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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

“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.

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.

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.

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)

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.

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.