Comment by vitaminj | Hacker News Reader

Comment by vitaminj | Hacker News Reader

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"When I spend $100 on materials and labor, and I can -- at best -- sell the result to you for $80, $20 of wealth is destroyed. Why? Because the original $100 came from the creation of wealth equal to that, and I transformed that $100 into something that is now only worth $80. Literally, wealth was destroyed."

In your example, no wealth is actually destroyed in the global sense, only relative to your bank balance (where you lost $20). Most people would call this a negative return on investment rather than wealth destruction.

The $100 you spent on labour and materials doesn't disappear into the ether - it is transferred to the people who worked for you and manufactured your materials. They could well do much more productive things with the cash than you and raise the wealth of the society accordingly.

Granted, Microsoft may not have used their resources particularly efficiently and there are indeed opportunity costs with their strategy, but who's to say that these resources would've been optimally used?

Without getting into it too deeply, money is not wealth. It is a wealth transfer mechanism.

When wealth is converted into $100 for trade with someone (e.g. Microsoft, by buying Windows and Office products) and Microsoft takes that $100 and converts it into something that can only be traded for $80, it has destroyed wealth, even though the original $100 of money is still around (it paid for materials and labor after all). The "world" still has the $100 that Microsoft used to have, but instead of having $100 worth of wealth to trade it for, Microsoft has stupidly destroyed wealth and now there is only $80 of wealth to trade for.

So yes, the money is the same, but the wealth actually did decrease, by $20. Someone, somewhere is stuck with $20 and nothing to buy after the Xbox is sold for $80, thanks to Microsoft. Global wealth was destroyed; the amount of $100 bills stayed the same.

You clearly do not understand economics.

When I enter into a trade, the amount of wealth I gain is my utility for the item I am purchasing. The amount of wealth I lose is my utility for what I'm giving away. This is true whether we are trading money for goods, or baseball cards for other baseball cards. Money is just a convenient item that people want which can easily be used to keep score. But since we each value the item at a different price than the trade, we can both become wealthier when we trade. It happens all the time. It happens every time I purchase an apple from the store that the shopkeeper was not willing to eat, but which I am.

Let's go back to your example. In your example the person who spent $80 and was willing to spend $100 winds up $20 off wealthier than they were before. That $20 can be traded for some other item of sufficiently higher value, so all the money is likely to remain in circulation.

There are other people for whom the item was only worth $90. They are now willing to buy it. And each one that does winds up $10 wealthier. That's new wealth spread around the world.

The seller, in your example Sony, now winds up benefiting less from each trade. But they still benefit. And they get new trades that they wouldn't have made before. They might or might not wind up wealthier at the new price point. But even if they become less wealthy, the world as a whole is more wealthy.

Incidentally the figures are bigger than you indicate. According to Sony's stock report for Oct-Dec 2000, they were making $175 in profit per PS2 sold. I believe that the Xbox got them to drop the retail price by over $100. At that point Sony was still making a handsome profit. Just less handsome than it had been. (And in truth they didn't have to drop it that much, I think they were trying to make the Xbox too expensive for Microsoft to stick it out. At that price point they made money and Microsoft lost money on every single console sold.)

Thanks for sharing. You got a lot of things right.

What you didn't get right was my example. I'm not talking about a situation where Microsoft is pricing a $100 product at $80. That does not result in wealth destruction, as you explained in detail. (It does result in less $$$ in Microsoft's bank account, though.)

My example was specifically about an Xbox that people were only willing to pay $80 for, and that Microsoft spent $100 to create. (Obviously, $100/$80 are illustrative, not actual figures.)

I will continue to assert that spending $100 to create a product that no one else values at more than $80 does, in fact, destroy global wealth. And that that is a Bad Thing, not "wise". You're free to continue to tell people the opposite.

Have you considered disposable razors, printer ink cartridges, cartridge-based coffee makers, those dust mops that use sheets, highway toll transponders, etc.

You might not be making a profit up front, but there can well be profit from convincing a customer into a particular revenue stream.

In cases like that, the wealth effect would have to consider the entire value stream, not just an individual transaction.

If the company with products you describe, over many years, lost money consistently and it was not due to just "giving away" product at lower than the market would pay but was truly because the market would not pay the company's cost of production for the goods and services offered, then in that case, the company will have destroyed global wealth.

Happens all the time.

I agree that spending $100 to create $80 is wealth destruction. However Microsoft justified it at the time by taking a cut of game sales. If people bought enough games, then they made a profit per unit.

Later generations of the console had much better profit margins for them.

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