Monday, November 15, 2010

How Wealth Is Shared

Two postings ago, this writer observed that wealth is created when you receive something more valuable to you than what you have given for it.

In a simple model of the world's economic system, the post details the creation of wealth:
"Suppose Harriet the hairdresser pays Joe the plumber $50 to unclog the drain on her shampoo sink. Then Joe pays Mike the mechanic $50 to rotate his tires and bleed his brakes. Mike pays Brenda's Room and Board $50 for his room and board. Brenda pays Glenda the geek $50 to polish her web page. And Glenda gets her hair done over at Harriet's, who does a really good job and only charges $50.

Each is wealthier by $50. $250 for the group. No one has more money than they had before, yet each is wealthier. Each has created value for another."
Each is also poorer by the time and energy they spent helping someone. Each is richer by the difference between what they expend and what they receive.

For a person to be able create this wealth for another requires at least one $50 bill, or the transaction cannot occur.

But if there is only one $50 bill, then Glenda can't get her hair done until Brenda needs her web page polished. Brenda can't get her web page polished until Mike pays up on his room and board, and this waits until Joe needs Mike to rotate his tires, which waits until Harriet needs to get her drain unclogged. Each step has a predecessor that needs to be completed.

If there are two $50 bills in circulation, wealth creation can happen twice as fast. There will be half the delays. If on the other hand there are suddenly no bills, things will come to a halt until barter is redeveloped.

If every participant has a $50 bill, then anyone can get taken care of whenever they have a need. Every market can be filled. Need can be filled asynchronously, without any wait. Except that those who have spent their $50 bill then need to wait until their services are needed before they can spend again.

If the five-member marketplace has more than five $50 bills, then casual spending can move the extra money around, creating more wealth while allowing every member to keep a $50 reserve in case they need immediate service.

Adding more $50 bills could further increase casual spending, but people would also save them. Beyond a certain point, each additional $50 bill in the pool would generate less and less new wealth monthly.

The other day at the small grocery store down the street, I was given in change a "Where's George?" dollar. If you check the 'Where's George' site, you can see where it's been and tell where you spent it. I remarked on this, and the clerk explained that one of their customers apparently stamps "Where's George" on his dollars and pays with them. But the dollars come in again and again from other customers.

The 'Where's George' dollars lubricate the economy of the neighborhood.

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