Yes, but you are looking for the difference in the wrong place.
You almost tripped over it here.
You aimed in exactly the right direction, but you had the gun backwards.
You are right to suggest that the increase in value is due to a difference between your house and others which are valued less. But that is the difference. The fact that your house is valued more is the difference between it and a similar house which did not increase in value. Consider that the exact same story could be told about an antique watch, or a fine piece of art. The increase in value may be related to the local crime rate, but it is not by any means the only factor.
Yes, you would be wrong. Remember that as your house appreciates, you will pay higher property taxes. Remember also that if you sell the house (unless you immediately buy another and it is your primary residence) you will pay income or capital gains taxes or both. Finally, remember that the actions of your local government are not the sole reason that the house appreciated in value.
I do not understand this reasoning at all. Are you saying that a person who simply holds onto capital which appreciates has not ethic right to that appreciation? I realize that this conclusion rests on some assumptions which I may have disagreed with above, but even taking your interpretation at face value, I still don’t understand what you mean by this last bit.
Well, you won’t be for long. Sooner or later the assessors will catch up.
That’s possible. It’s certainly quite possible for someone to be rich without doing any of the work; Paris Hilton, for instance.
It’s the exception, though. There are not a lot of Paris Hiltons. The great, great majority of people who make money have exerted some form of effort into doing so, either through manual labour or by being smart investors. By WORK I am referring to any activity that moves or changes resources from uses of lower utility to uses of higher utility. That could constitute anything from digging a ditch to investing in stocks to being a doctor.
If I let you use my machinery to create $100 of value, and you keep $80 of it and give me $20, have you exploited me?
I tried to read the thread, but got very distracted, so I probably missed somebody else stating this concept. Sorry about that.
What is throwing you the curve ball is the fact that returns to an additional unit of activity get smaller as the amount of the activity you’ve done grows. What this does is create a situation where the average return to the activity is smaller than the unit of activity “on the margin;” e.g. the last unit done. But since units done are conceptually fungible—if you sell seven apples instead of eight, it doesn’t matter which apple is the one you didn’t sell (it may matter whether the apple is a granny smith or a golden delicious, hence they have different prices)—they all have the same marginal return. Since the marginal return is what each individual unit of activity actually brings back to you, the total value brought in (the sum of the marginal returns) will be smaller than the sum of the average returns.
Using apples again, and assuming that you are a monopolist, in one universe you sell seven apples and get a certain price, and in the alternate universe you sell eight apples and get a smaller price for each apple. Since the eighth apple drops the price for the previous seven apples, it’s marginal return is its price minus the dent in price it did to each of the previous seven apples. So the price, which is the average return, is higher than the value each apple brings in because, in a sense, each apple is the eighth apple. (It doesn’t matter which of the eight apples you don’t sell, as long as you don’t sell one of them.)
Clear as mud?
The second thing that is confusing you is producer and consumer surplus. If only one apple were brought to market, one person would get it at a high price. She values it at, say, $2. If you sell eight at $1 a piece, she gets an apple for $1 that she valued at $2, and that extra dollar of value to her is her gain. That’s consumer surplus. It’s not stealing; it is welfare created through economic activity.
Fair enough, I suppose, itw as just the ‘numerical’ qualifier that I was clarifying. The numbers themselves are secondary or not needed at all, all that matters is an ordering. No big whoop.
Maeglin, I did not see your caveat about roughly identical goods, so I withdraw my objection.
RickJay said that I am not undertaxed because “the assessors will catch up”, and pervert says that I will have to pay higher property taxes as my house becomes more valuable. Not really! I live in California, where there is an amendment to the state constitution limiting the tax rate to 1% and limiting increases in assessed value to 2% per year. The rate of appreciation of my house, which is typical for urban California, leaves that in the dust. So I still contend that I am undertaxed and likely to remain so - do you agree?
Other posters have claimed that my gain really was the result of work on my part, and I just wasn’t looking hard enough. I’m still not convinced. As I said initially, even if I subtract the money I spent on upkeep and taxes, I still have a healthy profit. It is true that in my particular case, I did buy the house at a wise time and place. You can call that work. However, the very rich can well afford to hire someone to make investment decisions for them, and can make a profit even after subtracting their investment counselor’s fees. That has proven to be consistently profitable in the long run. Also, the law imposes a fiduciary duty on the investment counselor to act in the investor’s best interest, so there is a legal right to damages if the counselor is unscrupulous. I am still taking the position that I can make money without working in any reasonable sense of the word.
Then pervert asks whether I am saying that “a person who simply holds onto capital which appreciates has not ethic right to that appreciation?” No, not at all. I am simply saying that it is my conclusion, based on my experience with my house and the discussion in this very interesting thread, that if you are rich enough to be able to make investments, you can make money without working, and that this is an accepted part of the American economy. This explains why some people in America are allowed to inherit large amounts of money and live a life of leisure, whereas those who are born poor have to work. Whether this is ethical, I leave to individual judgment.
You are $.50 better off. Buyer is 1 apple better off. Some apple workers are $1.50 better off. That’s how wealth is created. Each step from raw materials to finished goods adds value. Because market information is imperfect, buyers and sellers can often take advantage of this to reap additional profits.
People like me can come in and help put together better information so buyers can make better purchasing decisions.
Quoting myself again. Let me put it another way: In a pure market economy, sufficiently rich people can make money off the efforts of others. This has not historically been looked on favorably in itself. However, the profit motive has proven to be an effective way to direct capital toward areas of high demand, probably more effectively overall than having the government decide where to spend the money. Whether this tradeoff is ethical is a topic for another thread.
Ok, this is closer to what I thought. I don’t think that you have shown at all that the value created by your house’s increase in price was created by the effort of others. Remember, that when you sell your house the extra money comes from the buyer. Unless you are willing to say that he was somehow manipulated, exploited, or coerced (or that he used those techniques to get his money) nothing like using other’s efforts has occured. You recieved more money for the sale of your house because he was willing to give you that much more money. It really is that simple. That you did not put any physical effort into creating that wealth is irrelevant. He is getting a house which he values more than it cost him, and you are getting money which you value more than the house. That is how wealth is created. It has nothing to do with the amount of labor which went into the particular resources involved.
Think of the same scenario but change your house for a peice of art, or an antique. You remove the possibility that you were undertaxed because the growth in value has nothing to do with local schools, police, or government at all. Everything else holds. The extra value created is simply a function of how much you value the resource and how much the buyer values the resource.
But I agree that the ethics of this are probably best left to another thread.
Think of a scenario where a person needs to sell their house because they can no longer make the payments. I don’t think you’d suggest that wealth was destroyed, would you? So why would the contrary event create it? A house increasing in price is not a stunning example of wealth creation to me. It does not make a dollar go farther, for example. Investing in a new machine that will create more parts with the same amount of labor, now that I can see as creating wealth (until pure competition returns everything to normal again). Inventing a new product, writing a new novel, and so on, that seems to me like creating wealth. A good appreciating in value doesn’t seem to have created any wealth at all. It seems to sink it. If anything, it seems like increased property values especially indicate rising wealth in the area (more dollars chasing the same goods), not any new alignment of value.
Unless I am missing what you’re trying to get at, pervert.
Well, I think this is because you are again, confusing the actors with the act. I would, in fact, say that value was destroyed. Except, of course, I’m not sure you could attribute the destruction to any particular act of any particular person. That is, I would have phrased as a loss of wealth rather than the destruction of wealth.
Wealth is created when 2 people trade goods which they value lower than the goods they recieve. If I give you $200,000 for a house in which you have only invested $150,000, you have gained $50,000. However, unless I have made the trade for some irrational reason, I now have a house which I value more than the $200,000. So, I have increased my wealth as well.
I think the difficulty may be in trying to keep to more easily understood measurements of wealth like money. While I am living in my ne house, for instance, I may not be able to spend my new wealth on anything except the enjoyment of life in that house. Specifically, it may be very difficult to measure just how much wealth has been created for my enjoyment.
I agree that it is probably much easier to understand the principles of wealth creation when we talk about widgets. In that case, we can see the effort put into the creation of such things. We can look at the expenses of moving them to customers. However, we miss the key ingreedient which is the voluntary exchange of value. If you just look into the costs of producing a good and try and calculate its worth from that, you have missed the most important aspect of trade IMHO.
I remember hearing about an economics proffessor who used to ask his class how much a new drug which cured the common cold should be sold for. He reported that discussions would always center around the cost of production, research, reasonable profits and so on. Eventually, someone would finaly give the correct answer. Which is, “How much is it worth not to have the flu?”
I think Sam Stonesaid it better than I could when he mentioned that looking into the labor of a good to divine the value of it gets the relationship backwards. Labor is attracted to the production or maintenance of certain goods because they are valued. Goods are not valued because they required labor to produce.
In a way, it is somewhat counter intuitive. It feels like the harder (or smarter) someone works the more he should be rewarded. And in the real world, this is generally true (I know, not strictly, but generally). But in reality the world works this way because very few people choose to expend their labor on tasks which they do not know for sure are valued by others. If you looked at all of the possible things one could do with one’s time, only those things which are valued by others will create wealth. It is the act of trade which does the creation or destruction.
This was something of a ramble. I hope I cleared a few things up. I know I got some of the cobwebs out of my own head.
During the interval where the house was purchased until the time the house was sold, a number of things could have happened that changed the monetary value of the home, including an increase in population (and dollars) chasing a relatively fixed amount of housing. This increases price. This, I believe you are suggesting, is a consequence of the creation of wealth: the person has more money for their house than they paid for it. But if they wanted to find a house, of course they’d find that this extra money wasn’t indicative of any change in wealth at all: the cost of housing aggregately rose, more or less in step with his “fair” transaction. In fact they’d have to leave the area and pay an opportunity cost in an attempt to make their dollars go farther.
I just think real estate appreciation is a really bad example unless someone actually does work (new paint, new siding, new windows, hardwood floors, whatever).
This is not to say that I buy the labor theory of value. Not at all. But without labor creating new goods, or extending the way existing goods are produced for less money, or without a banking system with interest, (among some other examples,) I remain unclear on any way wealth is created. I believe that your scope is too small if you are looking at individual transactions.
Well, surely, the prices of similar houses in the same area would have kept pace. That is a consequence of the fact that anyone buying a house has the choice to buy someone else’s house besides yours. But this does not change the fact that the original owner’s wealth increased. Presumably, before he put the home up for sale, he looked into whatever other options he might have had. I presume this from the assumption that he was free to sell the house or not. That is, selling the house was, to him, more valuable than keeping it.
I agree that it does raise issues not usually part of this discussion. Personally, it has been a very good example for me. I have been able to cristalize some of these concepts by virtue of this discussion.
Perhaps we are using the word “wealth” differently. Your right that I am using it in the small scope sense of the word personal value. If I trade you an apple for an orange (assuming I value the orange more and you value the apple more) then we have both traded a lesser value for a higher value. We are both richer for it. This is the basic mechanism by which wealth is created.
However, this does not necessarily map directly to GDP, for instance, nor is it directly measurable in the sense of whole economies. In other words, it is possible to increase my personal wealth without increasing the amount of wealth which others can easily measure. Especially if such measurement is limited to the market value of my assets. For instance, I remember hearing about bidding wars amongst Microsoft executives for homes near that company. Sellers would sometimes get several times the “market value” of the home. One could argue that the aggregate wealth of the country was not increased by such sales. And certainly one would be correct in that the aggregate wealth was certainly not increased by the amount of such a sale.
However, I think this is simply because there are incompatible systems for measuring value at odds. The Microsoft executives truly valued the homes more than the amount they paid for them. That they translated some of their money (which we can all easily measure) into a home with a market value below what they paid (which makes it hard for us to measure the value) does not mean that they destroyed the difference. It simply means that they translated it into something harder for us to measure. I supose one could say that they “consumed” it.
To me it demonstrates beyond a doubt that his wealth didn’t increase.
Yes. His preferences changed, and so he acted in accordance with those. But that does not ipso facto create wealth. It simply allocates resources with respect to their value i.e. his preferences.
To me, wealth has little to do directly with personal value, which is an ordered preference. Wealth increases the number of options available from a set of preferences, i.e., wealthy people can satisfy more wants and needs, but wealth itself does not change those preferences. Whether or not I have a million dollars, I still value food more than housing, for example.
Neither of us are wealthier. We’ve efficiently allocated resources. I valued good A more than you valued it; you valued good B more than I valued it; we exchanged goods voluntarily in order to align resources with our “aggregate” preferences. But neither of us are wealthier for it. I’m looking at value as a selection criteria or choice procedure, and wealth as the mechanism for satisfying preferences / acting on the choice procedure. A wealthier person has more choices able to be actualized, but all people still have a value system. Without this perspective, why would people try and make more money if not to satisfy pre-existing preferences?
Wealth is created at its most basic level by voluntary trade. One person trading a good or service to another person where each person gives up a lesser value for a greater one. This is what I was refering to as “personal wealth” creation in that last post.
When you consider the more broad concept of wealth creation, however, you have to substitute aggregate measurements of value for individual measurements of value. So, wealth is created at this aggregate level when enough people trade goods which enough people consider more valuable than thier costs.
That each of us was able to satisfy more of our personal preferences is exactly what you mentioned earlier as a measurement of wealth. “Wealth increases the number of options available from a set of preferences”. We are each able to satisfy a preference which was not satisfiable without the trade. The trade increased each of our “wealth”.
Trade is simply the mechanism by which values are satisfied. You’re discussing a physics problem to me. There’s a ball on top of a hill. A breeze comes by, and suddenly the ball rolls down one side. “Aha! Energy was created!” Whereas I say, “The energy was already there in potential form. All the breeze has done was make a more stable configuration.” To my ears, you’ve described a zero-sum game with a preferred state, and the economy is just a shifting of existing goods and services around based on some mechanism (in this case, “trade” through “money”). Eventually, preferences will be satisfied to the extent that they can be and the mechanism will be done, unless wealth is created in the methods I describe.
[hijack] pervert, it occurs to me that I don’t recall ever debating with you before this year even though you’ve been registered for more than that. Truth be told I don’t often check usernames, either, so it is quite likely I’ve done so, quoted you, and so on before then, but I have to say you’re always a pleasure to discuss things with. You barely ever make me fly off the handle, and I’ve never seen you be anything but polite. Always a pleasure. I hope I’ve generally returned the favor. [/hijack]
I guess the way I’m looking at things is that wealth indicates more potential satisfaction. In the case of real estate as we have isolated it, it seems that the owner, though satisfying his preferences, has not necessarily enabled him to achieve more satisfaction per se. Without complicating matters, I would suggest that, for whatever reason, his preferences have changed and so a readjustment is necessary; hence, trade. Given efficient allocation of resources, he is not better off in terms of wealth because his potential has not changed.
Well, strictly speaking energy was certainly added to the system described by the ball and the hill. The wind added enough to move the ball out of its position at the top of the hill. Clearly it did not add enough to move the ball the distance of the hill. Most of that energy was there already. But it certainly added some fraction of the energy required to produce the motion. If you expand the system large enough (the entire universe) you can say the no energy was created. It simply changed form. In this sense, it is possible to say that no energy is ever created.
From this perspective, it is also possible to say that no wealth is ever created. There is no new matter or energy ever created by any action that any person can perform. But wealth is not simiply limited to matter and energy. Wealth is the accumulation of such things, and the value hierarchy to which they are applied. That is, wealth means nothing unless the concept of value (with all of its attendant fuzzyness) is included.
So, when I say that wealth is created, I certainly do not mean it in the sense that a new vein of gold is discovered, nor necessarily in the same sense that a new house is built. However, the wealth created is just as real.
Right. But the wealth has to include the concept of valueation that is placed on those goods or services. What you might call the preference order to which such goods and services are applied. It is certainly true that in the sense of physical goods or the energy used to produce services, nothing is created or destroyed. Matter and energy are simply transformed into other shapes. However, neither matter nor energy has any intrinsic value in and of themselves. They are not “worth” anything alone. Thus, they cannot be said to be wealth outside of the context of some value hierarchy. I believe Sam Stone mentioned a mountain sized diamond orbiting around a distant star. It is certainly a large amount of matter. But it cannot be considered wealth until it is located and retrieved by some entity which values it.
Well, but this might be limiting the scenario too much as well. I agree that the monetary or market value of his wealth might not have increased very much (or at all, or even it might have decreased). But to my mind this is an insufficient measure of wealth. By this way of thinking, the apple and orange you and I traded are destroyed when we eat them. Surely their market value to the market has been destroyed. But this seems, to me, to place too much emphasis on the market place. Surely my life (which was sustained by the apple, or was it the orange ;)) is worth something besides my potential labor within the market. Whatever that someting is, can surely be considered some portion of my wealth.
What I’m saying is that the market or monetary value of a thing is one way to measure the amount of wealth it represents. But it is not the only way, and it may not be the best in some instances.
However, since we have been considering a house selling from the standpoint of its market value, perhaps I can redescribe the transaction.
Before the owner of a home puts it up for sale, the house is literally not on the market. One can estimate its potential market value by looking at the sale prices of other houses. But it cannot be said to be market valued wealth (in the sense of having the potential to satisfy anyone else’s preference to own a home excepting the owner) until it is “on the market”. Until the home is offered for sale, it is “consumed” as far as the market is concerned in the same sense that our fruit was consumed when we ate it.
<Warning gross image>If we were able to regurgitate the orange or apple in their original form, such an act could be said to have created the potential wealth for the market represented by the market value of the fruit. Putting a house on the market is a similar act. It cannot create a house in the same way that building one does, but it certainly adds a house to the local housing market in the same way that building one does. In this case the act of putting the house on the market (finding a buyer, completing the transaction, etc.) did indeed create wealth. That is the amount of houses available for satisfying the market’s prefernece for homes certainly increased by one house.
Now, presumably, the buyer of the house uses money which he earned through the trade of goods or services in some other market. Also, if the seller uses the proceeds to buy another home in the same area of the same type, he has simply transfered the wealth of his previous home into a new one. But so long as each actor has traded a lesser value for a greater value, each actor is richer. Neither of them may have assets valued more by the market than they did before the trade. Indeed, it is entirely possible that one or both of them could have reduced the market value of their total assets.
So, depending on how large of a system you are considering, it is possible to portray the transaction as merely transfering market valued wealth from one form to another. But remember, when you expand the system under consideration this way, you can’t make it too large. If you go far enough, you have simply encompassed the whole universe in which the concept of wealth becomes meaningless.
Perhaps it would be helpful to rephrase the total amount of wealth in existence at a given time in a given community in terms of preference orderings. In this way, the total wealth of said community can be said to be the valuation of all of the goods and services available by a preference ordering composed of some sort of aggregate* of the preference orderings of all participants in the community. In this sense, a house added to the market can be said literally to increase the wealth of the comunity by the amount represented by that home’s position in the aggregate* preference ordering. Of course, buying the house, or taking it off of the market, could also be said to reduce the total wealth by a similar amount.
If the purchaser and seller both come from inside the community, and all of the money is quickly translated into goods purchased and consumed within that community, this would certainly be true. But as I said, I think this grants too much importance to the aggregate* preference orderings at the expense of the individual’s preference orderings. It reduces the concept of wealth to the market value of goods.
I hope that was not too rambly.
*Aggregate is the wrong word here, but I’m not sure of what should replace it. I think it implies a simple adding up or averaging of the various preference orderings. That is not what I mean at all. I am talking about a preference ordering which is composed from some function using the preference orderings of the individuals, but I am not at all sure I understand what sort of function I am talking about.
For the record (if there is such a thing) you have invariably returned said favor. I don’t think I have ever seen a post from you which “flys off the handle” for which you are to be commende most heartily.
I think I did not post very often for a while after I first joined. I think I remember a thread about taxes in which you and I and jshore debated for some time. I’m not sure how long ago that was, though.
I still have not started a thread. I don’t notice user names very often either, but I have noticed yours. Frankly, I’ve found that you have a much greater grasp of the terminology and a deeper understanding of the concepts regarding philosophical systems issues than I do. I always consider it well worth my time to discuss such things with you. [/hijack]
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