How does everyone not become poor over time?

Look at the whole world --the union of all goods and services and workers and customers. Everyone who is a customer is a worker somewhere (they had to get the money to be a customer somehow). But not all revenue goes toward worker wages--some goes to cost of goods--production, not just labor. And considering the whole world--it's a closed system...so if everyone pays Z in as a customer--they lose X to cost of goods and are paid out up to Z-X as workers -- then, when they are next customers, next round of purchasing, Z-X goes back in as rev and Z-2X comes back to everyone... keeps going. You lose cost of goods each round of purchasing. you need X more from customers to sustain this--which means you need to keep injecting X from outside or have more customers than workers. But where do these injections come from if we are accounting for all goods and services? Or where is this larger set of customers who are not also workers? Where does their money come from if not from work? Elderly, children and those who do not work also derive their money from this cycle--they were workers, will be workers or live off a % of workers' wages from taxes or friends and family.

The answer is presumably wealth or value creation but how is this integrated into the cycle of workers and customers so that Z grows instead of shrinks?

Economic novice--thanks!

• You may want to checkout the Circular Flow model, which addresses precisely why the type of "leakages" you mention don't usually occur. The key issue in your reasoning, as pointed out by @Pekisch, is that you omitted resource (capital, land, and other means of production) ownership, which represents a separate source of income in the economy. – Herr K. Feb 5 at 0:55
• Where do you think the "cost of goods-production" goes to???????? – user253751 Feb 5 at 5:34
• Look up Marx's concept of "appropriation of surplus labour" for a clear description of why most people keep getting poorer (in money) while the rich get richer, even though the material world (our technology, our resources, etc.) might objectively be improving over time as workers improve it with their labour. Labour increases the size of the whole pie, but the proportion of the pie that is controlled by workers has been decreasing over the last ~40 years due to the poor state of the class struggle. – iono Feb 5 at 12:29
• We do become poor over time, but we offset it by continually exploiting mother earth for ever more resources so it's probably fair to say that something becomes poor over time - the earth - which consequentially means that we do (i.e. sawing off the branch we're sat on), but it's fine because in the grand scheme of things the whole lot is one big recycling project (bar the spacecraft that leave the earth never to return) that will survive the resource consumption even if the human race doesn't! – Caius Jard Feb 5 at 17:40
• I didn't understand that X is where money comes from. I thought it was the exact opposite--tech and factories loose their value right off the shelf--i imagined X as money spent on equipment that devalues as it rusts away. @Pekisch that was why i thought there was this leakage. I was pretending the world was one big company -- and they had to sell all their own workers the goods they make. It costs money to make the goods so all the money couldn't flow back to the customer / worker. I didn't link back it that making processes more efficient (improving the good making) is how value is built – DeeDee Feb 6 at 18:46

In short because economy is not a zero-sum game and because economic production does not need to decline but can grow over time.

First of all, forget about money. Money in economics is just extra tool that solves issue of double coincidence of wants, allows you to store value over time and to do accounting. In fact, traditionally money consisted of commodities such as stone, or precious metals or even products, coffee, cigarettes or even alcohol etc at some point in time and place served as money.

As a non-economist this might come as a surprise to you but most microeconomic models do not even have money in them. Money can play an important role in macroeconomic perspective because in the short-run it can affect the real economy, but from micro perspective and even long-term macro perspective money is neutral and not important.

Next, as you pointed out a world's economy, taken as whole, is a closed system but that does not mean people should get poorer over time. This is not an equivalent of thermodynamically closed system where entropy has to dissipate energy overt time. A closed economy can be described as:

$$Y = C + I + G$$

which says that output/income (they are economically equivalent) $$Y$$ has to be equal to consumption $$C$$, investment $$I$$ and government spending $$G$$. In turn, $$Y$$ is a result of production. A common specification for production process would be to use Cobb-Douglas production function, so I will do that here as well, although in principle there could be multiple functional forms that production process could have. Moreover, for simplicity I will restrict myself to two factors of production (labor and capital) even though in principle you could put into Cobb-Douglas also human capital (education), land and other factors, but I omit them for sake of brevity. Given these assumptions the production process would be given by:

$$Y = A K^{\alpha} L^{\beta}$$

where $$A$$ is the available technology (broadly defined - in economics better production strategies count as a technology as opposed to just 'gadgets' such as PC), $$K$$ is the stock of capital and $$L$$ is the stock of labor. Alpha and beta are parameters of the production function that determine other characteristics of production such as what sort of economies of scale production exhibits (e.g. increasing, decreasing or constant).

Thus, we can say that the consumption, investment and government spending is equal to this production process:

$$A K^{\alpha} L^{\beta} = Y = C + I + G$$

So as long as technology $$A$$ or capital $$K$$ or labor grows, output $$Y$$ will grow as well and even completely closed of economy can consume more, invest more or have more government spending.

Furthermore, what we really care about is usually output/income (in economics output and income are equivalent and interchangeable) per head. So if we for simplicity assume constant returns to scale ($$\beta = 1-\alpha; 0 < \alpha < 1$$) we can divide the last expression by $$L$$ to get whole expression per capita as:

$$A \left(\frac{K}{L}\right)^{\alpha} = \frac{Y}{L} = \frac{C}{L} + \frac{I}{L} + \frac{G}{L}$$

Here, if we keep the population growth constant then we can see that per capita incomes/output and consequently per capita consumption, investment and government spending will grow when our capital stock and technology stock grows. You get growth in capital stock from investment (investment is part of production that is not consumed but saved for future, possibly for further production), and growth in technology from human ingenuity or also depending on which economic growth theory you buy to also investment.

In addition, all the above is up till now just manipulation of definitional expressions. We could further continue by adding on some growth theory which could yield further insights. For example, the most popular growth model presently is the Solow-Swan growth model where it can be shown that what really matters is growth in $$A$$ because increase in investment and capital stock can only increase level of output not growth. If you buy into endogenous growth theories investment can even increase the growth rate further beyond that (you can read more on this in Barro & Sala-i-Martin: Economic Growth 2nd ed).

In order for people to get poorer over time (in per capita terms) an economy would have to experience either destruction of technology (for example ancient Romans, Greeks, Carthaginians etc had plumbing but this knowledge was lost in many parts of World - but not all - during dark ages, or another example would be concrete) or by destruction of capital (e.g. war, violence, natural disasters etc. but also just wear and tear i.e. depreciation). Empirically, and let me add thankfully, people historically turned out to be better at producing new technologies and adding new capital through investment, than at destroying either of them.

Consequently, to sum up people do not get poorer over time and in fact get richer because of growth in economic production (which in turn determines people's income), and economic growth occurs primarily thanks to growth in technology and investment. In fact note because the economic growth is to large extent driven by technology, it is possible for economic production to grow indefinitely (assuming technology has no limit - e.g. in real life it is possible you can't get at an end of technology tree like in some strategy game as it might have no end). In addition, more rich models would also include other important factors such as human capital (education) but the explanation above would not conceptually change (education macroeconomically functions in same way as capital - hence why economists call it human capital).

• Great answer--Thank you. So, we use production process to transform material into a form with higher utility, technology, and this is what wealth really stands for and how it's on-boarded from natural resources into the above equations and manifests as more income per person. So.. you could 'automate wealth creation' once the utility of material is high enough to upgrade the utility of material haha – DeeDee Feb 4 at 23:18
• @DeeDee you are welcome. You are bit mixing terms, utility in economics is what you get from consumption of goods and services - it doesnt need to correspond to income or wealth. You can be Jeff Bezos but if you live like Ebenezer Scrooge your utility will be low. Also wealth is value of accumulated net assets and the way how you accumulate those is by not consuming all your income. However, terminology aside yes production process makes more value than just sum of materials that go in. E.g, if you create a poem and recite it you are creating potentially valuable service without any materials. – 1muflon1 Feb 4 at 23:28
• I haven't seen what you describe, I notice a peak of prosperity for most during the height of their career and their wealth dwindles from there, only the minority who have invested their money in assets which become increasingly rarer do see an increase or even a value which can outpace inflation. Most in society who were poor a few generations back have remained poor with little opportunity for mobility. The possibilities are there for your wealth to increase over time but the education as to how to access those opportunities is not commonly known or accessible to most. – Vix Feb 7 at 15:25
• @Vix I dont know where you saw that but data generally dont support assertions you make. First you are conflating income and wealth - common misconception. What you are saying is not supported at all for income which was under discussion here (e.g. see discussions of this in Atkinson (2015) or Lee & Solon (2009)). There is no robust evidence showing that for most countries mobility decreased, if you have any I would like to see the paper. In some selected countries it might have but not overall and this answer is not written for any specific country but general answer – 1muflon1 Feb 7 at 16:41
• @Vix in addition, there is no evidence for large inflation in most OECD countries - in fact exactly the opposite. Most major developed nations had problems with virtually no inflation or even with deflation (e.g. EU). Again you could find some countries with high inflation problems such as Venezuela but there is no evidence to support that inflation would be problem among most developed countries (see OECD inflation statistics). Next, again this answer is general. In addition generally inflation is not important for real long-run economic growth (see Romer Avanced Macroeconomics – 1muflon1 Feb 7 at 16:45

There is a serious flaw in your reasoning. You seem to think that at each production step, some of the money goes to people (labour) and the rest is burnt in a fire.

This is not true. All of the money goes to people. When you pay Z for a product, all of Z goes to workers, owners, investors, rentiers, etc. None is destroyed.

Just adding to the great answer by 1muflon1. There is a fallacy in your argument: some money goes to pay for goods, but in capitalism there are property rights, so those goods (like land or the product of land) are owned by someone that gets an income from the money spent in them. There is no leakage of money.

And considering the whole world--it's a closed system...

But the world is not a closed system.

The Sun has continually pumped energy into it for billions of years, thus:

• constantly making more plants (including trees and food),
• while leaving abundant amounts of coal, oil and natural gas, and
• powering the weather, which in addition to recycling water, redistributes minerals from mountain rocks to soil.

Also, radioactive decay deep in the Earth powers the recycling of minerals in the crust. (Weathered lava fields are incredibly fertile.)

Efficiently tapping all that energy is what allows us to prosper.

The simplest possible answer is it's because economy is a system of exchange of labour, where labour is ultimately the source of all wealth.

If you build a log cabin for yourself in the woods, you don't become poorer -- on the contrary, you now have a one cabin's worth of labour in the form of a cabin, where some of that labour went into getting the resources, and some into processing these resources into a cabin. Now, if you have an economy with two people, who both contribute one cabin's worth of labour, they don't become poorer either. In fact, your economy will likely be richer than just 2 cabins, because of division of labour. If one of them focuses on building cabins, and the other on growing food, they can now both have a better cabin and more food than if they each had to build their own cabin and grow their own food. The more people you add to your economy, and the more sophisticated the division of labour, the more productive (ie. richer) your economy as a whole becomes. Note that there's no money here, just labour. Money is a relatively recent invention, and one that makes exchange of labour immensely easier, but it's not actually essential to having an economy.

Now, of course in particular places, in particular economic systems, at particular times, it's possible for economies to contract and lose wealth. That's what economic crises are, in addition to things such as wars, where wealth literally goes up in smoke. But even in crises, where collectively everyone becomes poorer, some people will individually become richer. Those things are however specific to particular circumstances; in general, that is not the case, because economies are essentially ways of answering the question of "what could we achieve if we worked together?". Some are better, some are worse, but they all rest on the value of labour.

• This answer is based (intentionally or not) on Smith’s labor theory of value -that is no longer theory accepted by scientific community -at least not since late 19th - early 20th century when labor theory of value was rejected and replaced by subjective theory of value as labor theory of value could not stand up to empirical evidence. There is a kernel of truth in the answer that labor can often create products that will turn out to have value but it is not accepted that it always does, less so that it is actually the source of all value (see Grant & Brue history of economic thought 7th ed). – 1muflon1 Feb 6 at 21:31
• @1muflon1 You're hard-pressed to find anything that creates value that is not labour or natural resources. Even entrepreneurship is just getting the labour to the right place where it can create value – user253751 Feb 8 at 9:13
• @user253751 1. Empirically many goods are nowadays not labor intensive so it’s not hard to find examples. 2. neither labor nor materials or other factors value - value is created by subjective valuation that depends on preferences. Empirically, the good with same labor input can have large value or small value or none value at all depending on preferences of person engaged in transaction- it is empirically impossible to establish any consistent link between labor (or capital or other factors). On the other hand empirically connection between value and subjective preferences is crystal clear – 1muflon1 Feb 8 at 11:38
• @1muflon1 Think of something that has value. Now ask yourself, how was that thing created? Either with labour, or by a machine (made with labour or by another machine made with labour) or it was a natural resource. – user253751 Feb 8 at 14:07
• @user253751 but for labor to be source of value there has to be consistent link between amount of labor and value. That’s like saying - think of something that has value it’s all crated from atoms and all atoms and everything in the universe is created by Big Bang - ergo Big Bang is source of all value - in some metaphysical sense that might be interesting to ponder - but this is not site on philosophy or metaphysics. In economic sense that does not hold and nowhere in a literature people would state that Big Bang created all value. – 1muflon1 Feb 8 at 14:12

A very straightforward answer is that, under the free market system, the vast majority of people do become impoverished over time.

They especially become impoverished in terms of their share of the economy.

There are several processes that have been concealing or countering this. Firstly is productivity improvements - most people don't tend to have a good idea of what their current share of the economy is, but whether they have more or fewer things or facilities than at an earlier stage in their life. Most economic products have been becoming dramatically less labour-intensive to produce, and therefore people often feel richer than yesterday, even though they are becoming increasingly poor in terms of their share of the overall economy today.

Secondly, globalisation has increasingly yoked more of the world's population into capitalist relations. The roles in which market wages are falling dramatically are increasingly distributed to developing economies, whilst Western workers have reoriented more towards roles involving economic administration that attract disproportionately high pay.

Thirdly, inheritance and parental subsidy help to redistribute concentrations of wealth allocated by the market, and whilst this doesn't fully reset the distribution to initial conditions, it does help the market system limp on for longer before the whole set of workers become obviously and wretchedly poor.

A final point to make about workers in developing countries. They too are accepting an increasingly smaller share of their economies, firstly because they too are benefitting from productivity improvements as their economy develops (i.e. the same thing that pacifies Western workers into accepting smaller slices of the economy over time), but also because the leveling up of skill and experience that comes from serving the Western economies, will convey them a long-term military advantage and will in future prevent non-market forms of exploitation or disruption of their societies based on Western military power (itself based on Western economic development and productivity), so part of the perceived benefit from accepting a smaller slice of the economic pie for workers in developing economies, is an increased ability to stop their pie being smashed or stolen by force.