0
$\begingroup$

I have read that the GDP of the world is growing. I do not understand how this is possible. If I make profits out of a commodity or a service, somebody pays me for it. Hence, their wealth has to drop. So, shouldn't wealth only get redistributed? If so, how is it possible for the world GDP to grow?

$\endgroup$
0
$\begingroup$

GDP is not a measure of wealth. It's just how many times money was passed along to someone else.

Imagine that you and your friend find an empty island and each of you has 10 dollars in their pocket (so, \$20 in total). You stay in this island for one year, but you eat the fruits that the trees give you. What is the GDP at the end of the year? \$0. Why? Because you didn't pass the money to anyone.

Now, let's say that for the second year, you decide to become a lumberjack and cut wood to make fire. Your friend decides to buy this wood from you for \$8. So, this is exactly what you said, your friend's wealth went down in the same quantity that yours went up. What is the GDP in this case? \$8. Note that it's not \$20 (the total amount of money in the island), nor \$18 (the amount you have accumulated) but \$8 which is the money that he gave to you in a market transaction.

Now, let's say that he decides to take the wood and make it a chair. You like the chair, so you decide to buy it and pay him \$10. Now the GDP is \$18 (\$8 from the first transaction and \$10 from the new one).

Here's where it might get confusing (although not so much). He decides to make a new chair for himself and gives you \$8 in exchange for more wood. Now, the GDP is \$26 which is larger than the total amount of money in the entire island! Indeed, this happens in every country: the GDP is larger than the money in the country.

Without printing more money, you can basically keep money changing from one hand to the other infinitely. A growing GDP only means that the money is changing from one hand to the other faster. Not that people have more money in their pockets.

$\endgroup$
  • $\begingroup$ So, is it true that wealth only gets re-distributed and not newly created? $\endgroup$ – user45959 May 25 '16 at 19:25
  • $\begingroup$ No, wealth was created: both of you have chairs, even though the amount of money has not changed. It really comes down to what do you mean by wealth: goods and services? or money (financial wealth)? Now, in the real economies, central banks can print new money any time and inject it into the system. Increasing the amount of goods and services as well as money. In such a case, the wealth can increase for everyone without decreasing anyone else's. $\endgroup$ – Ulises Genis May 25 '16 at 19:46
  • $\begingroup$ Here's what I'm trying to understand. Marxists argue for the redistribution of wealth to uplift the lower classes. Is redistribution the only way to uplift them? Isn't creation of new wealth also possible? If yes, how? Because, the way I see it, they can only use this new found wealth if they have some nominal claim against someone else (money), again implying redistribution rather than creation of wealth. $\endgroup$ – user45959 May 25 '16 at 20:21
  • $\begingroup$ Also, when central banks print money, who do they give that newly printed money to? $\endgroup$ – user45959 May 25 '16 at 20:21
  • $\begingroup$ Well, the problem is that you're seeing them as incompatible when in fact they are not: you can have both growth and redistribution at the same time. In fact, this happens in many countries and in many periods of time. The problem is what Marx called capital accumulation: the owner of the land has more rights than the workers. So he makes more money. So he buys more land. And he makes even more money. And then he buys more land. More money, more land, more money, more land... What Marx found is that there is no mechanism (nor can be) to stop this accumulation. $\endgroup$ – Ulises Genis May 25 '16 at 20:41
1
$\begingroup$

There's no such thing as a law of conservation of wealth. Wealth is created and destroyed in many ways. It is created when society produces goods and saves them. It is destroyed in disasters, or consumed when we use up our savings.It is created when we create knowledge, software, etc.

In a toy example: when a society starts out without any saved food, it produces food, eats half and saves half, then it is richer at the end. The accumulated food is an asset.

There's all kinds of wealth in a society: patents, ideas, buildings, roads, cars, computers, education, etc.

What does not get created or destroyed are nominal claims that we have against each other: if I give you a paper promising to pay you 10, that makes you 10 richer and it makes me 10 poorer but that's it. This means that its pretty had to figure out what is a society's total wealth, because there's all kinds of claims, explicit or implicit that are hard to value.

$\endgroup$
  • $\begingroup$ Here's what I'm trying to understand. Marxists argue for the redistribution of wealth to uplift the lower classes. Is redistribution the only way to uplift them? Isn't creation of new wealth also possible? If yes, how? Because, the way I see it, they can only use this new found wealth if they have some nominal claim against someone else (money), again implying redistribution rather than creation of wealth. Am I making it clear where my confusion lies? $\endgroup$ – user45959 May 25 '16 at 20:20
  • $\begingroup$ Wealth can be created or destroyed in many ways. It can also be redistributed in many ways. If you think wealth is unfairly distributed, then you might think that a good way forward to improve total welfare is to redistribute existing wealth instead of trying to crete new wealth for those that don;t have any. It might work, or it might not. Clearly, confiscating people's wealth makes it unreasonable to work hard for society in order to accumulate wealth. But you could also argue that a lot of wealth is not accumulated through hard work for society but through socially unbeneficial activities. $\endgroup$ – Fix.B. May 26 '16 at 6:18

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.