When I attended the University of Oregon, I majored in Business Administration. After a misguided attempt to minor in Computer Science, I switched my secondary focus to Economics because it was an easy minor to obtain as a Business major. Turned out though, I loved Economics! My 300 and 400 level Econ classes were some of my favorite. It was a thinking man's subject....it really got the wheels turning.
Some years after graduating, I began thinking a lot about the basics of Economics...the fundamentals. Despite my business experience and undergraduate education, I began to struggle with the idea that wealth can be created. If wealth is created, where does it come from? Where was it before? Does it just appear out of thin air?
I mean, look at the physical sciences as an example. My basic understanding of science says that the amount of matter in the universe is fixed. I also understand that energy can't be created or destroyed, it can only change forms. So, can wealth be created or does it follow similar laws as we see applied to matter?
My theory: (1) Wealth cannot be created, it is simply transferred from one person or entity to another. (2) There is a fixed amount of wealth in our world.
Let's walk through an over-simplified example together.
Say a fast food restaurant sells a hamburger for $1. When I buy one, I give them a dollar. That dollar gets split up in many ways. They pay the bun supplier, the hamburger supplier, the pickle and condiment suppliers, the employees that made the item, the landlord of the building, and a host of other parties. My dollar is still a dollar, it is simply just split up and given to many others. Let's say that the cost of materials, labor and overhead is $0.98, leaving the company with $0.02. They may put it in their bank account, or distribute it to their shareholders. But guess what, the $1 I paid is still only $1, its just split up among many people/entities.
That dollar was just $1 when I had it and $1 when the restaurant received it. One dollar is still one dollar, it just changed hands. Of course, I got that dollar from somewhere, likely my employer. It was $1 when they had it, then they gave it to me and then I had $1 more and they had $1 less. Before that, a customer had $1 and they gave it to my employer. That dollar changed hands, but it was still just $1. Where is the wealth creation? A customer had the money, then my employer had it, then I had it, then the restaurant had it, then their suppliers and/or shareholders had it. A dollar is a dollar is a dollar.
I think this is an important concept to meditate on. Looking at the theory in a macro scale can be eye opening. If I get one more dollar, it means that someone else has one less. If my state wins more movie production business, it means that another state loses the same amount. When China's economy grows by X, other countries economies shrink by X. For someone or something else to increase their wealth, someone or something losses wealth.
So what do you think? Am I missing something obvious and fundamental? Where does wealth come from?