Past performance is no guarantee of future gains. Just because real estate has gone up in the past does not mean it will continue to do so. Just ask the people of Japan. Their real estate market collapsed.
But it’s not even true that real estate always goes up in value. Remember, you can’t just look at absolute price. You have to subtract inflation. If your house went up in price from $150,000 to $200,000 over ten years, but inflation was at 5% per year, then in real terms you actually lost $44,000.
Incidentally, we bought our first house in 1991, and within four years it has lost 20% of its value. We sold it in 2001 for almost exactly what we paid for it, so in absolute dollars we lost quite a bit on our investment.
You’re still confusing work with value. Get that out of your head. You made money simply because someone else was willing to pay more for your house than you did.
This is a good thing. Without the ability to profit from large investments, people would have no incentive to invest. It’s also a market mechanism that helps stability. Think of it this way - the general perception that real estate goes up in value means that we understand that in the future people will need real estate more than they do today. The potential for profit from investing in it then leads people today to conserve that resource or even create more of it (people decide to build a new home rather than live at home, in part because of the investment potential). Again, you have been led ‘as if by an invisible hand’ to take an action that protects and creates resources that people in the future will need.
pervert, what you say makes sense and adds to this, but I think whaterislover means by “spiralling away” is when people lose their jobs, they lose buying power, and companies lose revenue, which means the companies would have to cut costs. These costs include salaries and wages, so people are laid off, and so on…
What keeps this from spiralling away is the actions of people involved. Economics is not physics. It is not governed by the laws of the universe. It is completely controlled by human action. Some people are willing to sacrifice pay partly or completely for a short time for the sake of getting the business on the rise, knowing that in the future it will pay off, either in better pay or position.
However, I feel that this does not completely answer erislover’s question. All companies want to survive, so in times of recession, the people in charge are willing to take risks, small and large. This could be hiring executives for a steep price to turn things around, buying an operation from another company, or taking a risk and hiring entry level labor, all at a loss. Even though it is harmful in the Short Run, they have probably calculated that the risk will pay off in the Long Run.
I know the difference between work and the creation of value, but I was seeking some kind of a causal link between the two. You seem to be telling me that in the right circumstances, there isn’t one - which leads me to the conclusion that if one has money to start with, one can obtain more money without working. I used to think you could only do that by going on welfare or stealing.
Thanks for that. That does make more sense than the way I interpreted his post.
In that case, I’d say that what keeps the system from spiralling away (as opposed to what keeps a particular company from spiralling down) is the fact that the economy does not consist of one or two or even a large number of companies. It consists of each and every one of us. Those who lose their jobs, those whose businesses fail eventually find other ways to create the wealth they need to succeed.
If every company now operating, and every piece of capital equipment were sudenly taken off of the planet (in a galactic hostile takeover, perhaps ), the economy would not die. It would take a huge hit, big enough for millions or even hundreds of millions to starve. But eventually, it would restructure itself along very similar lines to what we have today.
Your right, economics is not physics. But there are natural laws which govern the sorts of interactions that people have which are just as valid (in the agregate at least) as any of the laws of physics.
Imagine that you hear there might be a gold strike in Alaska. You think, “Hey, I’ll bet people will need picks and shovels!”. So you buy them for $1 each and take them to Alaska. The rush is on, and suddenly your picks and shovels are worth $10. You make out like a bandit.
The fact is, you provided a valuable service. Your foresight created a supply of shovels in a place that needed them so badly the people were willing to pay ten times the normal market price. Had you not been there, a tremendous demand would have gone unfulfilled.
This is a good, healthy thing. And nowhere did ‘work’ come into the equation.
Now think about real-estate, and other commodities. if you take a risk and put a whole bunch of money into real estate, and maintain it in good condition, then it will be available to someone in the future who wants it enough to pay you more for it.
If you must attach labor to this, think of it this way - the money that you invested in your house was created when you labored at whatever it is you do for a living. Later, someone traded their labor for yours at a profit to you because they needed the house more than you do.
Nonsense. You had to drive a truck to the warehouse, pick up the shovels and put them in the truck, take them to the pier, take them out of the truck and load them into a ship, pilot the ship to Juneau, unload the shovels out of the ship’s hold into another truck, and then drive that truck to the place where you could sell the shovels. You did LOTS of work.
Now think about real-estate, and other commodities. if you take a risk and put a whole bunch of money into real estate, and maintain it in good condition, then it will be available to someone in the future who wants it enough to pay you more for it.
If you must attach labor to this, think of it this way - the money that you invested in your house was created when you labored at whatever it is you do for a living. Later, someone traded their labor for yours at a profit to you because they needed the house more than you do.
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Gee, I thought I could make the point without being nitpicked. Okay, so you have a a bunch of old shovels in the barn. You’re going to throw them out, but then you think, “You know what, I read that there might be gold up here. People might need those.” So you hang on to them, and sell them at a big profit.
What you were paid for was for making a good decision. Not for your labor. You can go build a big escalator to nowhere, and expend tons of labor, and it will be worthless. On the other hand, Paul McCartney can wake up in the morning having dreamed the music to “Yesterday”, and make tens of millions of dollars from it.
Value has NOTHING to do with labor. Nothing. Labor has to be expended to create things, but whether the things created have value or not has nothing to do with the labor. People who think that labor creates value are getting it backwards - labor doesn’t create value, but valuing things causes us to expend labor to create them. You don’t say it you want a house because it was really hard to build - you expend labor to build the house because having a house has more value to you than the labor it takes to build it.
The world is full of things that took huge effort to build but which no one wants. Go to any landfill and look around. The world is also full of things that have tremendous value to people but which took no labor to create. A sunset, for example. Or an ocean view. People spend money to build houses on cliffs overlooking the ocean because they value the view, and they will pay big money to have it. But no labor was expended in creating that view - it just exists.
I’m not trying to nitpick or to espouse the Labour Theory of Value. What I’m illustrating is that ALL production of wealth involves work. In the end that’s what creates wealth; human effort. Where the LTV fails is that it does not recognize how value is assigned to labour. (As you point out, sunsets require no work. But they’re also free. Anything that requires no work to make, mine or harvest is free.)
In your case, the work involved in getting the shovels and picks to Alaska is assigned value by the demand for shovels and picks. Absent that demand, you can do the same amount of work and have it be completely worthless. If, while you were delivering shovels and picks, I went through the same process delivering blocks of ice, we could both exert the same amount of effort on doing work while generating vastly different amounts of utility. However, you still need work to turn your shovels and picks into cold cash.
Production is a function of labour, capital, and technical prowess. All three. Utility of that production is a function of production and demand. Where communism erred is that they equated production with utility, thereby forgetting the demand part. But labour’s still in there - it’s just not the whole story.
Your “work” in realizing that $200K profit would be twofold:
(1) work already done: acquiring that property in the right place and time, and maintaining it in adequate enough repair, that the market trends in that region lead it to appreciate by $200K. Yes, it’s minimal “work” for YOU, the individual, but the entirety of the economy has been working to make living in that address more valued. Maybe a major high-tech company opened a new plant nearby and is hiring. The Highway Authority opened a new access road. Taxes were cut in your state. The major employer in the city adopted a domestic-partner-friendly benefits policy. New-housing developers have been building subdivisions of badly built, cramped boxes-of-ticky-tacky homes two hours’ drive away from anything. And so on.
(2) work to be done: find a buyer, and a financing officer at a bank, who WILL GIVE YOU $250K for it. If NOBODY will pay more than $150K for it, then you don’t have $200K net, you have $100K net. That buyer is the one who has to do the work (or hire someone who does) to compensate the additional value.
As it stands, your extra $200K can disappear by tomorrow morning, if your economy is riding a major “bubble market” and the bubble crashes today. The good news is, your house WILL still be “highly valued”, only the market definition of what price represents “high value” will have been reset.
By the parties in question. The seller already knows what the object is worth to him and so does the buyer. These are represented by the maximum amount the buyer will buy for and the minimum amount the seller will sell for. The buyer will try to negotiate the price to a level below its value to him and the seller will try to do the opposite.
You don’t seem to understand that value and price are two different things in economics. Price is negotiated between two parties (or more) who already know what the value of something is to them. Value is not negotiated, the price is.
This discussion of “value” is something of a canard.
No. “Value” in any conventional sense is not relevant to modern economics, nor is it a technical term. Economists care about utility. Utility, broadly defined, is a numerical ordering of individual preferences over a bundle of goods. The utility an agent derives from a good is determined by his utility function, which maps a bundle of goods to a preference ordering. The idea of “value,” with all of its ambiguities, intangibles, and interpersonal comparisons is simply not found in formal economic theory. The sooner people stop quibbling over it, the better.
Ah, but you’re assuming that the profit the company makes falls into some black hole never to be seen again. While the employees go and buy things with their salaries, the company can afford to buy things with its profit, whether they’re new facilities, new phones, or a houseboat for the owner. It all goes back into the money pool.
The only time anybody gets screwed is when the company DOESN’T make a profit, buys stuff on credit, and goes bankrupt. The businesses who sold them all of the things they bought on credit
brane, the puzzle is not that the money is recirculated. In fact the puzzle assumes it is recirculated. Employers try to minimize costs, which is to say, pay smaller or the smallest possible salaries. This limits employee buying power, meaning they can’t buy as much. The company, seeing a decrease in sales (because all companies are doing approximately the same thing), needs to further cut costs to maintain their profits, which further decreases aggregate buying power, which further decreases profits, which causes further salary cuts…
Now, obviously, this doesn’t happen, our economy is moving along more or less fine and has done so for quite some time. There must be a pretty simple explanation to this little puzzle.
Is it, then, fair to say that companies, as a rule, do not necessarily cut salaries? Because that would certainly solve the puzzle all on its own.
Wages and prices are efficient. Profit-maximizing firms try to minimize their marginal costs. Broadly assuming that the market is competitive, firms must compete with others that produce roughly identical goods. Firms in general will sell goods so that their revenue equals their marginal cost. The lower the marginal cost, the cheaper the goods are and the more goods the firms can sell. In a nutshell, this is the solution to your problem. People may make less money, but it does not necessarily diminish their purchasing power. It sure may limit many individuals’ purchasing power, but this is not true in the aggregate.
Productivity growth can also offset wage decreases by lowering the marginal costs of production. This is an argument most easily made mathematically, and it depends on whether or not you find a certain kind of economic model useful, usually called an “AK” model. I can try to hash it out here if anyone is interested.
Wage cutting does not necessarily decrease the buying power of economic agents since they are already purchasing goods at the efficient price.
Massive economic discoordination can, unfortunately occur. Wages can go down and prices up. Currency deflation does exist. The reasons for this are numerous and very complicated. But given ordinary conditions, especially in an information-ridden society where wage and price data is both current and inexpensive to acquire, this kind of scenario is unlikely.
Now I’m getting closer to an answer. If you think about it, for my house to have enjoyed such a tremendous rise in value, there must be something different about my house. That is, a house in a different area that sold for the same price as mine a few years ago and did not appreciate like mine did is evidently less desirable than mine today.
I suspect the difference is not in the house itself, but in the things surrounding the house like the crime rate, schools, and local economy. It took labor and wise administration to make those things happen. I paid for it through various local sales and property taxes, but I’m still way ahead. Would I be wrong in interpreting this situation to indicate that I am grossly undertaxed?
The overall picture seems to be that labor/technology is at the root of the creation of wealth, but that a market economy permits no ethical linking between the two, which allows some wealth to flow to the owners of existing capital with no corresponding effort on their part.
>>hich allows some wealth to flow to the owners of existing capital with no corresponding effort on their part.<<
This is an unhelpful picture of the role of capital and capitalists. If you have capital, there are opportunity costs to investing it. The millions I invest in my mutual funds is money I cannot use to buy booze, hookers, smack, and a nice yacht. Since I enjoy consuming my wealth, investing it is costly for me. The revenue I earn from capital is compensation for not consuming it now.
It is the mirror image of the work/leisure tradeoff made by laborers.
But they can only minimize costs subject to certain constraints, because revenue and costs are correlated. For example, an automobile manufacturer could cut costs by using cardboard instead of sheet metal, but few people would buy a car made of cardboard, so revenue would fall tremendously. Maximizing profit and minimizing cost are not the same thing.
I would draw your attention to the stipulation I made in my entry to this thread:
My emphasis.
The demand for cardboard cars, to my knowledge, is nil. The existence of the identity constraint is enough to do away with examples like this.
You can also cut marginal costs to zero by producing nothing at all. Clearly this is not the point of the exercise.
Furthermore, marginal revenue and marginal costs are not necessarily well correlated, especially at the margins. Depending on the industry, the marginal cost curve is not at all linear even though the marginal revenue curve may well be.
I also never contended that maximizing profit and minimizing costs ar the same thing. I would appreciate it if you could recharacterize your objections to my analysis that takes into account the identity constraint and does not criticize conclusions that I did not draw myself.
), the economy would not die. It would take a huge hit, big enough for millions or even hundreds of millions to starve. But eventually, it would restructure itself along very similar lines to what we have today.