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?
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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.
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.
Economic assets can be used up (like the sandwich) or destroyed (as in war) and wealth goes down as a result. Wealth is *measured* in money, but describes all of the assets we have.
If your house burns down with all of your stuff inside, then you are suddenly much poorer.
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It’s called “consumption.”
The net worth of society has not shrunk by 1 sandwich, because producers are constantly turning out more sandwich components at a rate that roughly matches sandwich consumption. And the same is true of any consumer good, be it food, household appliances, smartphones, etc.
On the war example, if the money is still there, wouldn’t that mean people do have a net worth?
As far as being leveled, wouldn’t that mean there is just no infrastructure?
In this scenario, the countries infrastructure is an asset to the country, if it is destroyed then the country has less assets.
As far as the sandwich scenario, you are trading money for a sandwich, which provides you with energy to make more money, so you can buy more sandwiches.
Society might lose one sandwich when you eat it, but it gains the increase in energy you gain from consuming the sandwich.
Economists often talk about “durable goods” (or “hard goods”) on the one hand and “consumable goods” / “soft goods” / “nondurable goods” on the other. Your car is the former (even though it doesn’t quite hold its value), while the sandwich is the latter.
Think of unconsumed goods and services as capital. The economy is made of people who acts as producers and consumers. There is a global amount of capital which you can quantify as a USD value. Imagine the world as a giant company with a giant ledger of assets.
Naturally the global amount of capital naturally increases (e.g. trees grow) and decreases (e.g. hurricanes kill animals). There is also fixed capital like oil reserves and fertile land which can only decrease.
Production by labour is the conversion of capital. A tree with labour can be converted into timber which can be converted into a chair. The easiest way to quantify capital is the USD value of goods. The value of the “man-hours” could be their salary.
People are consumers as well as producers. If the chair is sat on enough it will eventually become useless. In this case, as you say, the net capital of the world is decreasing.
Money is an economic tool, but is not at the essence of economics; finite resources (capital) and infinite wants. Money changing hands does not directly constitute an increase or decrease of capital.
From an economics standpoint, eating the sandwich is consumption. Purchasing a plot of land is investment in an asset. Neither one is good or bad, they just do different things.
Some purchases seem to blur the lines. If you buy a house to live in, it’s both an asset and something that gets used. That gets accounted for by counting the house itself as an asset, and living in the house as consumption, since you could otherwise rent it out. (Passing up on this is called the opportunity cost.)
In practice, even though you could try to hold onto a sandwich and resell it, it’s treated as immediate consumption with an asset value of zero. Which I would endorse if you ever try to sell me a second-hand sandwich.
As far as “the net worth of society”, remember that the sandwich was only made to be eaten, because it was expected to be eaten. All the stuff and effort that went into making it won’t ever be used if people stop eating sandwiches. The “worth of society” won’t need to change. People will just start producing the stuff that replaced sandwiches.
If you want to think of it this way, the value of the sandwich is “added” to you as a person.
If you engage in economic/productive activity, that consumed sandwich is the fuel that generates positive economic value.
Think of it as purchasing a tank of gas/petrol for a vehicle. If that fuel is used unproductively, that society’s total welfare has reduced but if it is used to generate even more value, then society’s total welfare has increased.
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