“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 the 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.