Some Questions on Economics

[Eternal_Freedom]

Ok, first off I should point out that I have a limited understanding of economics, especially on a global scale. So, with that in mind, here is my thought process:

Given that all nations exist on Earth and trade only with each other, the global supply of wealth i]should[/i] be a closed system, with a finite amount of wealth and resources. Furthermore, any method of gaining more wealth should be a zero-sum game; to gain more wealth yourself it must (directly or indirectly) be taken from someone else. That sounds logical enough in my head.

And yet, it doesn't appear to be true. I keep hearing about "creating wealth" and "growing economies." But how can the global wealth supply keep going up without some input? And how can economies keep growing constantly without there being an upper limit and/or a corresponding negative effect on other economies?

Any answers given in layman's terms are much appreciated!

[VX-145]

Okay, huge disclaimer first: I am not an economist. I could easily be entirely wrong. That said, I think I know enough to answer this question.

Now, onto the question; while yes, all resources on Earth are limited, those resources have not been entirely mined out; new resources are being added to the world economy. Eventually, these will run out - any economist worth their salt will tell you that infinitely sustained growth is impossible given just the resources on Earth - but right now (and for the forseeable future), these resources are being used to create wealth in the form of food, iPads, novelty key rings et cetera, which are then sold for money. This general principle is the basis of pretty much all economics.

So, to answer the question: yes, wealth can be created and there is an upper limit but it is a rather large one. There are also mechanisms by which wealth is transferred between various bodies (nations, cities, regions, whatever), and these do have a negative effect if one nation overpowers another. A prime example of this would be the British Empire - they took resources from the colonies, processed them in Britain and sold them at a profit back to those same colonies.

As per usual, sorry if that makes no sense at all, and I hope this helps.

[Simon_Jester]

Ok, first off I should point out that I have a limited understanding of economics, especially on a global scale. So, with that in mind, here is my thought process:

Given that all nations exist on Earth and trade only with each other, the global supply of wealth i]should[/i] be a closed system, with a finite amount of wealth and resources. Furthermore, any method of gaining more wealth should be a zero-sum game; to gain more wealth yourself it must (directly or indirectly) be taken from someone else. That sounds logical enough in my head.

And yet, it doesn't appear to be true. I keep hearing about "creating wealth" and "growing economies." But how can the global wealth supply keep going up without some input? And how can economies keep growing constantly without there being an upper limit and/or a corresponding negative effect on other economies?

Any answers given in layman's terms are much appreciated!

Several points are missing from your picture of the situation.

1) There are truly renewable resources.

Sunshine keeps hitting the Earth and doesn't stop. Solar energy is the basis for our agricultural sector and, potentially in the future, a large part of our electrical supply.

Of course, by the same token food gets consumed and is not reusable, but the point is that at least in principle it represents an input that is not zero-sum; you can store up energy in sunlight without taking away anything from anyone. And you can do things with that energy, again without taking away anything from anyone.

Time is also a resource, the supply of which cannot be exhausted. A given person only has so many hours in a day, but there will always be more hours when those are used up. Even if you die, someone still has time in which to do things.

So long as people live, they can use time to work. The products of your labor can also be stored up over time, potentially without taking away anything from anyone. For example, a novelist can use time to create a new book, that has never existed before. The novel enriches the world economy, without diminishing anyone's wealth. A construction worker can build buildings- which represent a greater concentration of wealth than the raw materials that went into making them- over time, and these buildings persist and remain in place when the builders have gone elsewhere.

So the presence of unlimited reserves of time and energy allows us to potentially increase the total amount of wealth in the world, even if all other resources are finite and fully in use.

2) Not all physical assets are owned.

Aside from the (pretty much intangible) things listed above, most wealth we can measure ultimately comes down to physical, tangible goods. Goods have to be made of something, so presumably there's a fixed amount of stuff changing hands and moving around the world, and physical wealth is finite, right?

Wrong. Many physical resources are still being extracted, and have always been in the process of extraction. When they're under the ground, while someone might theoretically claim to own them, they contribute little or no value to the economy. Once they're out of the ground, they can become valuable. A worthless lump of rock in China becomes the rare earth metals needed to make a microchip. Another rock becomes the coal-fired energy to make a third rock into a piece of steel, which becomes a valuable part of a building or a car.

Some of these kinds of physical wealth are nonrenewable (phosphorus fertilizer being used once and then flushed out into the ocean, oil being pumped up and burned). Other kinds are renewable (e.g. aluminum). But even in the nonrenewable cases, extraction continues and will continue for decades to come, although the resources may get more expensive to extract, because there will be fewer sources that are harder to get at.

But nevertheless, the net amount of physical wealth in the world is still increasing. And this can occur without anyone being robbed, so it's not a zero-sum game. Sooner or later we'll hit limits on how much of a given resource there is on the planet, but those limits are still well into the future. They have nothing to do with the past, so we don't need to worry about them when explaining how wealth DID increase in the past.

3) Not all forms of the same tangible asset are of equal value.

Cotton is worth less to us in the field than it is as raw fabric, and worth less as fabric than it is as a shirt. Iron ore is worth less than steel beams, which are in turn worth less than skyscrapers. By using labor to turn less valuable things into more valuable things, we can increase the total amount of value and wealth in the world. And we can do this without robbing anyone. It is not part of the zero-sum game to melt down a rusty old car that performed poorly, and make a new car that performs better in all ways than the old one ever did, and is therefore more valuable in real terms than the old one ever was.

[Dominus Atheos]

Ok, first off I should point out that I have a limited understanding of economics, especially on a global scale. So, with that in mind, here is my thought process:

Given that all nations exist on Earth and trade only with each other, the global supply of wealth i]should[/i] be a closed system, with a finite amount of wealth and resources. Furthermore, any method of gaining more wealth should be a zero-sum game; to gain more wealth yourself it must (directly or indirectly) be taken from someone else. That sounds logical enough in my head.

And yet, it doesn't appear to be true. I keep hearing about "creating wealth" and "growing economies." But how can the global wealth supply keep going up without some input? And how can economies keep growing constantly without there being an upper limit and/or a corresponding negative effect on other economies?

Any answers given in layman's terms are much appreciated!

Just to be clear, what you are asking about is stuff that people with graduate degrees in Economics don't understand very well. I'll try to explain it, but don't expect me to do a very good job...

The first thing you should know is that going back on the gold standard is not a good idea. Why is this the first thing you should know, despite it being almost completely unrelated to your question? Because the actual answer to your question is: bullshit. Wealth is created and destroyed by bullshit. Economies grow because people inside them are engaged in bullshit.

There are several ways to generate wealth from nothing, almost all of them bullshit. A good example is capital requirements for banks and financial institutions making loans. In laymen's terms, a bank can lend more money then it actually has, most lend up to ten times the amount of money they actually have. This was responsible for the housing crisis and subsequent bailout: a bunch of bad loans came due and banks actually ran out of money.

Another example is stock prices. Stocks, which are more or less a valuation of a corporation's worth, can shoot up or plunge down on news of the most irrelevant things despite the fact that the actual physical price of what the company does didn't actually change. Speeches by the company president can have a huge effect on stock prices, despite the fact that nothing actually changed.

Also, fiat currency. Just... fiat currency. Technically the money in your wallet isn't actually worth anything besides the value of the paper as a burnable material. It only has value because everyone agrees it has value. Thus goldbuggery, where the government will give you a certain amount of gold for every paper bill you give them. As I said before, this isn't actually a good idea though.

In short, the entire economic system runs on bullshit, but that's okay because bullshit actually seems to be a pretty good fuel.

[energiewende]

Given that all nations exist on Earth and trade only with each other, the global supply of wealth i]should[/i] be a closed system, with a finite amount of wealth and resources. Furthermore, any method of gaining more wealth should be a zero-sum game; to gain more wealth yourself it must (directly or indirectly) be taken from someone else. That sounds logical enough in my head.

And yet, it doesn't appear to be true. I keep hearing about "creating wealth" and "growing economies." But how can the global wealth supply keep going up without some input? And how can economies keep growing constantly without there being an upper limit and/or a corresponding negative effect on other economies?

3) Not all forms of the same tangible asset are of equal value.

This is the principal reason. A car is worth more than the equivalent pile of steel and plastic (for instance).

It's also true that the same object can be worth different amounts to different people. If I have 1,000 oranges and you have 1,000 apples, neither of us can eat all of our fruit before it starts to rot. If I exchange 100 of my oranges for 100 of your apples, neither of us have lost anything since we still cannot eat all of our fruit before it rots. But, we can now enjoy the taste of two different fruits rather than only one. The 100 organes that I gave to you are worth more to you than they are to me, and the 100 apples you gave to me are worth more to me than they are to you. So the total amount of wealth in the world has increased merely by changing ownership of property.

Ultimately Simon_Jester is also right that the sun's input of energy to the earth means it isn't a closed system, but the amount of wealth in the world can still grow an enormous amount before that would matter.

So, to answer the question: yes, wealth can be created and there is an upper limit but it is a rather large one. There are also mechanisms by which wealth is transferred between various bodies (nations, cities, regions, whatever), and these do have a negative effect if one nation overpowers another. A prime example of this would be the British Empire - they took resources from the colonies, processed them in Britain and sold them at a profit back to those same colonies.

This is a mischaracterisation on several counts. First, before the Great Depression the British Empire did not greatly affect the distribution of British trade. There was more British trade with South America, the USA, and China than with most of its colonies. The total non-colonial trade was usually greater than the total colonial trade. Second, refer to the above two ways of generating wealth: India exchanging cotton for railways does not mean that India is losing out. It may well value the railways more than it values the cotton, even if Britain values the cotton more than it values the railways. India couldn't process the cotton efficiently and it couldn't build railways, so it stands to reason that this was the case.

Just to be clear, what you are asking about is stuff that people with graduate degrees in Economics don't understand very well.

If that is the case they should return their graduate degrees. I certainly hope you don't have one.

[mr friendly guy]

Ok, first off I should point out that I have a limited understanding of economics, especially on a global scale. So, with that in mind, here is my thought process:

Given that all nations exist on Earth and trade only with each other, the global supply of wealth i]should[/i] be a closed system, with a finite amount of wealth and resources. Furthermore, any method of gaining more wealth should be a zero-sum game; to gain more wealth yourself it must (directly or indirectly) be taken from someone else. That sounds logical enough in my head.

And yet, it doesn't appear to be true. I keep hearing about "creating wealth" and "growing economies." But how can the global wealth supply keep going up without some input? And how can economies keep growing constantly without there being an upper limit and/or a corresponding negative effect on other economies?

Any answers given in layman's terms are much appreciated!

I won't go into all the reasons, however there are plenty of untapped resources we haven't begun to access yet, so the while resources are finite, we haven't reached that level yet. For example Australia still has plenty of mineral resources which we are hoping to exploit and sell to foreign markets. Look up gas shale and how new fracking technology is predicted to help the US become more energy independent. Compare also that China is thought to have a larger share of shale gas and has barely begun to tap that resources. We have other resources which we can only tap with breakthrough in technology.

[Simon_Jester]

Just to be clear, what you are asking about is stuff that people with graduate degrees in Economics don't understand very well. I'll try to explain it, but don't expect me to do a very good job...

The first thing you should know is that going back on the gold standard is not a good idea. Why is this the first thing you should know, despite it being almost completely unrelated to your question? Because the actual answer to your question is: bullshit. Wealth is created and destroyed by bullshit. Economies grow because people inside them are engaged in bullshit.

There are several ways to generate wealth from nothing, almost all of them bullshit.

Dominus, this is ridiculous. Do you consider it bullshit to dig coal and iron out of the ground, make steel and build railways and industrial infrastructure?

Because that represents an increase in wealth, a very real one that is ongoing and has been since the early 1800s. There is and remains a very real, tangible economy that drives increases in wealth and the standard of living, and it didn't go away just because you have a grudge against Wall Street.

[Your grudge against Wall Street may well be justified- that's not the point. The point is that if you dismiss economic growth as bullshit, you are adopting a terrible burden of willful ignorance. That burden leaves you no more fit to comment on economics than a laissez-faire fundamentalist.]

In short, the entire economic system runs on bullshit, but that's okay because bullshit actually seems to be a pretty good fuel.

Point.

3) Not all forms of the same tangible asset are of equal value.

This is the principal reason. A car is worth more than the equivalent pile of steel and plastic (for instance).

Actually, I would argue that (1) and (2) are the really important one. If it weren't for the fact that some resources are truly renewable (sunlight, rain, time), and others can literally be dug out of the ground... (3) wouldn't matter. There wouldn't be enough raw materials in the world to be converted into high-value products.

Ultimately Simon_Jester is also right that the sun's input of energy to the earth means it isn't a closed system, but the amount of wealth in the world can still grow an enormous amount before that would matter.

Without sunlight, we'd have no agriculture and everything else would be a moot point.

Second, refer to the above two ways of generating wealth: India exchanging cotton for railways does not mean that India is losing out. It may well value the railways more than it values the cotton, even if Britain values the cotton more than it values the railways. India couldn't process the cotton efficiently and it couldn't build railways, so it stands to reason that this was the case.

India HAD been able to process cotton efficiently until the British deliberately destroyed the Indian textile industry to grant themselves a monopoly. And the infrastructure left by the Raj was so fragile and feeble, it was largely useless as an engine of growth for the Indian economy- a sparse rail network and precious little else.

It is inconceivable that an independent India would have had such a totally negligible base for producing industrial goods in 1947. Japan didn't, and India in the late 18th century was hardly a poorer or more primitive place than Japan was.

[K. A. Pital]

It is inconceivable that an independent India would have had such a totally negligible base for producing industrial goods in 1947. Japan didn't, and India in the late 18th century was hardly a poorer or more primitive place than Japan was.

You are now hurting him by actually making a sensible argument. Regardless of Japan's underdevelopment in the early 1800s, it was industrialized (especially for its size) and this manifested itself more than once in their successful conquests from the late XIX century up to 1939-42. India was so screwed that its now-famous metallurgy giant TISCO was founded with American - not British! - expertise and investment was a Swadeshi thing - London gave Tata nothing. It even made things harder for the company: TISCO could not obtain orders for rails until the 1920s - everything was shipped from Europe, including engineers, servicemen and materials. Britain utterly ruined India, and arguing otherwise is again exposing energiewende's stupidity.