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>The vast majority of all value is created through the exchange of already-existing assets. Could you explain that? Not having studied much economics, I would

>The vast majority of all value is created through the exchange of already-existing assets. Could you explain that? Not having studied much economics, I would defined "value" the net sum of assets across society. From there, I would say that no value is created through exchange, only through production. The purpose of financial markets would then be to optimize production, not in an end in themselves.

systoll 9y ago
Roughly -- The value of an asset depends on who can use it. When two parties agree to an exchange, it suggests that they both valued what they ended up with more than what they started with.
- drabiega 9y ago
  This assumption breaks down for most financial assets. Both parties still think that they are gaining value, but one of them has to be wrong.
  - mattmcknight 9y ago
    This is completely wrong. I sell stocks because I need cash. I make a loan because someone else needs cash. Liquidity preferences matter, volatility preferences matter, both parties can gain value.
redy 9y ago
Trading is the zero sum activity par excellence. But GP doesn't know what "zero sum" (and neither do a lot of commenters in this thread apparently). For every trade, there is a winner and a loser [1]. Financial profits require this axiomitically. What's interesting is that it's not necessarily the case that losers in a trade are worse off than they were before. Every month thousands of retirees "cash out" of the stock market as they begin to draw off their savings. These trades are almost all losing trades made by unsophisticated, uninformed "traders" who are essentially forced to transact irregardless of price. But now the retirees have money to buy food so arguably even though they lost they're doing better than before because now they won't starve. Society can benefit from zero sum games (eg trading allows price discovery, locking up prisoners and guarding them saves others) but zero sum games do not produce actual wealth, utility is just being to and fro and usually this happens along information differentials. The end result of zero sum games is inequality: better informed winners keep winning and becoming better informed, poorly informed losers keep losing and becoming even more poorly informed. Adair sort of dances around it and he's got a very prestigious reputation to keep up but the reality is productivity growth means virtually nothing in the massively unequal economies like those of the US and the UK. The winners accrue any and all benefits from productivity growth and then translate this into political power which is further used to ensure the winners keep winning and the losers keep losing. The decoupling of productivity and welfare is exactly what you would expect in any feudal society where the serfs, no matter how hard they work, cannot improve their station. [1] https://en.wikipedia.org/wiki/Zero-sum_game https://en.wikipedia.org/wiki/Zero-sum_game
thaumasiotes 9y ago
The theory of comparative advantage ( https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage ) tells us that optimal production requires exchange. If you prohibited the exchange of existing assets, it would not be possible to achieve the same total production regardless of who you assigned to produce what. (You could of course have everyone keep producing what they were producing for the trade-is-possible world, but if you did that, nearly 100% of all production would be thrown away as waste. Coal is valuable in small quantities as a heat source, but it's valuable to power plants only because they can sell electricity, and it's valuable to mine owners only because they can sell it to power plants.) That is value directly created by exchange.

systoll 9y ago

Roughly -- The value of an asset depends on who can use it. When two parties agree to an exchange, it suggests that they both valued what they ended up with more than what they started with.

drabiega 9y ago
This assumption breaks down for most financial assets. Both parties still think that they are gaining value, but one of them has to be wrong.
- mattmcknight 9y ago
  This is completely wrong. I sell stocks because I need cash. I make a loan because someone else needs cash. Liquidity preferences matter, volatility preferences matter, both parties can gain value.

redy 9y ago

Trading is the zero sum activity par excellence. But GP doesn't know what "zero sum" (and neither do a lot of commenters in this thread apparently). For every trade, there is a winner and a loser [1]. Financial profits require this axiomitically. What's interesting is that it's not necessarily the case that losers in a trade are worse off than they were before. Every month thousands of retirees "cash out" of the stock market as they begin to draw off their savings. These trades are almost all losing trades made by unsophisticated, uninformed "traders" who are essentially forced to transact irregardless of price. But now the retirees have money to buy food so arguably even though they lost they're doing better than before because now they won't starve. Society can benefit from zero sum games (eg trading allows price discovery, locking up prisoners and guarding them saves others) but zero sum games do not produce actual wealth, utility is just being to and fro and usually this happens along information differentials. The end result of zero sum games is inequality: better informed winners keep winning and becoming better informed, poorly informed losers keep losing and becoming even more poorly informed. Adair sort of dances around it and he's got a very prestigious reputation to keep up but the reality is productivity growth means virtually nothing in the massively unequal economies like those of the US and the UK. The winners accrue any and all benefits from productivity growth and then translate this into political power which is further used to ensure the winners keep winning and the losers keep losing. The decoupling of productivity and welfare is exactly what you would expect in any feudal society where the serfs, no matter how hard they work, cannot improve their station. [1] https://en.wikipedia.org/wiki/Zero-sum_game https://en.wikipedia.org/wiki/Zero-sum_game

thaumasiotes 9y ago

The theory of comparative advantage ( https://en.wikipedia.org/wiki/Comparative_advantage https://en.wikipedia.org/wiki/Comparative_advantage ) tells us that optimal production requires exchange. If you prohibited the exchange of existing assets, it would not be possible to achieve the same total production regardless of who you assigned to produce what. (You could of course have everyone keep producing what they were producing for the trade-is-possible world, but if you did that, nearly 100% of all production would be thrown away as waste. Coal is valuable in small quantities as a heat source, but it's valuable to power plants only because they can sell electricity, and it's valuable to mine owners only because they can sell it to power plants.) That is value directly created by exchange.