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Alice has $100,000 in the bank. She pays an architect $100,000 to build a house. She ends up with a $100,000 house, and the architect ends up with $100,000 in the bank.

Where did the extra $100,000 come from? --StanSilver

The architect's time and effort. Money is only an abstraction for the bartering of resources. In this case, the resource was the architect's time and effort. Or am I missing something? Note that the architect may not lose his skill after this, but he does lose time. On a totally random note, when selling information, many people think that nothing is lost by the vendor but bandwidth. This is one reason InformationWantsToBeFree, they claim. But the vendor did lose something: control over the information. Information is very expensive. Ok, ok, enough soapboxing. -- SunirShah

Actually, I'd say money was not created, unless one considers valuable things to be equivalent to money. The architect/contractor pair created a new valuable posession, but no new money was created. Alice winds up with a house valued at $100,000 (because she preferred the house over keeping the $100,000), but she does not have $100,000. Presumably, Alice could *sell* the house for $100,000, but that money would come from a third party (like Tom).

To make my point more clear, suppose that both Alice and the architect used the same bank for their accounts. The architect builds the house, and Alice gives a check for $100,000 to the architect. Since they both use the same bank, when the check is deposited, $100,000 is moved from Alice's account to the architect's account. (Using the same bank isn't really important, but it makes it easier to visualize.) Also, who keeps the money/posessions isn't important. Suppose the architect built a house (fairly appraised at $100,000), and then Alice freely donated $100,000 to the architect. The same amount of money/posessions exist with or without trading posession. --CliffordAdams

Now to understand the banking system, you have to see that when the bank gives you a mortgage, they are creating money out of thin air. Conceptually, they liquidate your house and give you access to an equivalent amount of money.

So before you took out the mortgage, there was $100,000 in the architect's account and afterwards, there is $100,000 in your bank account too. This works because if you don't pay off the bank on time, it will take possession of your house and sell it to someone else who does have money.

Of course, since the Central Bank of each country has a legal monopoly on the creation of money, that means the entire banking industry is illegal. The banking industry creates money for people and then the people have to pay the banks for the priviledge. What a wonderful scam. -- rk

The conclusion I came to a few years ago was the same as Sunir's - the architect's time was turned into something with value. Actually, to be a little more precise (but still not perfect), the equation would probably be: $100,000 in money + $50,000 of supplies + $50,000 of architect's time = $100,000 in money + $100,000 house. So Clifford is right - no new money is being created, but worth is being created from the architect's time. Time is money :) (or at least can be converted to money) --StanSilver

In Business Studies they call this "added value". You can add value by expending effort, or just by trading. For example, I have a house that I don't want and can't use - it gives me perhaps $50,000 of benefits. I sell it to you for $100,000. You like the house and it gives you $150,000 of benefits. We've just created $100,000. You can view the riddle above in precisely the same way. The architect has time worth $X/hour - she gives you the time, and you give her cash, and value is created in that trade. --MartinHarper



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