Money... whos the loser?

richiee

Ok, I better apologise first for asking this question, Im sure to most of you it will sound stupid. It only came into me mind the last few months and Id like an answer. Here goes...

We are all here to make money or at least try and make money. So for example I make money at my business, so does Johnny down the road, Mary over the road, Ted next door and so on and so on... I get paid for the service I provide as does everyone else... So if we all make a profit, who looses? Or where does the profit come out of.. It has to lead back to someone who makes a loss or is this not how it works?

The only other way is if there is new money being printed every day... am I being too simplistic...

Heres another one which Id love to hear your comments on.

Years ago, (actually 43 years ago) when the Americans landed on the moon an old man, with little or no education came up with a great way of looking at how money works. A few neighbours were in his house and the moon landing came up in conversation. One person said what a waste of money it was, sending men to the moon, another agreed but the old man of the house spoke up and said,

"Why is it a waste of money? The money wasnt sent to the moon, the money is still here on earth and in fact the vast majority of it was spent in the USA, so ye see its not actually a waste at all!!"

It sounds like this synopsis of the situation makes sense... am I being too simplistic here....?

Again, I apologise to all you who understand the way economics etc work..

andrew

I'm not entirely sure I understand you. When people (Johnny, Ted) buy things, there are no losers. Imagine Johnny sells cars, and Ted buys one. Ted gets something he wants - a car, and Johnny gets something he wants - money in the form of the profit he made on the car. Everybody wins.

andrew

Off topic and comments will be/have been deleted.

richiee

Yea, but where is the profit coming from...?

andrew

richiee wrote: »

Yea, but where is the profit coming from...?

What do you mean? The car owner sells it for more than he bought it, so he makes a profit.

Stripey Cat

It's actually a very good question.

Some people are primary producers in the economy- farmers, fishermen etc. They get stuff for nothing (or next to nothing) by taking it from the environment in the form of meat, fish, crops, fossil fuels etc.

Some of their profit is passed on down the chain. Other people modify these raw materials into produced goods, and take their cut. Others further modify them, or have a hand in selling them, or keeping things running so everyone eats and the kids go to school etc.

Further along other people share these profits by trading a share of them for entertainment, and so on.

People in the developing world are also exploited for their labour. They work hard and give up their health to maximise profits in the west.

All of these resources are finite of course, there is only so much copper, oil, wheat, fish, etc, but we hope that we can recycle, and manage the earth's resources in a sustainable way.

We hope so, anyway.

richiee

What Im trying to get at is this. Say theres x amount of money in the world how can everyone make a profit?.... Say for aguments sake theres 100 million euro in the world (as an example). Microsoft and google and all the big companies make a profit, this has to leave less to go around, someone has to be loosing out do they not...?

Stripey Cat

How about this.

All energy comes from the sun. Some is in plants, some in animals, some in oil.

We source this free energy in its rawest forms, and then build most of our civilization on distributing more and more refined versions of it to each other.

The initial "value" is derived from the suns energy, which comes for free.

The sun is losing its heat, but very, very slowly.

andrew

richiee wrote: »

What Im trying to get at is this. Say theres x amount of money in the world how can everyone make a profit?.... Say for aguments sake theres 100 million euro in the world (as an example). Microsoft and google and all the big companies make a profit, this has to leave less to go around, someone has to be loosing out do they not...?

Here's an example. Lets say I chop down a tree in my garden and make a chair, which I sell for ten euro. Imagine my profit is 9 euro, since I had to buy an axe for 1 euro. I buy some bread from a shop for 10 euro, and again imagine the shop makes 9 euro profit, having made the bread for 1 euro in costs. Then the shopkeeper buys a knitted jumper for 10 euro from Mary, which again she makes 9 euro profit on, with 1 euro in wool costs.

See how a single 10 euro, can actually lead to 27 euro in total profit? The amount of money in the world, the stock of money, doesn't have to correspond to the flow of transactions or profit. You can have multiple people profiting from a small amount of money.

Stripey Cat

As long as the tree, the wheat, and the sheep don't come looking for payment.

richiee

Yea... I think I get it..

irish_goat

richiee wrote: »

Years ago, (actually 43 years ago) when the Americans landed on the moon an old man, with little or no education came up with a great way of looking at how money works. A few neighbours were in his house and the moon landing came up in conversation. One person said what a waste of money it was, sending men to the moon, another agreed but the old man of the house spoke up and said,

"Why is it a waste of money? The money wasnt sent to the moon, the money is still here on earth and in fact the vast majority of it was spent in the USA, so ye see its not actually a waste at all!!"

The money may have been spent in the US but whether it was spent productively is a different matter. i.e. how many new schools/hospitals could have been built instead?

Stripey Cat

Presumably they spent some money on the moon too. It's so hard to go away for a few days without spending anything.

SupaNova

richiee wrote: »

Heres another one which Id love to hear your comments on.

Years ago, (actually 43 years ago) when the Americans landed on the moon an old man, with little or no education came up with a great way of looking at how money works. A few neighbours were in his house and the moon landing came up in conversation. One person said what a waste of money it was, sending men to the moon, another agreed but the old man of the house spoke up and said,

"Why is it a waste of money? The money wasnt sent to the moon, the money is still here on earth and in fact the vast majority of it was spent in the USA, so ye see its not actually a waste at all!!"

The money wasn't wasted sending men to the moon, it was the resources. Take the example of Alaska's road to nowhere, a crystal clear example of waste. It was the natural resources, the labor time and everything used in its construction, that was wasted.

andrew

It's all entirely subjective; I'm sure plenty of people see sending humans to the moon as being an eminently worthy objective and not a waste at all, and can make decent arguments for it.

waitingforBB

The hundreds of millions spent sending people to the moon could be viewed as spend in technology delvelopment. The money was spent on salaries of hundreds of Phd folks (who in turn spent that money back in the real economy), and on materials and technology (which funded companies, which created jobs, paid their employees, spawned spin off businesses). So the huge outlay is cycled back around the economy.

Huge amounts of waste as well, kickbacks, bad investments. But that mirrors real life. View it as a capital expenditure. Provided salaries to many to bouy the economy. In many years we may have an economically viable entity on the moon (tourist travel, experimental stations, who knows) and then the m(b)illions is justified. Like the western rail corridor haha

SupaNova

The reason I gave the example of the 'road to nowhere', was because it is a much clearer example of waste, and I also don't really have a personal position on money spent on space programs. But saying that, because money is recycled therefore it isn't a waste, is poor logic, as using that logic you can justify spending on anything. And the so called pro of all those involved spending their money elsewhere, giving a boost to other industry, can be said as a pro for any kind of spending.

UsernameInUse

A central bank is not one of the functions of capitalism. wealth cannot be devalued by the ECB via quantitative easing, devaluing or manipulating interest rates as the founding rule of the economic system. if the fiat money is not back by something incorruptible then the people lose i.e - our situation right now. how do you solve this? allow gold and silver to be legitimate mean of exchange in the marketplace along with private competing currencies competing on the market. Who loses then? Big government bureaucracy of course. Who benefits? the little man in the street.

viclemronny

Don't think of the excess money you get as profit. So, if you buy something for €6 and sell it for €10, don't think of the €4 as profit. Think of what you buy with the €4 as the profit and the money as simply a unit/tool of account.

Now, the reason that more wealth can seem to be created is because it is. If you have to grow food and make furniture and I have to do the same it is less efficient than if the one of us who is better at growing food(say me) does enough for both of us and the one of us who is better at building furniture (say you) builds enough for both of us. Then we swap with each other what we need.

The advantage is that by specialising at what we each are best at, we can do it faster. So making both furniture and food takes each of us 40 hours a week. But making enough of one thing for 2 of us takes 35 hours a week due to out natural talents residing in the areas respectively employed in the production of furniture and food.

This leaves each of us 5 more hours to work each week and we can then trade the produce of those 5 extra hours to someone else for, I don't know, fancy jackets.

The point is that through further and further specialisation and trade the total output of society can be increased. therefore everyone can continue to be better and better off than they were in the previous state of the world because the wealth of society is greater and there is therefore more to go around.

Suryavarman

richiee wrote: »

Yea, but where is the profit coming from...?

People value present consumption more than future consumption. That means to get people to postpone consumption today they must be rewarded to do so. The result of this is interest/profit.

Joe1919

Trade Can Make Everyone Better Off. Trade allows each person to specialize in the activities he or she does best. By trading with others, people can buy a greater variety of goods or services.

(Mankiw's ten principles of economics)
http://www.slembeck.ch/principles.html

pacquiao

richiee wrote: »

Yea, but where is the profit coming from...?

If you hold onto the money and you don't use it, they have to print more. It's that simple.

[Jackass]

My attempt to paint a picture on this (agree it's a very good question)

Money (as we know it today) are promissory notes. It replaced a form of gift / service or barter as a use of exchange for goods or services, followed by replacing valuable coinage made out of valuable metals, and originated by placing these valuable metals in vaults, whereby the holder of the promissory note could go and collect the valuable metal. But instead of carrying around all of your valuables and going to collect these all of the time, the notes in themselves became the form of tender (hence the creation of banks and their great wealth).

Some money of the time was a promissory note on valuables that may not actually be in the vault, but as with today, the holders of the valuables (now known as banks) were hedging their bets that they could have (for example) 10 items in their vault of value, and have 10 notes in circulation, BUT they would issue another 5 notes to people assuming that not everybody would come and collect their valuables at the same time, and the people who got the extra 5 did so as a loan, and would have to pay back with interest, and hence fractional reserve lending was born.

Now money is printed by the various central banks / federal reserve etc., but when you work you earn money, which is paid into your bank account, you then go to the ATM and get your promissory notes (cash), give it to Pat the baker, that becomes his income and you exchanged it for a good, and then pat the baker spends it in exchange for a good, whilst someone else buys something in his shop, and money is circulated like this.

No one is losing out, as money is no longer valued on the existence of precious metals etc., it is now valued on availability, i.e. the money is now the commodity, so it can come out of thin air by just printing more and more, but for every extra note that is printed, the value of your money is reduced, as more is now available, more is in circulation, it is less valuable as a foreign exchange as there are more of them to buy, so they are cheaper, think of simple supply and demand.

Also, this is what is behind inflation, that the more and more money that is circulated, the less valuable it becomes, so the price of goods (treated as a constant, or always of the same real or actual value) goes up to compensate for the money now being worth less as there is more of it.

Imagine there are only 5 notes in circulation as the entire amount of money in the world and all of the same value. You could buy anything with that note, as you have something rare that hardly anyone else has, so you can get a lot for that one note, but imagine for every person on the planet there was 5,000 notes, all of the same value, then a single note will no longer get you much, as there's so much, now you have to give lots and lots of notes, as everyone has them and they're not as precious....

mt76

I am afraid, you have the wrong idea about nature of profit and its relationship first to Income Growth and second to Money Supply.

1) You assume/imagine profit as an add on. That's not so. Profit/Profitability is not equal to increase in Income/Production (Y).

2) A Net increase in Overall Profit (from year N-1 to year N) might be equal to increase in Income/Production (Y) and that's only if certain conditions are met such as no decrease in wages/salaries, interest or rental income during the same period

3) Were your company profitable last year, how about the rest of the business

The firms that are profitable in year (N), weren't most of them also profitable in year (N-1) so what's the add on, not the mere existence of profitability

Existence of Profit does not mean increase in the size of the pie (economy), profit is just one slice of the pie (salaries, interest and rent being others) and has always been so, in other words its not new, its not an add on, it was always part of the pie and its existence does not require a larger plate/tray:)

poiuytsam

Bank of relaid announced there figures several weeks ago , a substantial loss , yet the market reacted favourably , share price went up ? Is this not ridiculous ? A bank has lost loads of money , then made more loses and they are congratulated ?

Please explain

andrew

poiuytsam, You might get a better response/discussion if you post in/create a thread in the 'irish economy' forum, which can be found here. The economics forum is more for the discussion of economic theory in general (and this thread was about money in general) rather than discussion about specific share price movements.

Suryavarman

poiuytsam wrote: »

Bank of relaid announced there figures several weeks ago , a substantial loss , yet the market reacted favourably , share price went up ? Is this not ridiculous ? A bank has lost loads of money , then made more loses and they are congratulated ?

Please explain

When a business is expected to report losses in the future, the share price will be lower for that business than it would be if it was expected to make a profit, even if the loss hasn't been announced. I don't know the figures for Bank of Ireland but if investors expected BOI to make a loss of €1 billion and then BOI announced a loss of €800 million it is normal that the share price will jump despite a loss because the loss will be lower than previously feared and BOI will be perceived to be doing better than originally believed.

twerg_85

Wealth can also be transferred from those who currently have wealth but are not productive (e.g. lazy heirs) to those who are productive.
In this case, there isn't a creation of profit so much as a transfer of money from one group to another in return for time/effort.

Or to answer your question,the 'profit' comes from the new effort expended by you an Ted.

F.