What’s it called if I buy something like a sandwich, then consume it, and the net worth of society has now shrunk by 1 sandwich? Versus buying something that keeps its value.

Question

Maybe a better example would be a country getting leveled in a war. All of the money is still there, but now everyone is poor and has no net worth. How does that work?

It seems kind of like losing that amount of money, even though we didn’t?

In: 3475

Answer 1

Your war example is often discussed as the “Broken Windows” falacy. The opportunity costs of having to rebuild are huge compared to if the community had been able to use those resources for another project.

If I have a war torn village in Africa and the men and women have to rebuild it they use a lot of effort. Imagine they didn’t have to rebuild and instead built a community well and rocket stoves at each house. The opportunity cost is safe water and more effecient cooking.

Your sandwich example needs to account for economic productivity. As the sandwich store owner, I took your dollar and kept maybe $0.10. but spent the other $0.90. Then the people I bought goods and services did the same…. and so on. So that dollar actually turns into about 10 in productivity.

Also you buying a sandwich made you richer. Why? Well imagine if you had to grow the wheat, animals and vegetables that went into it. Instead you pursue a skill that you do really well and pay someone else for their skills.

In the end everyone benefits from having much better opportunity costs.