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Context: OnMoney

Quora Answer : Is someone else getting poorer when I make money? For example, if I make a million dollars from scratch in a year by doing some business, those million dollars have to come from somewhere. And they come from people.

Apr 16, 2015

Yes. Of course.

Anyone who answered this question by starting to talk about that completely informal and hand-wavey concept : "wealth" is just plain wrong.

There's a finite amount of money in the economy at any particular moment. Economists measure it using terms like M0, M1, M2 etc.

It's finite, scarce, and therefore absolutely zero-sum.

Economists aren't completely stupid. If money wasn't finite and scarce, they wouldn't even try to count it. Measuring doesn't make sense for infinite or indefinite phenomena.

So yes, every time you acquire more money than you had previously, that money has to come from somewhere else in the finite pool of money in the world. Someone else has to have less of it.

Except ... there are certain mechanisms by which more money is actually created.

You, personally, NEVER "make" money from scratch. In some places, people find more gold in the ground and make coins from it. In some places, central banks can print extra money[1]. In some places, certain private banks are authorized to lend it into existence. (They make a "loan" by putting new money in the field in the database that represents your deposit, and some other numbers in the field that represents how much you owe them.) In the US it's even more complicated.

Anyway, the interesting question is why people are often so wrong about all this.

Well, partly because they get confused between "money" and "wealth". What they're thinking is that when you do something that "creates value" in the world, then that obviously adds more "value" to the total stock of value in the world. That's very true. And there are a lot of ways you might create value. You might do some work. You might have a brilliant idea. You might make a connection that allows information to flow more easily or broker a deal between two third-parties that's beneficial to everyone. You might smile at a stranger or tell someone you love them. We certainly don't seem to have limits on "value". Which is why economists aren't stupid enough to try to measure it.

So why do people confuse "money" with "value" the whole time? Such that they think that the open-ended, extensible nature of "value creation" somehow infects money and turns it into a non-zero sum game?

Well, it's partly terminological confusion. We have the idiotic phrase "making money" which seems deliberately designed to conflate the two different activities of "acquiring money" with "creating value".

But it's mainly because we do try to use money (a measurable quantity) get a handle on the unmeasurable value that we have. So we take money as a proxy for the wealth in society. However, we should ALWAYS remember that this is basically a heuristic and utterly dependent on how we choose to make the formal mapping between what we consider wealth and money. That mapping is somewhat arbitrary. VERY ideological. And always open to misleading. (A classic example: if all the mothers in the world stopped taking care of their own children and hired another mother as a paid babysitter, there'd be a huge increase in money transactions (and probably more money printed to enable this ... so it would look fantastic on paper) but negligible extra value would actually be created. The same number of women would be spending the same number of hours caring for the same number of children.

So, yeah. Bottom line :

  • you NEVER "make" money yourself unless you're a bank or a counterfeiter.
  • you "acquire" money from a finite pool in the economy, and yes, that means when you get more, everyone else has to have less.
  • if you acquire it by selling a lot of new value that you personally created, people will feel that it's legitimate to print some extra money to represent the extra value (ie. the "growth of the economy") It then seems (to anyone who's ignoring the mechanism) like you managed to "make" that money out of thin air.

[1] So you CAN acquire money without anyone else losing it. The funny thing is, though, that this is the way that many people seem to think is the least legitimate way of getting new money. Because it's considered to be "inflationary" to create brand-new money rather than simply take it from someone else.

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