Today I was thinking about a subject I discussed in a previous article of mine. In the comment section of that article, I mentioned that it's impossible for a country to become wealthier when its citizens sell products to fellow citizens. You will be hard pressed to find "experts" make the same statement! (Many readers seemed incredulous at my statement). So who's the real expert? Myself, or the "experts"? Judge for yourself!
When one citizen sell a product to another citizen, the seller receives revenue, but the buyer loses wealth in an amount equivalent to the revenue the seller earned. So, it's impossible for a country to become wealthier in this scenario!
I was thinking about the weather today. An article claimed that retail sales have been hampered by the poor weather lately. After seeing the snowstorm on the news today, I realized that articles would probably claim that the snowstorm damaged the economy greatly, by reducing retail sales. You've perhaps read many similar claims. About 9/11 causing economic damage. About the power grid blackout weakening the economy. Etcetera.
Here's what I think. The "experts" simply don't understand the economy. If my logic is correct, perhaps I'm the one that should be hired as an expert! My advice would be worth billions to a country. Literally!
If the snowstorm results in retail sales being lower than they otherwise would, will it cause any economic damage? Perhaps (I will explain why I hesitate to answer with a clear "yes" or "no). But the snowstorm will not cause an amount of economic damage even close to the amount that the "experts" claim.
Here's why: Much, if not most, of US retail sales involve Americans selling products to other Americans. The net effect of such transactions is that the wealth of the country has not changed at all!
Now, some US retail sales are made to foreign customers (tourists, etc). Those lost sales do result in the US being less wealthy than they would have been, sans the snowstorm. However, I would think that sales to foreigner customers are a small percentage of overall US retails sales.
Earlier I wrote:
"If the snowstorm results in retails sales being lower than they otherwise would, will it cause economic damage. Perhaps."
Did you wonder why I used the word "perhaps"? Well, think about it. There are also foreign owned retail stores that have set up shop in the US. Part of their revenue is paid to American employees in the form of a salary, but their profits go to the foreign head office (assuming the company is a privately owned company, of course). (By the way, for argument's sake, I'm assuming that both foreign owned US retail stores and US owned US retail stores employ only Americans. I realize this is not the case, but as long as most employees aren't foreigners, this doesn't affect the main tenants of the argument I make here).
What happens to overall US wealth when a snowstorm reduces the sales of a foreign owned US retail store? The foreigners lose out (assuming they were running a profitable business in the first place!), but America actually benefits! Here's why:
Here's an example. Let's say that company X (German owned, US based) earns $20 in profit for every $100 in revenue. The other $80 is paid in salary and expenses (let's assume that the entire $80 in salary and expenses is paid to American employees, and assume that all revenue comes from American customers).
So, when the snowstorm occurs, for every $100 in lost revenue, the following occurs: Germans lose $20 in profits.
But Americans actually save $20! Why? Well, it is true that the American employees do lose the $80 in earnings from lost salary and expenses; but remember, Americans are also the customers who would've paid the full $100 of revenue! Therefore, the lost sales to American customers mean those same American customers no longer make those purchases, and those Americans are no longer out money in an amount equivalent to 100% of the store's revenue!
Therefore, each lost $100 in sales means Germans lose 20%, while Americans gain 20% (-80% in salary/expense + 100% in revenue).
And actually, Americans are likely to be even better off than $20 per lost $100 in revenue. Much of the $80 in salary and expenses will be paid to American employees regardless of whether customers make a purchase! There will still be expenses (manufacturing, shipping, etc). Management still needs to staff the stores, regardless of whether there are many customers in those stores (although salaries would often be reduced simply as a result of employers choosing not to call in as many employees to work).
So, if a high enough percentage of all US retail stores are owned by foreigners, it's actually possible that a snowstorm can result in an increase in the USA's overall wealth!! When was the last time you heard that!
WHY DO PEOPLE WORK AT ALL?
So, this brings me to the topic of my article. Let me be clear. My title was slightly inaccurate, in order to appear dramatic. I don't actually believe that all people don't increase their wealth by working. But I do believe many people don't increase their wealth by working, and I do believe that many people (perhaps most) actually lose wealth by working!
Surprised? Let me explain.
I've already explained that the country doesn't become wealthier when citizens trade with each other.
If that's the case, you may ask, why bother with retail sales at all? After all, if the country isn't becoming wealthier, why bother working?
Well, if retail sales results in the overall wealth being distributed equally among each person, than indeed there would be fewer reasons for society to offer retail sales at all!
Think about it. If the retail economy resulted in money being transferred from person A to person B in the form of sales revenue, and if that same sum eventually gets back to person A in the form of income, and if this happened to all citizens, then that would mean that each citizen is no better off, wealth-wise, than they were prior to working in the retail economy!
So what's the sense in working at all? Three reasons.
1) Well, you can "beat the system" and get more than your share by earning more than the average citizen does. More than the amount of wealth that would be distributed to each citizen if distributed equally. (To be clear, not all citizens work. Therefore, the wealth equations would have to be adjusted to account for the unemployed. However, the theory still stands).
2) There is a way to increase your wealth without also taking an equal amount from fellow citizens: sell profitably to foreigners!
3) There is a third benefit of having a retail economy. It allows citizens to obtain goods that they otherwise might not be able to manufacture themselves.
But back to what I wrote:
"If the retail economy resulted in money being transferred from person A to person B in the form of sales revenue, and if that same sum eventually gets back to person A in the form of income, and if this happened to all citizens, then that would mean that each citizen is no better off, wealth-wise, than they were prior to working in the retail economy!"
If the claim in the prior paragraph is true, and wealth doesn't increase, then how did people possess enough assets to pay for retail goods in the first place?
People have a "lump" of assets that have accumulated through the years!! It could be through inheritance, it could be through salary, it could be through profiting from sales to foreigners.
But crucially, notice that I chose to use the word "assets" and not "wealth" in the previous paragraph. Why?
Because the assets that one has may not be wealth in the following sense: If you take the total assets of the country and divide it by the number of citizens, you get a certain amount. But any particular individual's share may be less than that average. Therefore, that person isn't wealthy in the sense that they aren't wealthier than average. Their participation in the economy has meant that they've been losing wealth over the years, either by taking lower paid jobs, by inheriting less money than others inherit, etc.
So what exactly happens when someone takes a job that is paid less than average? Well, that person's level of asset intake is less than the average intake that others are receiving.
Now, with that situation in mind, compare that situation versus the other one I mentioned earlier: the one where nobody works at all, and everyone's level of wealth remains the same (remember, when Americans buy and sell to other Americans, the overall wealth of the US does not change).
When someone takes a job that is paid less than average, their wealth actually decreases relative to the average American! Because, by receiving less income than the average American does, one makes others more wealthy by shifting the distribution of wealth among the country!
Hence, I've come full circle, back to the title of this article: People that are paid less than average actually work to lose wealth!
Are you one of those people?
When one citizen sell a product to another citizen, the seller receives revenue, but the buyer loses wealth in an amount equivalent to the revenue the seller earned. So, it's impossible for a country to become wealthier in this scenario!
I was thinking about the weather today. An article claimed that retail sales have been hampered by the poor weather lately. After seeing the snowstorm on the news today, I realized that articles would probably claim that the snowstorm damaged the economy greatly, by reducing retail sales. You've perhaps read many similar claims. About 9/11 causing economic damage. About the power grid blackout weakening the economy. Etcetera.
Here's what I think. The "experts" simply don't understand the economy. If my logic is correct, perhaps I'm the one that should be hired as an expert! My advice would be worth billions to a country. Literally!
If the snowstorm results in retail sales being lower than they otherwise would, will it cause any economic damage? Perhaps (I will explain why I hesitate to answer with a clear "yes" or "no). But the snowstorm will not cause an amount of economic damage even close to the amount that the "experts" claim.
Here's why: Much, if not most, of US retail sales involve Americans selling products to other Americans. The net effect of such transactions is that the wealth of the country has not changed at all!
Now, some US retail sales are made to foreign customers (tourists, etc). Those lost sales do result in the US being less wealthy than they would have been, sans the snowstorm. However, I would think that sales to foreigner customers are a small percentage of overall US retails sales.
Earlier I wrote:
"If the snowstorm results in retails sales being lower than they otherwise would, will it cause economic damage. Perhaps."
Did you wonder why I used the word "perhaps"? Well, think about it. There are also foreign owned retail stores that have set up shop in the US. Part of their revenue is paid to American employees in the form of a salary, but their profits go to the foreign head office (assuming the company is a privately owned company, of course). (By the way, for argument's sake, I'm assuming that both foreign owned US retail stores and US owned US retail stores employ only Americans. I realize this is not the case, but as long as most employees aren't foreigners, this doesn't affect the main tenants of the argument I make here).
What happens to overall US wealth when a snowstorm reduces the sales of a foreign owned US retail store? The foreigners lose out (assuming they were running a profitable business in the first place!), but America actually benefits! Here's why:
Here's an example. Let's say that company X (German owned, US based) earns $20 in profit for every $100 in revenue. The other $80 is paid in salary and expenses (let's assume that the entire $80 in salary and expenses is paid to American employees, and assume that all revenue comes from American customers).
So, when the snowstorm occurs, for every $100 in lost revenue, the following occurs: Germans lose $20 in profits.
But Americans actually save $20! Why? Well, it is true that the American employees do lose the $80 in earnings from lost salary and expenses; but remember, Americans are also the customers who would've paid the full $100 of revenue! Therefore, the lost sales to American customers mean those same American customers no longer make those purchases, and those Americans are no longer out money in an amount equivalent to 100% of the store's revenue!
Therefore, each lost $100 in sales means Germans lose 20%, while Americans gain 20% (-80% in salary/expense + 100% in revenue).
And actually, Americans are likely to be even better off than $20 per lost $100 in revenue. Much of the $80 in salary and expenses will be paid to American employees regardless of whether customers make a purchase! There will still be expenses (manufacturing, shipping, etc). Management still needs to staff the stores, regardless of whether there are many customers in those stores (although salaries would often be reduced simply as a result of employers choosing not to call in as many employees to work).
So, if a high enough percentage of all US retail stores are owned by foreigners, it's actually possible that a snowstorm can result in an increase in the USA's overall wealth!! When was the last time you heard that!
WHY DO PEOPLE WORK AT ALL?
So, this brings me to the topic of my article. Let me be clear. My title was slightly inaccurate, in order to appear dramatic. I don't actually believe that all people don't increase their wealth by working. But I do believe many people don't increase their wealth by working, and I do believe that many people (perhaps most) actually lose wealth by working!
Surprised? Let me explain.
I've already explained that the country doesn't become wealthier when citizens trade with each other.
If that's the case, you may ask, why bother with retail sales at all? After all, if the country isn't becoming wealthier, why bother working?
Well, if retail sales results in the overall wealth being distributed equally among each person, than indeed there would be fewer reasons for society to offer retail sales at all!
Think about it. If the retail economy resulted in money being transferred from person A to person B in the form of sales revenue, and if that same sum eventually gets back to person A in the form of income, and if this happened to all citizens, then that would mean that each citizen is no better off, wealth-wise, than they were prior to working in the retail economy!
So what's the sense in working at all? Three reasons.
1) Well, you can "beat the system" and get more than your share by earning more than the average citizen does. More than the amount of wealth that would be distributed to each citizen if distributed equally. (To be clear, not all citizens work. Therefore, the wealth equations would have to be adjusted to account for the unemployed. However, the theory still stands).
2) There is a way to increase your wealth without also taking an equal amount from fellow citizens: sell profitably to foreigners!
3) There is a third benefit of having a retail economy. It allows citizens to obtain goods that they otherwise might not be able to manufacture themselves.
But back to what I wrote:
"If the retail economy resulted in money being transferred from person A to person B in the form of sales revenue, and if that same sum eventually gets back to person A in the form of income, and if this happened to all citizens, then that would mean that each citizen is no better off, wealth-wise, than they were prior to working in the retail economy!"
If the claim in the prior paragraph is true, and wealth doesn't increase, then how did people possess enough assets to pay for retail goods in the first place?
People have a "lump" of assets that have accumulated through the years!! It could be through inheritance, it could be through salary, it could be through profiting from sales to foreigners.
But crucially, notice that I chose to use the word "assets" and not "wealth" in the previous paragraph. Why?
Because the assets that one has may not be wealth in the following sense: If you take the total assets of the country and divide it by the number of citizens, you get a certain amount. But any particular individual's share may be less than that average. Therefore, that person isn't wealthy in the sense that they aren't wealthier than average. Their participation in the economy has meant that they've been losing wealth over the years, either by taking lower paid jobs, by inheriting less money than others inherit, etc.
So what exactly happens when someone takes a job that is paid less than average? Well, that person's level of asset intake is less than the average intake that others are receiving.
Now, with that situation in mind, compare that situation versus the other one I mentioned earlier: the one where nobody works at all, and everyone's level of wealth remains the same (remember, when Americans buy and sell to other Americans, the overall wealth of the US does not change).
When someone takes a job that is paid less than average, their wealth actually decreases relative to the average American! Because, by receiving less income than the average American does, one makes others more wealthy by shifting the distribution of wealth among the country!
Hence, I've come full circle, back to the title of this article: People that are paid less than average actually work to lose wealth!
Are you one of those people?
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