Economics Question - Do the producers "steal"? Do buyers "steal"? Is profit created?

Great Debates
21

Of course not. The opportunity cost and the expenditures (all expenditures) exactly equal the value. The opportunity cost couldn’t exceed the value unless the expenditures were negative.

In an earlier post you used that word, but in the one in this exchange you said “richer”, which certainly carries the connotations of money. If you didn’t mean this, I’m sorry for the misinterpretation.

And you’re locallizing to humans on this one planet. Remember what I said about local versus global? I swear, nonmathematicians can’t read to save their lives.

22

Ooh, you’re so close to the sanity everyone else is dancing around.

23

So what kind of apples are these anyways? A buck fifty seems a little steep. Must be really great apples. Can they be purchased online?

24

Adding value is a function of making a product desirable for human needs. If I dig up make back yard and make assorted piles of rocks in a seemingly random pattern, I’ve created no value. If however, I perform the exact same amount of work but sort out the precious metals or minerals I find into their own piles, I’ve created value because people will want to own these particular rocks and will appreciate the ease of buying them sperate from the other rocks. So obviously opportunity costs and expenditures are not the only factors in determining value.

25

You expend more mental effort in the sorting process than in randomizing the results.

26

Okay, here’s how wealth is created in a capitalist economy:

Bob wants to build a house. He’s very good at carpentry, but he’s lousy at bricklaying. He can do carpentry at the rate of one house per month. But bricklaying takes him three months to do a house. And roofing takes him two. So if Bob builds his house by himself, it will take him six months.

Joe is great at bricklaying, and can lay bricks for a house in a month. He’s just as good at carpentry and rooflaying, because he’s very smart. So he can build a house in three months.

Between the two of them, they can build three houses in six months (Joe can build two, Bob can build one).

Now, Bob goes to Joe and says, "Tell you what, why don’t you lay my bricks, and I’ll do your carpentry? But Joe isn’t interested, because he gains nothing and has to travel, take on risk of the other guy not being happy, etc. So he says, “Tell you what - I’ll lay your bricks for you, but in return I want you to do the carpentry on my next two houses.” So for Bob, this is a good deal too, since he can do two month’s of labor and in return Joe will do what would take Bob three months. Joe also gets two months of labor from Bob, at the cost of only one month of his own.

So now, after six months there are three houses, plus framing for two more (Bob’s payment to Joe, plus the extra framing he could do with his spare month), The new framing would not have existed had Joe and Bob not agreed to exchange services.

Now, it doesn’t do Bob and Joe much good to do framing for two houses that don’t exist yet, so Bob gives Joe an IOU for the framing he’s promised to do. Joe can then take that IOU and trade it to someone else for whatever he wants.

As you start adding more people to the equation, and everyone is giving each other IOUs for goods, it starts to become a real pain. You’ve got an IOU for bricks, and you meet a guy who will make you a chair. But he doesn’t want bricks. So you have to start looking for intermediaries. So to get rid of this hassle, you create money, which is essentially a generic IOU. Now you don’t have to worry about who wants what - you give the chair guy money, and he can go use it to buy what he wants. Now the system is more efficient.

There is nothing magic here - the free market is just a gigantic clearinghouse of goods and services. It allows people to organize together for efficiency, and the price system communicates what people are willing to pay for various services. Wealth is created because people can specialize on what they do best, or organize together to create things they couldn’t create on their own. Everyone has their own comparative advantage - some are smarter, some are better with their hands, some might live near natural resources. The free market allows people to trade their comparative advantages and improve overall efficiency, which creates even more wealth.

The rest is just details. (-:

27

Wrong. You negotiate price, value is determined before hand.

28

Are you trying to make yourself sound like an ignorant ass? Aren’t you the one who misinterpreted my post? Incidentally, citing Heisenberg’s Uncertainty Principle to try to sound smart, thereby stating what is obviously a silly non-sequitur, will impress nobody on this message board.

Of course I’m “localizing to humans on this planet” (which is what GLOBAL means, by the way. You can find definitions of “Global” and other fine words at http://www.m-w.com). Since we are presently unaware of life existing on any other planets it’s pointless to discuss the economics of the Epsilon Eridani system. What this has to do with anyone’s reading comprehension I cannot fathom, because we weren’t discussing interplanetary, interstellar, or intergalactic economics. When the Vogons come wanting to trade, let me know.

Mathochist, if you have something to add to this discussion I’d suggest you start adding it; babbling about how you’re smarter and saner than everyone else just makes you sound stupid and crazy. You have not in any way supported your claim that value cannot be created. You have not addressed any point directed at you. My rather simple but true point that the sum of human wealth has increased over time remains unaddressed. Do you have some reasonable, fact-based rebuttals, or do you plan on tossing out insults until you get banned? Your pick.

You can start by explaining WHY, exactly, the sum of wealth hasn’t increased since, say, two thousand years ago. Please explain how it is that six billion people who appear, at least, to be better off then 300 million people cannot possess more wealth, value, utility, or whatever word you choose to employ.

You can start by explaining how YOU are defining “value.” I suspect it is not the same definition used by every economist in the world.

29

/me sighs

Okay, when the ad hominem attacks start I guess I have to show my hand. Of course what I wrote was bullshit, but it was a specially crafted bullshit to (a) be funny to those who understand enough QFT to get the joke (mostly Chronos, if he’s reading), and (b) underscore that the OP itself is based on a faulty premise: that value exists in any way objectively. There’s no such thing as value beyond saying that at such and so a point in space and time, these two specific groups exchanged these collections of goods and services, thus showing that each group valued the other group’s offering at least as highly as its own. Nothing else can be said objectively and rationally.

Not to a geometer, thus the joke I mentioned in my first post.

30

I bought my house for a certain price a couple of years ago, and now it’s worth a lot more. In order to own the house (i.e. the right to sell the house and keep the proceeds) I had to pay interest and fees on a mortgage, but those expenses were small compared to the increase in value of the house, and if I were rich enough, I could have avoided those expenses altogether by paying cash. I also have to pay a little property tax, but again, this is small compared to the increase in value of the house.

Since I own the house, I’m legally entitled to the gain realized when I sell it. Or, I could rent the house out at a profit. It seems I can make money without actually doing anything at all except owning the house. In fact, at the present rate, I am making almost as much on the appreciation of my house as I earn at my job. Who is generating the extra value, and why should I be entitled to it?

31

Could you clarify this a little, please?

32

No, because tying your money up has opportunity cost. The difference between paying cash and taking a loan is the difference between what the bank is charging you in interest for the loan, vs what you could have earned in interest by putting your money in the bank instead of putting it in your house.

So if you are charged 6% for a mortgage, so instead you pay cash, you aren’t saving 6%. If your cash would have earned 4% in an investment, the real cost of borrowing is 2%.

A fundamental understanding of market economics is not difficult. My simple example above explains the underlying mechanism rather well. I believe the reason there are so many misunderstandings about it is because the world is full of demogogues trying to make you believe what they want. For instance, the silly notion that employing labor is theft. That’s ridiculous, but it’s a common notion simply because there are people who want other people to believe it.

Similarly, Marx’s ‘labor theory of value’ is ridiculous. There is no such thing as ‘value’ as an objective thing. A 400 million pound diamond floating around another star system has no value, until sentient people go and get it and start haggling over it. If I could take my desktop PC back in time 40 years, it would be worth millions of dollars. Five years from now, it will be next to worthless, and I’ll probably have to pay someone to dispose of it. The difference in value is totally dependent on how much people want it. It has absolutely nothing to do with the amount of labor it took to create.

The only way in which labor can be said to approximate value is that normally we won’t expend labor on things unless we value the result of that labor more than the labor itself. But there are plenty of examples of huge amounts of labor being expended on items that turn out to have no value. For example, Ishtar.

Neurotik said:

Determined by whom? Everyone has their own concept of the value of something. The price is the result of a negotation where my value and your value overlap. The area of overlap is the area in which we can haggle about price. If someone tries to set the price outside of the intersection area by fiat, there will be no transaction. But no product has an intrinsic value. It just has value in relation to humans, and it’s different for every human.

33

MOVED to Great Debates. I probably should have moved it before now, but we always try to let questions with potential factual answers stick around.

samclem GQ moderator.

34

I’m not sure how this applies to my question. Whether you reckon it in real or nominal terms, the interest rate I’m paying still has the same effect, specifically a very small dent in the overall rate of increase in my net worth due to the appreciation of my house. The fact is that I can make a large profit simply by having owned my house for a short period of time. Alternately, I can increase my net worth by renting it out for more than I’m paying in interest and upkeep. Either way, value is being created and I am getting rich without actually doing anything. What I was asking is where the added value came from.

35

And I do see your comments on value not being objective, so I’ll define value in this case as simply how many dollars I have. Before I bought the house, I had $50,000 and no house. After I bought the house and let it appreciate, I have no cash, a $250,000 mortgage, and a house worth $500,000. So I’m $200,000 ahead. Where did it come from? Did someone have it before I had it, or did it get created, and if so, who created it?

36

It would be more accurate to say that other people value your house more now than they did before. There can be many reasons for this - labor cost increases, population growth increasing demand, etc.

You, as the owner of a property that is more highly valued, profit from its sale. Transactions like this are very important - if you decide to sell your house to make money, it will be because you have decided that you value the house less than the price you are being offered. And the other person has decided that the money he is offering is worth less to him than your house. You both profit.

This is economically efficient because a property has shifted to the person who values it more. The same happens every time any economic transaction occurs - good move to where they do the most good.

37

It would be more accurate to say that other people value your house more now than they did before. There can be many reasons for this - labor cost increases, population growth increasing demand, etc.

You, as the owner of a property that is more highly valued, profit from its sale. Transactions like this are very important - if you decide to sell your house to make money, it will be because you have decided that you value the house less than the price you are being offered. And the other person has decided that the money he is offering is worth less to him than your house. You both profit.

This is economically efficient because a property has shifted to the person who values it more. The same happens every time any economic transaction occurs - goods move to where they do the most good.

38

I think the mechanism you are looking for is the value that your labor is to you. That is, the employer would rather pay nothing and get everything. But you would rather do nothing and get everything. Where these two value systems intersect is the negotiated wages you earn for the negotiated amount of labor you perform. The system never spirals away because neither side switches its value system.

39

Not to but in, but in point of fact, you do not have an extra $200,000 house until you sell it. So, if you do sell it, you in fact have found the person who created it.
And, once you sell it, you will know (if he tells you) where that person got the money.

Think of it this way. You created the extra value by compensating the previous owners of the house back when you bought it. If no one had bought the house then, it would have been condemed and possibly destroyed. Your purchase and upkeep of it can be looked on as similar to the actions taken by someone who might build an identical house next door. He did not have to purchase the home in the past, but he will have to expend more in labor and materials to get one just like it.

Remember, the value of a given home is simply an agregate measurement of what some people pay for similar homes in the same area. It is not the same as if you had a pile of 50,000 1 dollar bills and then a few years later found it to be a pile of 200,000 ` dollar bills.

40

I don’t dispute that I had to outlay some money to buy the house and keep it up, and that I had to assume some risk that the house might have decreased in value rather than increased. But by selling the house today, I could recoup those costs plus a whole lot more. Also, in the long run, real estate always appreciates in this area, so the risk is actually negligible as long as I stay in the house for a while. Because of this, anyone who can afford to get into the market does so.

I am still left with the fact that I am $200K ahead without having performed what one would normally consider “work”. Or, I should say, I did some work like mowing the lawn, etc., that I could have paid someone else to do and still had most of the $200K left over. All I needed was the initial investment. Perhaps this is the secret to getting rich.