Mao Yushi — Does Exchange Create Wealth?
2006/7/17 12:45:33
Today I saw Mr. Mao's article "The Unfreedom Behind Economic Liberalism" — utter garbage where the ass determines the brain. Of course, Mr. Mao has some acquaintance with my family, so I won't refute it point by point; completely stripping Mr. Mao's article bare would be too disrespectful. Here I'll just take his brilliant theory that "exchange creates wealth" and discuss it with one example.
Whether exchange actually creates wealth — various theories give different answers. We don't need to stuff those various asses into our brains; we only need the simplest model to see clearly: Person A and Person B — A has 100,000 yuan, B has 10,000 shares of stock. They exchange at a stock price of 9 yuan, each paying 0.5% in transaction fees. Before the exchange, the total wealth of both parties can be expressed as 100,000 yuan + 10,000 shares. After the exchange, the total wealth becomes 99,100 yuan + 10,000 shares, where A's wealth changes from 100,000 yuan to 9,550 yuan + 10,000 shares, and B's correspondingly changes from 10,000 shares to 89,550 yuan.
Clearly, the missing 900 yuan was taken as exchange costs. If we include exchange costs in the total wealth, then in such a model, the exchangers' total currency + exchangers' stock quantity + exchange costs is an invariant. A better form can be expressed as: (exchangers' currency + exchange costs) + exchangers' stock quantity. We can see that (exchangers' currency + exchange costs) is also an invariant, but each transaction inevitably reduces the exchangers' currency while exchange costs accumulate, ultimately reducing the exchangers' currency to zero and making further exchange impossible. Obviously, this model can be extended to any number of exchangers, where with total exchanger currency held constant, exchange must eventually terminate.
To resolve this termination of exchange, the simplest approach is to return the exchange costs back into the exchange system as exchanger currency. In reality, this can be offset by increasing money supply, among other forms. Therefore, we may as well assume an exchange process with no exchange cost sedimentation. In this stock exchange example, total wealth after all exchanges can be expressed as: exchangers' currency + exchangers' stock quantity — and both the exchangers' currency and exchangers' stock quantity remain constant after each exchange. In other words, exchange does not cause any increase in wealth.
Of course, we can introduce a new definition of wealth by adding virtual wealth, with the corresponding wealth formula: Total Wealth = exchangers' currency + exchangers' stock quantity × stock price. Obviously, under this formula, total wealth depends entirely on the stock price, while the exchangers' currency remains unchanged after each exchange (under the assumption of no exchange cost sedimentation). Under this formula, since stock prices constantly change — they can rise or fall — we might say wealth increased after a certain exchange, but correspondingly there exist exchanges that decrease wealth. Therefore, the assertion that "exchange creates wealth" does not hold here either.
In fact, from this formula we can tangentially derive the secret of modern capitalist credit trading. If in reality we introduce a mechanism that converts "exchangers' stock quantity × stock price" into actual "exchangers' currency" — and this conversion occurs not through exchange but through an external mechanism — this obviously results in an increase in exchangers' currency. This trick of virtualizing reality is the secret behind the apparent wealth creation in all modern capitalist credit transactions. This kind of wealth might as well be called self-gratifying wealth, or fantasy wealth if you prefer.
Of course, since in reality there exists a mechanism to realize this self-gratifying wealth, for each individual it is also a tool that can be utilized. But the risks it contains — for individuals, just ask those who traded on margin during the bear market and you'll understand; for nations, once sufficiently accumulated, if even currency devaluation cannot resolve it, then the only option is to let the bubble burst. The realization of modern capitalism's virtual wealth is nothing but a game of fantasy. Yet from a national perspective, this is the most powerful weapon rich countries use to exploit poor countries — the mechanisms involved, I'll discuss when there's time. As for Mr. Mao, at such an advanced age still worrying so much — that's not easy either — so I'll say no more.