Post
Topic
Board Economics
Re: Some dilemma regarding investments and social welfare in an all bitcoin economy
by
Foxpup
on 23/05/2013, 07:39:13 UTC
This is the fatal flaw in the model. In any real economy, not all participants have access to the same information. People with access to good information can profit at the expense of those who don't, by buying undervalued investments and selling overvalued ones.

The point, my dear Watson, is that either way you are more profitable by doing nothing.
Huh No I'm not. If I have information that nobody else has, I am more profitable using that information to make better investment decisions than everybody else. Everyone else is losing money by lacking this information, so it is more profitable for them to try to acquire this information, assuming it is not too expensive (the cost of information is the main reason (and if you assume everyone acts rationally, the only reason) for the market being a game of imperfect information in the first place). Either way, it is most certainly not profitable to do nothing.

This model also neglects the changing value of money. Suppose a company invests in more efficient manufacturing technology, and can produce twice as many goods as a result. Since the money supply is constant, the same amount of money is now buying twice as many goods, or in other words, each unit of currency is worth twice as much in terms of goods. So even if the company has not gained any money in nominal terms by its investment, in real terms, it has doubled its wealth (along with the wealth of everyone else using the currency).