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Felix

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Being a newbie in this area myself, I still wonder if I can pull off defending this theory, but I'll give it a try. :pirate:

Let's start with a simple problem:

In any market, every dollar that enters it has to leave it. This means that any person's profit has to happen at the expense of another person's money. And more importantly: Not everyone can profit. One person's profit is another person's loss. Now I'm not talking about felt benefit, but about actual measurable profit:

Namely, you enter the market with y Dollars and leave it with y+x Dollars. It's a mathematical necessity that if someone gains money, someone else loses it.

Now every company enters the market with the goal to make such a profit. And as far as I see it, most of them have to fail.

The main mistake made by Austrians is that they confuse money with felt benefit:

The idea held is: I have 5000$ and I want to buy a car and it is worth 10000$ to me. Then there is the guy who sells that car to me for 5000$, because that's what it's worth to him. I then get a car worth 10000$ and he gets his 5000$ and it looks like I have made a profit of 5000$. But I have not. All that is not profit, but felt benefit. It's all in my head. I can't invest these 5000$, I can't pay my bills with it. Simply because they don't exist. They are a way of expressing my happiness about the car. But it creates no additional money. All we have is a car and 5000$. Like before. The difference is that I am happier about having the car than he is. But that's not profit. Profit would be if I would then sell it to someone else for 6000$. Then I would have made 1000$ of profit. It's this difference that's not seen in economics that makes me doubt the theory of profit by mere exchange.

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In any market, every dollar that enters it has to leave it. This means that any person's profit has to happen at the expense of another person's money. And more importantly: Not everyone can profit. One person's profit is another person's loss.

Check your premises here. They're wrong. Focusing on dollars is also wrong. I suggest thinking through Carl Menger's "Principles of Economics".

1. Dollars (euros, etc.) are not the primaries in markets - values are.

2. Your formulation ignores credit.

3. Transactions can create profit for all participants, in both dollar and value terms.

4. Your last sentence pretty much encapsulates the exact opposite of Ayn Rand's economic message in Atlas Shrugged. Have you read it?

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It's a mathematical necessity that if someone gains money, someone else loses it.

The point of economic activity is to gain values to sustain one's life, not to add dollar bills to one's bank vault. Money is a medium of exchange, and has no value apart from that. Wealth is not measured by the amount of dollars I have, but by the amount of goods and services I have at my disposal to further my life. It follows that I can be incredibly rich and still have $0 - I would just have to have in my possession all the economic goods and services I require.

It is true that when someone gains *money*, another loses it. But money does not equal wealth. Thus, it is not true that when someone gains *wealth*, another loses it. In any mutually beneficial trade, both gain.

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1. Dollars (euros, etc.) are not the primaries in markets - values are.

I doubt that. Markets exist so that companies can get back the money to pay back the debt they accepted to finance production plus interest and profit. Production is the means to monetary profit and markets are the place to get it.

2. Your formulation ignores credit.

My formulation actually leads to the fundamental necessity of credit/debt. Still, the fact that one man's monetary gain is another man's monetary loss can't be ignored. This is true if there's credit or not.

3. Transactions can create profit for all participants, in both dollar and value terms.

In value terms, yes. But not in Dollar terms. If I'm wrong here, please provide an example. Maybe that can end my whole argument. I provided my example in the last paragraph of my previous post.

4. Your last sentence pretty much encapsulates the exact opposite of Ayn Rand's economic message in Atlas Shrugged. Have you read it?

Twice. :pirate:

I understand very well that if my theory is correct, Galt's Gulch is impossible.

That's why I ask.

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Felix, what you fail to take into account is that in an expanding and efficiency-improving economy, prices will gradually fall relative to the medium of exchange; that is, the same dollar will buy a larger amount of goods. The average production of goods and services per person increases, so each person can trade more goods and services with others. Everyone comes out ahead (on average ie not counting people whose individual production falls).

You also ignore the fact that goods and services have different values for different people. I trade something that is of low value to me to someone who values it more highly; in exchange I get something that is of lower value to them than to me. We both benefit.

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Felix, Are you familiar with the notion of "economic surplus"? I ask because your formulation of "felt benefit" is similar; so, you may be interested the idea.

I have a question: In your example, you buy a car for $5,000 and sell it for $6,000, making a profit of $1,000. Is the $6,000 a loss for the buyer of the car? If not, then where is the $1,000 loss that you say must counter-balance the $1,000 profit?

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Felix, what you fail to take into account is that in an expanding and efficiency-improving economy, prices will gradually fall relative to the medium of exchange; that is, the same dollar will buy a larger amount of goods. The average production of goods and services per person increases, so each person can trade more goods and services with others. Everyone comes out ahead (on average ie not counting people whose individual production falls).

Unless people start taking on debt, the economy can't possibly expand. What can happen is efficiency-improvement, yes. And that makes everything cheaper for those that have money. I agree completely. But that does not change the game we play to get money in the first place.

You also ignore the fact that goods and services have different values for different people. I trade something that is of low value to me to someone who values it more highly; in exchange I get something that is of lower value to them than to me. We both benefit.

No I don't. If that wasn't the case, profit would be impossible, because exchange would not take place.

Exchange takes place because of different evaluations of whatever is being exchanged. But this emotional side doesn't change the fact that someone actually loses when another one wins. In objective, (ac)countable monetary terms.

Felix, Are you familiar with the notion of "economic surplus"? I ask because your formulation of "felt benefit" is similar; so, you may be interested the idea.

Ah, thanks. That was the term I was looking for. I only knew it in German. (For those who are interested: "Ökonomische Rente")

I have a question: In your example, you buy a car for $5,000 and sell it for $6,000, making a profit of $1,000. Is the $6,000 a loss for the buyer of the car? If not, then where is the $1,000 loss that you say must counter-balance the $1,000 profit?

If I enter the market with 5000$ and leave it with 6000$, someone else must have left it with 1000$ less. I'd say that the person who bought the car for 6000$ lost the 1000$, because he could have bought it directly from the guy who sold it to me for 5000$.

It is true that when someone gains *money*, another loses it. But money does not equal wealth. Thus, it is not true that when someone gains *wealth*, another loses it. In any mutually beneficial trade, both gain.

No. They only both think they do. One of them is wrong.

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I'd say that the person who bought the car for 6000$ lost the 1000$, because he could have bought it directly from the guy who sold it to me for 5000$.
That begs the question: why would the buyer be so irrational? Is there a reason he took that loss? Do we assume that loss comes about due to the irrationality of buyers?

Further, after rejecting "felt benefit" as being different from monetary profit, you are now slipping back into is by saying "notional or possible loss" is monetary loss. In monetary terms, the buyer could be viewed to have made a loss of $6,000 or of $0, depending how you want to define it. However, to use $1,000 is to equivocate on the loss side while not doing so on the profit side.

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That begs the question: why would the buyer be so irrational? Is there a reason he took that loss? Do we assume that loss comes about due to the irrationality of buyers?

I'd say that I was smarter than the buyer. B)

Further, after rejecting "felt benefit" as being different from monetary profit, you are now slipping back into is by saying "notional or possible loss" is monetary loss. In monetary terms, the buyer could be viewed to have made a loss of $6,000 or of $0, depending how you want to define it. However, to use $1,000 is to equivocate on the loss side while not doing so on the profit side.

No. He made an actual loss of 1000$. If it hadn't been for me, he could have bought it for 5000$. He lost 1000$ to me and I gained them. He could have had 1000$ and the car but now I have the money.

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Unless people start taking on debt, the economy can't possibly expand.

This appears to be a rationalist assertion, likely due to thinking that the sum of bills=the economy. Robinson Crusoe and Friday can't build a treehouse and store coconuts without credit cards? First learn what an economy is before you offer further predictions.

If I enter the market with 5000$ and leave it with 6000$, someone else must have left it with 1000$ less. I'd say that the person who bought the car for 6000$ lost the 1000$, because he could have bought it directly from the guy who sold it to me for 5000$.

It appears that you think markets are Platonic. Must every transaction be perpetually up for global auction to not be flawed? One man has a car that was worth more than $6000 to him, in exchange for $6000. Another man has $6000 in return for a car that was worth less than $6000 to him. Perhaps he bought it for $5,000 and rebuilt the engine and re painted it for $500. In your imaginary zero sum world, was he a sucker then an exploiter? By this standard, anyone who doesn't buy a stock at its historical low price is a loser, as well as everyone who sells a stock at anything less than its all-time high. Because Felix can IMAGINE that a better trade could have been made.

What you are doing is imagining all the various goods in the world would still exist without the profit motive, and then imagining that they could all be had at (price minus profit). This is essentially the same as imagining that everything could be had for free, and so every item purchased above zero involves loss.

Mutualy profitable transaction example: a farmer pays $1 for seeds, grows wheat, sells wheat to baker for $2, baker turns wheat into and sells $4 of bread. But it could have all happened without money, with farmers, bakers, and shepherds all exchanging their produced values in exchange for the goods produced by others, so take your eyes off the dollar signs and watch what they are doing if you want to learn what an economy is. The dollar signs simply show the relative values of their products, and helps guide them toward the highest use of their efforts and inputs.

I am being harsh because a reasonable person is expected to engage in some thoughtful reflection, inductive observations, consult useful reference materials, and think before spouting nonsense hypotheses which we are presumably obliged to refute. This too (thinking) has a cost, though not necessarily a monetary one.

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This appears to be a rationalist assertion, likely due to thinking that the sum of bills=the economy. Robinson Crusoe and Friday can't build a treehouse and store coconuts without credit cards? First learn what an economy is before you offer further predictions.

So then, everything people ever do and ever did is economics. I can spend all day counting ants in the garden. What does that have to do with economics?

It appears that you think markets are Platonic. Must every transaction be perpetually up for global auction to not be flawed? One man has a car that was worth more than $6000 to him, in exchange for $6000. Another man has $6000 in return for a car that was worth less than $6000 to him. Perhaps he bought it for $5,000 and rebuilt the engine and re painted it for $500. In your imaginary zero sum world, was he a sucker then an exploiter?

If you want to call these people suckers and exploiters, well, then he's an exploiter because he left with more money than he entered.

By this standard, anyone who doesn't buy a stock at its historical low price is a loser, as well as everyone who sells a stock at anything less than its all-time high. Because Felix can IMAGINE that a better trade could have been made.

You can be a winner in the game by being a middle-man. You only lose if you have to sell for less that you bought it for. It's the actual transaction that determines the outcome.

What you are doing is imagining all the various goods in the world would still exist without the profit motive, and then imagining that they could all be had at (price minus profit). This is essentially the same as imagining that everything could be had for free, and so every item purchased above zero involves loss.

Mutualy profitable transaction example: a farmer pays $1 for seeds, grows wheat, sells wheat to baker for $2, baker turns wheat into and sells $4 of bread. But it could have all happened without money, with farmers, bakers, and shepherds all exchanging their produced values in exchange for the goods produced by others, so take your eyes off the dollar signs and watch what they are doing if you want to learn what an economy is.

This is an example of a middle-man transaction. As I said, this qualifies as a profitable trade, because you leave with more than you enter. You just dropped the guy who bought the bread for 4$.

The dollar signs simply show the relative values of their products, and helps guide them toward the highest use of their efforts and inputs.

I am being harsh because a reasonable person is expected to engage in some thoughtful reflection, inductive observations, consult useful reference materials, and think before spouting nonsense hypotheses which we are presumably obliged to refute. This too (thinking) has a cost, though not necessarily a monetary one.

You can attack me personally as well as my theory as much as you like. But there is no way around the fact that if one man leaves the market with more money than he entered it with, another has to leave it with less.

The motivation for economical behavior is a person's value structure. I agree on that. But I doubt that economics should stop there. To have a grasp of what's going on, one needs to see how actual goods are actually transfered. Where they end up and why. That's my motivation behind this. I don't see how this is irrational and if you can provide me with any literature regarding that, please help me. I haven't found anything on that, because economists all seem to stop when they see that people make a trade and think: Oh well, it must have happened to both people's benefit, otherwise they wouldn't have made the trade. That's like saying: People act the way they do, therefore it must be good. There's a word for that: Positivism.

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Felix,

I already mentioned Menger's principles. But if you say the things you do after reading Atlas Shrugged twice, then I must conclude that you are either lacking in reasoning ability, or simply intellectually dishonest.

If you cannot see a connection between the production of food and shelter and economics, then I don't see much point in discussing economics with you.

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Call me crazy but Felix treats the market as if it were a gambling casino, dropped out of the sky. This casino only allows a certain number of people in, represented by nothing more than dollars, and never lets them leave. The casino never changes. No new dollars are let in and none are let out. Everyone just continues gambling forever and ever and ever. His so-called theory would only be meaningful if this were true of markets but it is not (would it be right to say “metaphysically impossible?”). He ignores the crucial fact that a market is a system of trading values, not simply dollars. Most importantly, value does not require money to produce or a dollar amount to trade. I think I can make this clearer with this simple illustration.

John enters a market with 0$ and leave with $1000. How? By trading work for value, with Frank. John traded work for money. Yes Frank is now down $1000, but he also gains the value of John’s work. This is something Frank did not have before. I believe that if Felix’s ledger book “theory” of economics were meaningful or useful this example would be impossible. But it happens everyday.

FELIX: why do you ignore externalities, and more importantly, opportunity costs? Why do you continue to ignore what money represents? Why do you ignore the influx of values (potential dollars) that previously did not exist in the given system (think mining companies)?

HAVE YOU EVER WONDERED WHAT WAS THE ROOT OF ALL MONEY?

$

Marnee

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Felix,

I already mentioned Menger's principles. But if you say the things you do after reading Atlas Shrugged twice, then I must conclude that you are either lacking in reasoning ability, or simply intellectually dishonest.

If you cannot see a connection between the production of food and shelter and economics, then I don't see much point in discussing economics with you.

Atlas Shrugged is a work of fiction written to make a philosophical point. The theory of economics which is its basis is basically Austrianism. It is this basis that I question. Why does not simply accepting what's written in Atlas Shrugged and having questions about it mean that I am stupid and a liar?

First: If I lack reasoning ability, why do I ask questions about things that I don't understand? And why do I want to know what is wrong with my point - if I am? Why do I try to explain my current understanding and am willing to debate it?

Second: Why should I lie? I don't even have anything to gain from that!

If you don't like to discuss with me, that's your good right. But don't try to rationalize it, please.

I'll have a look at Menger's principles even though I suspect it's a rehash of what I have already read on the subject and disagree with. But maybe there's something in there that changes my mind.

Thanks for the recommendation.

HAVE YOU EVER WONDERED WHAT WAS THE ROOT OF ALL MONEY?

What do you think I'm doing here?

As far as I see it, money is not a product. It's not a commodity. People don't want money because they like looking at the beautifully printed paper. Money is an option on the work or the products of the work of other people. You put more dollars into the system by accepting debt of the same amount. This debt is backed by your ability to pay it off, that is: to provide work which is of high enough subjective value to other people so that they willingly give you the money so you can pay it off. Money is nothing but the other side of debt. And given that a dollar is made a generally acceptable means of payment by law, it can be used to pay for anything you could possibly want. That's the root of money as far as I see it. If I'm wrong here, please correct me.

John enters a market with 0$ and leave with $1000. How? By trading work for value, with Frank. John traded work for money. Yes Frank is now down $1000, but he also gains the value of John’s work. This is something Frank did not have before. I believe that if Felix’s ledger book “theory” of economics were meaningful or useful this example would be impossible. But it happens everyday.

Why is he paid that money? Usually he's paid it by his employer who uses his work to get more money from his customers.

And people let go of their money for two reasons:

1) actual needs like food and clothing

2) additional things they think they need

The second is just a matter of personal taste. But the fact that he gets something he values for his money doesn't change the fact that he gave his money to John and now has 1000$ less.

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In a proper economy money is backed by wealth, i.e. by physical goods that improve the life of man. It is to the extent that they do that that they have value to someone. If you enter a voluntary agreement with someone to trade your work for his money then there is no one being taken advantage of. I think your mistake is in assuming that money has an inherent value, but it doesn't. Your money would be totally worthless if there were no goods backing it, because in a way it is note saying you're owed a certain value in goods. To trade this note for the goods in question does not harm either person's interests.

If you divorce money from what's behind it, then your theory would be correct (as far as I can see). This is not the case, however, and there is not a static amount of wealth in the world, simply because by means of work you can improve a certain product's value, and because a lot of things aren't included in our wealth (Like natural resources we haven't yet accessed). As long as there is a way to improve upon existing processes and innovate there will be more wealth being produced, and everyone will profit.

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I'd say that I was smarter than the buyer.
This would imply that when a producer has a cost of goods [cost = labor + material + interest] of $5,000, then anyone who buys the finished goods from him for more than $5,000:

  • could have got it cheaper elsewhere
  • could have got it at all if the seller knew it would not sell for more than $5,000

Usually, neither of those are true. Many economists assume they could be true in their notion of a "perfect market", which is actually neither real nor perfect.

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This would imply that when a producer has a cost of goods [cost = labor + material + interest] of $5,000, then anyone who buys the finished goods from him for more than $5,000:

  • could have got it cheaper elsewhere
  • could have got it at all if the seller knew it would not sell for more than $5,000

No. This was only true for my example. In your example the reason is mere convenience for the buyer. He doesn't have to go through the hassle of production. That saves him time. And he pays for that.

All I'm saying is that if it sells for more than the cost, you have made a profit and thereby taken money out of the market. If it's not made, it's not sold. It is made with the intention of profit. And competition usually drives profit down and increases consumer surplus.

And since everything on the market is there with the intention of profit, not everyone who enters the market makes one. Some don't break even. There isn't even enough money in the market to pay for interest. Some win, some lose. And those who win do so at the cost of those who lose. They who are losing have invested their time and work and still lost money or had to take on debt. This is true for any market.

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If you divorce money from what's behind it, then your theory would be correct (as far as I can see). This is not the case, however, and there is not a static amount of wealth in the world, simply because by means of work you can improve a certain product's value, and because a lot of things aren't included in our wealth (Like natural resources we haven't yet accessed). As long as there is a way to improve upon existing processes and innovate there will be more wealth being produced, and everyone will profit.

The thing is that the money game is zero-sum. All the products in the world cannot change that. Actually it isn't even zero-sum. It's worse. Once money is borrowed, there is now a demand for money that doesn't exist in the first place (interest). The thing is: money is not a commodity. Money is an option on someone's work. That means that for every dollar there is someone who has debt to that amount. There is no net money. One man's money is another man's debt. And the existence of interest means that there is never enough money to go around to pay back that debt. It is this time pressure that gives Capitalism backed by a formal property system its boost and it's the reason why poor countries remain poor due to the lack of such a system.

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The thing is that the money game is zero-sum. All the products in the world cannot change that. Actually it isn't even zero-sum. It's worse. Once money is borrowed, there is now a demand for money that doesn't exist in the first place (interest). The thing is: money is not a commodity. Money is an option on someone's work. That means that for every dollar there is someone who has debt to that amount. There is no net money. One man's money is another man's debt. And the existence of interest means that there is never enough money to go around to pay back that debt. It is this time pressure that gives Capitalism backed by a formal property system its boost and it's the reason why poor countries remain poor due to the lack of such a system.

This is terribly confused. Money is a medium of exchange. Sound money represents something, such as units of gold or silver. "One man's money is another man's debt"? On the contrary, money represents not debt, but assets. The reason for interest is that present money is valued more highly than future money. Jones cannot wait until he has saved $100,000 to buy a house. So he borrows the money from Smith. To get the money now instead of 20 years in the future, Jones pays a premium, i.e. interest. If there was "never enough money to go around to pay back that debt," then bankers and other investors would go out of business. Capital investment endures and thrives because people generally do pay back their debts.

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Unless people start taking on debt, the economy can't possibly expand.

:) The economy expands when people produce more goods and services than they did previously. It has nothing to do with debt or even money. Think about a primitive barter-type economy in which different people produce bread, beer, buildings, etc, and trade these goods with each other. If Joe Brewer figures out some effort-saving method that allows him to make 2 kegs of beer in the time that formerly only allowed him to produce 1 keg, that's an economic expansion.

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This is terribly confused. Money is a medium of exchange. Sound money represents something, such as units of gold or silver. "One man's money is another man's debt"? On the contrary, money represents not debt, but assets. The reason for interest is that present money is valued more highly than future money. Jones cannot wait until he has saved $100,000 to buy a house. So he borrows the money from Smith. To get the money now instead of 20 years in the future, Jones pays a premium, i.e. interest. If there was "never enough money to go around to pay back that debt," then bankers and other investors would go out of business. Capital investment endures and thrives because people generally do pay back their debts.

People pay back their debt? Hmm... Have a look at these charts:

Debt in the US

Money doesn't represent the products and services that are already there, but those that are promised to be made and offered. Only coins can be remotely considered as having actual (already paid for) value as they should consist of valuable metal. But they don't. You get a lousy coin that is cheap to produce and it backs itself. The difference between the cost to make that coin and its "value" is called minting profit. They can be considered as having only exchange value.

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The thing is that the money game is zero-sum.

Felix, please tell us that your calendar is a couple of weeks off and this whole thread is an April fool's joke! How can you seriously believe that money is a zero-sum game?

According to the 1800 census, there were about 4.35 million free people in the United States in that year. Let's say each of them had $1000 in cash on average (which is probably an overestimation). That means the total number of dollars in 1800 was 4.35 billion. Today, Bill Gates alone owns a lot more than that. Where did all the extra dollars come from?

Or even more blatantly: one million years ago, there were no dollars at all, because there were no men at all. If money were a zero-sum game, the total number of dollars in circulation would have had to stay zero !

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:) The economy expands when people produce more goods and services than they did previously. It has nothing to do with debt or even money. Think about a primitive barter-type economy in which different people produce bread, beer, buildings, etc, and trade these goods with each other. If Joe Brewer figures out some effort-saving method that allows him to make 2 kegs of beer in the time that formerly only allowed him to produce 1 keg, that's an economic expansion.

That's correct according to the Austrian barter model, because there an economy is defined as all the stuff people create and barter. It totally ignores money like pretty much all economic models.

I know very well that the theory I present goes strongly against one of the foundations of Austrian dogma, actually against one of the foundations of pretty much every economic theory. But I still think that it is valid and correspondingly that Austrian theory has got it wrong.

The model I am presenting is completely focused on money and the corresponding contracts. It describes the economy as a system of contracts on debt made in time. This model only regards an action as economically relevant if it leads to a new contract. So, building your own house with stuff you have already bought is not economically relevant while paying a company to do so is. It's a theory based pretty much exclusively on finance, regarding actual production and trade as secondary and derivative. All subjective value evaluations are ignored and only the actual contracts are considered.

It's something completely new, which is why I was hesitant at first whether I should even mention it especially as I am still learning this myself.

I expected harsh words and criticism because pretty much everyone who is interested in economics on this forum is an Austrian. Since trying to ask these questions on the Austrian Forum only ended up in attacks by Pete, I thought that I could give it a try here, hoping that people here are less dogmatic and more open to a new perspective.

I understand, however, that this is a fundamental premise I am attacking.

Where did all the extra dollars come from?

Or even more blatantly: one million years ago, there were no dollars at all, because there were no men at all. If money were a zero-sum game, the total number of dollars in circulation would have had to stay zero !

Funny. These were the questions that got me started initially.

Tell me: Where does the money come from and why does it have value?

I gave my answer. Give yours.

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Tell me: Where does the money come from and why does it have value?

In a free country, money takes two forms: gold and credit. Gold is produced by miners; its value is primarily ornamental; and its easy convertibility into other goods makes it valuable for other than ornamental purposes. Credit arises from the creditor's trust in the productive ability and integrity of the debtor, which are the same things that make it valuable.

The amount of gold that has been mined is not static, and men's productive ability is even less so. Money is definitely NOT a zero-sum game.

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