also built to transfer different risks (derivative markets, insurance, swaps, etc.), other serve to exchange your positions depending on your changing consumption preference (ie. now vs later) and your need for liquidity (money markets, bond markets, etc.).

    What we have today is misleading, most people regards markets as a speculative vehicule where you try to make money for your retirement. That’s not the real function of markets.

  35. Bill says:

    Why does it have to be a zero sum game. If my job is to sell product X and I get paid to do that, when I sell it company A trades something of value – money for that product – both get something of value – my company takes that money and pays me, pays the people that produced the product, and, hopefully, pockets a profit. Seems to me like everyone in that equation gained some wealth – or the potential for wealth – via the transaction and exchange of quality goods and services. I realize you can get very philosophical and say that for Bill Gates to have billions, someone else had to give up billions, but I don’t see it that way. He crated something of value – Microsoft – which he used to create great wealth for himself and others – way more than was actually invested in cash to get it started – and thus the pie grew – rather than it coming from some other pie.

    Interesting topic and one that makes you think about how the economy really works – but at the end of the day I don’t think that people accumulate wealth at the expense of others. All can benefit – just not all equally. I think that is what capitalism has proven – too bad we are moving so aggressively away from it to gov’t run economies.

  36. Geo Man says:

    Please be cautious when you read about wealth. Unfortunately for some, wealth is a generic term and is often used to mean many different things.

    Most who talk about wealth make massively erred statements throughout their discourse because they mix the different definitions of wealth and treat them as though they are all one in the same item. Wealth can mean net worth, total assets, total revenues, profit, cash, cash equivalents, negotiable assets and or non-negotiable assets, even the nation’s GDP, and more abstractly, purchasing power, general wherewithal, and wealth creation. Wealth creation is a process, not wealth itself.

    The existence of wealth already created is a quantifiable entity and is finite. In fact, already created wealth that exists at a certain point in time is quantified frequently. This type of wealth is a zero-sum game.

    The abstract idea of wealth is frequently and erroneously mixed simultaneously with the objective quantifiable form of already created wealth, all in the same context, as though all wealth is only one thing, especially when the concept of creation of wealth is introduced and made part of the discourse. This has obfuscated the truth and has led to many misconceptions of the issues surrounding wealth in general and in specific.

    I am not saying abstractions are not real or valid, not saying that at all. I am saying there are legitimate and different definitions of wealth, some are abstract, some are objective. Don’t mix the two, be clear on that, they are distinct from each other.

    For example, the right wing says that wealth is not a zero-sum game, the left says it is. When the right goes on to develop their case, they do so by commonly saying wealth is infinite, not finite, because all wealth is the product of creation, creation is infinite, hence wealth is infinite, and therefore cannot be a zero-sum game.

    Well, is the right talking about the objective form of wealth that has already been created and exists at one point in time or are they talking about wealth creation which is a process which transpires over continuous time? They often mix the two in one context, call it one thing, and then draw their conclusions based on that flawed premise.

    Manufacturing a yacht is a process, a yacht on the water is an objective existing item and is a product of the manufacturing process already completed. The process and the finished product are two different things, even though the yacht was a product of the completed process. Don’t confuse the two, don’t let yourself be misled.

    Pick up an annual report of a corporation, look in the back for the financial statements, and locate the balance sheet (Statement of Financial Condition). Now, look at the Capital (equity) section of the balance sheet and there you will get a specific number for the net equity or net worth (or net wealth) of the corporation. That is the most common item considered the wealth of the company. The balance sheet also has the total assets number that some refer to as the wealth of the company, it also has total cash or cash equivalents, the current assets, you can even calculate the net working capital if you want to. Each of these things have been referred to as wealth.

    But, there is another important thing you need to see. Look at the top of the balance sheet and you will see the balance sheet date. It is commonly the last day of the fiscal year for the corporation. It is one single day, in fact, more technically, it is the last second or instant in time that is the stroke of midnight on that day. That is the only moment in time that balance sheet is intended to represent. That is, a specific point in time.

    There are many other examples of references to wealth that are similar in this context, such as total income of US taxpayers, total net worth of US taxpayers, total net worth (wealth) held by all citizens in the USA, the annual GDP, etc., etc., etc.

    Don’t be fooled, don’t be misled, do not be lied to. Know what specific definition of wealth any pundit or so called expert is talking about. Don’t let them confuse the issue and get away with circular arguments that mix the abstract with the objectively finite and try to tell you they are one in the same.

    Manufacturing process, yacht on the water. Not the same, and both exist.

  37. tom woodruff says:

    Nicely done, Geoman.
    There may be more to be said, but you did the heavy lifting, I think.
    Lots of the argument on the right fails to take into consideration the discovery of oil, for example, which we are in the process of burning up. Sure, it took ingenuity to fully realize it’s potential, but it’s still a non-renewable resource. As a “force multiplier” which has given us the vastly better lives we now live, it’s demise will effect us in ways we would prefer not to accept.

  38. Steve Athey says:

    Interesting stuff but I am not sure I am much closer to an full understanding. It seems to me, not an economist, that the socially useful purpose of business and other economic activity, eg taxation & government spending, is to cause money to circulate. So when Lazyman earns his wage he doesn’t make someone else poorer, as such, but is engaging in activity that enables many people to make a living. He uses his wage to buy goods & services from others & so on. Some successful businesses enable the owners to fairly reward themselves at a level above what you might call subsistence. It seems to me that the real value of the money circulating shouldn’t change but does it? And if so what causes it to change (I’m not talking about governments printing money which I don’t think increases the total wealth). Also, it seems to me, that when people talk about wealth creation they are really talking about concentration of money, enabling some individuals & groups to become wealthy by accumulating more and more money. All well and good if they have earned it properly, ie not through scamming, while money continues to circulate but absolutely not good when the wealthy take their money out of circulation or use it to avoid paying their dues to the society in which they have gained their wealth.

  39. BigBen says:

    Money is and is not zero-sum game?
    I all depends on how you view money, If your in the camp that believes that there is a finite amount and is purely circulated around to fill in the holes of debt, perhaps. I am not gonna go into “how money is created or recirculated or even more inflated”, lets just view the concept that we actually have control over, and that is our use, value and view what it represents, from the perspective of wealth.
    When it comes to how we see money there are really two logical outcomes: The first is an Asset, the other a Liability.
    Let’s address money as an asset, If used as an asset this capitol is used as a tool to leverage time for results, tangible goods, and other investments, for a gain of other assets, that will continue to build wealth. Thus not a zero sum game, but a solid strategy to have your money work for you and not vise-versa.
    From a liability perspective, you sell your time for the promise of payment to create wealth, this is a zero-sum game. A timeless pitfall for the working class. Ever find yourself in a situation that your boss tells you that you have to work on a holiday. That’s when you should have realized that your the asset, and your availability (time) is the liability that is being leveraged, to make someone else wealthy.
    After all I’ve said above, regardless of your views, money is just money, and has only the value one can negotiate something for. Wealth is asset vs. liability, based not currency based.
    The more assets and the less liability one has = the degree of wealth, money plays both sides,and perhaps to a degree assets can also double as a liability, if it does it is normally insured or protected to limit the degree of liability and change the performance of ‘asset’ to behave as intended. This goes into the whole asset protection area….my point is you would not protect a loss, you logically protect value,time or wealth, evidence that it is not a zero-sum game.

    • Lazy Man says:

      Yes, you protect wealth and money is an example of that. Even if you had a home that was underwater, a liability more than an asset, you would want to insure that home, because you want to prevent it from losing its value as an asset, putting you in a huge hole.

  40. AbelDj says:

    Wealth is not zero sum because free energy enters the economic system. One massive input of “free” energy has come from fossil fuels. Yes it does cost money to release this energy but we get back much more than we put in. Since we discovered how to harness fossil fuels, global wealth has grown massively. Wealth was already growing before we harnessed fossil fuels, and it was due to the energy input of the sun. That is the same free energy input that will keep global wealth growing even after we exhaust fossil fuels. As long as the sun burns, global wealth may continue to grow. Energy from the sun is converted to wealth in a variety of ways, ie. agriculture, hydro power, irrigation, even fossil fuels are due to the energy of the sun (if you dont believe in the abiotic origin of petroleum).

  41. Mara Agemy says:

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  42. Trent says:

    Yes, it is a zero sum game (actually worse – entropy etc), a facet which all neoclassical economists try to obscure. Google the Positive Money group which has good videos explaining this. The short answer is that all “value” or “wealth” is created at a cost, and all money is created with corresponding debt and for people not to be in debt, people must be in debt. This is why most of the world is poor and always will be.

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