Your Wealth Makes Me Wealthy

One of the concepts in economics that people seem to have difficulty grasping at an intuitive level is how other people's income affects one's own income. Many people instinctively ascribe to the "lump theory" of money, in which one may imagine all wealth to consist of a set amount of money, like a dragon's hoard. If you capture more of it, that means that someone, somehow, has ended up with less.

In certain circumstances, this theory might describe things pretty well, but in most times and places wealth grows and shrinks with productivity. Basically, if I am able to produce more goods and services of value to othe people in the same amount of time, then my income grows.

Not only does this benefit me, it also benefits the other people near me with whom I do business -- even if their productivity has not actually increased.

So for example. It's not unusual at this time of year to have some guy come knocking on our door and offer to mow the lawn for $20-30. I always say no, partly because I take a non-monetary pride in being the sort of guy who mows his own lawn, but mostly because I don't want to pay $20-30 for something which I could easily do in 45 minutes of spare time in the evening.

Imagine, however, that I drastically increase my income, by producing goods or services that people value a great deal more than my current efforts. Now I make three times as I did before. The idea of paying $30 not to have to spend an evening mowing my lawn might sound great. Indeed, I might be willing to pay $50. So the lawn mowers would probably end up making more money, even if before going and investing their hard earned money in a 30-inch-swath self-propelled lawn mower and increasing their own productivity.

This is why one of the constants of a growing economy is that all commodities other than human labor decrease in price, while labor increases in price.