It's a zero sum because the persons and financial resources buying what you have to sell is a finite number. If they buy from me they probably wont buy from you.
This is independent of the relative merits of the products we are both selling. Maybe I forced my products to be shown in the major television channels, because I also own the television channels and you dont.
New persons are born every day and financial resources are a bookkeeping tool. If I make something new and you make something new then we can trade our products and we both gained without anyone losing out. It is not true to say the world is zero-sum.
The Federal Reserve who controls the M1 supply would like a word with you.:-)
There is a limited amount of goods and services you can sell to the inhabitants of a planet with a population of 7.7 Billion.
What if the planet would have only a population of 7? Each person owning one of the 7 continents? Let's say the persons owning Africa and the person owning North America, due to some meteorological disaster, and unfortunate investments,
had to sell their respective continents to the hotshot owning Europe?
If the money supply is infinite, then has no value. Now from the finite money supply in the world who is going to gain the most?
But you fail to note the creation of a market happens by destroying another.
Amazon vs Book Shops, Uber vs Taxis, Cars vs Faster Horses, Netflix vs Theater Industry and DVD Rentals.[2]
There is a limit of resources and economic output per year, the ones
owning the more productive processes will get a progressive bigger share of the
output. More and more, lots of activities are zero-sum and the long term is a complete zero-sum. [3]
It's not a view from mainstream economists, because many do not want to be seen as heirs to Karl Marx ( an Economist let's not forget, not a politician).
It's also a discourse popular from a certain political current, that spouses the "we can all benefit mantra".
I prefer to use Constrain Theory [1], and be reminded that if somebody creates a more efficient Amazon, faster, cheaper, better then Amazon will not prosper. If somebody opens a new service, or creates a new product, there will less disposable income from the customers of this product to shop at Amazon.
Reminds me of a story, normally told with several variations so my details are not exact. When Henry Ford II toured some factory, he taunted some workers with the fact increased Robotic Automation would make Ford less dependent on the workers. The workers replied asking Ford how many cars he was expecting the Robots would buy?
> you fail to note the creation of a market happens by destroying another
This isn’t true. If you go back to the origin of human civilization, economic “output” was limited to survival - food/shelter. Today survival represents an ever-smaller fraction of economic activity. Where did this additional activity come from if it was limited to replace preceding activity?
Similarly real gdp per capita has been increasing since the beginning of time. How can this be possible if the economy is zero sum?
> It's a zero sum because the persons and financial resources buying what you have to sell is a finite number.
Nope. It's obviously false by inspection - the GDP grows most years.
At the micro level, suppose I give Picasso $25 worth of art supplies. He then creates a painting with it worth $1,000,000. This painting becomes a valuable asset that he can then use as collateral for a loan. Banks loan money by creating it.
I.e. $999,975.00 magically appeared!
I wish the schools would teach this stuff. In my experience, very very few people understand this.
The Federal Reserve also has the ability to adjust banks' reserve requirements, which determines the level of reserves a bank must hold in comparison to specified deposit liabilities. Based on the required reserve ratio, the bank must hold a percentage of the specified deposits in vault cash or deposits with the Federal Reserve banks..."
"...By adjusting the reserve ratios applied to depository institutions, the Fed can effectively increase or decrease the amount these facilities can lend. For example, if the reserve requirement is 5% and the bank receives a deposit of $500, it can lend out $475 of the deposit as it is only required to hold $25, or 5%. If the reserve ratio is increased, the bank is left with less money to lend out on each dollar deposited..."
The monetary value of Picasso work, is tied to the competition between the ones who have a part of the current money supply, and how much they want a Picasso. If Picasso could produce 10,000 paintings per day, so that each person
in planet could have one, we would not be talking about millions of dollars per painting.
So no money is being created from nothing. It's leverage plus application of constrain theory. The main constraint being the amount of money printed and the leverage on the assets.
> That is called leverage and only exists because the government prints money.
This existed long before the government took over the banks and decoupled it from gold. It's called "fractional reserve banking".
> The bank did not create money
It absolutely did. It's how fractional reserve banking works. The "fetters" are the collateral backing up the loan. The money is destroyed when the loan gets paid back. I know it sounds like magic, but it isn't.
No bank in the world will loan you money without collateral. Now using your example of a loan based on a Picasso painting, the value of the painting is correlated to the money supply.
If Picasso decided to go live in Zimbabwe and decided never to sell his paintings to other than Zimbabwe nationals, paying on the local dollar, that would limit the loan the bank can collateralize with the asset, in other words the painting.
The bank does not create money.
"Fractional Reserve Banking: The Myth of Creation of Money" :
> No bank in the world will loan you money without collateral. Now using your example of a loan based on a Picasso painting, the value of the painting is correlated to the money supply.
That's what I wrote. The value of the painting was created by the painter, and money was created to back it. (And that money is destroyed when the loan is repaid, until the next time the painting is used as collateral.)
This is how the money supply (in free banking) naturally rises to match the asset wealth in the economy.
> The bank does not create money.
Of course it does. Your linked article is simply wrong. Trying to equate it to gold bars is a grossly wrong equivalence.
If Fractional Reserve Banking would create money, then it would not have a problem when all the depositors go at the same time to claim their money at the bank. :-)
As the previously mentioned article states, the bank does not create money, it increases the Velocity of Money.
> all the depositors go at the same time to claim their money at the bank.
If the bank did not create money, and simply loaned out the deposits, the depositors would still not find their money there when they run to get it.
Banks loan out a multiple of the deposits, meaning they create money.
Your theory that FRB doesn't create money is a fringe one, which should give some pause. What should also give pause is the gold example, which doesn't apply, and the false notion that bank collapses from runs only happen when they use FRB.
"...The phrase “banks create money” forms part of the popular discourse, but it conveys an erroneous representation of the banks’ role in the money creation process..."
"...Without the correct understanding, the misguided belief that banks create money out of nothing will continue to influence models of the financial sector and monetary policy interventions..."
"...The traditional view adopted in the money supply debate is that banks create bank money by granting loans. This explanation is then extended to suggest that banks thereby create money out of nothing. However, this is an inadequate caricature of the process of bank money creation..."
"...To an outsider, it appears as if by recording an asset account entry connected to the buyer and by recording a corresponding deposit entry, the bank has created money out of nothing; this is the illusion of the bank having created money..."
"...But this is only the prima facie appearance and not the truth of the matter because the outside observer has neglected to acknowledge that the deposit value records the value-for-value exchange conducted through an underlying transaction. In reality, the seller no longer has a house and the buyer now has a house..."
I feel you are getting into the definition of the role of the Bank as intermediary as stated in the latest link above, and to be fair the definition of what Money depends on what is role in the economic transactions.
Bankers themselves don't describe like that: "Economists frequently assert that banks can create money out of nothing. Bankers have a different opinion: for every loan they need to attract money. And, strangely, they are both correct. How can this be reconciled?"
This is independent of the relative merits of the products we are both selling. Maybe I forced my products to be shown in the major television channels, because I also own the television channels and you dont.