Let's say you have 5 players selling car tires. There are 1000 cars in the area, and only one brand of tire to buy. For the most part, these 5 players compete on something other than price, since the market is mature. They have 20% of the market each.

Let's introduce 3 new players into this market. They bring nothing new to the market per se, but by default they get some sales (maybe they are closer to the car owner's homes, maybe they have a hot chick at the front desk). Nothing major, let's say they share 10% of the market overall, and the 5 incumbents lose 2.5% of their sales each.

The incumbents panic and look to counter this threat, and one of them happens upon the fact that if you change the formula for the tire a little, you can get a 50% increase in performance and a 20% increase in lifespan with only an extra 5% in manufacturing costs.

Now everyone scrambles: Some into R&D, some into improving customer service, some into death. The overall value of this market increases, because of the 5% increase and corresponding price increase... inflation, if you will.

This innovation happened completely and only because of the dreaded saturation of the market you are complaining about. The quality of the noobies is irrelevant, since the incumbent did the innovation. Point is the innovation happened, and wouldn't have happened without the new entrants creating pressure through competition.

Even a case where an innovation decreased market efficiency (of this does happen - all players would love to have a monopoly), the trend is for the market to work towards increased efficiency.

I'm no hard-core libertarian, but unless you have outside interference in a market - big tire 5 use government to mandate a tire-selling license that presents a barrier to entry - or one of those markets that lead itself to creating natural monopolies, this is the way things work.

I never said it didn't.

I said greater market participation increases innovation by default, regardless of the quality of said participation. You are the only one equating the behaviour of the markets to being either "good" or "bad". The reality is that these are not concepts the market understands or cares about.

Innovation can and does destroy entire markets all the time. But unless you feel innovation itself is horrible and we should be writing these arguments with typewriters and cabling them to each other, you simply have to accept the reality that innovation will occur all the time in every direction.

I don't think its that easy, and the story could have turned out a number of different ways and you chose the one that supported your argument (much like I did in my other reply to you).

Increased competition could lead to a race to the bottom, with each competitor slashing prices, engaging in expensive marketing wars and predatory acquisitions. With so much heated competition, R&D budgets get slashed by short-term thinking managers. There is no innovation for a decade, only decreased profits.

Decreased profits are an innovation. Clearly the market was overpriced. It's the same as buying a new machine and decreasing your costs.

Creating wealth is not "building something" directly. I think this is where you are confused. Creating wealth is "acquiring something". This could be a physical item or something nondescript like time.

False. This happens with or without the 3 new players. Those 5 players are going to be vying for a bigger piece of the pie. They're trying new marketing, new formulas, etc. Over time an increasingly large part of the company will be dedicated to growing it, (especially if they're not growing!). Some of them might invest in or partner with the car companies and secure a contract for new cars. They might work together to increase the size of the market. Markets that are stable are not so because players idle, they are stable because everyone is innovating at a similar pace. When one of these guys makes the mistake of thinking he can take it easy and sit on his 20%, the others will take it as fast as possible.

(I'm not disagreeing that new entrants to a market are a bad thing, just saying that it's not for this reason)

Failing a strong leader that can create monopolistic conditions in a market, oligarchies are the norm. The reason for this is that the status quo is often more desirable than the risk required in advancing your position.

What you are suggesting will only happen if for some reason, competitors view themselves as enemies. The reality is that it is often the opposite, and nobody wants to rock the boat - except for the upstart.

It's for that reason that new competitors are almost a requirement, never mind a benefit.

Created and transferred are 2 completely different things and I think OP is against innovation that simply transfers wealth (popular example is financial industries). A more cynical example is Groupon, which transfers wealth from small businesses to them.

Creating wealth is making something more efficient like creating the airplane or the internet. Or improving the standard of living like creating a cure for a disease.

It's actually very very hard to do it, and less than 5% of tech startups probably succeed in doing it, even the ones that are successful.

There is no "good" wealth creation, nor is there "bad" wealth creation. It just simply is. A tornado is a horrible event, but it creates wealth.

You are conflating simple wealth creation - the idea of providing value that wasn't previously there - with innovation and/or human progress. That's simply a misunderstanding of the term when used in the context of economics.

Classic broken window fallacy.

A tornado doesn't create wealth. On net, it leaves the society poorer than before. It may create a windfall for a particular industry, but that's just moving wealth around. The money spent on rebuilding had to get pulled away from something else. It would have necessarily been spent or invested, and now that spending or investment will never happen.

Bastiat called it the seen vs the unseen. We see the builders making money. We don't see the economic activity that would have otherwise occurred if there had been no tornado.

The overall impact on economic activity is a wash, and the only net effect is the original property destruction.

Of course it does. It's a catalyst.

On net, it leaves the society poorer than before.

There's no basis for you to make that assertion. If a trailer park is destroyed and a regional business park is what replaces it, there's no way you can argue that there hasn't been a net growth economically. Natural disasters almost always increase GDP in the recovery phase.

We don't see the economic activity that would have otherwise occurred if there had been no tornado.

This is kind of irrelevant since economic activity can't be measured until it actually happens. It's like suggesting that going to the moon was a net loss for humanity because we could have reinvested those funds in going to Mars instead.

We don't see the economic activity that would have otherwise occurred if there had been no tornado.

Again, because said activity is completely irrelevant. The point is that there is economic activity that is a direct result of the event. Is Christmas a wealth creating event? You are suggesting it's not, after all, all the resources used for Christmas presents would have been used somewhere else, no? Using those terms, nothing is a wealth generator, and the economy is zero sum.

That is completely wrong.

What you are looking for though is Quality of Life. This measurement is an attempt to do what you are looking for: harness non-economic indicators together with the empirical data to determine how people are doing.

EDIT: To your first point - If you are giving some of your wealth (often in the form of money) to someone else, you are usually doing so for a reason, in that they are producing something that you value. The very act of producing value is creating wealth.

Say I take out a loan of 100K to build a house. Did I create new wealth?

Yes. You're paying interest to the bank aren't you? Interest that wasn't there before. That's new wealth. You're also paying your realtor. That's new wealth, etc. etc.

The fact that you don't think the bank needs any more wealth is entirely besides the point.

There's a good pg essay on this that explains these concepts well: http://paulgraham.com/wealth.html

People think that what a business does is make money. But money is just the intermediate stage-- just a shorthand-- for whatever people want. What most businesses really do is make wealth. They do something people want.

Besides this one confusing sentence PG gets wealth creation correctly: its about increasing the size of the pie, and that is what's important for the country as a whole.

Your example of the realtor and the bank is not wealth creation, but money transfer. They didn't create new wealth. They made money from you, and your "wealth" is now decreased. The only wealth created in this instance is the wealth you add to the pie when you use that loan to complete your house. The realtor and bank add value in that they enable you to do your wealth-creating thing: build a house. The simple act of lending you 100k is not wealth-creation because if you piss that money away or burn it, all you have done is give money to someone else. The world is not richer as a result.

Money transfer - assuming it isn't charity - is wealth creation, you are always getting something in return in exchange for that money. That something is increased wealth.

The only wealth created in this instance is the wealth you add to the pie when you use that loan to complete your house.

First, that $100K did not exist before I asked for it. It literally was created. Second, these aren't two unrelated events. I bought money after all.

if you piss that money away or burn it, all you have done is give money to someone else. The world is not richer as a result.

Actually, the bartender would be richer in this case. I bought money, that action alone increased my wealth the same way buying a car increases my wealth. I have something now that I didn't have before. What I do with that money is really irrelevant, in the same way that how fast I drive the car is irrelevant.

If I physically burned the money, sure. But the same is true if I physically burn my house down. Of course this too adds to the economy.

Again, conflating wealth to some sort of "good" is a near impossibility, since it devolves into opinions of value and worth.

My wealth is now decreased? Hello? I have a house that I didn't have before! It takes some strange reasoning to assume my wealth is decreased because I'm paying interest on a loan.

You give the example of Christmas. Wealth is hardly ever created when you buy lots of stuff for Christmas - that's wealth distribution from your savings to Macys. Savings is still wealth. If nobody spent anything for Christmas, wealth would not decrease - because our money would remain in our savings accounts.

Technology is a good example of wealth creation. With the invention of the internet, we save time on many things like shopping, buying plane tickets, etc. Time that could be used on other things in our lives.

As such, some of the things you are saying are absurd in that context, and it really makes it difficult to keep the conversation in scope. I can certainly tell you that if everyone stayed home this Christmas, the economy would come close to collapsing.

I don't take issue with what you're saying, but you have moved beyond this being a discussion regrading economics, I'm afraid.

the meaning of wealth is context-dependent and there is no universally agreed upon definition. At the most general level, economists may define wealth as "anything of value" which captures both the subjective nature of the idea and the idea that it is not a fixed or static concept.

So it seems a lot of the discussion in this thread revolves around semantics, mainly about what defines wealth.

So what exactly is your definition of wealth? I don't understand the logical basic behind your arguments.

For example: Actually, the bartender would be richer in this case. I bought money, that action alone increased my wealth the same way buying a car increases my wealth. I have something now that I didn't have before. What I do with that money is really irrelevant, in the same way that how fast I drive the car is irrelevant.

You exchanged your money for a car. You could now be wealthier in the sense that the car brings you happiness or functionality that you didn't have before, enabling you to be more productive. But what if you already owned a car and were simply indulging yourself? What if this was your 5th car that you didn't need? So you could keep on buying cars forever, and you'd be continually increasing your wealth? I don't understand why buying the car automatically makes you wealthier. If you give a hobo $10,000 to buy an hour of him walking in circles, you've increased your wealth of entertainment perhaps, but it is a stretch by any definition of wealth to say you've created it.

If I physically burned the money, sure. But the same is true if I physically burn my house down. Of course this too adds to the economy."

Assuming your house was functioning and adequate then the economy is poorer without your house. That is wealth destruction not creation. For now you have to pay for a new house. Someone has to use the materials and labor to build that house. You pay him your money to do so. Now you have less. Wealth was not created here. It was shifted around from your pocket to the construction company's.

Created and transferred are two different things. Created means new wealth is generated through increased efficiency or innovation. The pie gets bigger. Transferred means one player loses and the other gains (the definition of zero zum). The pie stays the same, only the relative size of each slice changes.

Secondly, increasing competition increases pressure to become more efficient and/or innovative, which in turn drives market growth. The whole idea of helping and soliciting help in business is an act of innovation.

You argue that increased efficiency is a kind of innovation. Your argument is that increased competition leads to increased efficiency, and by increasing efficiency in a market more resources are freed for other markets and the pie gets bigger.

I may agree with you here, but you'll have to provide examples.

* Increasing the quantity of entrepreneurs by default increases the quality, because it increases the pressure to compete, and therefore leads to the very innovation you feel is the real solution*

Can you provide concrete examples?

Several points: I can agree with your argument on a theoretical level but its still a leap to make the connection between increased quantity leading to innovation without evidence or examples.

1) One instance in which your argument could be true: If there are greater efficiencies discovered in one industry (for example, a new gizmo that doesn't require as many restaurant cooks), leading to less labor costs and subsequently lower cost of food, leading to increased money in consumer's pockets with which they could spend in other industries.

But who discovered that efficiency? It could be made by a separate party and have no connection to the increase of competitors. It is a leap to draw the correlation between increased competitors and innovation.

2) One instance where it may not be true: An industry where there are little or no efficiencies to be captured.

Lets say there are 10,000 software design firms competing with one another and they make their profit from software consulting projects. If they all make a profit of $1,000,000 / year and you add another 10,000 competitors, all providing the same service, two things will happen for sure: 1) some of the new competitors will gain entry to the market, leading to lower profit for everyone else. 2) some competitors will fail.

It is possible that the innovations are simply not there to be found by the new entrants, even with their newfound startup wisdom. Innovation is not a matter of strictly effort. For example, I recently came back from a trip to Southeast Asia where I traveled for 3 months across many of the developing countries and witnessed the effects of increased competition there among the street hawkers.

In the street-hawking industry there simply aren't many innovations to be discovered. Adding more entrepreneurs to the mix wouldn't lead to innovation, but rather a race to the bottom. Profits across the board would decrease and consumers would benefit.

Also, a point about quality: increased quality does not necessarily lead to a greater pie. We may lead richer lives from 10% more delicious food but the wealth pie stays the same. (although that is valuable as well).