• 201903.27

    Wealth is (mostly) a zero-sum game

    I’d like to talk about wealth. I’ve heard many times from many different people that “wealth is not a zero-sum game.” I disagree.

    Wealth is (mostly) a zero-sum game. I will argue that most “creations” of wealth are not actually creations, but instead diversions, and when someone talks of “creating” wealth, they usually mean diverting wealth.

    Firstly, let’s distinguish wealth from money. I will define wealth (for our purposes “material wealth”) as the collection of all of one’s possessions that have monetary value in terms of exchange or use. This can be property, investments, money, stockpiles of food, weapons, etc. This is distinct from money because while money can be printed, wealth cannot. Wealth can gain or lose value without any exchanges happening because the market value of the items counted in wealth might change over time, however the loss of value of wealth for one person is generally a gain of wealth for another. For instance, printing money will raise the wealth of the agency printing it while lowering the value of the currency for those holding it (this is a diversion).

    Secondly, let’s distinguish wealth from value. In many of the discussions I’ve had about wealth, “value” inevitably comes up. “Value was created.” Wealth encompasses things than have a value (for our purposes, a market value), however this is distinct from societal value, and people are speaking of societal value when they say “value was created.”

    Third, let’s describe a market economy. An economy is a network. The nodes of the network are people, companies, or states, and the connections between nodes are transactions. Wealth moves and flows through our economic network like a series of rivers and streams. This network has inputs (things outside of it that feed into it) and outputs (things that are consumed). Creation of new wealth would be defined as an external input to the economic network that previously did not exist (the addition of a new input). All other changes to transactions in the network are diversions.


    Let’s start with inventions. Often, this is the first thing brought up when people speak of wealth being created. Let’s say I invent the first clock. It consists of a spring that’s wound to power the system mechanically, a set of gears, and a face with arms. The invention is a smashing success, and within a year I am swimming in wealth. Was wealth created? It would certainly seem so, if you were to only look at the individual node of the economic network representing me. That doesn’t explain where the wealth I’ve gained came from then. When I invented the clock, did the market value of one of my clocks suddenly show up in the bank account of everyone interested in buying the clock? No, it did not. Instead, the people who bought the clock found it more useful than something else they would have otherwise bought. In other words, my creation of the first clock did not create wealth, it merely diverted it. If you were to take a simplistic view, you could say that wealth was diverted from sundials. So while I have found new riches, the builders of sundials are perhaps wringing their hands at the very thought of me.

    Now, an important distinction I brought up before: wealth and societal value are different! When I created the first clock, societal value was created. People can now tell time at night and they can tell time without owning a plot of land on which a sundial would have gone. I have created value (as in societal value) with my invention. I have not, however, created wealth. No new economic inputs appeared. I have instead diverted existing wealth from other nodes of the economic network to myself.

    This applies to all inventions. Airplanes diverted wealth from trains. Cars diverted wealth from carriages, equestrian tradespeople, and barns. Computers diverted wealth (and continue to do so) from countless industries and professions. None of these things directly created new wealth (however, indirect wealth was created when the market demand for silicon skyrocketed in order to build computers).

    Stock market

    But the stock market! If I buy IBM at $10 and sell a year later for $15, wealth has been created!

    Not really. In the simplistic view, people sold other stocks in order to purchase IBM. The stocks they sold are now worth less than before. Or perhaps someone decided to buy IBM’s stock instead of a second car. The car dealership lost a sale because your IBM stock went up.

    Why, then, does the stock market keep trending up over time? Isn’t wealth being created? In some ways, yes. If a country has oil reserves, mining that oil has created wealth. This is not enough to explain the overall market growth, however. In essence, the stock market grows when people put money into it. So it follows that the stock market grows because more and more people are buying stocks. This can be seen as a diversion of wealth from outside the stock market as purchases into the stock market. This is, in essence, a growing concentration of wealth into the market, most probably caused by extractions of profit by those who are more inclined to invest:

    Dow Jones 100-year inflation-adjusted

    Here’s the Dow Jones over a 100-year period, inflation-adjusted. Notice the growth patterns before the 1990s: a peak in 1929 of $5.5K, a slightly higher peak in 1966 of $7.8K, then after 1996 explosive growth. This explosion happened right around the time of Clinton’s neoliberal policies encouraging hostile banking in foreign nations and relaxation of trade regulations. In a capitalist sense, this represented a new frontier. Wealth was not created, but diverted to the United States from developing nations.

    Speaking of wealth and stock markets, the 2008 financial crisis is a wonderful example of what happens when people attempt to create new wealth. The government bailouts to banks ended up being a large diversion of wealth from taxpayers to greedy pricks.

    Actual wealth creation

    So why then is wealth a mostly zero-sum game? Because wealth can be created: mining resources, homesteading a previously uninhabited plot of land, and harnessing natural forms of energy (such as farming or solar and wind power).

    The best case for wealth creation would likely be mining. Mining creates new economic inputs that were previously unusable, and some of these economic inputs have very high market value.

    Also, new technologies can unlock economic inputs that were previously inaccessible. Invention of the offshore drilling rig allows oil extraction where previously infeasible. A device that allows humans to breath underwater indefinitely might allow homesteading of the ocean floor…what was once useless to humans (in the sense of monetary value) is now commodifiable. Or perhaps a space ship that can mine raw materials from Mars would result in the creation of new wealth.

    However, in the case of creation of wealth, the wealth created (as in, the economic inputs added to the network) is miniscule to the other economic operations required. For instance with farming, you have to buy the machines to prepare the soil. You have to buy the seeds. You have to buy the watering infrastructure and the water. You have to hire the workers to help you. You have to pay taxes to fund the legal and military system that ultimately protects your land from hostile takeover. The amount of in-network economic transactions required to produce the new economic inputs (the input being food grown by the sun), are miniscule to the creations of economic inputs.

    In reality, the few cases where wealth creation actually occurs are either hyper-competitive such that nobody is getting rich by participating (unless they own massive amounts of land and equipment), or they are exclusive to those who already have immense amounts of wealth.

    Yes, wealth can be created (but not by you)

    Wealth can be created. The creation takes place as an economic input that is either external (like the sun), locked away (under the Earth), or by new technology that allows the harnessing of either of those in order to produce new economic inputs. These new technologies are generally not immediately available to the general public, meaning creation of new wealth is controlled by those that have a critical mass of it already.

    In essence, the amount of economic processes that create wealth are tiny compared to the amount of economic processes that are simply diversions of wealth, and unless you have a good heap of starting capital, you will not be creating wealth anytime soon.

    For someone with a net worth of $500M, perhaps wealth can be created. For someone with a net worth of $100K, wealth cannot be directly created…only diverted, by convincing people who have wealth already to do so.

    Wealth is (mostly) a zero-sum game.