Tosh5457 said:
As for the definition of profit, it doesn't matter when you only look at balances.
Yes, correct definitions and assumptions matter. If you assume things that are wrong, you will likely get wrong conclusions from the logic. That's a basic principle of logic.
It's ridiculous that you didn't quote the part where I assumed that the money varied...
I consider it ridiculous that you say you accept that the economy has a continuously increasing (over the long-term) total value, then build models that assume otherwise!
And it's also ridiculous that you're using the argument that because the money in the system varies, then it's not a zero-sum game.
It seems like you are losing focus on what your argument is here. The problem isn't the money in the market, the problem is with the value of the stocks. We both agree that investors are continuously pumping cash into the stock market. What we're disagreeing on is whether there is a corresponding change in real value of the stocks themselves based on the value of the companies.
You're forgetting the fact that when money enters the system, there is 1 more player in the game, therefore my conclusion still holds. That argument of yours also works to "prove" poker is a non-zero sum game
Er, no:
Standard tournament poker has a fixed initial value and a fixed starting number of players, with players dropping out as they run out of money. It is an inherently degenerative situation, which is why it doesn't find an equilibrium but rather results in a single person holding all the money.
Casino poker on the other hand has a continuously changing quantity and roster of players and continuously changing pool of money. If you were to remove the house "take", it would overall be zero-sum, with winners and losers exactly in balance. Many people erroneously believe the stock market follows this model. It doesn't because the betters in the casino are trading cards, not stocks. Cards have no inherent value, stocks have a value...that is increasing.
But you said a
growing roster of players. A casino poker game does not have a growing roster of players over the long term, but the economy does. Perhaps that's where your problem lies:
The fact that the economy is growing partly due to population growth, which therefore leads to more investors adding more money to the system, may make it appear similar to a pyramid scheme. But a closer look shows that the economy and stock market grow faster than the population (indeed, many European countries are shrinking, not growing). Why? Added value. Time (labor), intellectual property creation, and cash dug out of the ground (crops and minerals) add value to the economy faster than consumables (food, cars, etc.) take money out.
The growing population is giving you a
false impression that the market is a pyramid scheme. Even if the number of investors remained static, the value would still grow in a growing economy.
What you're saying is that there is creation of money.
There
is creation of money and value! That's the entire issue we're arguing about!
I have to say, it seems like you're really shooting from the hip here and losing track of the argument -- like you're not trying to learn but are just arguing for the sake of arguing, regardless of where your argument leads you.
The money on the side of the buyers growing is the same as saying more players with money entered in the stock market game, and that alone doesn't mean it's not a zero-sum game, it still is.
That is true
only if the amount of money each player brings in when he/she enters stays constant. It doesn't. If each new player brought in as much money as the last, it could be like a pyramid scheme because growth would
require new investors. But again, the growth rate exceeds the rate of new investors entering because the economy is growing faster than the population.
Now on the other side, the companies grow, that's true. But that richness they earn don't pass to the stockholders. You argue it does, and I argue the only mechanism that exists for that are dividends. You can't describe the mechanism by which that happens. Of course if you accept that stocks can grow in the long-term just because of offer and demand in the secondary market you don't have to assume that mechanism exists, but since you can't accept that you have to assume it does.
You missed something here because I have never argued that the value passes or has to pass to the shareholders. Others have argued it, but I avoided it because it is an unnecessary complication: It doesn't have to for stocks to have or gain value. Dividends are really a separate source of revenue entirely. A company could grow at a rate equal to excess revenue, which results in it never turning a profit, but in growing it still gains value for the stockholders. Or it could stick the profits in a bank account, with the same result.
Again, you are making the mistake of thinking that a person has to be able to directly access the assets of the company in order for their stock to hold value. All that has to exist is the theoretical possibility that they could. I think you are letting the size of companies make you think there is something else going on in larger companies than happens in smaller companies. In smaller companies, it is easy to see:
Owners of companies are shareholders, regardless of the size of a company or if the owners do any of the work. But if you look at small, direct ownership, it becomes easy:
If two people each use $10,000 to buy equipment start a company together, each now owns half of a $20,000 company. If the company turns a $10,000 a year profit for 20 years, but the owners stick that money into a bank account instead of taking it out of the company in bonuses, the company now has $20,000 worth of equipment and a bank account with $200,000 in it, for a total value of $220,000.
Now one of the partners wants to retire. He has a piece of paper that says he owns half of the company. The partnership agreement and negotiation will determine exactly what he can do with it and how it works, but typically the options are:
1. Sell his half of the company to the other partner. Now the initial investment was $10,000 but since the sole owner could just sell the assets and pocket the money in the bank account, it doesn't make sense to sell $100,000 in cash and $10,000 in equipment for $10,000. The sale price has to be about $120,000.
2. Sell half to a new shareholder. Same valuation.
3. Force the other shareholder to dissolve the company. Same valuation.
No matter how you slice it, when the shareholder wants out, he pockets $110,000 for a return on his investment of $100,000. Whether a new shareholder enters the game or not.
*
Now here's the part where you seem to be slipping up: At any time during those 20 years, the shareholders could make the decisions above. The fact that they
don't doesn't mean that the company has zero value (or a constant value of $20,000) in the meantime. The company has a higher value because they
could.
*This made me think of another important point. One of your issues here is that you think that money can only pass through the market from the company to the shareholders without dividends. Actually, it can: the company can buy back the stock. Sometimes they do that and the buyback price does not have to equal the original issuing price. I'm annoyed I didn't think of that example before.
)
