Friday, March 9, 2012

Mathematically profit is impossible

Mathematically profit is impossible

Suppose you live on an island with another person. There are 2 people on this island, you and your neighbor. You sell and buy to your neighbor.
Let's suppose you and your neighbor each have 50 coins of gold. The total amount of money on the island is 100 coins of gold. This amount is fixed and limited and we suppose nobody is counterfeiting money.

Let's suppose you decide to make a profit and start selling more than you buy. What happens then? It means that your neighbor starts losing money.
If you have now 60 coins of gold it means your neighbor now has 40 coins of gold.
If you have now 70 coins of gold it means your neighbor now has 30 coins of gold.
It is impossible for everyone to get richer at the same time. If you get richer, it means your neighbor is getting poorer.

How do you make a profit? By selling more than you buy.
According to Accounting, profit is defined as the difference between revenue and expenses.
Revenue is money that comes in.
Expense is money that goes out.
If more money comes in, you have a profit.
If more money goes out, you have a loss.
When you sell, money comes in.
When you buy, money goes out.
If you sell more than you buy, you have a profit.
If you are having a profit, it means your money is increasing. If you start with 50 coins of gold, with profit, your money may increase to, say, 60 coins of gold.
But if you have 60 coins of gold, it means your neighbor has now 40 coins of gold.
If you are getting richer, it means your neighbor is getting poorer.

Eventually the economic system will collapse. Your neighbor will end up with no money and he will stop buying from you, because he has no money!
But since you have money you may decide to continue buying from your neighbor without selling anything. In that case your neighbor will refuse to sell to you, because this money would be useless to him. What is the point of having money if you cannot buy anything?
Money exists only to facilitate the exchange of goods and services. If you have no goods and services to offer to your neighbor, your neighbor cannot give you any goods and services in exchange.

It is a win-lose situation, also called zero-sum game. It is not possible for everybody to win at the same time, for someone to win, someone else needs to lose.

It doesn't matter how many people are on this island, you could have billions of people, mathematically the situation is exactly the same. For a group of people to make money by selling more than buying, another group of people necessarily needs to lose money.

Of course I am supposing the total amount of money is fixed and limited and nobody is counterfeiting money and increasing the money supply.

This conclusion is very disturbing because economically I have come to assume that commercial transactions ideally are a win-win situation.
In the real world you may have win-lose transactions, but economically all transactions should be win-win situations.

The point is: how can you have a win-win situation? Mathematically it is impossible.


  1. Hi there, Hisao!
    One of the facts that pushes me away from writing a blog is this loneliness feeling every single blog writer gets to feel once in a while ahahah

    Well, your logic seems to me quite... logical. I haven't ever studied Economics thoroughly, so I can't really point mistakes. If there's any, I mean.

  2. Hisao, don't give up even if it seems lonely right now. Ultimately if you don't have a lot of followers it's definitely more likely that you'll have less comments, but you know I've learned through my own blog experience it's nice to just reflect on my own thoughts at times. And since these thoughts are public I feel comfortable sharing with whomever I come into contact because I know I write the words I published in my blog with sincerity and they are appropriate to share with all audiences! hehe

    My main channel on YT is AmericajinYumi, that used to be the name of my blog too but I changed it this past month.

  3. i have been a long time subcriber to you on youtube,and now that i have a blogspot,i have decided to follow you. My youtube is kiwitomcrawford, oh and btw do you have windows live messenger, i would like to get in contact

  4. Hisao you are partly right and in that lies the answer that proves your statement wrong. Remember that money is only the medium of exchange not the wealth of the country. As such it only represents the wealth.

    People on the island grow richer by growing the economy not by growing the money supply.

    For example: Lets say your neighbor is good at getting fish and you are good at getting edible plants. In the beginning he catch fish with a line, hook and bait while you get plants by collecting it. Eventually you learn to plant and he makes nets and fish traps. Even if the amount of money is still just 100 gold coins he will be forced to give you more fish for the one gold coin than he used to in the past because what else will he do with the fish? So too you will give him more grain and berries than in the past because what else will you do with your grain and berries?

    Of course both of you could just work fewer hours but that can also be seen as economic gain. More free time.

    In a island with billions there will be many suppliers of fish and grain so both of you will be forced to lower prices but you will also have many more buyers which allow you to raise prices. This will balance out so the price is neither so low that no one wants to fish or plant for a living and neither so high so that no one wants to buy either. That is the equilibrium price.

    Assuming each person has only 100 gold coins to start with you will get a situation where you can buy more and more with each coin as time goes by and that will be because of improvement in farming, fishing, clothes making, house building. This is because techniques and technologies as well as the supply of tools each person build up to do the job increase in both quantity and quality.

    That is called economic growth and assuming the number of gold stays the same it will lower prices so you can get everything cheaper and therefore a lot more for your money. That is the real wealth. The knowledge, technology and tools of each tradesman that he uses to do the job.

    In the real world of course there are two problems. One is inflation and the other is skewed distribution of income. Still the purchasing power of currencies in developed countries is much stronger than that of developing countries precisely because they have more capital stock, technologies and education.

    In either case (stable amounts of coins or printing presses going wild) the money only represents the goods and services. They are not the real wealth of the country. The real wealth of the country is the means of producing goods and services. Which is what I describe above.

    All of this of course assumes quality stays the same.