We obviously have more wealth then we did 100 years ago. I do not simply mean more money, but actual value with substance. Where did it come from? How was it created? We have seen how wealth can be destroyed (1970’s inflation, stock market crashes, post WWI hyperinflation), but how does that actually happen? It seems like there must be something real behind the creation of wealth, it is more than a simple accumulation of stuff. That would most often be accompanied by inflation. Although it some times seems like it (just look at how stock prices fluctuate), I do not think that it is just a meaningless game where in people somehow come to an agreement that this is worth $1 yesterday, but now is worth $2 today.
I think it would have to be created by efficiency. The businessman finds people who can perform labor, assembles them into a unit, and produces goods which have value above that of the value of the individual work done. Supposing three laborers each with a value of 1 unit of wealth for the labor they perform over a period of time, then 1+1+1=4, so to speak. That extra bit of value created by the efficiency of the process is the wealth created by the businessman. When you can do more with less, wealth is created. If we can now do alot more things with a metric ton of some ore extracted from a mine than we previously could, that ton of ore can be traded for more things than it could before and can be turned into more things than it could before, so that’s all more wealth in people’s hands.
In addition to efficiency, I suppose increased wealth could also be related to an increase in the volume of natural resources available to an economy.
I know Bohm-Bawerk had something to say along these lines, perhaps somebody familiar with the Austrian economists would be able to give a full answer. I suspect Libertarian may know a little about this.
The root of Austrian theory regarding wealth creation is best espoused by Mises, in my opinion. This might be a bit of a tedious read, but if you will follow it closely, it can be quite enlightening. If nothing else, you’ll have a new way to look at the economy.
Mises calls the basic atom of human action a “praxis”, and he uses the term in a specialized way to mean an action or inaction that is both volitional and voluntary. Thus, breathing is not a praxis. But both smoking and not smoking are praxes, assuming there is nothing coercing you to smoke or not smoke.
Wealth is created when an economic praxis occurs. An economic praxis is a matter of a shift in the balance (or equilibrium) of property.
Say that Mr. Smith has a dollar, and Mr. Jones has a pencil. An economic praxis will likely occur if (1) Mr. Smith believes that the pencil is worth more than the dollar, AND (2) Mr. Jones believes that the dollar is worth more than the pencil. If either party does not believe (1) or (2) no praxis is likely to occur. Also, no praxis is likely to occur if even both parties believe that the value of the dollar and the value of the pencil are equal. (Why exchange for something that you don’t value more in some way than what you already have?)
Each time a praxis occurs, an atom of wealth is generated. Each party, believing that he has acquired something of greater value than what he had before the exchange considers himself wealthier.
At the macro level, the most successful wealth generating economy is the one that allows the most freedom and the least coercion so that praxes may occur. (Remember that they must be both voluntary and volitional.) Because of the subjective nature of praxes, and because of their uncountable permutations, Austrian theory holds that all macroeconomic models are intrinsically dubious.
RD:The businessman finds people who can perform labor, assembles them into a unit, and produces goods which have value above that of the value of the individual work done. Supposing three laborers each with a value of 1 unit of wealth for the labor they perform over a period of time, then 1+1+1=4, so to speak. That extra bit of value created by the efficiency of the process is the wealth created by the businessman.
? Do laborers not create wealth too? You make it sound oddly robotic, as though what the laborers do is some pre-programmed routine. So the successful completion of their new tasks in the “efficient process” doesn’t reflect any increase in the value of their “individual work”, but is entirely due to the businessman.
That doesn’t quite square with the reality of the employer-labor relations I’ve seen: the employer certainly can come up with good ideas, but the laborers also contribute to the efficiency increase.
on a less economic level, it seems to me that wealth is created by changing things into more worthwhile things. rather than simply saying “creating something that is worth more than the sum of its parts”, i suggest that a thing is created if it is worth more than its parts were in their original format.
for example, oil in the ground isn’t worth much of a damn to any of us. but mined and refined, we have a fuel usable for all sorts of things.
a thought in someone’s head isn’t worth much on its own, but when he invents say an incandescent lightbulb, or radio communication, it is moved into a more valuable position. and the result is more valuable than what was there before.
Interesting concept…I would expand on that a little. No wealth is actually created by simply exchanging two items of equal value. Even if the other party perceives the value of the other item to be higher, the total REAL value is the same (1 dollar + 1 pencil).
Now say Mr Adams has a ream of paper he is willing to depart with for a dollar (and Mr Smith has two, not one dollar). In exchange for two dollars, Smith takes the pencil and paper and writes a great novel worth much more than the sum of the paper and pencil used to create it. The pencil isn’t worth any more to Smith, but with the pencil he can create something worth much more.
That’s basically how wealth is created. Raw materials like wood or iron or grapefruits have a certain amount of value by themselves. But when combined in various ways (like tables, silverware and …uh…grapefruit knives) products can be manufactured that are worth more than the sum of their parts.
That’s kind of why I laugh when people complain about a $2000 computer or a $40000 car containing only a couple of dollars or couple hundred dollars worth of material. How much value can you get out of a 1000 lb block of aluminum by yourself?
So why do we have more wealth today than 100 years ago?
-Greater access to more raw materials
-More intellectual capital and “know-how” for creating more uses for those materials
-More efficient production methods that let us do more with less
This is fascinating stuff Lib: mind two questions?
How does this theory define “value”: in some absolute sense (like market value) or in the sense of “value to the individual”? (or some combination)?
Where does need figure into this? Is “need” included in “value”?: Per the bit I quoted above. If Mr. Jones needs that pencil right now, even though he believes it’s worth more than the dollar, he may make the exchange. Ditto in reverse.
That’s right, MsSmith. You’ve got the gist of it. When items of equal value are exchanged, it is not an economic praxis (it’s like breathing) and therefore no wealth is created.
When you consider that, each day in a noncoercive free-market, billions of people might engage in hundreds of individual praxes each, it is easy to see why any macro analysis is futile.
That notion was the basis of Hayek’s proof of the futility of socialism, for which he won a Nobel prize in economics. He reasoned, basically, that by the time a government analyzes economic data, the data are already obsolete. The government therefore has no reliable basis for setting prices.
Notice that Austrian theory models exactly what happens when you decide to buy something. The real decision that you’re making is whether the item you’re buying is worth more to you than the money the store is asking for. If it weren’t, you would just keep your money.
Notice also that involuntary economic decisions (like taxation), which are not praxes, do not create wealth.
Unfortunately, these sorts of examples remind us of how one way wealth is “created” is by destroying types of wealth that aren’t measured while creating types that are. For example, we haven’t always put value on clean air and water and thus our societies dirtied them until we realized that we had to somehow (either through regulation or otherwise internalizing externalized costs) account for them in the economy…And, we still seem to have quite a ways to go on that.
But there are themes. Another important Austrian theme is the importance of entrepreneurship as a creative force in the economy. Other themes in growth theory include the importance of the accumulation of human capital and (not surprisingly) technical change. Still another theme takes Smith’s famous saying that “the degree of specialisation depends on the state of the market” and proposes that an economy which begins to grow (due to primary factor growth) generates growth which can be self-sustaining.
I noticed that nobody has actually defined “wealth.” That would seem to be a good starting point for a discussion.
What, exactly, is a “non-coercive free-market”? (The term “free-market” is in itself a term of propaganda. The only reason to attach the term “free” in front of “market” is for propaganda purposes.)
He proved no such thing. What he did was to take a very simplified model of a system that he defined to be “socialism,” formed some axioms and proved some results which followed from those axioms. To go from this to the leap that he “proved the futility of socialism” is a huge leap indeed.
For one thing, his assumptions are at odds with what socialists consider to be socialism, which has at its root economic democracy. Hayek actually takes the opposite of socialism–namely state control of the economy–to stand for socialism. However, even under this absurd assumption, his “result” does not follow, simply because there have been examples of state-controlled economies that have had significant growth.