Creating more wealth by destroying some of it. How is this possible?

Factual Questions
1

Hi There,

So I was sitting around thinking, and came up with this scenario:

A poor man finds a goose can that lay golden eggs (any economic good would suffice here. I’m going with golden eggs). The goose lays three eggs, and then dies. The eggs are more or less identical to each other. They are the only golden eggs in existence. The poor man decides to sell the eggs, and sells them to three separate highest bidders, for around $50,000 each.

Going rate for a golden egg: $50,000.
Collective value of all golden eggs: $150,000.

The three buyers are:

  • A Paris museum (egg 1)
  • An eccentric billionaire (egg 2)
  • Mr Jones (egg 3)

A year later, Mrs Black decides she wants to buy a golden egg. She approaches the museum, who tells her that they are willing to sell the egg for $75,000, but only after the egg has been on display for an additional 2 years. Mrs Black gets impatient, and approaches the eccentric billionaire, who doesn’t appear to be willing to sell at any price. Mr Jones is willing to part with his egg, but wants a cool million for it. Mrs Black decides to wait it out, and ends up purchasing the egg from the museum for $75,000.

Going rate for a golden egg: $75,000.
Collective value of all golden eggs: $225,000.

Late one night, a drunken Mrs Black becomes paranoid that thieves are trying to steal her golden egg, so she wanders off in to the Nevada desert and buries it (for the purposes of this hypothetical situation, the egg is now impossible to find).

Mrs Black, desperate to reclaim an egg, goes back to the eccentric billionaire, who continues to act as though there’s just no price he’s willing to accept for the egg. Mrs Black goes back to Mr Jones, who still wants the cool million. Mrs Black agrees to pay.

Going rate for a golden egg: $1,000,000.
Collective value of all golden eggs: $2,000,000!!

What has happened here? By destroying some thing of value there is a net increase in the value of all some things?

And, it’s doing my head in trying to understand how you can have a net increase in wealth by destroying something of value.

I’m not sure what my question is…

  • How do we define what ‘wealth’ is in such a way that the definition can allow for an increase of it when you destroy some of it?

  • Are there any real world examples where such a scenario has occurred?

2

Something is worth only what somebody else is willing to pay for it. Mrs. Black is willing to pay $1,000,000 for an egg, but you haven’t shown that anybody else is willing to pay $1,000,000 for the remaining egg. Until you can show that, your conclusion that the total value of all remaining eggs is $2,000,000 is unproven.

And to prove it, you need a commodity that is more plentiful than golden eggs, from which you can draw useful market statistics.

Consider this. Suppose that the day after Mrs. Black forks over a megabuck for her egg, a previously unknown stash of ten thousand identical golden eggs is discovered in a long-forgotten shipwreck. Do you think anybody would be willing to pay $1,000,000 for a single egg then? Is the value of the two other eggs still $2,000,000?

So now you’ve got a glut of golden eggs: the market has crashed. Mrs. Black is fuming, but the Eccentric Billionaire is ecstatic.

So, clearly, you should short golden egg futures.

3

But value has been lost.

You are down one egg with a retail value of $1mil.

When you are working on markets of such illiquidity, valuation is problematic.

4

There are two things that happen when one of two eggs is destroyed. First, there is a loss of “wealth” equal to the going price for the egg. Second, the other egg is no longer one of two, but is now one of one. Being a unique item will increase its value, resulting in an increase in “wealth”.

So, the key is that the second egg changes as a result of the destruction of the first egg. It becomes rarer and thus more valuable. If the increase in value due to its rarity is greater than the loss in value due to the destruction of the first egg, overall “wealth” increases.

5

In increasing the scarcity of an object, you increase its value.

The real word example that comes to mind is the fact that prices of art lithographs are maintained by destroying the plates (and with them the ability to produce more copies) after the edition has been completed. Implicit in the increasing value of scarce objects over time is the understanding that they are likely to be becoming scarcer. Interestingly the value of the object is independent of any rational functional attribution. Old stuff often does less in a worse fashion than new stuff, but sells well because of its rarity and cachet.

6

… who is posting to this message board.

(OK, OK, gold isn’t really iridescent.)

Changing topic, was I the only one who thought this thread would be about the broken window fallacy?

7

If A, B, and C are worth 1, 2, and 3 dollars respectively, the total value of the goods is 6 dollars. If you destroy A, the average value goes from 2 to 2.5, but the total value of the goods goes from 6 dollars to 5 dollars. You are not creating more wealth by destroying A. You’re making B and C more valuable, but consider a real world scenario. If all of the computers in the world stopped functioning except your desktop, and it was impossible to create new computers, you would suddenly have a machine worth a billion dollars, but the rest of the world lost trillions of dollars in wealth. You’re not creating wealth just because the average cost of computers went up a million-fold.

8

I like the username. You and I may have bumped into each from time to time at the tables. At least in the old days, when I was still young and frisky regarding such things.

Value = Benefits - Price, with Benefits defined in the mind of the purchaser. You can also subsitute the classic economics textbook definition of ‘Utility’ for Benefits.

As others have stated above, calculations of Benefits becomes problematic in illiquid markets with high degrees of intangibles, such as the one you have described above.

You would not expect to have an example such as yours arise in a modern, realistic market for grain, Pentium processors or Honda Accords.

9

Going rate for one of three golden eggs: $75,000
Going rate for one of two golden eggs: $1,000,000
Going rate for one unique golden egg: priceless

There are some things that money can’t buy… for everything else, there’s Mastercard.

10

Just to be nitpicky, but wealth and money are separate things. Removing an egg from the world removes the wealth of the world, but increases the monetary value (in this case).

Wealth, though its definition varies a bit by author, can be vaguely described as all the possessions or influences you have except for money. Land, statues, your company, your skills, etc. these are all wealth. Money measures the rate at which society values any particular item of wealth, but due to inflation, extenuating factors, and human wonkiness, the monetary value of a thing can vary widely and for often random reasons.

11

The loss of the first egg didn’t cause the increase in the last-traded-price; the purchase did. If, after Mrs. Black had lost the egg, she had just decided “Oh, well, it was nice having a golden egg while it lasted”, the value of the other two eggs wouldn’t have changed one whit. Alternately, if Mrs. Black hadn’t ever lost her egg, but decided that she really wanted two eggs and bought Mr. Jones’ egg for a cool megabuck, then the last-traded-price for golden eggs goes up without any of them needing to be destroyed.

Of course, there’s also the issue that the last-traded-price is a misleading indicator of value, since each egg-owner values their egg differently. Mr. Jones still values his egg at one million dollars, and the eccentric billionaire still values his egg at some amount so much greater than a million dollars that there’s no chance of anyone meeting his (unstated) price, while the museum would presumably still value their egg at $75,000 if they still had it.

12

There are many real-world examples where this kind of thing happens.

Some people in Detroit have suggested bulldozing half of the city so that they can increase property values. This isn’t just a crackpot idea either - Detroit has lost a lot of its population and apparently has a lot of empty/unused property. Bulldozing what isn’t needed and concentrating the population apparently would increase the overall value.

A few years back, dairy farmers requested that a certain number of dairy cows be killed. This would reduce the supply of milk and therefore increase the price of milk, helping to offset recent drops in the commodity price.

The bottom line is that monetary values are only relevant in the face of scarcity. If everything was infinite in quantity and easy to obtain, then no one would ever pay for anything. Thus, it should be intuitive that any increase in relative scarcity would increase the monetary value of a commodity.

Whether “wealth” has increased as a result of the destruction is up for debate based on how you define wealth. Inflation drives up monetary values of resources without increasing the resources themselves. We would not say that inflation increases wealth when it only increase prices. Your story is another example that shows how increases in monetary value are not always related to the amount of resources available. Clearly wealth and monetary value are not directly connected… but money is the only simple measure we have for wealth, so it’s hard to talk about wealth without referring to money.

13

Another real-world example I heard of years ago was in stamp collecting. There was one stamp of which only two instances were known to exist; so a wealthy stamp-collector who owned one bought and burned the other. Presumably the value of a unique stamp was (or might be) greater than the value of the pair - at least in the eyes of the owner.

14

To build a bit on Chronos point above, the stamp collector should have bought the other stamp and just held onto it.

He always has the option of burning it, if he wants to. He could also just tell someone he burned it, or lost it, or whatever and see what happens. Maybe that will drive up the price of the remaining stamp to an interested purchaser. Maybe it won’t. But if he actually burns the stamp, he has destroyed option value. He can always offer to burn the stamp as part of a transaction…or sell both stamps to a purchaser who may then decide to burn one by himself/herself.

15

It seems to me that “value” is little more than a rhetorical device.

16

You’re calculating value based on the purchase price. That’s not really a good way to do things when you want to be precise, like here. Sure, Mrs. Black bought an egg for 75 k, but she would have paid a mil for it. So you should value it at a million dollars.

Either that, or later on, Mrs. Black shouldn’t buy an egg for a million. She should walk away from the deal egg-less.

But the way you have it set up, you’re changing how much Mrs. Black will pay for an egg just by declaring it to be so. As was mentioned, you don’t even need to create or destroy anything to create wealth. You can just declare “It’s raining” in your scenario and watch the value of umbrellas rise. You’ve said “OK, an egg disappears, so now Mrs. Black will pay a million for an egg.” The question is, should that be the case? Would it be the case? Probably not.

17

Thanks for the responses.

I do understand the concept of greater scarcity = greater value, I just find it strange that in some instances, as Iridescent Orb pointed out:

This realisation is turning my understanding/perception of what “wealth” is on its head.

18

I’m not sure you fully grasped what friedo, Sage Rat, and Chessic Sense were saying because if you did, you would have notice that Iridescent Orb’s statement about ““overall “wealth” increases”” is incorrect.

There were a couple of flaws in your original post.

#1 Wealth (or to be specific “real” wealth) is not money. When you and Iridescent Orb say, “overall wealth increases”, you’re only factoring the (possible) monetary increase but not factoring the loss of the actual golden egg. You’ve lost the “wealth” of the gold in that egg to cap fillings in teeth or coat hi-fi audio connectors to prevent corrosion. You’ve lost the utility of that egg. That utility is wealth.

#2 You can’t multiply the last transaction price times the remaining items (what you call “collected value”). This is a phony number unless you have ironclad contracts from buyers agreeing to purchase the other eggs using your price calculation or you have a long history of buy-sell transactions that closely mimic the last transaction price.

19

Here’s another way of looking at it.

Value is semi-permanent. It lasts as long as the item does or the benefits of a service does.

Price exists quite literally for a moment: specifically the moment of purchase. It has no reality outside of that, ever ever ever. Period. If there are a lot of such transactions, it will probably be pretty predictable and stable, because…

Value creates the purchase price, but because value is intensely personal, so is price. The more widespread the value, the more likely the price will be consistent. So coca cola is pretty evenly priced, with some regional or national variations but rarely any significant* local ones.

*There are always variances and such because of the practicalities of doing business, packaging differences, sales promotions, etc. But you don’t see cokes going for 10 bucks a can because even if there are people who might pay that much, most people get roughyl the same value and wil pay a roughly similar price.

20

Sort of, but you’re giving it short shrift.

Nothing has an intrinsic value other than what we assign it. That doesn’t mean it’s a worthless concept, though. For example, there is no such thing as morality independent of consciousness - a rock isn’t moral or immoral.

Value is simply a concept that we assign to things, as is beauty or taste or silliness or any other number of things, but that’s not to say the concept of value doesn’t have… well, value.