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
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.
One thing I haven’t seen people touch on is wealth. Wealth of sort of like one measure of net worth, so the wealth of a country is the sum of all the assets and peoples net worth. Your wealth is the sun of your assets (basically, eli5 so simplified) your house, car, etc.
Wealth is both created and destroyed all the time. The sandwich maker took bread worth a dollar, meat worth a dollar and put it together with their labor and sold a sandwich for 3 dollars, that extra dollar is newly created wealth, created by transforming goods or resources with their labor.
Later that sandwich was eaten and that wealth was destroyed. You were worth three dollars more when you had the cash, then you traded the cash for a three dollar sandwich and you were worth the same because you traded three dollars for an asset worth three dollars (although you wouldn’t have been able to sell it again since there’s not a market for second hand sandwiches). then you ate the sandwich and your net worth was lowered because you spent your wealth in consumption and destroyed a sandwich worth of goods.
Consumption is the primary driver of Welty destruction, but many things just lose value over time. A car you bought for 30k ten years ago is no longer worth 30. That wealth decreased over time.
Wealth is created and destroyed every day, hopefully more is created than destroyed that’s how an eceonomy and society grow, but in your case of a city being leveled that would represent a huge loss. Money is only one representation of wealth because it lets us buy goods and services, but those foods themselves can be assets which are also wealth.
This is a Marxist way of looking at it but I feel it gets at the common sense intuition the OP is looking for:
When you purchase the sandwich it exits the realm of exchange and enters the realm of consumption, so in one sense it doesn’t matter economically what you do with it because the money has been paid and has entered the economy.
However you also have an economic value, your labour power, which you sell on the open market in exchange for wages. Just as the sandwich can’t exist without bread, which must be factored into its price, your labour power can’t exist without your body, which must be continually replenished with food.
So in a more holistic sense, the value of the sandwich isn’t destroyed when it’s consumed but rather metabolized by your body, nourishing you so you can go to work the next day
Ah but you’re forgetting. The sandwich is actually gone, it’s just been turned into fuel for you body. Which I would argue is more valuable to society then the sandwich was
Given an initial situation, a Pareto improvement is a new situation where some agents will gain, and no agents will lose.
I would recommend watching the Futurama episode Futurestock. It is a story highlighting the value differences between holding onto stock shares versus a sandwich-heavy portfolio.
TL;DR: [https://www.youtube.com/watch?v=FnGOmYEuXRo](https://www.youtube.com/watch?v=FnGOmYEuXRo) … [https://www.youtube.com/watch?v=EHUtHITYb94](https://www.youtube.com/watch?v=EHUtHITYb94) … https://www.youtube.com/watch?v=kId0WiD69JM
The first problem your 5-year-old world view has is putting a fixed value on things.
Say you buy a sandwich for a dollar.
What is the sandwiches worth?
It is _not_ one dollar – otherwise, if the next guy offered you a dollar for your sandwich, you would sell it to him, because one dollar is one dollar(‘s worth of sandwich), right?
Wrong.
You bought that sandwich, because you valued the sandwich higher than the one dollar.
And the vendor valued the dollar higher than the sandwich, so he sold it to you.
So, What’s the sandwich’s value?
Different people value it differently.
The trade (sandwich for dollar) was a net gain in value for both parties (both gained something they valued higher than what they had before), so, a net gain for society.
You ate the sandwich, which was good for you, giving you energy and joy. Nothing was lost here.
I’m seeing a lot of economists not explaining like your 5.
If you eat a sandwich you haven’t reduced the value of the economy by one sandwich. You’ve invested that sandwich in energy that you can use to be productive or not.
The idea that a war damaged country has all the value still present is the basis of the most misleading thing about what the general public accepts as true. It’s often boiled down to a pie analogy and a war damaged country as your saying is still the same size slice of the pie.
Here’s why that’s wrong. It assumes there’s only one pie. Let’s discover why you already knew there was more than one pie. You assumed the value of the sandwich was lost because you ate it. That’s only true if you invested that energy that in no way benefited you. It was your investment and you do what you like with it. Obviously there’s another sandwich out there.
If you’re saying there’s only finite resources on this planet and that is the pie. Then it doesn’t matter who uses what or when and no one is poor because we are all ingredients in the pie.
Making more pie, how? Pies take ingredients and different pies take different ingredients. It’s up to you to find what has value.
A war damaged country has more potential than a fully functional city. The money is there you have to start making pies. In a fully functional city the pie is getting made at regular and predictable rate and the investment in the pie is low risk. People like low risk, and low effort. This is why the pie seems small. Low risk means low rewards which means low opportunity for more investment. You’ve got an inability to gather ingredients for a new pie.
You purchased a sandwich, so the value contained in the sandwich is still circulating in society in the form of money. It didn’t go away, it just got transmuted. And if you are a worker, consuming the sandwich is a form of productive consumption, because it gives you the energy to produce commodities that contain a greater total amount of value than that sandwich (to ELI5 that last bit, the calories in 1 sandwich could give you the energy to make another 50 sandwiches, which could then each be sold for the same price as the original sandwich – your labor is what creates value). Of course, you could also consume the sandwich unproductively, by using the energy to play video games or something. Still, that wouldn’t change the fact that the value in the sandwich is still out there, circulating as money, and other people are also out there creating more value by making more sandwiches, etc. New value is always entering circulation.
The question about a city being leveled in war is a different issue. See, value (how much money you can exchange a commodity for) is inextricably bound up with *use-value*, an object’s ability to be useful to someone for something. Use-value is based on the physical characteristics of the object. A building is has use-value while it’s standing, because people can live and/or work in it, or use it to store things. Once it’s been bombed to rubble, it has no use-value, and so the value originally contained in it is gone. It can’t be sold for the price of a building, because it can’t do building things. To further illustrate, you bought the sandwich in the first example because it has the use-value to you of nourishing your body. But say that as the guy from the sandwich shop was just about to wrap it up for you, a cockroach fell from the ceiling into your sandwich. Now, it no longer has the use-value of being nutritious, because there’s a potential disease vector in it, and the sandwich guy has to throw it out. The value that’s in it is gone, wasted, because the use-value is gone.
Money become sandwich, sandwich becomes energy, energy becomes productivity, productivity becomes money, money become sandwich.
There is no such thing as creation or destruction, only transformation.
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