# How is wealth created? **URL:** \ **Category:** Great Debates\ **Created:** [December 4, 2002, 10:35pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539 "2002-12-04T22:35:39Z")\ **Posts on this page:** 20\ **Page:** 4
**Author:** ![Maeglin](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Maeglin](https://boards.straightdope.com/u/Maeglin)\ **Post date:** [December 6, 2002, 5:46pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/61 "2002-12-06T17:46:50Z")
> [@](#): > > But macroeconomic analysis is meaningless because (1) there is too much data, (2) decisions that drive the data are subjective and arbitrary, (3) the relations among those data are controversial and arbitrary, (4) by the time the abridged data are analyzed, they are obsolete, and (5) the exact same analysis can be interpreted differently by different people, depending on what their pet theories are. While some of the above criticisms may be instructive, to conclude that “macroeconomic analysis is meaningless” is improper and unjustified. **Too Much Data** Everyone knows this. To quote Keynes: > [@](#): > > Macroeconomics is a science of thinking in terms of _models joined to the art of choosing models_ which are relevant to the contemporary world – to which it is applied --, is, in too many respects, not homogenous through time…The object of a model is to _segregate the semi-permanent or relative constant factors from those, which are transitory, so as to develop a logical way of thinking of the latter_. My italics, Keynes’ underline. Macroeconomics seeks to sift the signal from the noise, and by understanding the signal, create a rational way of considering the noise. Since “too much data” exists, creating and choosing relevant models are crucial to the macroeconomist. The fact that so much data exist (which is **ghastly** insufficient in a lot of sectors) is not relevant to the meaning or “meaninglessness” of macroeconomic analysis. **Decisions that Drive the Data Are Subjective and Arbitrary** I am not sure what you are saying here, **Lib**. All economic decisions, even on the micro level, are by definition subjective and arbitrary. The amazing thing about economic analysis to begin with is that economists see coordination where someone who does not consider economic problems would only see chaos. Environments change, actors only have partial knowledge, nevertheless they act in what they perceive to be their best rational interest. This is, by definition, subjective and arbitrary. **The Relations Among the Data Are Controversial and Arbitrary** This objection makes even less sense to me. Perhaps you could clarify. The fact that there is controversy invalidates the entire enterprise? Surely you don’t hold, say, physics to this same standard. **By the Time the Abridged Data Are Analyzed, They Are Obsolete** Of course not. Applying rational theory to the “noise” is never obsolete, even if the events themselves are already over. They have predictive, normative, and political value. **The Exact Same Analysis Can Be Interpreted Differently By Different People** I am going to assume that you mean the “exact same data,” which places macro on the same level as virtually any other science _or_ art. I think the problem is not in the nature of macroeconomic analysis, but your disproportionate expectations. What you are missing, **Lib** , is that macro analysis isn’t useless, its “knowledge assumptions are hidden, therefore there is a tendency to claim that each theory is either general or totally useless.” Keynes said that, and I certainly think it bears repeating here. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 6, 2002, 5:56pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/62 "2002-12-06T17:56:02Z")
> [@](#): > > I don’t understand your objection about the businessman making unilateral decisions and thereby violating the liberty of his employees. They have no ethical right to his property (including his mind), nor his right to use it peacefully and honestly in any way he sees fit. This has nothing to do with the fact that the wealth-generating decisions all of them make _count on assumptions about the others_. This is a macro context; the businessman depends on the aggregate choices his employees make to make his decisions. Its inability to be described is a blind spot. It doesn’t make these aggregate effects go away. Similarly, the workers depend on the aggregate choices the buyers of the product they produce make, and they depend on the choices the owner of their company makes. It is not a matter of saying any rights are violated. It is a matter of describing an obvious effect: events that happen because of accumulated and aggregate choices. ---
**Author:** ![kevlaw](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kevlaw/32/2281_2.png) [@kevlaw](https://boards.straightdope.com/u/kevlaw)\ **Post date:** [December 6, 2002, 8:59pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/63 "2002-12-06T20:59:16Z")
> [@](#): > > \*Originally posted by erislover \* > …when clearly outside events do in part determine whether or not I can buy pencils at all, nevermind whether I _would_. Isn’t it true that outside events influence most transactions ? A worker has some freedom in choosing his place of employment - but not absolute freedom. The firefighters in the UK have very little freedom to exchange their labor with anyone but the government. Same story for the dock workers on the west coast of the USA. And many transactions take place without the consent of all the interested parties - I get very little say in what Pacific Lumber does with those trees that I value, for example. The pencil for a dollar transaction is portrayed as voluntary - or not. A binary decision. I’d suggest that there are many degrees of freedom between these two extremes. > [@](#): > > \*Originally posted by Libertarian \* > Wealth is not necessarily destroyed if you go broke. Wealth is destroyed when an economic transaction takes place that is not a praxis — when you pay taxes, for example. And the decision about what taxes you pay is not completely involuntary. I choose to live in a country that funds public education. I favor politicians that raise taxes for this purpose. I have a small degree of freedom in my decision about whether or not I pay those taxes… about the same degree that a laborer enjoys when he chooses to exchange his labor for wages. It seems to me that _praxis_ is not a binary quality. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 6, 2002, 9:10pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/64 "2002-12-06T21:10:12Z")
[quote] Isn’t it true that outside events influence most transactions?[/qutoe]Of course! That’s the point. My freedom is not _just_ limited by coercion. Macro effects from micro decisions come at me, too. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 6, 2002, 9:27pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/65 "2002-12-06T21:27:29Z")
Dyslexics of the world, untie! ---
**Author:** ![tracer](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tracer/32/20578_2.png) [@tracer](https://boards.straightdope.com/u/tracer)\ **Post date:** [December 6, 2002, 9:31pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/66 "2002-12-06T21:31:10Z")
> [@](#): > > \*Originally posted by Libertarian \* > **With respect to Tracer’s observation, I know very little about other economic theories. But my understanding was that a consumer surplus occurs when people are able to buy goods or services for less than they would be willing to pay. That is not the case in an economic praxis. You buy for neither more nor less than you are willing to pay.** Au contraire! In the praxis example you gave, Mr. Smith was willing to buy the pencil from Mr. Jones for $1 because to Mr. Smith the pencil was worth more than $1. That means that Mr. Smith would have been **willing to pay** more than $1 for a pencil. The fact that Mr. Smith only had to pay $1 for a pencil that was worth more than $1 to him created a consumer surplus when he bought it, equal to the difference between $1 and what the pencil was worth to him. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 6, 2002, 9:39pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/67 "2002-12-06T21:39:56Z")
Eris wrote: > [@](#): > > That is always true, even for individual decisions. We choose what data we feel is important, and as much as we feel we need to in order to make an analysis. But that’s not a problem for Austrians, since how the decision is derived is irrelevant. All that matters is whether the action or inaction, once the decision is made, is a praxis. And that is determinable by investigating whether the context is coercive. > [@](#): > > Nevertheless, trends often develop in an inter-subjective context. I’m not sure what that means. I mean, “trends” develop anyway. Unfortunately, they are not predictable in the way that, say, tides are. > [@](#): > > This is the purpose for creating and testing predictive theories in the first place, and why I appeal to inter-subjectivity rather than objectivity. The same is true, for example, of scientific theories. Nevertheless, we have microwaves, even if the microwaves in the product cannot be predicted to take a specific, objective path all the time. Well, I don’t disagree with that. But if you are testing to find the paths of the microwaves, then you are testing for the wrong thing. You should be testing whether the ovens can cook. > [@](#): > > Only if you are trying to, once and for all, describe an objective state of affairs. This is an unreasonable requirement to place on any theory, economic or not. The data is relevent to the time it was collected. A predictive theory is attempted to be made to explain the data. If it is a workable theory, it will also help explain data we are collecting now, and will collect in the future. This is the characteristic of a theory. The characteristic of a theory (a scientific one, anyway) is that it is falsifiable. Science is rich with such theories, and they describe objective states of affairs (e.g., the mass of a planet, the trajectory of an asteroid, etc.). But pseudo-scientific theories are like tautologies — they are proven by everything under the sun. A marxist sees in the newspaper that a business has declared bankruptcy, and for him it is just more evidence of the inadequacies of capitalism. But a capitalist sees the same news story and sees it as evidence that the market is mitigating some disequillibrium. The economy is a dynamic, uncontrollable beast that is driven at an atomic level by subjective and unpredictable decisions made by individuals. Often, even the individuals themselves cannot predict what they will and will not do. The entire field is rife with unintended consequences. The whole zeitgeist can change without warning in an instant. In fact, there can be localized and parochial influences that defy any objective evaluation. How will analysis of incomplete and conflicting data that are old be reliably predictive? There is a _reason_ that investment firms are required to disclose that past performance is not an indication of future returns on investment. > [@](#): > > And the Austrian looks at their debate and considers it proof of his own opinions. None of this tells me what is happening outside of my own solipsistic economic context, when clearly outside events do in part determine whether or not I can buy pencils at all, nevermind whether I would. Gosh, Eris. Have you even read _Human Action_? Austrian theory was developed strictly by formal deductive logic. > [@](#): > > This has nothing to do with the fact that the wealth-generating decisions all of them make count on assumptions about the others. Well, yes, but Austrian theory is not about wealth-generating decisions; it is about economic praxes — i.e., _actions_. The decision making process, as I’ve explained to a fare-thee-well, is entirely subjective. The only thing Austrianism predicts is that, if the transaction is voluntary and volitional, wealth will be generated. If it isn’t, wealth will be destroyed. The employer and employees would be as well off to consult and astrologer as they would be to consult a macroeconomist. You want a predictive theory? Here’s one: make the market as free as you possibly can, merely protecting every participant from coercion to the best of your ability. I predict that you will have an economy that is robust beyond your dreams. * * * Maeglin wrote: > [@](#): > > Macroeconomics seeks to sift the signal from the noise, and by understanding the signal, create a rational way of considering the noise. So does John Edwards, but so what? Your macroeconomic projections are notorious for their hit-and-miss mystical and apocolytpic prognostications. Like Nicene religion politicians arguing over piddly shit, non-Austrian economists _still_ — in the 21st century! — are arguing over causes of the Great Depression. Much of the “noise” comes from the economists themselves. > [@](#): > > Since “too much data” exists, creating and choosing relevant models are crucial to the macroeconomist. And yet, the Keynesian will create and choose models completely different from the Chicagoan. For something that is so “crucial”, you would think there would be a science (not a pseudo-science) behind it — something that is falsifiable. > [@](#): > > The fact that so much data exist (which is ghastly insufficient in a lot of sectors) is not relevant to the meaning or “meaninglessness” of macroeconomic analysis. No, the data are not insufficient. What is insufficient are means for _collecting_ the data. Economic transactions occur (mostly not as praxes) all the time, and they are the data. The problem with there being so _much_ data is manifold: not only can macroeconomists not collect all of it, but if they could, it would be too much to process, and even if it weren’t, there is no process scientifically proven to work. > [@](#): > > All economic decisions, even on the micro level, are by definition subjective and arbitrary. No, not all. Only praxes. Some economic decisions are made on your behalf and without your consent. They cannot be called subjective or arbitrary. For example, you have to charge prices that will cover costs imposed on you by government. > [@](#): > > The amazing thing about economic analysis to begin with is that economists see coordination where someone who does not consider economic problems would only see chaos. Yeah, I’ve made that point already. Every macroeconomist can easily “verify” his theories in everything he sees. Keynes, who never saw an economic problem that he couldn’t cure with a dose of inflation, saw coordination in government spending and deficits. Unfortunately, when his policies were enacted, they left the rest of us in chaos. > [@](#): > > Environments change, actors only have partial knowledge, nevertheless they act in what they perceive to be their best rational interest. This is, by definition, subjective and arbitrary. If by actors, you mean the actual _participants_ in the economy — who are overwhelmingly not economists — then you and I agree. But it is precisely because buying decisions (those that still remain voluntary and volitional) are subjective and arbitrary, that you cannot analyze them objectively. You don’t know, case by case, whether or not people will spend, save, or invest their money. And even if you ask them, their answers might be unreliable. They might change their minds or even lie. When macroeconomists analyze data, they look for patterns. Unfortunately, the patterns they find mean about as much as patterns found in Hebrew characters from Old Testament scripture. They operate just like Freudian psychoanalysts. And their theories are just as unfalsifiable. Even macroeconomists with diametrically opposite views can cull support, each for his own theory, from identical data. When that happens, it is evidence of magic afoot. Pseudoscience. Voodoo. > [@](#): > > This objection makes even less sense to me. Perhaps you could clarify. The fact that there is controversy invalidates the entire enterprise? Surely you don’t hold, say, physics to this same standard. Some physics, certainly. Speculations about cosmic origins, eternal blanes that bridge multiple universes, worm-holes in space, that sort of thing are the physics equivalents of macroeconomics. They are untestable, unprovable, and unfalsifiable. But most of physics isn’t like that. Most of physics is F=MA or E=MC[sup]2[/sup]. And unlike economics, where theories about supply and demand result in competing analysis between the supply-siders and the demand-siders, there are no physicists who believe that force equals anything other than mass times acceleration (except whenever something might be equivalent to MA). > [@](#): > > Applying rational theory to the “noise” is never obsolete, even if the events themselves are already over. They have predictive, normative, and political value. They do indeed have political value, to be sure. Politicians can use the theories to frighten, placate, or motivate the populace in order either to fill or disburse the government coffers. Since you are a Keynesian, let me ask you: how many economic transactions have occured world-wide since you began reading this post? How do you propose to collect their data? What data are significant? How long do you project it will take to process them through one of your theories? And what problems are caused for your prognostications by data that are missing? > [@](#): > > I am going to assume that you mean the “exact same data,” which places macro on the same level as virtually any other science or art. No, you assume wrong. From the data, a macroeconomist might announce that his analysis indicates that unemployment is down and inflation is up. For some in the macroeconomic community, that analysis is celebratory news, and for others, it is cause for suicide. And yet just like a Popperian nightmare, each camp declares that the analysis validates what they’ve been saying all along. Creationist “scientists” have long wallowed in the argument that models and analysis of scientific data regarding origins and the history of man are “open to interpretation”. They claim that two scientists can look at the Grand Canyon such that one sees evidence of a punctuated equillibrium and the other sees evidence of a catastrophic deluge. But the difference is that the evolutionist is testing his theories with falsifiable experiments in the field and in the laboratory. The creationist is doing voodoo, making conjectures with irrelevant formulae, and drawing conclusions that the earth would have had the magnetic moment of a pulsar 10,000 years ago and that the odds of abiogenesis occuring are greater than the number of electrons in the universe. Macroeconomists are like creationists. They speculate. They fret. They waste a lot of time and money. You’re right that they analyze a lot of sound and fury, but it signifies nothing. > [@](#): > > What you are missing, Lib, is that macro analysis isn’t useless, its “knowledge assumptions are hidden, therefore there is a tendency to claim that each theory is either general or totally useless.” I’m missing a lot more than that, and I’m glad of it. I don’t know how to cast magic spells either, and I don’t intend to waste time learning how. The knowledge assumptions aren’t hidden; they are mystical. It is the data that are hidden. ---
**Author:** ![Maeglin](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Maeglin](https://boards.straightdope.com/u/Maeglin)\ **Post date:** [December 6, 2002, 9:46pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/68 "2002-12-06T21:46:01Z")
Au contraire indeed. Without trying to explain supply and demand curves, consider that the pencil is worth different amounts of money to different people. The people who are willing to pay $.50 obviously don’t buy the pencil. The people who are willing to pay $5.00 for it walk away with $4.50 of consumer surplus. In a classical market in which prices are taken, the price itself occurs at the intersection of supply and demand. In other words, at the point that maximizes consumer and producer surplus. The person who buys the pencil for $1.00 generates no consumer surplus, but also consider that the marginal pencil made, for which the marginal cost is $1.00 generates no producer surplus, either. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 6, 2002, 9:53pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/69 "2002-12-06T21:53:47Z")
> [@](#): > > \*Originally posted by tracer \* > \*\*Au contraire! In the praxis example you gave, Mr. Smith was willing to buy the pencil from Mr. Jones for $1 because to Mr. Smith the pencil was worth more than $1. That means that Mr. Smith would have been **willing to pay** more than $1 for a pencil. The fact that Mr. Smith only had to pay $1 for a pencil that was worth more than $1 to him created a consumer surplus when he bought it, equal to the difference between $1 and what the pencil was worth to him. \*\* Well, no, you’re kind of looking at it cross-eyed. We could have as easily said that Mr. Smith had a cigarette and decided that the pencil was worth more to him than the cigarette. That, too, would be an economic praxis. But that aside, note that Mr. Jones also “created a consumer surplus” when he bought the dollar, which is worth more to him than the pencil. Finally, if Mr. Smith forced Mr. Jones to sell his pencil for $1, that would not be a praxis either, economic or otherwise. Is a consumer surplus dependent on volition and freedom, independent of government controlled currency, and washed out by the off-setting transaction? If not, then it is not the same as an economic praxis. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 6, 2002, 9:56pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/70 "2002-12-06T21:56:17Z")
Kevlaw wrote: > [@](#): > > And the decision about what taxes you pay is not completely involuntary. It is not a matter of degree. A praxis is an action or inaction that is both voluntary and volitional. ---
**Author:** ![kevlaw](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/kevlaw/32/2281_2.png) [@kevlaw](https://boards.straightdope.com/u/kevlaw)\ **Post date:** [December 6, 2002, 10:08pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/71 "2002-12-06T22:08:36Z")
> [@](#): > > \*Originally posted by Libertarian \* > It is not a matter of degree. A praxis is an action or inaction that is both voluntary and volitional. \*\* I understand the definition that you are using - and I am finding that definition to be very useful to me in understanding what has previously been a fuzzy topic for me. But once you start applying this abstraction to the real world, the abstraction seem to lose it’s value a little. In the real world, actions are rarely completely voluntary or completely coerced - including the decision to exchange my labor for wages and including the decision to pay taxes. I _choose_ to work and I _choose_ to pay taxes. Sure - my choice is somewhat restricted - but both I make both choices of my own volition. ---
**Author:** ![Maeglin](https://avatars.discourse-cdn.com/v4/letter/m/8baadc/32.png) [@Maeglin](https://boards.straightdope.com/u/Maeglin)\ **Post date:** [December 6, 2002, 10:14pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/72 "2002-12-06T22:14:19Z")
Wow, **Lib** , you sure talk a lot for someone who knows “very little about other economic theories.” > [@](#): > > So does John Edwards, but so what? Your macroeconomic projections are notorious for their hit-and-miss mystical and apocolytpic prognostications. Nonsense. If your only experience with macroeconomists is in newspaper op-eds, then you would be entirely correct. But prognostications are absolutely not the kinds of things that the world’s leading macroeconomics are currently studying, for they are all profoundly aware of the limits of the discipline. I would encourage you to educate yourself in this sector before passing judgments of this kind. > [@](#): > > And yet, the Keynesian will create and choose models completely different from the Chicagoan. For something that is so “crucial”, you would think there would be a science (not a pseudo-science) behind it — something that is falsifiable. Nope. Your comparison of economics to hard science is nonhelpful for one fundamental reason. In economics, you cannot perform experiments to verify or falsify your hypotheses. Hence the very expectation of absolute falsifiability is misguided and unproductive. Believe me, economists would _love_ to be able to tinker with the real world economy to see if their theories and corollaries work. But unlike dropping an apple a half dozen times or using a particle accelerator to perform experiments in physics, **they can’t**. Real economists recognize this, and they consistently refine their models and adjust their claims accordingly. Increasingly sophisticated computer simulations _help_, but the fact is, economics is a very new discipline for which no closed system experiments can be performed. > [@](#): > > No, the data are not insufficient. What is insufficient are means for collecting the data. Semantic and non material. If I want to develop an economic model for poverty in the Sudan, I would have a bloody hard time at it. There is very little data. And that is the bottom line. Data might as well not exist outside if it is not collected. > [@](#): > > No, not all. Only praxes. Some economic decisions are made on your behalf and without your consent. Also semantic and non-material. All decisions. Decisions in which the individual, you or I, are objects as well as subjects. > [@](#): > > Yeah, I’ve made that point already. Every macroeconomist can easily “verify” his theories in everything he sees. Keynes, who never saw an economic problem that he couldn’t cure with a dose of inflation, saw coordination in government spending and deficits. Unfortunately, when his policies were enacted, they left the rest of us in chaos. For the love of all that is holy, macroeconomics is not about arguing the supremacy of one theoretical system or another. This is fine for politicians and undergraduates, but if you take a look at current macroeconomic literature, you will find a _plurality_ of theoretical tools meant for solving individual problems, and far less superstructure. As to whether the implementation of Keynes’ policies worked or not, that is grist for another mill. > [@](#): > > But it is precisely because buying decisions (those that still remain voluntary and volitional) are subjective and arbitrary, that you cannot analyze them objectively. > > You don’t know, case by case, whether or not people will spend, save, or invest their money. And even if you ask them, their answers might be unreliable. They might change their minds or even lie. On the individual level, this is absolutely true. Assessing demand for a particular product or pricing an IPO is tricky, tricky business. While there will never be an equivalent in economics to the absolute certainty of gravitational acceleration, there _are_ useful tools for analyzing partial, ambiguous, and unreliable data. And to a large extent, they _work_. > [@](#): > > Most of physics is F=MA or E=MC2. And unlike economics, where theories about supply and demand result in competing analysis between the supply-siders and the demand-siders, there are no physicists who believe that force equals anything other than mass times acceleration (except whenever something might be equivalent to MA). When the economy operates with the same unchanging principles as those of physics, get back to me with this objection. I believe I have settled the impossibility of experimentation issue above. > [@](#): > > Since you are a Keynesian, let me ask you: how many economic transactions have occured world-wide since you began reading this post? How do you propose to collect their data? What data are significant? How long do you project it will take to process them through one of your theories? And what problems are caused for your prognostications by data that are missing? With all due respect, **Lib** , the fact that you assume I am a Keynsian reveals that perhaps you had better do some more reading. I quoted Keynes because he was useful, but the substance of my analysis with respect to the point of macroeconomics is all PK (post-Keynes). > [@](#): > > No, you assume wrong. From the data, a macroeconomist might announce that his analysis indicates that unemployment is down and inflation is up. For some in the macroeconomic community, that analysis is celebratory news, and for others, it is cause for suicide. And yet just like a Popperian nightmare, each camp declares that the analysis validates what they’ve been saying all along. Ok, **Lib** , now it’s time for you to cough up some cites. Not from newspaper columnists, please. Because you seem to be blithely going back and forth from the prescriptive and the normative functions of economics, when in truth we should discuss them _separately_. > [@](#): > > . I don’t know how to cast magic spells either, and I don’t intend to waste time learning how. The knowledge assumptions aren’t hidden; they are mystical. It is the data that are hidden. I think it’s time for some more cites. You appear to be so wrapped up in your Austrian theoretical supremacy that you are not seeing what macroeconomics really is. > [@](#): > > Austrian theory was developed strictly by formal deductive logic. And every macroeconomist will tell you that you can’t do good macro by _deduction_. In deduction lie your irrelevant formulae, your nonsense prognostications. Induction, not deduction is your friend. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [December 6, 2002, 10:39pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/73 "2002-12-06T22:39:56Z")
I wouldn’t say experiments are impossible, **Maeglin** , but that what counts for an economic experiment isn’t the same. If we have a theory which predicts the result of a behavior, and that behavior ends up happening (the data is collected), then our theory is found to be justified or not. We don’t have to _make_ events happen. Yes, we lose the control factor. But this doesn’t mean theories can’t be validated or repudated based on actual events. If so, then astronomy couldn’t be a science. We can’t, after all, make stars. But we can predict what should happen given a supernova. We could predict when a supernova should happen, or the number we are likely to find given such telescopes and in a certain portion of three dimensional space. **Lib** > [@](#): > > But that’s not a problem for Austrians, since how the decision is derived is irrelevant. I’ve been trying to get your link to work, but it looks like I’m going to have to buckle down and buy the book. But… _irrelevant_? Good god, man. How people make decisions can aid our understanding in what sort of aggregate effects to expect. No wonder there is no macro level analysis: they disavow all the tools that could possibly create one. > [@](#): > > I mean, “trends” develop anyway. Unfortunately, they are not predictable in the way that, say, tides are. So we don’t use that style of analysis in understanding and predicting these trends. Here is a macro trend: Christmas shopping. Anticipating it is absolutely vital to many businesses who make most of their yearly profit during this time. And yet, without a way to look at aggregate trends in shopping, none of them could satisfy the hordes of people showing up at their door. Yes, the hordes of people showing up at their door are primarily only concerned with their individual praxis. But hordes of people show up. > [@](#): > > The characteristic of a theory (a scientific one, anyway) is that it is falsifiable. That’s one such criteria. But I don’t think you’ll take an argument very far that scientific theories aren’t _also_ interpreted and debated over, as well. > [@](#): > > The economy is a dynamic, uncontrollable beast that is driven at an atomic level by subjective and unpredictable decisions made by individuals. Then I’m sure you’ll agree the best—and only—way to describe farming is through the equations governing the fundamental forces at work in the particles that comprise the seeds, earth, and rain. > [@](#): > > The decision making process, as I’ve explained to a fare-thee-well, is entirely subjective. If I decide you are right, was that subjective? Are all of the criteria I use to make a decision found only in me, or are some of them based on things I’ve been taught (publicly)? > [@](#): > > The employer and employees would be as well off to consult and astrologer as they would be to consult a macroeconomist. I disagree. Long term planning is only possible by considering aggregate effects. “How much inventory should I stock?” is not answerable by praxis. ---
**Author:** ![js\_africanus](https://avatars.discourse-cdn.com/v4/letter/j/87869e/32.png) [@js\_africanus](https://boards.straightdope.com/u/js_africanus)\ **Post date:** [December 6, 2002, 10:50pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/74 "2002-12-06T22:50:53Z")
> [@](#): > > \*Originally posted by Muad’Dib \* > \*\*What is wealth? Where does it come from? How is it created and destroyed? \*\* I’m going to take a different tack. Since I’m still new, it remains difficult to juggle the content of 60-odd posts, so please! nobody have any hairy cat-fits if you feel I haven’t done your post justice. Two things to get out of the way: 1. **Muad’Dib** , for an interesting lay intro to economics check out Steven Landsburg’s book _The Armchair Economist_. It covers, in an intuitive fashion, a panolpy of sophisticated economic models without all the math. A good portion of a Ph.D.'s core year in microeconomics will be covered in a completely intuitive manner–it’s the best answer to the question “what is economics _about_?” that I have encountered. I cannot recommend it strongly enough. 2. The question of “what do bosses do?” has been bandied about in this thread. The best answer to that question comes in the form of two articles. The first is titled “What Do Bosses Do?” by Stephen A. Marglin, published in _The Review of Radical Political Economics_, Vol. VI, No. 2 (Summer, 1974). The second is titled “What Do Bosses Really Do?” by David S. Landes in _The Journal of Economic History_, Vol. XLVI, No. 3 (Sept., 1986). Both these articles are non-technical; the first is a Marxist treatment of the role of the boss in factory production, the second is the (neo-classical?) response. I advise you to read them in order, though the first may be difficult to find. Now to the main course. What is wealth? Depends who you talk to. In mainstream economic analysis, since mathematics play such an important role, wealth is defined variously and very specifically in order to fit the formal models of analysis. Those answers aren’t going to do you any good right now–it will be sufficient to say that wealth is the stuff we consume & enjoy, i.e. goods & services. This defn., although it may be protested bitterly by some, fits your question the best. It does lack that _je ne sais quoi_ that makes the definition seem meatier; however, it does have axiopisty and intuitive reality. Where does wealth come from? From the context of your post, I think you are asking two questions here: 1. How is wealth created? & 2. How does the volume of wealth in the economy grow? The first is fairly simple and has been hit on already. Suppose I cut off a piece of arrow root, put some sharpened bone on one end and some feathers on the other. I’ve created an arrow. That arrow has _more value_ than the arrow root, bone and feather, in that people who need arrows to hunt, let’s say, want it more than it’s constituent parts in their native state. Suppose I have an axe and there are people who need homes. I could chop down trees for log homes. Those logs have more value than the trees, because people need homes more than trees. (This is not universally true, obviously–it’s just an illustration.) Some have asked “do businessmen or workers create wealth?” According to Marglin, only workers do. According to Landes, they both do. Since I’ve read both articles, and since Landes’ article is basically a slam dunk, you can guess my answer to that. Notice in my second example in the previous paragraph that I used an axe. That axe is capital. By applying my labor to the capital I created wealth. So the bosses, the workers, and the capital (plant & equipment) all play a role in creating wealth. As to your second sub-question, how does the stock of wealth grow?, the answer is a little trickier. But still easy to understand. We now move into the action packed world of macroeconomics. Taking the link provided by **Hawthorne** , let’s utilize a simple Cobb-Douglas production function: Y = A \* K^a \* L^b. Here, Y is the output of the economy; A is some variable that augments labor; K & L the stock of capital and labor, respectively; a & b are elasticity parameters (don’t worry what that means) for capital and labor, respectively; and a + b = 1 (don’t worry about that, either). What we have is output is equal to some efficiency factor times some “adjusted proportion” of the amount of capital times some “adjusted proportion” of the amount of labor. That “adjusted proportion” bit is going to make economists scream in agony–it is not an accurate statement, but getting it right is not worth the effort right now. What we can do is take that equation relating amounts of output, “efficiency”, capital, and labor, and turn it into an equation relating their rates of growth. In words, we get something like: the growth rate in output is equal to the growth rate in efficiency plus the growth rate in capital plus the growth rate in labor. I apologize for coming to that last sentence so indirectly. I could have just stated it. However, I find it helps to know where it comes from…for what that’s worth. That sentence answers your second sub-question. The amount of stuff we enjoy increases when the number of people producing increases. When some of that production is invested into more effective machinery (sharpened flint stones, plows, and automated welding machines), the amount of capital grows which leads to even more stuff. (More per person, in fact–hence individuals in America, for example, have more stuff now than they did 100 years ago.) When we find better _ways_ of making stuff using the same capital and labor, that is, when we become more efficient, the amount of stuff produced grows. The reason we (in America) have more stuff today than 100 years ago is three-fold: more people working, using more & better machinery, and learning how to do it even more effectively. Note: The math of my explanation may be sketchy, but the idea should be pretty good. Your final question: how is wealth destroyed? (I already hit the created part.) Well…hurricanes are a good start. Tornados. Godzilla. Something to note: production can concievably reduce value. Suppose that a stand of redwoods is really valuable to the people of the world–not alot to each individual but in aggregate they’re worth alot. But they don’t have the organization, the legal standing, or the political wherewithall to make that value known in any meaningful sense. Then we may have a market failure, and the redwoods may be cut anyway. Alot of environmental problems can be chocked up to market failures. A classic one is called the Tragedy of the Commons. Here the individual optimizing conditions don’t match the social optimizing conditions and, for example, a fishing fleet wipes out the whale population. That _is not_ capitalism gone bad, it is failure to understand economics writ large. I hope that helps. ---
**Author:** ![Justhink](https://avatars.discourse-cdn.com/v4/letter/j/edb3f5/32.png) [@Justhink](https://boards.straightdope.com/u/Justhink)\ **Post date:** [December 7, 2002, 11:09am UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/75 "2002-12-07T11:09:12Z")
> [@](#): > > Chumpsky wrote: Nobody really has any idea of what is going on. There are few very basic results that most economists agree on, but mostly it is just a huge guessing game. [http://boards.straightdope.com/sdmb/showthread.php?s=&threadid=148162&pagenumber=3](http://boards.straightdope.com/sdmb/showthread.php?s=&threadid=148162&pagenumber=3) Follow that link and read my third post at the end for a very brief summary. I can explain the entire process so as to be reproduced in a laboratory using methods of falsification. These individuals can equally be created. It’s not so much about the general question “what creates value” so much as it covers how to lie about it and concentrate it against consent (which is the only way you can concentrate it). Part of the process is teaching people some very complex algorithms and then putting them under. These individuals are only as good as the algorithms they have been exposed to, and keep updated upon. The process is modeled on logical corruption, but even the brain doesn’t create something from nothing. I imagine that to build an incredible wealth machine, you’d use someone with high memory retention and recall abilities so as to flood out their ability to engage in critical thinking. This will also make conversion easier for putting them under; it may take a few months of them feeling like they’re acting totally silly, but eventually it’ll just snap; and once it does the system catches the rest. The phenomenal decryption for unequal wealth distibution is a manual suicide machine. That will alert even the biggest moron in the universe where logical corruption is. The abstractions of the mind that process these decryptions are also suicide and the negations rendered by proof of a monism. The patterns I presented aren’t that complex. If you really wanted to dump a bunch on someone before putting them under, the subconscious will do wonders with intricate situational detail. Unless the child possesses tremendous inhereted capacity for abstraction, the child of a wealthy family will never actual have a manual system of indenture - they will adopt the complex patterns of corruption used by the parents, and will never experience the existential pressure necessary to abstract resources or resource collapses. There is no society on earth, currently, with a written law, which deselects the methodology which can be applied here. Once written law is abstracted outwards, social automation becomes abstracted outwards. If this written law is not coded consistently with the process which even allow the ability to write to emerge; the law will always be more corrupt than the automated system before it was abstracted. The process of written law, once abstracted, can never be unabstracted; it simply has to be written to completely code out non-transparency. -Justhink ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 7, 2002, 11:23am UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/76 "2002-12-07T11:23:23Z")
Kevlaw wrote: > [@](#): > > In the real world, actions are rarely completely voluntary or completely coerced - including the decision to exchange my labor for wages and including the decision to pay taxes. It looks like we really don’t disagree. Mises made Austrian economics into a purely deductive science. (The entire text of _Human Action_ is a deductive argument.) One conclusion that he reached was that economics, while useless for determining how to shape the economy, is useful for determining how to shape the society. Given freedom from coercion, the economy will spontaneously generate (see Hayek’s Theory of Spontaneous Order), much in the same way that language does. Without that freedom (for example, with central economic planning), what rules the day are unintended consequences. So, Austrians understand that their theory applies mostly to black markets and niches in the economy. It is merely their contention that the best thing to do for the whole economy is to liberate it from frivolous regulation and interference. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 7, 2002, 12:13pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/77 "2002-12-07T12:13:54Z")
Maeglin wrote: > [@](#): > > Wow, Lib, you sure talk a lot for someone who knows “very little about other economic theories.” All I know is their basic underlying theory and axioms, similar to what I know of astrology. > [@](#): > > If your only experience with macroeconomists is in newspaper op-eds, then you would be entirely correct. But prognostications are absolutely not the kinds of things that the world’s leading macroeconomics are currently studying, for they are all profoundly aware of the limits of the discipline. 😃 Well, it’s the limits of the discipline that I’ve been pointing out in quite some detail. If macroeconomists have lately admitted the futility of their work, then I am delighted. But you need to tell the politicians, since they are still conducting much of their planning on the basis of economic predictions. > [@](#): > > In economics, you cannot perform experiments to verify or falsify your hypotheses. Then it shouldn’t be called a science. In _Conjectures and Refutations_, science philosopher Karl Popper, summarizing his seven points, wrote, “One can sum up all this by saying that the criterion of _the scientific status of a theory is its falsifiability, or refutability, or testability_.” (Italics his.) Since Austrianism is deducitve, it IS testable, refutable, and subject to falsification. > [@](#): > > Semantic and non material. Semantic and nonmaterial? 😃 Well, _that’s_ rich. You were the one who “corrected” my wording from analysis to data. I merely took your words out of my mouth. > [@](#): > > If I want to develop an economic model for poverty in the Sudan, I would have a bloody hard time at it. There is very little data. And that is the bottom line. Regarding “little”, I don’t think that word means what you think it means. According to the CIA Factbook, Sudan’s population is more than 37 million. It imports $1.6 billion in goods, including foodstuffs, manufactured goods, refinery and transport equipment, medicines and chemicals, textiles, and wheat. It exports $2.1 billion, mostly in oil and petroleum products, cotton, sesame, livestock, groundnuts, gum arabic, and sugar. It receives $187 in economic aid, and it is in debt to the tune of $24.9 billion. Its industries include oil, cotton ginning, textiles, cement, edible oils, sugar, soap distilling, shoes, and petroleum refining, pharmaceuticals, armaments, automobile/light truck assembly. It has a labor force of 11 million people, and its government budget is for revenues of $1.6 billion and spending of $1.9 billion (including capital expenditures). If you think that there is very little data in all that, then I disagree. > [@](#): > > Data might as well not exist outside if it is not collected. But that’s the point that _I’ve_ been making. > [@](#): > > For the love of all that is holy, macroeconomics is not about arguing the supremacy of one theoretical system or another. Well, it _should_ be. What is it, grab one out of a hat and see what happens? > [@](#): > > This is fine for politicians and undergraduates, but if you take a look at current macroeconomic literature, you will find a plurality of theoretical tools meant for solving individual problems, and far less superstructure. You seem to be saying that it is more eclectic. And that’s fine. But a little bit of Freud and a little bit of Adler is still just pseudoscience. > [@](#): > > Assessing demand for a particular product or pricing an IPO is tricky, tricky business. While there will never be an equivalent in economics to the absolute certainty of gravitational acceleration, there are useful tools for analyzing partial, ambiguous, and unreliable data. I don’t know what you mean by “useful”, but for me, the most useful economics theory is the one that will generate the most robust economy. > [@](#): > > When the economy operates with the same unchanging principles as those of physics, get back to me with this objection. No, when that happens, _you_ get back to _me_. And in the meantime, I’ll just go with the Tealeaf Reading theory of macroeconomics. > [@](#): > > With all due respect, Lib, the fact that you assume I am a Keynsian reveals that perhaps you had better do some more reading. I quoted Keynes because he was useful, but the substance of my analysis with respect to the point of macroeconomics is all PK (post-Keynes). What kind of reading, mind reading? How was I to know why you were quoting Keynes? I assumed that, when you went out of your way to dig up a quote and annotate it as seminally important, you were an admirer of his. > [@](#): > > I think it’s time for some more cites. I gave you a link to the _whole book_. > [@](#): > > And every macroeconomist will tell you that you can’t do good macro by deduction. 😃 But that’s _my_ point. There is too much data, no way to collect it, and no way to determine what it _means_. That’s the _reason_ than you can’t do good macro by deduction. > [@](#): > > In deduction lie your irrelevant formulae, your nonsense prognostications. […dumbfounded stare…] I might not understand macroeconomics, but you clearly do not understand logic. For your information, your entire post was deductively argued. > [@](#): > > Induction, not deduction is your friend. I’ll choose my friends, but thanks anyway. Meanwhile, I’ll leave you with a quote from [this site](http://www.geog.ouc.bc.ca/physgeog/contents/3a.html): “Francis Bacon (1561-1626), a 17th century English philosopher, was the first individual to suggest a universal methodology for science. Bacon believed that scientific method required an inductive process of inquiry. Karl Popper later refuted this idea in the 20th century. Popper suggested that science could only be done using a deductive methodology.” Get back to me when macroeconomics reaches the 20th century. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 7, 2002, 1:02pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/78 "2002-12-07T13:02:50Z")
Eris wrote: > [@](#): > > I’ve been trying to get your link to work, but it looks like I’m going to have to buckle down and buy the book. I’m sorry that the link isn’t working for you. I tested it before submitting, and it came up fine. At any rate, you can get to it from the main Ludwig von Mises site at [http://www.mises.org](http://www.mises.org) and clicking “Human Action” from the online books menu. But if you want to buy the book, that’s good too, since it is the most important economic treatise ever written. > [@](#): > > But… irrelevant? Good god, man. Yes, irrelevant. Don’t conflate Austrianism with the voodoo of macroeconomics. Decisions are irrelevant to Austrian theory. All that is relevant are actions, and that those actions are based on freedom and will. > [@](#): > > How people make decisions can aid our understanding in what sort of aggregate effects to expect. They can? After you’ve read the book, let’s see whether you change your mind. > [@](#): > > No wonder there is no macro level analysis: they disavow all the tools that could possibly create one. You mean crystal balls? Mind reading apparatuses? Anal probes? If you were to ask me why I bought _Human Action_, I would machine gun you with answers. I was curious about it. It had been recommended to me. I loved books, how they looked, how they felt, even how they smelled. Snippets I had read seemed interesting. I liked seeing various views. I had the opportunity to buy. I had the means. I thought it would be valuable to me. It seemed like a challenge to read, and I loved challenges. I liked what I had read about the author. I loved reading. I had the time to read it. Dammit, I just plain wanted it. And on and on and on. There might even be reasons that did not immediately occur to me. How you will turn those abridged, vague. and subjective statements, along with billions of others from other people, into anything remotely resembling an objective formula that you could use to benefit the economy is beyond me. But I’m willing to listen. Did I mention that I liked its color and binding? 😉 > [@](#): > > Here is a macro trend: Christmas shopping. Anticipating it is absolutely vital to many businesses who make most of their yearly profit during this time. That’s a _societal_ trend that is based on a Christian holy day. Anthropology would give you data just as useful or more so. > [@](#): > > And yet, without a way to look at aggregate trends in shopping, none of them could satisfy the hordes of people showing up at their door. Well, they rarely satisfy me. Sometimes I find the perfect gift at the perfect price, but not often. > [@](#): > > Yes, the hordes of people showing up at their door are primarily only concerned with their individual praxis. But hordes of people show up. God help the store owner who needs an economist to tell him that that will happen. > [@](#): > > That’s one such criteria. But I don’t think you’ll take an argument very far that scientific theories aren’t also interpreted and debated over, as well. That’s fine. A scientific theory need not even be falsified. It need only be falsifi_able_. But it must be that. > [@](#): > > Then I’m sure you’ll agree the best—and only—way to describe farming is through the equations governing the fundamental forces at work in the particles that comprise the seeds, earth, and rain. Ignoratio elenchi. Describing an economic praxis is trivial. Unlike macroeconomists, Austrians do not attempt to tell the farmer how to farm, nor to describe farming to him. The Austrian description would be along the lines of leaving farmers free to make willful decisions, and they will _find_ the best way to farm. > [@](#): > > If I decide you are right, was that subjective? Are all of the criteria I use to make a decision found only in me, or are some of them based on things I’ve been taught (publicly)? Hell if I know. Ask a macroeconomist. > [@](#): > > I disagree. Long term planning is only possible by considering aggregate effects. “How much inventory should I stock?” is not answerable by praxis. Another red herring. The matter of inventory levels is addressable using any number of deductive formulas from Materials Science, such as the Order Up-to Method, the Manual Demand Method, the EOQ Method, and so on. ---
**Author:** ![hawthorne](https://avatars.discourse-cdn.com/v4/letter/h/c89c15/32.png) [@hawthorne](https://boards.straightdope.com/u/hawthorne)\ **Post date:** [December 7, 2002, 3:19pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/79 "2002-12-07T15:19:22Z")
Well, this thread has drifted. **Libertarian** , you talk a lot about “macroeconomics”, but you don’t seem to know what it is. It _is_ true that Austrians generally don’t like and don’t do macroeconomics (for various reasons), but you seem to think that “macroeconomist” means something like “interventionist”. > [@](#): > > _Lib_ > Unlike macroeconomists, Austrians do not attempt to tell the farmer how to farm, nor to describe farming to him. Now neither decribing farming (to a farmer or anyone else) nor telling a farmer how to farm is _remotely like_ what macroeconomics is about. _Micro_economists of various sorts might be interested in doing this, and indeed agricultural economists spend much of their time studying farmers and wondering how well markets work. But this is just not the sort of question macroeconomists are interested in. Macroeconomists are interested in aggregates, how they “behave”, how well they perform and whether any policy might improve matters. Macroeconomists study questions like: Are capitalist economies stable? Since they seem to fluctuate, why? Is this a matter of concern? (The famous Austrian economist Joseph E Schumpeter was a contributor on this matter.) Many macroeconomists think that intervention in the macroeconomy (by monetary, fiscal or external policy) is either not required or counterproductive. Your opinions about macroeconomics are (in the words of Samuelson) “not even wrong”. ---
**Author:** ![Liberal](https://avatars.discourse-cdn.com/v4/letter/l/848f3c/32.png) [@Liberal](https://boards.straightdope.com/u/Liberal)\ **Post date:** [December 7, 2002, 3:54pm UTC](https://boards.straightdope.com/t/how-is-wealth-created/140539/80 "2002-12-07T15:54:50Z")
Very well, then. I stand corrected. I will no longer opine about macroeconomics. [Previous page](https://boards.straightdope.com/t/how-is-wealth-created/140539.md?page=3) [Next page](https://boards.straightdope.com/t/how-is-wealth-created/140539.md?page=5)