Lately, I've had a number of discussions with people about the nature of money and how wealth is distributed. Something I've noticed is that many people have a fundamental misunderstanding of economics. They believe that economics is a zero-sum game. That is, that the more one person or nation has, the less remains for the others.
I'm no expert in economics, but I believe I can demonstrate that this idea is false through some simple common sense.
I will now try to provide examples of how wealth is created daily. The numbers are simplified for ease of comprehension.
Example one: A miner goes out and mines one ton of iron ore. His expenses for this operation are $5. He sells the ore to a foundry for $10. The foundry smelts the ore and uses it to forge steel I-beams. Their total cost is $15 (including the $10 for the iron). They sell the I-beams to a construction contractor for $20. The contractor uses the steel to build a building. His total cost is $30. He sells the building to a realtor for $40. The realtor rents out the building for $2 daily.
After 20 days they have paid off their costs and the rest is profit. The tenants in the building, Starbucks, sell coffee. They have no trouble recouping the cost of their rent and provide wonderful caffeine at an affordable price.
Now, explain to me how anyone loses wealth here. Not only did no one in this example lose anything, they all gained by it: the miner is $5 richer, the foundry is $5 richer, the contractor is $10 richer, the realtor is God knows how much richer and we all know Starbucks is in no danger of going broke.
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Oh, but what about the people buying the coffee? Aren't they being impoverished by Starbucks' cruel and heartless exploitation of them?
Hardly: Bob buys coffee at Starbucks, using $2 of his last paycheck. Bob's employer, Craigco, pays him $400 every two weeks to sell widgets. Each widget costs $25. If Bob sells three widgets daily, Craigco brings in $75 daily, $525 weekly, and $2,250 monthly. Minus Bob's monthly salary, $800, the costs of the widgets and other miscellaneous Bob-related expenditures, $450, Craigco makes a profit of $1,000 a month employing Bob that it can use to hire new employees, improve its widgets or whatever it wants. Everyone wins.
The three basic concepts underlying this principle are as follows.
One: spending money is not the same as losing money. When a furniture company buys wood from a lumber company, they have lost nothing. They have less cash but they now have an equal value in lumber. Even though the lumber cannot be used to buy candy bars, it nonetheless has value. In fact, to the furniture company, it has more value than the equivalent amount of cash, because the furniture company knows how to turn the lumber into something it can sell for even more money.
Two: Human creative energy creates value. Why are you willing to pay more for a new car than two tons of scrap metal? Why are you willing to pay more for a stained-glass window than five pounds of sand? Why are manufactured goods worth more than raw materials? Because when human beings are allowed to apply their minds to creativity and invention, they are capable of creating things that are worth more than its components. We are willing to exchange more money for the expertise that goes into constructing our computers than the raw materials it's made of. So, since products are always being sold for what the buyer thinks they are worth, but which is more than it cost to make them, what is left over is newly created wealth.
Three: Resources are infinite. Yes, I know that economics is the study of how scarce resources are allocated. At any given instant in time, there is only so much of everything available. But as time progresses, it will always be possible to get more of the raw materials we need.
The metals we use are inexhaustible for practical purposes, and plants are a renewable resource. In order for economics to be a zero-sum game, we would have to always be reusing the exact same materials. If there was only five rolls of toilet paper that had ever existed and would ever exist, then we would have a zero-sum situation: if I have five rolls of toilet paper, then you don't have any.
Fortunately, it's not that way: toilet paper is abundant and plentiful and there's no end of its production in sight. We can always produce more, and if we start running out of whatever it's made of, we can always grow more.
A spaceship might have a zero-sum economy since its occupants could only use what they brought with them. World economics is not a closed system; the universe contains more resources than we can ever use up. The only question is how best to distribute them.
by Craig A. Butler
Daily Lobo Columnist
