Three-part article, part 2: the zero-sum game vs wealth creation

In the first part of this article (https://reddcointalk.org/topic/18/three-part-article-part-1-a-future-for-cryptocurrency) I wrote about the worries and concerns that crypto-enthusiasts have about altcoins being no more than short-term bets, and also about the volatile nature of cryptocurrency and the fact that this volatility is actually hard-wired into every altcoin regardless of the quality of each individual project.

Something I reminded readers of is that it is still early days for cryptocurrency, and that with growing demand in the future there are definitely going to be projects that achieve success.

Our job is to work out where to invest our money but before we do that, we should look at a couple of widely-used concepts in the worlds of trading and investments: the zero-sum game and wealth creation. But what is wealth, first and foremost?

Wealth

It is important to understand the difference between money and wealth. To be wealthy is to have an abundance of what we desire, be that material possessions like property, cars, furniture, etc., or experiences like holidays, rounds of golf, going to restaurants, etc., or other kinds of fundamental things that we need and want.

In this respect, although having money may give us the power to obtain wealth, it is not actually the same thing as being wealthy, as having an abundance of the things that are collectively known as wealth. A fridge full of food is a form of wealth and gives you a certain level of wealthiness wherever you are in the world; having a pocket full of money in the desert clearly does not make you wealthy.

Correctly understood, money is a medium of exchange, a tool that was created to facilitate trading wealth, and today’s dollar or euro can be traced back to archaic forms of money made from gold and silver and based on the value assigned to those metals by common agreement.

Before money existed people bartered goods – bartered wealth. As societies evolved the old method of bartering one object for another became impossible. Today you are unlikely to be able to go down to the local car dealer and convince them to take 100 hours of translation work in exchange for a BMW in the same way that people used to swap foodstuffs or goods they produced themselves for foodstuffs or goods they required, for the wealth they required and wanted. Likewise the BMW factory requires thousands of specialised car parts sourced from other factories all over the world: bartering is out of the question; a tool is needed to facilitate trade. That tool is money.

So don’t confuse money with wealth. Money may represent the power to get whatever you want, but it is what you want that is wealth.

Zero-sum game

The idea of a zero-sum game can be summed up in the following sentence: in a particular situation whatever one person / one group of people gains is balanced by a corresponding loss to another person / group of people.

It is quite easy to see that a gambling game like poker is a zero-sum game, because the total amount won by the player or players who win overall during a game is equal to the total amount lost by the player or players who lose. The net change in monetary value on the table is zero – hence “zero-sum”.

Other, somewhat more complicated situations, such as the management of a local government’s annual budget, actually also boil down to a zero-sum game. The simple fact of having a fixed amount of money to allocate to projects over the year means that to spend more on one project means to spend less on another – a zero sum game.

An analogy often made to illustrate the zero sum game is the analogy of a cake. If you share a cake with a friend you could cut it straight down the middle and share it equally; if you cut a bigger piece for yourself your friend is obliged to have a smaller piece. It’s a zero-sum game.

Wealth-creation

Although it might sound counter-intuitive, wealth can actually be created. Wealth is created all the time. The reason why some people might find this idea counter-intuitive is because they confuse money with wealth. Although you might have at a certain time a fixed amount of money in your bank account, you can actually create wealth.

Look at what I am doing right here, writing this article. At this very moment I am creating wealth. This is not arrogance; writing is one of the things I actually do to make a living! Many people appreciate reading the writings of others and if you look on bookshelves, in libraries, on the Internet… you will see wealth in the form of writing all around you. And hundreds of millions of people pay for this specific type of wealth every day.

I am publishing this article here for free, but sometimes I sell what I write. So the wealth I create by writing does not just make the world richer in a metaphorical sense – it makes me richer financially when I sell my work.

It is important to see that in making myself richer this way, I have not made anyone else poorer. If I sell my work the buyer has acquired something of value. They have voluntarily paid me for this valuable creation. Perhaps it is a little easier to understand this point if we consider that instead of writing an article I made a piece of jewellery. When someone pays me for this jewellery they are not losing out so that I gain; they are acquiring a valuable object, an object that they could indeed sell on if they wished.

Understanding how wealth can be created goes against the common misconception that there is a fixed fixed amount of wealth in the world. Often we tend to think that a few people hold all the wealth, condemning the rest to live in poverty. But when you consider wealth as shown above, it is easy, perhaps surprisingly easy, suddenly to realise that the amount of wealth in the world is not fixed, and that wealth can be created and is being created all the time.

The last part of this article, “Reddcoin – zero-sum game or wealth-creation?”, will be published in a few days’ time. All comments and points are much appreciated!