Somebody owns some land, perhaps it was auctioned off by government. They plant trees(Adds value to the land). Lumber jacks pay to cut down the trees, and prepare the wood for woodwork(adds value to wood). They sell the wood to a woodworker, who crafts it into a chair(adds value to the wood). Who then sells it. The owner of the land may plant more trees and the cycle starts again.
At each step more value has been added(using labour and skill), which people are willing to pay more for.
Money is injected into the economy via banks and government to represent the value of products and services in the economy. If you create too much money, for the amount of value created you get inflation. To little and you get deflation. Obviously this is overly simplified. You also have stuff like velocity of money.
Tim amends: But in formerly rich countries, many people who used to be paid well for their work now have to compete for lower-paid jobs, while those who already own meaningful capital take a larger and larger share of the pie. This is the real “pie fallacy” — the idea that as long as the pie is getting bigger, everyone is better off. It’s true that through technology, trade, and the spread of knowledge, we have made a bigger pie. But that doesn’t mean that some people aren’t getting far more of the benefit, while others are losing out.
This is a step forward, but I confess that I'm still not convinced that the simpler version is actually a fallacy. I can't shake the sense that more and more people are consuming shared resources in a finite ecosystem.
Paul continues: It takes a conscious effort to remind oneself that the real world doesn’t work that way. In the real world you can create wealth as well as taking it from others. A woodworker creates wealth. He makes a chair, and you willingly give him money in return for it.
But where does he get the wood? Does he cut down a tree, which is no longer there for others to use? Or if he buys the lumber, how does he get the money to do so? And the person with the lumber, did they cut down a public tree to get it? For that matter, where does the person who buys the chair get his money? Does it matter if he too "created wealth" or it OK if he took it by force?
Can someone who once shared my naiveté explain what convinced them that the "finite resources" view is indeed a fallacy? It might be that I don't distinguish correctly between wealth and value. I understand that people can create something of value, and that they can make themselves wealthy, but I don't think I understand the concept of creating wealth.