Wednesday, January 07, 2004

Wealth is Non-Zero Sum

Phil at The Speculist posts a response to Glenn Reynold's Tech Central Station article discussing income income inequality. Both gentlemen agree that income inequality as we have it where the rich get richer faster than the poor get richer will become more pronounced yet less important with time. Phil takes Glenn's ideas a step further and points to nanotech and virtual reality as technologies that will ultimately make wealth moot by destroying poverty.

In the comments section, a reader named Hearn admits to not understanding how a person can become richer without someone else becoming poorer. I responded with a comment two entries lower, and I will further develop my idea here.

In strictly a monetary sense, any transaction means that one person gains money and another loses money, hence it is zero-sum. As the philosophers say, however, money isn't everything.

While cost is an absolute, value is not. If it were, economic exchange would be impossible. As I wrote:

If you look at the value of the exchange, however, then you see that neither side comes out losing. I may pay for a car, for example, with money, but I would believe that the car has more value to me than the money I paid for it. If I didn't, then I would not make the purchase. The seller of the car would have to assign more value to the money that I give him than he would to the car, or he would not make the sale. Both of us would walk away (Ok, I'd drive) feeling that we had increased the value of what we had and are therefore wealthier. As Adam Smith would say, Wealth has been created.

(It may be bad blogging form to quote yourself like this, but why write it all twice?)

All economic exchanges involve the increase in value. A craftsman and a factory take materials and apply effort. The end result is something that will have more value to a customer than the materials did to begin with. For the manufacturer, this has the effect of turning his effort (truly a use it or lose it resource) into money. Meanwhile, the purchaser has increased the value of his possessions by replacing his money with something of greater value.

Even those who work in services create value. A pair of very dear friends of mine own their own computer repair business. While they do not produce anything per se, they do increase the value of the possessions of their clients. To use some really messily expressed math:

1. (Cost of Labor) + (Cost of Parts) < (Value of Functional Computer)

2. (Value of Time Repairing Computer) + (Wholesale Cost of Parts) < (Fees Collected)

The Customer "wins" if 1 is true. The business "wins" if 2 is true. Note that these are not mutually exclusive. Because:

3. (Fees Collected) = (Cost of Labor) + (Cost of Parts)


4. (Value of Time Repairing Computer) + (Wholesale Cost of Parts) < (Fees Collected) < (Value of Functional Computer)

The non-zero aspect of this equation is that (Value of Time Repairing Computer) on the left is determined by the business and (Value of Functional Computer) is determined by the customer. So long as the absolute, objective value in the center satifies both 1 and 2, both sides "win" and both feel wealtier.

Granted the clear definition of boundaries is not absolute. My friends often tell the customer that the customer can get better value for the money by getting a new computer. In the short term this would be a loser for the business, but they recoup in the satisfaction of not ripping off their clients and in good will from said clients.

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