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Comment by screye | Hacker News Reader

Related : I have a request for the 1 major concept that has never clicked for me --> Can someone help me understand 'productive value' in an economy ?

I have tried hard, and can't for the love of me understand what lies at the bottom of trade, what is the base value of assets / activity. It just doesn't click.

Questions like:

- Can a services based economy work if the consumers of the services weren't producing some non-services based value ?

- How can there be any economic value in middle-men ?

- Is speculation on artificially limited assets (housing) just a pyramid scheme ?

- How is it NOT a zero sum game ?

- Is a Fiat currency just 'vibes based economics' ?

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Here's something to think about: suppose you buy an assortment of candy from the grocery store and distribute a uniform collection of pieces to a room full of middle school students.

Some students will like the sour candy; others won't. Some will like coconut; others won't. Some will love nuts; others will hate them.

Now you let the students talk to each other and trade candy. The ones who like sour candy but hate coconut will trade with the students with the opposite preference, and so on.

At the end of the trades, everybody is happier with their new bundle - why would they have traded otherwise? So value has increased. But this is magic - no new candy was produced! Through trade we have increased overall value - the exercise was positive sum.

With some effort you can see that a middle man might add value by expediting trades - connecting people who like coconut with people who hate it (suppose there are thousands of students in the class who all speak different languages).

And you can see how fiat currency might make things easier. Rather than having to come up with the barter value of coconut candy and sour candy to nuts, you can convert both to a single unit and then trade units.

I can answer two of those. Middle-men are useful whenever there is fan-out or fan-in. A producer wants to sell to consumers, so there is a lot of fan-out. The producer could get the consumers to come to the factory and to buy good directly, or they could go door to door, or they could use middle-men: retail stores. The stores buy the goods wholesale and take on the work of selling them to individual customers, in exchange for a portion of the total profit. Customers visit stores for the same reason, to avoid having to visit every factory for every producer of the goods they want. With time and effort saved on both sides, the stores benefit both the producers and the consumers.

The economy is not a zero-sum game because we are summing the value, not the prices, of the goods that are traded. If I grew wheat and you grew apples, then we can trade between us to mutual advantage, because after the trade we can both make apple pie (assuming we can find some cinnamon). The total amount of wheat and apples hasn't changed, but their value has gone up. Every trade involves two parties who must both believe that they will gain value by the trade. Of course it is possible for either party to be mistaken (or even deliberately swindled by the other party), but as long as the majority of trades have net positive value then the economy as a whole will be a positive-sum game.

Please see this layman’s opinions in line.

- Can a services based economy work if the consumers of the services weren't producing some non-services based value?. Hypothetically, yes. But it would not be very wealthy. Examples are tourist oriented economies and cities like Las Vegas, New Orleans and Cancun. The reason is that they depend on discretionary income. When times are tough, service industry is hit hard.

- How can there be any economic value in middle-men? Middleman can provide value. For example, a real estate agent ideally speeds up your house search when buying and how long your house is on the market when selling. In many cases, saving time equals money.

-Is speculation on artificially limited assets (housing) just a pyramid scheme ? No. Housing is in the USA is a low risk investment. Artificially limiting it, decreases risk and makes it even more valuable. This is the opposite of speculation. We speculate with crypto and baseball trading cards as they are risky with arbitrary random monetary value. Ponzi schemes are outright theft as they are intentionally scams.

- How is it NOT a zero sum game ?. Classical economists argued trade increased wealth as it allowed for specialization.

- *Is a Fiat currency just 'vibes based economics'. I don’t follow what you mean. But even if there is no currency and only barter. We would still be dependent on government provided laws and security. Otherwise we would live in a society that would raid and steal what we want. In other words, trade and property rights are only possible because of government. Not in spite of government.

I can try some of these

> Is a Fiat currency just 'vibes based economics' ?

I'd think of it more like contract-based/trust-based. If a government has promised you can pay your taxes and debts in a fiat currency, and you believe them, then you'll value that currency. You may need it some day. When the trust erodes, so does the value. I don't think this is simply "vibes", it's people behaving rationally about what they expect the future to hold. And in fact this is just what "value" means for all things generally. Someone thinking rationally about how to value a gold-backed currency is still asking themselves whether they expect gold to be worthwhile in the future.

> How is it NOT a zero sum game ?

A zero-sum game would be one where there's just a fixed amount of value to allocate however, and you're stuck to the pareto frontier; that is, there is no re-allocation which would leave someone better-off and nobody worse-off. But in reality there's obvious misallocation all of the time! That's why you would ever buy or sell something: because two parties both believe they benefit from that exchange. Whether that exchange is actually positive or negative for society depends on externalities. But it seems pretty clear to me that a lot of activity is a negative-sum game (if it cause pollution, addiction, etc), and a lot of activity is a positive-sum game (most other things), and almost nothing is actually zero-sum. How is it NOT NOT a zero sum game?

> Is speculation on artificially limited assets (housing) just a pyramid scheme ?

Kinda.

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